Photographer: Andrey Rudakov/Bloomberg

Mining Ready for M&A Revival, Producers Fight for Survival

  • Deutsche Bank sees deals starting this year as distress grows
  • Recent market swings hold back activity as valuations in flux

Nothing drives change like necessity.

QuickTake Iron Ore Wars

The $1.4 trillion collapse in the value of mining stocks since 2011 is poised to reshape the industry as all but the strongest companies are squeezed by the lowest commodity prices in six years. Rio Tinto Group and BHP Billiton Ltd. are among the best placed to grab assets sold by rivals desperate to stem losses or pay down debt.

“We would be supportive,” Martin Gilbert, chief executive officer of Aberdeen Asset Management Plc, said in an interview with Bloomberg Television on Tuesday. Aberdeen has more than $400 billion of funds under management and is the second-largest investor in BHP’s London shares and the fifth-largest holder of Rio’s London stock.

“They are financially reasonably strong and the low-cost producers in the sector, so if there was an opportunity to consolidate, yes, clearly it would make sense to do so,” he said. Rio Tinto and BHP would likely use cash and shares in any potential deal, he added. Aberdeen owns 5.7 percent of BHP’s London shares and 2.9 percent of Rio’s U.K.-listed stock. The two companies are listed in Sydney and London.

The rout in commodity prices, combined with a debt binge in the past decade by mine operators high on surging Chinese appetite for raw materials, means even past titans of the industry are trading at minnow valuations. The Bloomberg World Mining Index has plunged to its lowest since 2004 as Chinese demand falters. Anglo American Plc, worth almost 50 billion pounds ($73 billion) in 2008, is now valued at about 3 billion pounds.

‘Fantastic Assets’

“There are going to be fantastic assets available at distressed prices in the market over the next three to six months,” said Simon Grenfell, co-head of global market commodities at Natixis SA in London.

BHP and Rio Tinto could raise as much as $21 billion through share sales to strengthen their finances in preparation for snapping up bargains, Bank of America Corp. analysts led by Jason Fairclough said last week. That would suck up a large chunk of the financing available for equities from investors, according to the analysts.

“What is certain about 2016 is that if current conditions prevail we will see a very different mining industry globally in 12 months’ time,” said Jeremy Wrathall, head of global natural resources in London at Investec Plc. “Those who haven’t got debt will reshape the industry. There’s going to be a shifting of the assets.”

Share Sales?

Should BHP and Rio Tinto sell stock, this “might hasten the onset of distress of other more leveraged companies,” including Anglo American, Fortescue Metals Group Ltd. and Teck Resources Ltd., helping to shake out better quality assets, according to Bank of America analysts.

BHP shares dropped as much as 3.4 percent in London on Tuesday to the lowest since May 2005. Rio Tinto declined 1.9 percent to the lowest in almost seven years.

Copper will be a major target for the world’s two biggest mining companies. Rio Tinto Chief Executive Officer Sam Walsh and BHP counterpart, Andrew Mackenzie, have both said they would be interested in acquiring top quality copper mines at the right price.

Market Outlook

The market for the metal will shift to a deficit in 2016 after the biggest slump in prices since the financial crisis forced miners to curb output, according to Macquarie Group Ltd. Prices will average $6,500 a metric ton in 2019, up more than 40 percent from current levels, Morgan Stanley forecasts.

“Copper will be the biggest focus by far because they all still have the belief that the copper market will be back into deficit within a few years,” said Mike Elliott, former global head of metals and mining for Ernst & Young. “These guys will jump at these assets if they get a chance to buy the quality mines that fit their criteria.”

Anglo and Glencore Plc each own 44 percent of the giant Collahuasi copper mine in Chile. Just one of those stakes could fetch as much as $5 billion, according to Bank of America.

Deals Decline

Still, transactions involving copper producers or mines announced last year slumped to $4.3 billion, from $17 billion a year earlier, making it the slowest year for deals since 2009, according to data compiled by Bloomberg. The only deal of $1 billion or more was a purchase by Antofagasta Plc of Barrick Gold Corp.’s stake in the Zaldivar mine in Chile.

Part of the problem is that slumping metals prices, along with increased volatility, makes it harder to reach agreement on the value of mineral resources and mining operations.

“It is surprising that we haven’t seen more M&A,” Paul Gait, a mining analyst at Sanford C. Bernstein Ltd. in London, said by phone. “But the wild swings that we are getting in the commodity markets are dampening down M&A activity because they are making it hard to get a handle on what fair value actually looks like.”

The value of completed transactions across mining and steel fell to about $54 billion last year, from $98 billion the year before and as high as $224 billion in 2006, according to data compiled by Bloomberg. The 2015 figure excludes about $35 billion of pending deals.

Rio Tinto, with the strongest balance sheet in the industry, is in the best position to take advantage of depressed valuations, according to Rob Clifford, a mining analyst at Deutsche Bank AG in London.

“It kicks off this year,” he said. “At some point, someone has to stand up and say, ‘You know what? the Emperor’s not wearing any clothes.’ This is not rational.”

Before it's here, it's on the Bloomberg Terminal.