Metals heat up

Mergers and acquisitions (M&A) activity in the metals sector has made quite the comeback. Backed by rebounding commodity prices and growing global thirst for resources, metals deal activity is on track to return to the level seen at the end of the 2006-2008 boom.

The 2010 numbers are nothing short of impressive and give some indication of what’s to come in 2011. Total metals sector M&A rose a staggering 79 per cent to US $27 billion from 2009, according to PricewaterhouseCoopers’ (PwC) latest Forging Ahead Metals Deals report. Total transaction value also increased substantially, with a US $14.3 billion total by the end of 2010 compared to US $4.4 billion in 2009.

What’s in store for 2011?

We saw some interesting trends in 2010 that could shape this year’s deal activity. For instance, there was a threefold increase in international cross-border deals, which rose 46 per cent year-over-year. This interest in international deals is being driven by moves to secure raw materials supply like iron ore. In fact, two of the top three metals deals completed in 2010 were for iron ore resources and to gain a greater presence in fast growth markets.

Reviewing the past year’s deal activity leads us to believe we’re in store for a heightened pace of deal-making in 2011. Already, the five largest deals announced in 2010 or early 2011—pending anticipated completion later this year—total around US $17 billion, up 60 per cent on the US $10.6 billion value of the five largest deals completed in 2010. Moreover, two Canadian announced deals have already made headlines in the few short months of 2011 with Cliff Natural Resources’ $4.9 billion takeover of Consolidated Thompson Iron Mines and ArcelorMittal’s $590 million takeover bid of Baffinland Iron Mines.

Who are the big players?

Counter to common perceptions, it is companies in developed markets rather than Chinese companies that are dominating deal-making. Japanese, North American, Western European and Australian buyers (along with Brazil’s Vale), all accounted for more international metals deal value than their Chinese counterparts. Instead, Chinese companies are focusing on consolidating their fragmented domestic metals sector.

In 2011, we believe all eyes will be on Africa as the country continues to make its foray as a global player in the metals deal market. Vale’s US $2.5 billion purchase of a 51 per cent interest in Guinea-based BSG Resources last year is a case in point. Africa is now a key area for deal-making as demand surges for raw materials supply. In fact, Africa now accounts for 13 per cent of worldwide target deal value in the metals sector and is expected to play a significant role this year.

So long as confidence remains in the sector, we’re likely to see a take-off in deal activity and value in 2011. The past year was a key turning point for metals M&A activity. The value of international metals deals broke away from the lows seen during the economic downturn and is now on track to returning to the level achieved during boom times.

To read the full Forging Ahead Metals Deals report, visit: http://www.pwc.com/gx/en/metals/mergers-acquisitions/2010-mergers-acquisitions-analysis-annual-review.jhtml CM

Jim Forbes is Global Metals Leader, PwC, Toronto.