Mega mergers ahead for mining industry

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By Ignacio Badal - Analysis

SANTIAGO (Reuters) - With metal prices holding in what many call a super cycle, the global trend toward mergers and acquisitions will continue among miners, according to analysts and executives who attended the CRU/Cesco copper week in Santiago this week.

Small and medium-sized miners, and juniors who are still in the exploration stage, are the easiest targets for bigger companies, but the acquisition wave won't likely stop there, they said.

Mining analysts agree the market will soon see more huge takeover bids announced, like the failed attempt by Brazilian mining giant Vale (VALE5.SA: Quote, Profile, Research) (RIO.N: Quote, Profile, Research) to buy Xstrata (XTA.L: Quote, Profile, Research) for more than $90 billion.

Executives say acquisitions will continue because global copper demand is growing and supplies are tight, so new supply has to be brought on line. The easiest way to do that is to buy existing producers.

Companies will be on the lookout for producing assets and smaller players won't have the same access to financing to bring new output on line.

"(Mining) costs have skyrocketed in recent years, with the subprime crisis and the disappearance of securitized debt markets ... it is increasingly difficult to finance, meaning only the best capitalized players can afford to invest," said Bart Melek, a Toronto-based analyst with BMO Capital Markets.

"We may well be entering an era of super-consolidation. We'll see what pans out during the course of the next two years," Charlie Sartain, the chief executive of Xstrata Copper, told the CRU conference on Thursday.

Words like mergers, acquisitions and takeovers were among the most heard at the CRU and Cesco copper week, where potential buyers and sellers huddled in hallways and hotel lobbies.

"We are looking for acquisitions and mergers," said Owen Hegarty, president of Australian miner Oxiana (OXR.AX: Quote, Profile, Research).

Oxiana is in the middle of a A$6.1 billion (US$5.67 billion) takeover of fellow Australian miner Zinifex (ZFX.AX: Quote, Profile, Research).

Prices for copper hit a record of more than $4 per pound on Thursday, compared with 60 cents a pound five years ago. Prices for other metals, including gold, silver and nickel, are also high.

Experts say prices could stay high for several more years, and high costs will continued to cut into company profits.

"Acquisitions will continue because there is an enormous need for capital for development," said Hugh Callaghan, president of junior miner Tamaya Resources.

Among the big miners that industry sources signal may enter the fray are Southern Copper (SPC.LM: Quote, Profile, Research) (PCU.N: Quote, Profile, Research), a unit of Grupo Mexico (GMEXICOB.MX: Quote, Profile, Research), Chile's Antofagasta Minerals (ANTO.L: Quote, Profile, Research), Mexican silver miner Penoles (PENOLES.MX: Quote, Profile, Research) and Freeport-McMoRan Copper & Gold (FCX.N: Quote, Profile, Research) of the United States.

"I don't think its the best time for acquisitions, because prices are so high," Penoles explorations director David Giles said, adding that his company could nevertheless be looking for potential purchases.

"We're on the lookout for many opportunities," said Xioaling Ren, vice president for marketing for Aluminum Corp of China.

(Editing by Pav Jordan and Walter Bagley)