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Despite a recent prolonged stretch of growth, the mining industry is fundamentally a cyclical business. It is especially during the downturns that companies are forced to remember this reality, and adjust to the risks.
So far in 2013, there have been a number of reminders — from falling commodity and equity prices to multibillion-dollar write downs across the sector. Neither gold’s reputation as a haven nor China’s steady hunger for commodities have been able to hold back the bears, as the global economy continues to try to find a solid footing.
Mergers and acquisitions fall 31%
The current volatility in the mining sector has had a noticeable impact on merger and acquisition (M&A) activity in 2013. While some companies have taken advantage of lower prices to pick up assets, the number of deals across the global mining sector fell by 31% in the first half of 2013 compared to the same time last year, which was already considered to be a slow time for deal activity. While majors continue to invest in their operations, projects have been deferred and capital spending has been curbed.
Junior mining company takeovers down
The real challenge in the current M&A market is finding buyers. Juniors are not seeing the same level of takeovers they’ve come to expect at a certain stage in their growth, while majors are mostly looking to divest assets, not pick up more. Meantime, mid-tier consolidation interest has waned due to tight financing conditions and fewer buyers overall.
What we have seen so far in 2013 is somewhat of an anomaly in the industry, skewing results for what is shaping up to be a down year in mining M&A.
Mining equities fall
Equities across the sector have fallen by about 30% so far this year, which has also impacted the size of deals. Deal value fell 74% to US$20.6 billion between January and June 2013 versus the same period last year, which was a period highlighted by Glencore International plc’s US$54-billion purchase of Xstrata plc (GlenX), the largest-ever takeover in the sector. Even without the blockbuster GlenX agreement, deal values were down 21% for the first half of 2013 as compared with a year earlier. Gold and copper continued to be the most active for buyers and sellers in the first half of 2013. That trend is expected to continue as depressed prices create opportunities for companies that can afford to buy, and may force others to sell.
Geographical shift in mining deals
One shift so far in 2013, as compared to previous years, is in the geography behind some of the top deals, and who’s making them. Unlike in previous years, when deals were dominated by players in countries such as Australia and Canada, top M&A activity so far this year is coming from former Soviet Union states, namely Russia and Kazakhstan. Russia accounted for more than a quarter of deal value by geography in the first half of 2013, followed by Kazakhstan. The United States rounded out the top three.
That’s a new lineup compared to last year when Canada, the United Kingdom, Switzerland (thanks to GlenX) and China dominated the top spots for deal activity by geography. Deals by Russian and Kazakhstan oligarchs led M&A activity for the first half of 2013. Two Russian billionaires are behind the top deal, which was for a stake in Polyus Gold International Ltd., the country’s largest gold miner, while Kazakhstan billionaires were behind the second and third-largest transactions for the January-to-June period.