A worker taps into the copper stream at BHP Billiton's Olympic Dam smelter.
The merger and acquisition hunt is back on in the mining sector, as a rebound in commodity prices and a growing scarcity of resources drive companies to make deals and find partners to help finance big projects.
A flurry of deals in recent weeks has kicked off what is being viewed as a new wave of mining transactions expected to reach a level not seen in more than four years, when foreigners picked off such Canadian icons as Inco, Falconbridge and Alcan.
Unlike that last round of deal-making, the next one is expected to see more small and medium players being bought out, and attempts to find ways to develop mines beyond their price range.
The recent "merger of equals" between mid-tier copper players Vancouver-based Quadra Mining Ltd. and Toronto's FNX Mining Co. Inc. is seen as a model of what's to come for many miners. Add to that Quadra's $1-billion joint-venture deal with a Chinese state-owned utility company to develop its Sierra Gorda project and Franke mine in Chile.
There's also junior Osisko Mining Corp.'s friendly offer last week to buy Brett Resources Inc., a move that combines their Canadian gold projects.
"My expectation is that the trend will be up," for mergers and acquisitions, said Egizio Bianchini, global head of mining for BMO Nesbitt Burns. "It's about getting the best assets."
The deal-making is being driven by a sharp rise in commodity prices since the recession, which has left many miners flush with cash. Surplus cash for global mining companies is expected to rise to 55 per cent of the total debt level in 2010, up from just 7 per cent in 2009, according to a recent Citigroup Inc. report.
"With many mining companies running low on quality projects, we believe that there is likely to be a wave of M&A activity within the mining space," Citigroup said.
"The M&A activity is likely to be its strongest in the small- to mid-cap miners looking to consolidate their positions within a sector and lift themselves up the food chain."
Some of the big buyers include Toronto-based Barrick Gold Corp., Australia's BHP Billiton Ltd., Vale SA and Newmont Mining Corp. "looking to add high-quality resources (and longer-term volume)," Citigroup wrote. It listed such targets as U.S.-based Cliffs Natural Resources and Anglo-Swiss giant Xstrata and a handful of Australian miners.
Miners are considering deals again now that their share prices are up and rising commodity prices are being reflected in their books, said Rick McCreary, head of global mining at CIBC World Markets Inc. "You tend to get lots of M&A in an up cycle because the seller has had a good run in their share price and is willing to cede control to a major player, and the major player still sees run in the metals prices or the market still to be capitalized on," he said.
Mergers are also being driven by state-owned firms in countries such as China and India, which are looking to meet growing commodity demands.
"To meet their industrial consumption needs, they are looking to base metals, more so than precious metals," said David Bain, head of mergers and acquisitions at UBS Securities. Mr. Bain said there also appears to be more of a rebalancing this year between financing and merger and acquisition activity.
Quadra chief executive officer Paul Blythe said now is a good time for him to do deals with both China and his mid-tier rival FNX with the market rebounding and his expectation that copper prices will continue to rise.
"It's a natural flow of events. We've been trying to do something like this for along time," Mr. Blythe said yesterday.
He said the merger and Chinese joint-venture will make his firm stronger for the next possible downturn. "If you are a single entity company it's not a good place to be ... when the world collapses.
"To make yourself more resilient to that, you need the balance sheet and market cap that go with delivering a combination."