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M&A Share Attractiveness Ranking – February 2013

February 17, 2013 Comments off

The latest update of the M&A share attractiveness ranking for the world’s 40 largest mining companies demonstrates the current slump of gold (and to lesser extent copper) mining stocks. Discounting Ivanhoe, which has been taken out by Rio Tinto, ENRC tops the list of companies that might become the target of an acquisition. The company’s stock moved higher over the past weeks on acquisition rumors, reducing its attractiveness ranking, but analysts still see approximately 50% upside in the stock. Behind ENRC the ranking is dominated by gold and copper miners, with Anglo American the only non gold or copper miner in the top 10. Low gold and copper prices and the emergence of gold ETFs has depressed the share price of the miners over the past year, but most analysts still expect better times for this group of miners.

The thebusinessofmining.com M&A share attractiveness ranking is a combination of analyst expectations and current share level compared to the annual high, normalized against BHP’s share performance. The ranking provides a market perspective of how ‘cheap’ a stock is for potential acquirers.

Mining M&A - Share attractiveness chart - 130217

Mining M&A - Share attractiveness ranking - 130217

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Mining M&A – Top 40 Share attractiveness ranking

August 4, 2012 Comments off

Valuations across the mining industry are coming down as a result of low commodity prices and uncertainty about the future of the global economy. Many companies are reviewing investment plans, pressured by investors to return money to shareholders if the project pipeline is short of feasible investment opportunities. Most companies in the industry will be extremely careful with large-scale M&A at this moment, but for some companies with either a lot of cash or a good position to give out more equity the reduced prices could provide opportunities to make a big acquisition. The ranking presented below presents the attractiveness of acquiring any of the Top 40 mining companies.

An acquisition of any of the world’s largest 40 miners will have to be financed to a large extent by raising additional capital from equity holders, as the acquisition price would be too high for most companies to pay cash after taking on more debt. The attractiveness of executing a share deal to acquire a company is split into the current level of share depression (historic performance) and the outlook for the share as given in analyst targets (future performance).

The share depression is represented in the chart and the ranking below by taking the ratio of current share price compared to 52-week high, normalized to the performance of BHP Billiton, the largest company in the group (i.e. share depression of BHP Billiton = 1.0). The 52-week high is used surprisingly often in acquisitions as the price paid, as it is easy to accept for many shareholders of the target company that they will receive the highest price over the past year.

The outlook for shares is given by the ratio of consensus analyst target dividend by current share price. Whatever the historic performance of a share, the outlook ratio shows the expected potential for the share. For these large mining companies the consensus target is typically formed out of at least 10 equity analyst and banker targets. An overall ranking score of share attractiveness is calculated by dividing the outlook ratio by the share depression ratio.

In this initial ranking of attractive targets, using closing share price of August 3rd 2012, the top 5 positions are claimed by ENRC, Ivanhoe, Kinross, Peabody, and Anglo American. Each of these shares has taking a significant beating over the past year. Apart from Anglo they have all dropped about twice as far from their year high share price as BHP Billiton. However, analyst targets for each of the companies are high too, each being expected to gain at least 50% of value in the relatively short term. The combination of a big drop in share price and a promising upside makes the companies attractive for potential buyers. Clearly many more factors play a role in target selection, and politics, synergy potential, and several other factors rule out quick action for most of the top targets in the ranking. However, the chart and ranking below do serve well as a quick scan to see which companies are in the ‘danger zone’ of becoming an acquisition target.


©2012 | Wilfred Visser | thebusinessofmining.com

Rio Tinto Iron Ore General Manager expects more M&A activity

July 29, 2012 Comments off

In preparation the ‘Mergers and Acquisitions in Mining’ conference October 30 and 31 in Sydney, Cody Whipperman, the General Manager of Business Development for Rio Tinto Iron ore, expressed his view that iron ore M&A will pick up as a result of lower prices and decreasing share values:

We’ve come off extremely high prices for global iron ore, driven primarily, if not exclusively, by demand from China. Inflated asset and equity vales have begun to deflate back to more reasonable levels, which should continue if the downturn persists and project financing remains difficult. The last few years have not been a great M&A environment for those seeking value. The next few years should be better and those with cash or access to financing should be able to take advantage of these opportunities and find real value. So, I think the next few years will prove to be good for value-driven M&A activity.

