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Mining bosses have warned against plunging into the M&A market and repeating mistakes of the past as forecasts mount that the industry is on the verge of a dealmaking boom.
Rio Tinto chief executive Jakob Stausholm was the most outspoken as he hinted at the experience of his predecessor Tom Albanese, who was ousted from the top job in 2013 after an ill-fated acquisition.
Albanese was blamed for Rio’s $38bn deal for Canadian aluminium rival Alcan in 2007 that contributed to $30bn in writedowns following the metal’s tumble on the markets.
“A lot of deals were made between 2005 and 2012 and a lot of these turned out to be really bad,” Stausholm told the Financial Times.
“Now it feels like things are opening up a little bit . . . but from the Rio Tinto perspective, that’s not that relevant: I have no fomo or fear of missing out.”
Mark Bristow, the pugnacious South African chief executive of Barrick Gold, agreed, saying it can “happen fairly easily” that the industry overstretches itself again by paying too much for assets.
The debate over whether M&A is about to surge follows the boosting of balance sheets by the big groups in the past decade in an effort to restore returns in the wake of the 2015 commodity crash, potentially creating the firepower for deals.
The expected driver is a desire to snap up supplies of metals critical for clean energy, say investment bankers. Miners think these will be in short supply in the future, forcing up prices as demand outstrips supply.
In this scenario, copper is forecast to be the most hotly pursued commodity as it is used in vast quantities in renewables, power grids and electric cars and will therefore be vital in the move to net zero.
Others think the fall in spending on developing new supplies of minerals because of the restricted availability of capital and the hit to profits from falling commodity prices is laying the groundwork for more dealmaking.
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Michael Rawlinson, a former investment banker and now chair of London-listed silver and zinc miner Adriatic Metals, said this drop in spending could lead to supply shortages, prompting a rebound in prices and profits that in turn provides the ammunition for M&A.
He points to the bottom of the market in 2000, which coincided with the last tech bubble when “low prices restricted supply, leading to price rises and an M&A frenzy and overspending on new projects in 2006-2011”.
“Here we are in 2024 with possibly another tech bubble breaking, a backdrop of unrelenting demand growth for units but nobody in the west has spent the money on projects to fill the gap,” he added.
Some of the big players have already stepped into the M&A fray. Swiss commodity trader Glencore last month completed its acquisition of a majority stake in the coal assets of Canada’s Teck Resources for $6.9bn, while BHP swooped for Anglo American, although its £39bn bid collapsed in May.
In addition, BHP bought Filo Corp — a Canadian exploration company — for $3bn last month, while Anglo is now breaking itself up by auctioning off its metallurgical coal mines in Queensland and its De Beers diamond subsidiary, as well as spinning off its platinum metals unit.
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Elsewhere, South Africa’s Gold Fields paid $1.6bn this month for rival gold producer Osisko Mining at a 55 per cent premium to the 20-day average of the share price before the deal.
However, others say predictions of a boom may be wide of the mark, pointing to the fall in deal count, which dropped to the lowest level in five years in the first half of 2024, according to research group BMI.
Sabrin Chowdhury, commodities analyst at BMI, said deals were tricky due to lower earnings off the back of falling metal prices and inflation. This makes new mines more expensive to build and raises the cost of the assets.
“Sentiment towards commodities is quite low as optimism of stimulus in China has worn out,” she said. “This year the miners are still quiet because of the lower metal prices.”
Falling prices for commodities, such as iron ore, copper and aluminium, is likely to deter dealmaking rather than encourage it, according to some bankers.
“If they’re brave and ready to be countercyclical [buying despite a falling market]then it makes sense [to buy],” said one investment banker. “But the majors don’t tend to be countercyclical. They nearly always go out and do their big stuff at the top of the cycle.”
Still, the expected demand for copper in the clean energy transition is prompting groups to scour the market for potential deals.
Even specialist miners, such as gold producers Newmont and Barrick Gold, want the red metal, fuelling speculation that the world’s biggest copper producers, including the Canadian trio of Teck, First Quantum and Capstone Copper, are now the main targets for predators.
Competition for other commodities, such as precious metals, iron ore and coal, is expected to increase too, according to Farid Dadashev, head of Emea metals and mining at RBC, who saw “robust fundamentals for mining M&A in the next 12-18 months”.
The positive reaction to deals from investors was likely to help fuel M&A, he added. “We expect to see boards increasingly regard M&A as an avenue to unlock future value.”
Rebecca Campbell, who heads mining and metals at law firm White & Case, said she was seeing more work coming through for individual mines and strategic joint ventures rather than “the big, sexy M&A”.
One such sales process is for two of Canada-based Lundin Group’s zinc and copper mines in Europe, which has garnered interest from Glencore, South32, Sandfire Resources, Grupo México, Zijin Mining and Elliott-backed mining fund Hyperion, according to two people familiar with the matter.
Others say there are already signs of a market overstretching itself. Bristow branded BHP’s deal for Filo as a “long out of the money development project” — meaning it will take time before the investment reaps returns — bought at a premium.
Analysts add that the BHP deal highlights the lack of other viable opportunities. “Spending billions on an undeveloped mine — if that’s the hottest thing in the market, then there’s not a lot out there,” said Bob Brackett of Bernstein.
Chinese competition is not helping the risks of overstretching either, as they are willing to pay over the odds for mines because of their strategic importance. “If you win a fight with the Chinese, then you overpay,” said Rawlinson of Adriatic Metals.
However, government intervention, as witnessed in the two latest M&A dramas, may act as a brake on dealmaking.
After Glencore sealed the deal for Teck’s coal business, Ottawa vowed to raise the bar for approving future deals for Canadian mining groups, warning that they would only be waved through in “the most exceptional of circumstances”. Likewise, South Africa came out swinging to protect Anglo from BHP’s takeover approach.
Even so, analysts expect more big combinations to come.
They say BHP’s chief executive Mike Henry will be undaunted by the Anglo rejection, especially given the bumper profits and cash flows on his company’s balance sheet from iron ore.
“The idea that somehow his first rebuff in M&A derails his long-term plan feels a bit silly,” said Brackett. “No doubt he has a shopping list of things and will reconsider Anglo.”
In November, UK takeover rules will permit BHP to bid once again for Anglo, which has vowed to slim itself down to a copper and iron ore producer by the end of the next year.
“The base case would be someone comes back and has a go at them,” said Dawid Heyl, portfolio manager at Ninety One, a shareholder of several large miners. “BHP, Glencore, Newmont and Rio are all going to do the work to see if they can afford it and get the synergies.”