Cash-Rich Global Quest for Limited Resources Fuels Spike in Deals, Joint Ventures

The Wall Street Journey

DECEMBER 4, 2010

Banking on prolonged strength in the commodities market and rapid industrialization among emerging economies, mining companies are deploying the cash reserves accumulated during a stretch of strong prices to quickly buy other miners or launch joint ventures.

The deals range from gold to coal and stretch from Canada to China as mining companies move to quickly snare limited resources and develop new ones. On Friday, several multibillion-dollar deals were announced or sealed. Australia-based Andean Resources Ltd's shareholders approved a $3.58 billion buyout by Canada-based Goldcorp Inc. Walter Energy Inc. announced a $3.3 billion in cash and stock acquisition of Canadian rival Western Coal Corp., creating a metallurgical coal giant with 385 million tons of coal reserves.

The world's third-largest miner, Rio Tinto, made two announcements. It said it would both form a joint venture with Aluminum Corporation of China to explore mineral resources in China and expand its joint venture with Sinosteel Corp. to mine ore in Australia. And, according to a person familiar with the matter, Australian miner Legend International Holdings is looking to sell its phosphate mines for between $500 million to $1 billion, cashing in on growing demand in Asia for fertilizer.

A Walter Energy coal conveyor in Alabama. The company is buying Canada's Western Coal for $3.3 billion.

"Right now, we are at a time when a lot of these commodities tend to do well, so there is a fair amount of confidence in the industry," said Michael Chender, the chief executive officer of Halifax, Novia Scotia-based Metals Economics. "The majority of people believe demand will continue to rise, along with sustained high prices for metals and minerals."

He also believes there is an element of herd mentality, with companies concerned about falling behind. "Somebody will move and then you will see a plethora of deals behind it, because there is a general sense that people are concerned about losing out in asset of opportunities."

But a more fundamental reason behind the activity is a strong belief in continued demand from emerging markets—China, but also India and second-tier countries such as Turkey. China is a huge consumer of raw materials and increasingly a big developer of those same raw materials.

"There's no question that China has an insatiable appetite for raw materials that is driving the significant surge in M&A activity that we've seen over the last few months," said Jeremy Sussman, a coal analyst with Brean Murray, Carret & Co.

Gold is particularly attractive because it is getting increasingly hard to find good ore grades from existing mines.

In the two-month period of September and October, there have been about 40 announced acquisitions by gold companies alone, compared with 28 in the combined July and August period, representing a 43% rise, according to Industry Monitor, a mining industry publication.

The estimated resource value of those same deals was $97.9 billion in the more recent two-month period, up from $18.7 billion in July and August. Gold's sustained high price, hovering around $1,400 an ounce, accounts for the spate of deals, analysts said.

Acquisitions are also strong for base metals, such as copper and zinc. In the two-month period of September and October, there were 20 announced acquisitions, mostly for copper, compared with 13 announcements in the July and August period, according to Industry Monitor.

Tom Whelan, a partner at Ernst & Young's mining and metals practice said that the these deals stem in part from a cash buildup among mining companies. Commodity prices for iron ore, copper, zinc, coal and other metals and minerals recovered quickly after the economic downturn in 2008.

"We've had 18 months of spectacular earnings," he said. "Major and mid-tier producers are getting cashed up quite nicely."

Moreover, building a new mine is becoming more difficult due to political and social concerns, as well as worries about fickle foreign governments changing rules.

"Getting a social license to cooperate has become so difficult," says Glenn Ives, chairman of Deloitte & Touche in Canada and head of its North American mining group. Still, he said, mining companies are willing to take risks because of strong prices.

The high commodity prices "are making every region, no matter how dangerous, attractive," including Afghanistan.

One way to lessen the risk and cost is to set up joint ventures, such as those announced Friday by Rio Tinto.

The lack of infrastructure is also playing a large role in companies' rush to secure resources. The race for metallurgical coal assets has become more urgent because ports in Australia have become congested, tightening supplies, and industry officials say existing infrastructure in other parts of the world may not be up to meeting future demand.

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