Here is an optimist! This time the cheerful fellow is not even in the industry. He is a broker. And he thinks that 2008 will be another boom year for bids and deals despite the credit crunch.
It’s unusual for brokers to be so bullish. Especially analysts. They are renowned in the industry for being pessimistic, especially about prices. It has been the mining companies themselves who have been so confident that we’re still in a major revaluation cycle.
This is fantastic news, if Mr broker is right. It means there’s a chance of some money for the punters. Currently the miners are being pushed down to the bottom in stock market round-ups. No new news here! The deals on the board are all the old ones. Even though gold seems set to go through $1,000!
Discouragingly, fights over the world’s increasingly scarce resources never seem simple. Take Brazil’s giant miner Vale’s chase of Swiss group Xstrata. There is a major shareholder in the middle who just won’t agree a price or metal deal. So, negotiations are still stuck after weeks of negotiation.
However, it’s hard to argue that more money can’t be put into the deal, when the markets are booming! So odds are this one will go through in the end.
Our happy optimist, David Houghton, co-head of BMO Capital Markets, thinks the big miners still have no choice but mergers and acquisitions (M&A). They are running out of reserves. Speaking at a conference in Hollywood, he says the big picture is bleak. Exploration cash buys fewer and fewer tonnes. There are limited places the miners can dig. So the only option is to go and buy someone else’s seemingly greener space!
Getting the money into the ground
As he sees it, the majors are piling up cash as gold, silver, diamonds, etc, all soar in price. They have to get that money into the ground and producing. If they don’t then soon the cash will stop piling up. That view has led to the heavy consolidation in the industry over the last three years.
Shareholders have, of course, first say on the money. Payouts in the form of dividends and share-price supporting buy backs exceeded US$18bn in 2006, he points out. But there is plenty left!
Not that he is saying anything new. It is just that the fear has been that the severe contraction of banks’ willingness to lend could bring M&A to a halt. So no one has been talking M&A as much recently.
BMO Capital Markets is Canadian and pretty close to the mining industry. So, chances are he knows what he is talking about. He is focusing on M&A in the gold industry, in particular.
"Industry concentration is still much lower in gold than for base metals or bulk commodities," he says.
Main action he predicts will be the major miners picking up the small fry. So many of the mid-caps have already been taken out. Where are Pechiney, Alcan, Western Mining and Income? Long gone! Those left are vulnerable to approaches from the super miners.
The Chinese are the new tip
Even among the super miners, he points out, cannibalism is rampant. So, BHP is still trying to capture a very reluctant Rio Tinto, Vale has not given up yet on Xstrata, Anglo will take over other Africans, and the Russians are getting together.
Houghton suggests that the Chinese will start getting predatory in 2008. Their line of action was thought more likely to be among the smaller companies. But the way they teamed up with Alcoa to take what could be a bid blocking stake in Rio Tinto changed all that! Now analysts are scouring through the miners for other companies the Chinese might wish to remain independent.
Of course, the definitive work on mining M&A recently has come from accountants and consultants Ernst & Young. They do not believe that the deals on the table "mark the end of consolidation." This despite the fact that nearly US$125bn was the figure on M&A deals last year and the year before.
Fortunately the list of bid candidates is being boosted by new primary mining listings. There’s been Xstrata, Vedanta, Kazakhmys, Ferrexpo, Gem Diamonds and Hochschilds in London alone.
Three major deals in 2008?
Ernst & Young predicted just before Christmas that there would be three more major transactions valued at over $50bn in 2008. Plus a number of smaller deals in the $5bn-$10bn range. Among the bidders they expect the Russians and Chinese to show their faces more. Not to mention the new Sovereign Wealth Funds.
Those Wealth Funds are very interesting. The market believes there is a strong possibility that they will seek to take strategic control of supplies. Bids for the larger, successful, exploration companies are forecast to secure long-term reserve bases.
Of course, the miners are unlikely to be allowed to divide up the industry by themselves. Governments are taking increased interest as awareness of shortages rise, and as inflation spirals! Rulings to restrain companies from dictating prices are increasingly likely. Though governments may not be more effective than King Canute!
So, more resource wars!
Happy mining!
Erin and Isabel.
