Clifford Chance

Appetite for M&A grows in mining and metals sector as investors seek opportunities in high-growth markets

New survey published by Clifford Chance identifies top drivers and risks for M&A across an increasingly complex global landscape

London 6 June, 2012 – More than half (57%) of mining and metals sector respondents to a new survey, Cross-border M&A: Perspectives on a changing world published by Clifford Chance, are expecting current cross-border M&A activity levels to be maintained or increased over the next two years. Some 70% of sector respondents expect to focus on strengthening their core business rather than diversifying into new areas and, accordingly perhaps, the great majority (59%) expect to see some disposal of assets in response to tax, regulatory and political risks.

The research, which was conducted by the Economist Intelligent Unit on behalf of Clifford Chance, surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the mining and metals sector.

The survey also revealed that 55% of mining and metals companies are focusing their M&A strategy on high-growth economies, rather than domestic (28%) or global developed markets (17%).

A number of significant themes in the mining and metals sector emerge from the survey findings:

• Shareholder pressure was a frequently identified driver behind sales in the sector (cited by 32% of mining respondents). Despite record income from historically high commodity prices, many mining companies have significant funding pressures because of record capital expenditure commitments. Shareholders are increasingly concerned about the impact of project spend on earnings and there is mounting pressure for companies to respond by selling non-core and costly assets.
• Cultural integration issues emerged as a more prominent barrier to M&A activity (for 24% of mining respondents). Additionally, some 67% of mining respondents agree that concerns about cultural differences are a deterrent to pursuing cross-border deals – a higher figure than any other sector.
• Minority investment in a local company is, overwhelmingly, the most popular deal structure. For buyers, this can manage exposure to operational and regulatory risks as well as overcome merger control issues. For sellers, minority stakes can be sold to raise funds for projects while maintaining overall control.
• Cash is not necessarily king:  Acquisition activity is less likely to be funded by cash than in other sectors. Cash is preferred by only 16% of mining respondents against an average of 37% across all sectors, despite many miners having record cash inflows from increased production and high commodity prices.  Acquirers are willing to consider a range of funding sources.
• Sovereign wealth funds are the most important finance source for the mining and metals sector according to 32% of respondents (up from 22% two years ago), the highest level across all sectors, and a sign of the strategic importance of commodity supply to developing economies.

David Lewis, co-head of Mining and Metals sector commented, "The energy, mining and utilities sector has been the most active sector by value in 2011 with some US$557.1billion in announced deals, up 3.6% from 2010 (US$537.7billion). This buoyant market was fuelled in part by the Asian superpowers' continued fight for natural resources and assets becoming available at reasonable prices. While the frenzy may have slowed, we see that continued strong demand for natural resources, with particular focus on the untapped resources of less well-developed regions such as Africa, and shareholder pressure to focus on core assets, will still drive deal flow in the sector."