Johannesburg - The era of super consolidation has arrived for the resources industry, with the number of mergers and acquisitions concluded by the sector climbing 69% and the total transaction
value rising 18% to US$158.9bn, or R1.3trn, in 2007.
PricewaterhouseCoopers (PWC) said in its Mining Deals 2007 annual review that both the number of deals and their total value were more than double the level recorded just two years earlier in 2005.
The annual review, which was released on Wednesday, showed that the number of deals valued at more than US$1bn trebled in just two years, from eight in 2005 to 25 in 2007.
"Competition for deals is intense and is being given further momentum by increasing international activity from Chinese and Russian companies," said PWC, adding that the total value of mining deals undertaken by companies from these two countries rose six-fold, from just $5.3bn in 2005 to $32.7bn in 2007, and accounted for about one-fifth of total mining deal value worldwide.
"Eat or be eaten has become the new reality," said PWC.
The mining sector is in a phase of major structural change with
consolidation evident in the mid-tier, among smaller companies and with the emergence of super-majors.
Upstream integration is also on an increase among companies in
industries such as metals, particularly steel and power.
'Deals are key
"Mining companies cannot afford to be bystanders in M&A activity. Deals are a key mechanism for filling the pipeline of development projects, bringing forward new development projects and diversifying corporate portfolios in terms of both commodities and geography," said PWC.
Ushering in the era of super consolidation is Rio Tinto, which set a new top deal bar in 2007 with its $43bn purchase of aluminium producer Alcan, and the year ahead may beat that record with BHP Billiton formalising its takeover offer for Rio Tinto.
If successful, the takeover - with a potential deal value more than $150bn - "would shatter all previous records".
Super-consolidation is being further evidenced by rumours of a Vale bid for Xstrata in a deal that could be worth US$90 billion.
Underpinning these trends is the quest for world scale, resource
acquisition and resource diversification, said PWC.
Diversification is being sought across commodities and geographies.
The report showed the major growth in deal activity coming from the base metals, diversified and other sectors including coal, uranium and mineral sands, while less dramatic changes were seen in the precious metals sector where a different set of economic metrics apply.
While PWC predicted that the economic slowdown in the US, continuing financial market uncertainty and fears of actual recession would "inevitably cast a cloud of uncertainty over the period ahead", it said there was very little evidence of a slowdown in deal activity as a result of the credit crunch late last year.
The number of mining deals announced in the fourth quarter of 2007 was more than double the level recorded in the corresponding quarter of 2006, it said.
"From the macroeconomic point of view, much will depend on the continued sustainability of Asian demand. Instabilities are likely to deliver a bumpier deal-making ride, although the fundamentals for M&A activity in mining remain strong," PWC said.
Looking ahead, PWC said a series of landmark deals might reshape the top-tier mining groups, while consolidation would continue to be a strong deal driver among mid-tier and smaller companies.
"Whatever its size, no company will be able to be complacent about their M&A strategies as the industry continues to chart a dynamic M&A path," it concluded.