Minmetals in C$1.3bln bid for Canada’s Anvil

October 4, 2011 Comments off

“China’s Minmetals Resources has launched a C$1.3bn (US$1.25bn) takeover offer for Anvil Mining, a Toronto-listed copper producer, in a move that underscores the rising international profile of Chinese mining companies.
Chinese miners have been slowly but steadily advancing their overseas presence, as China’s consumption of key commodities such as copper, gold and coal continues to grow.

Minmetals announced Friday it would offer C$8 per share for Anvil in a friendly deal that has the approval of Anvil’s board and major shareholder, Trafigura Beheer. The price is a 30 per cent premium to Anvil’s 20-day trade-weighted average.”

Source: Financial Times, September 30 2011

Observations:

  • Minmetal’s made a bid for Equinox in April, but withdrew this offer after Barrick offered a higher price.
  • Minmetals acquired many assets of OZ minerals in Australia in 2009. Its mining division MMG is mainly managed by western managers and operates mines in Australia and Laos.
  • Anvil’s most important asset is the Kinsevere copper project in Congo, which is expanding to a 60,000tpa capacity and has proven and probable reserves of approx. 750 thousand tons contained copper.

Implications:

  • Anvil’s board informally put the company up for sale last month although it is in the process of a fully financed expansion program. Analysts expect the move to be driven by the large shareholders that want to cash in on their investment.
  • Minmetals will continue to look for $1-7bln copper investments in Southern Africa, trying to expand its portfolio and potentially build on the experience of Anvil’s management. According to the Economist stability in the Katanga copper region is uncertain as the strong governor of the province has decided to leave the office next year. Congo’s copper assets will certainly be in the center point of attention in the coming year.

©2011 | Wilfred Visser | thebusinessofmining.com

Anglo chief plays down acquisition talk

September 14, 2011 Comments off

“Cynthia Carroll, chief executive of Anglo American, has downplayed speculation that the multinational miner is on the hunt for acquisitions, saying that bid prices in the mining sector have been ‘too high’ for the company to enter the fray.

‘We are always looking at possible combinations across the sector and always evaluating whether it’s a better business case to build our own projects or look at acquisition opportunities,’ said Cynthia Carroll. But she added that ‘prices are still too high’, basing her comments on recent bids and takeovers.

In recent months, Anglo has been linked to a bid for Riversdale Mining, an Mozambique-focused coal miner that was ultimately bought by Rio Tinto for A$4bn. More recently, it considered a possible bid for Macarthur Coal, an Australian coal miner. Macarthur has since accepted a joint A$4.9bn ($5.2bn) bid from a consortium led by Peabody of the US. The bid values the Macarthur at 18 times estimated 2012 earnings.”

Source: Financial Times, September 13 2011

Observations:

  • Anglo American has not made any large acquisitions since 2008, when it bought several iron ore assets in Brazil. Of the 5 large diversified miners the company has been least active in large scale M&A over the past 10 years, as depicted below (click on image for larger version).

Implications:

  • If the acquisitions would be paid in shares, the current low share prices would hinder acquisitions (large dilution of ownership). However, with the current large operating profits acquisitions are mainly paid in cash.
  • Valuation of companies is done in various ways, based on standalone company value and additional financial and operational synergies of a change of control, all leading to different results: a ‘true value’ of a company can never be determined, as the value differs per acquirer and valuation assumptions are debatable. However, the fact that various companies are acquiring targets in Southern Africa which would have a better operational match with Anglo American (= higher synergies) implies that Anglo is more conservative in its valuation, being cautious to overpay.

