The correction in commodity prices is sparking a new round of merger and acquisition talk in the mining sector as cash-fat companies look to pick off competitors at cheaper prices.
Mining equities have seen a much sharper sell off when compared with metal prices in the recent market rout, which has created opportunities for acquisition-hungry companies, while leaving smaller rivals more vulnerable.
That could lead to more hostile bids for miners reluctant to sell at current depressed prices.
Friendly deals will also likely be struck by companies in greater need of cash to advance projects amid the growing global economic uncertainty.
After a surge in mining deals earlier this year, driven by record-setting commodity prices, negotiations cooled off in early summer as prices were driven lower by debt woes in United States and Europe and on concerns of a slowdown in Chinese economic growth.
August’s global market meltdown pushed commodity prices down further, but miners suffered the most, with some stocks losing more than 30 per cent. That has turned many companies into prey for deal-driven producers with a bullish long-term view of future demand for their products. Mining companies rely on acquisitions to help grow production and compete aggressively for what’s left of the world’s shrinking resources.
Industry deal makers say they are preparing for a revival of mergers and acquisitions activity in the weeks ahead, while analysts suggest buying operations is a better strategy than building mines amid rising capital costs.
“At some point the cashed-up miners will no doubt calculate it’s cheaper to buy than build,” a team of analysts at BMO Nesbitt Burns Inc. wrote in a recent report.
Capital expenditures are soaring, the analysts noted, “so the hurdle to make acquisitions attractive is falling.”
Despite concerns another global recession could be on the horizon, miners are still counting on aggressive growth in countries such as China to continue to fuel demand for commodities. That’s despite some concerns the Chinese economy is also faltering as it reports weakening economic activity.
China’s double-digit economic growth helped pull many miners from the brink after the 2008-09 global market meltdown. Growth in China has since slowed to around 9.5 per cent as of the second quarter, but is still considered steady and enough to prop up demand for a wide-range of industrial metals such as copper and coal and iron ore used to make steel, as it builds out its infrastructure base.
“Unless China rolls over, the valuation gap is now highly attractive for investors,” BMO said.
BHP Billiton Ltd., the world’s largest mining company, also pointed to China as a beacon of hope during these tumultuous times.
“If you had asked me last week what was going to happen in the markets over the last few days, I would’ve been terribly wrong and I’ll probably be terribly wrong for the next month,” Mr. Nasser told a business audience in Australia last week. “But what I’m really confident about is that China will continue to grow.”
While M&A talks are heating up, deal makers suggest there is no rush to push through agreements right now given global currency fluctuations, adding some uncertainty to the accounting.
What’s more, analysts are predicting further volatility in markets in weeks to come, which could drive valuations even lower.
The slight rebound in metal prices late last week “is likely to prove short-lived,” Capital Economics commodities economist Ross Strachan said in a note.
“Even if there were more quantitative easing, we would expect its impact on commodities to be more muted than on previous occasions.”
The exceptions are silver and gold, which are considered currencies and a safe place to invest money in troubled economic times.
“The uncertainty around the global economy is encouraging demand for havens and therefore these metals,” he said.
Gold, a storage of value purchased by central banks around the world, hit a record above $1,800 (U.S.) per ounce last week.