Mining M&A:

Predicting mining M&A activity is not an exact science. The landscape can change in an instant with natural disasters, political turmoil and economic shifts. However, there are strong indicators that lead us to believe that mining M&A could experience another banner year in 2011.

As we approach mid-year, many are wondering if we’ll meet the volume levels seen in 2010. Last year, deal volumes gained 28% over 2009 and shattered the previous record by posting a 21% gain over the 2007 peak. Yet it’s important to note that although deal value climbed 77% higher than 2009 to US$113 billion, it was still 26% lower than the 2006 peak due to an absence of mega-deals (transactions over US$10 billion).

With mining companies eager to capitalize on high commodity prices and growing demand for resources, we believe it could be another record-setting year. There has already been a flurry of M&A activity to date and this frenzy could help drive deal values higher-creating the right environment for mega-deals to return. Mining M&A is ever-changing, but we believe we will see some interesting trends develop this year.

BHP Billiton’s US$40 billion takeover bid of PotashCorp last year is an indicator that we may see higher valuations in the near term, albeit likely not as high as this one. Upward pressure on deal values may lead more seniors to turn to organic growth — as deal targets become more costly, investing in this type of growth becomes more attractive. BHP Billiton, for example, recently announced plans for a US$80 billion investment in organic growth over the next five years.

Faced with limited assets in developed markets, we expect more miners to traverse deeper into the world to frontier geographies in a rush to secure resources-trawling the seabed being an interesting example. The benefit is that these areas are virtually untapped, but the downside is that they often carry significant political and infrastructural issues.

If you believed all the hype about China’s M&A activity to date, you would assume that China is amassing de facto control of the world’s mining resources. However, data for the decade ended December 2010 tells a different story.

The reality is China’s current market share pales in comparison to other developed mining markets. In 2010, only 6% of deals involved Chinese acquirers, compared to acquirers from Canada (36%), the United States (16%) and Australia (16%). What’s even more interesting is that from 2000-2010, 61% of projects acquired were within China, and only 22% of transactions involved a target with a project on Western soil. Although China has made a notable leap in M&A activity this past decade, the country remains a small player. However, we do believe this may change in 2011, predicting the Chinese will take a more aggressive approach to M&A this year by consolidating their fragmented domestic market and increasing investments overseas.

Similarly, we expect Indian companies to ramp up M&A activity this year. As of 2010, India represents a mere 1% of buy-side volumes. However, they will likely increase deal-making to secure iron ore and coal supplies to fuel their aggressive growth plans.

Although the thirst is there to make deals, the ability to close them is another issue. We believe a significant challenge miners will face this year is overcoming closing hurdles amidst growing criticism from governments, shareholders and NGOs. The Government of Canada’s rejection of BHP Billiton’s takeover bid of PotashCorp. is a case in point that governments around the world will be closely monitoring M&A. In 2011, we believe it will be more important than ever that mining companies proactively work with their stakeholders to avoid similar deal disruptions.

PwC’s report highlights that a continued rally in mining M&A is not a sure thing. While most of us view the emerging market growth story as an inevitable truth, others question the sustainability of such meteoric growth. However, if the frenzy to capitalize on strong commodity prices continues, coupled by growing international demand for resources, we expect deal-making in the mining sector to continue on its upward climb. And judging from the record-setting pace of mining deals in the first two months of 2011 – US$33.5 billion – our expectations appear well grounded.

For more information, or to read the full Mining Deals report, visit: www.pwc.com/ca/MiningDeals.