©2011 | Wilfred Visser | thebusinessofmining.com

Coal’s Glow Attracts Major Miners

September 12, 2011 1 comment

“The sector’s confidence in emerging market demand for coal, especially the sort used in steel making, is keeping deal activity brisk. Four of the 10 largest mining-sector mergers and acquisitions in the first half of this year were for metallurgical coal assets, according to PwC. Total deal value so far this year, at nearly $19 billion, is already close to last year’s $22 billion total. Peabody Energy and ArcelorMittal’s $5 billion agreed bid for Macarthur Coal late last month is unlikely to be the last transaction. Anglo American, which was in the running for Macarthur, remains on the prowl for acquisitions, as do other mining majors.

But strong demand and a scarcity of top-notch coal assets can lead to punchy valuations. Acquirers this year have paid 13.2 times trailing operating profit for coal companies, compared with an 11.2 times average over the previous decade, according to IHS Herold. Peabody and ArcelorMittal are paying 20.8 times trailing operating profit for Macarthur.”

Source: Wall Street Journal, September 9 2011

Observations:

  • Top coal mining deals of the last year include Peabody-Arcelor’s (PEAMcoal) $5.2bln bid for Macarthur, Itochu’s $1.5bln Drummond deal, Alpha Natural Resources $8.5bln acquisition of Massey, and Arch Coal’s $3.4bln acquisition of International Coal.
  • In a poll on this site in January 38% of respondents indicated coal would be the commodity triggering most M&A in 2011.

Implications:

  • The key drivers for high valuations of coal producers in the last year are consolidation of the North American industry and the ‘need’ for steelmakers to integrate vertically and secure the access to a stable supply. A similar trend could drive up valuations of iron ore mines if growth of demand keeps up and ramp up of capacity of the major miners goes as slow as expected.
  • Most of the recent acquisitions in the coal sector have been done by Indian steelmakers or US coal miners, with targets often in Indonesia, Australia and Southern Africa (all relatively close to Asian consumers). Surprisingly Chinese companies are not yet playing an important role. Strategic acquisitions by Chinese steelmakers and/or coal mining giants, supported by government institutions, could further drive up valuation ratios of metallurgical coal assets in the area.

©2011 | Wilfred Visser | thebusinessofmining.com

Chinese Consortium Buying Stake in Brazilian Miner

September 5, 2011 1 comment

“A consortium of five state-owned Chinese companies bought a 15% stake in the world’s largest niobium producer for US$1.95 billion in cash, a move that highlights the race among steelmakers to secure resources amid tightening supply.

Brazil’s Companhia Brasileira de Metalurgia e Mineração, known as CBMM, announced the deal on Friday. The company produces more than 80% of the world’s supply of niobium, which is used to strengthen steel and is widely employed in making cars and natural-gas pipelines.

China, whose steelmaking capacity has recently leapt to over 700 million metric tons a year, is the world’s biggest importer of niobium. Growth in emerging markets has underpinned demand for scarce commodities. World-wide demand for niobium grew 10% annually from 2002 through 2009.”

Source: Wall Street Journal, September 2 2011

Observations:

  • The group of 5 existing clients of CBMM buys 15% of the controlling stake of the Moreira Salles family. The family sold another 15% to a group of Japanese and Korean companies for $1.8bln in March.
  • Niobium is considered a rare earth mineral. Various governments tried to stimulate domestic mining of rare earths because China currently holds over 90% of global rare earth production. In May the new Brazilian government persuaded Vale to look into rare earth production.

Implications:

  • It is not fully clear why the Moreira Salles family sells minority stakes of their company. The almost $4bln the family raised by selling 30% is owned by the family, not by the company, and thus will not be used for expansion of the company. As the family held 55% of the company before this year (the other 45% is held by Unocal), ownership is now fragmented, with 2 or 3 of the shareholder groups required to support any major decision.
  • CBMM is well positioned to be the world’s leading niobium producer in the coming decades, as most of the world’s reserves are located in Brazil. Strengthening ties with this producer is crucial for steel makers in order to control their input prices. It will be a challenge for the large Indian and European steel makers to secure their niobium supplies without buying into a producer too.

©2011 | Wilfred Visser | thebusinessofmining.com

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