OPINION-The party is over for mining M&A

(The opinions expressed in this article represent the views
of metal industry consultants Raw Materials Group. They should
not be seen as necessarily reflecting the view of Reuters)

By Magnus Ericsson and Martin Jansson, Raw Materials Group

Feb 18 - The party is over

The boom in mining mergers and acquisitions (M&A) is
definitely over. For the third year in a row mining M&A has
decreased reaching only $80 billion in 2008, down by 20 percent
from 2007 and from a peak of $140 billion in 2006.

There is a straight relation between M&A appetite and metal
prices and with the present gloomy outlook for most metals M&A
in 2009 will continue down.

THE YEAR OF FAILED TAKEOVERS

The year was rather characterised by the deals that failed
than any great new visionary formations of strong new entities.

At the top of this list of deals that did not make it is of
course the BHP Billiton (BLT.L) (BHP.AX) hostile takeover bid
for Rio Tinto (RIO.L) (RIO.AX).

The protracted battle ended after over a year of bitter
fighting. BHP Billiton claimed plunging commodity prices and the
global recession made the deal impossible. But there is still a
lingering doubt whether the deal -- almost monopolising global
iron ore and in particular threatening European supply -- would
have been given the necessary regulatory green light.

The final winner might be the Chinese. Chinalco, already
being the major shareholder of Rio, could very well decide to
take advantage of Rio's difficult position and take up a
majority share. If they did they would become the first Chinese
among the Top 10 mining companies in the world.

If this is the case the final outcome will be similar to the
battle for Gold Fields (GFIJ.J) 20 years ago: Management fought
off the hostile take-over attempt launched by Anglo American
(AAL.L) and Minorco only to see raider Lord Hanson coming in a
few months later.

Vale's (VALE5.SA) $90 billion bid for Xstrata (XTA.L),
though never formal, and the latter's aborted attempt to take
over Lonmin (LMI.L) are other deals that did not go through.
Possibly to the great relief of the management and boards of the
aggressors?

Top Failures 2008

Acquirer Object Metal Value

($mln)

BHP Billiton Rio Tinto Diversified 150,000

Vale Xstrata Diversified c90,000

Xstrata Lonmin PGM 9,000

Impala Platinum Mvelaphanda PGM 2,200

Kalaharti Resources Extract Res. Gold, Uranium

Cliff Nat. Resources Alpha Nat. Res.Iron Ore

Midwest Corp. Murchison Iron Ore 1,300

Gold Aura Premier Mining Gold

Source: Raw Materials Data 2009.

SOME SUCCESSFUL DEALS

Although the level of M&A activity is plummeting it is still
much higher than it used to be before 2005 when the commodity
boom took off.

In the decade before that annual M&A spending in the mining
industry hovered around a meagre $20 billion.

Including the Chinalco acquisition of Rio there were four
deals valued over $5 billion each in 2008:

Russian oligarch Prokhorov's United Company Rusal took a 25
percent stake in Norilsk (GMKN.MM), the merger between
Australian Zinifex and Oxiana and Anglo American's iron ore deal
with Brazilian tycoon Eike Batista.

Top Ten Deals 2008

Acquirer Share Object Metal Value

(pct) ($mln)

Chinalco 12 Rio Tinto Diversified 14,300

UC Rusal 25 Norilsk Nickel 7,000

Zinifex 100 Oxiana Zinc 6,282

Anglo American 100 Iron X Mineracao Iron ore 5,500

Sterlite* 100 Asarco Diversified 2,600

Barrick Gold 40 Cortez Gold Gold 1,700

Mine

Goldcorp Inc 95 Gold Eagle Mines Gold 1,500

Public (sold by 48 Silver Wheaton Silver 1,499

Goldcorp)

Mechel OJSC 100 Oriel Resources Steel 1,498

Marubeni Corp 100 Esperanza Copper Copper 1,401

Mine

Source: Raw Materials Data 2009.

* New deal reported to be close in early Feb. Sources said
would be lower than the original $2.6 bln.

IRON ORE

Iron ore prices remain at high levels compared with most
other metals. This is reflected in the high level of activity in
iron ore. Around 20 percent of all deals were made in this
sector.

This trend is most likely to continue into 2009 with prices
expected to remain at relatively high levels despite a predicted
fall in the on-going benchmark negotiations.

Gold was the second most attractive target based on even
higher gold prices. Continuing good profits among the gold
miners also indicate further high levels of M&A activity in this
branch of mining.

FUTURE

The trend of increasing consolidation in the global mining
sector will slow in 2009. Corporate concentration will rise
however in iron ore and possibly also in gold.

Funds available for M&A will dry up in most companies in
2009 but those that still have cash can make some very exciting
deals.

Perhaps the Chinese will take the opportunity to finally get
into the top ten?

If you would like to speak to the authors please call:

00 46 8 744 0065