Mining M&A surge to persist through 2011

Renewed vigour within the mining sector gave rise to a marked increase in merger & acquisition (M&A) activity during 2010's second half. Deals in the industry accounted for around 11 per cent of global M&A activity, worth a total of £146bn. That represents a 58 per cent increase on 2009's levels and, with many large miners sitting on large cash balances, that M&A surge could continue throughout 2011.

That said, a big cash pile is no guarantee of bidding success - as BHP Billiton's chief executive Marius Kloppers can possibly testify to. In August, BHP tabled a hostile $38.6bn (£23.6bn) bid for Potash Corp of Saskatchewan, the world's largest producer of fertilizer inputs. It's not only pre-eminent in potash, but also a major player in the production of nitrogen and phosphate - the holy trinity of muck-spreading. But Potash's board labelled the offer as derisory and the bid was scuppered in November after BHP received word that the Canadian Minister of Industry was minded to block the deal. The aborted bid left BHP saddled with a $350m impairment charge relating to associated financing and legal costs.

Indeed, the Potash saga represents the third major unsuccessful deal tabled by BHP during Mr Kloppers' time at the helm. It may also have prompted the board to reactivate the outstanding element of a $13bn share buy-back plan that was put on hold during 2007, when BHP launched an earlier ill-fated bid for rival . The unsuccessful Potash bid would also have constituted the largest single deal last year had it been successful, but BHP is still actively pursuing its huge Jansen potash project in Canada. Mineral fertilizer inputs are finite commodities, while rising populations and increased soil degradation has alerted BHP and other companies that an increasingly profitable place is likely to be where mining overlaps with agriculture.

There was other M&A activity initiated by FTSE 350 miners last year. Antofagasta, for instance, moved to expand its copper, nickel, and platinum interests in the US through a C$77.6m (£50.2m) joint acquisition of Toronto-listed Franconia Minerals Corp. That's being conducted in partnership with its joint venture partner, Duluth Minerals. Moreover, Rio Tintois seeking to expand its already substantial coal reserves through a A$3.9bn (£2.5bn) bid for Riversdale Mining. That Australian registered miner boasts interests that include 13bn tonnes of high quality metallurgical and thermal coal deposits at its Benga and Zambeze projects in Mozambique. The group has also announced plans to dramatically boost its iron ore capacity by investing an additional $1.2bn in infrastructure at its Pilbara operations. .

But possibly the best recent news for the FTSE 350's miners was that China has become the world’s largest net importer of thermal coal. It's also likely that global steel producers will be forced to contend with a significant production deficit in relation to metallurgical coal. This tightening supply and demand ratio should provide long-term support for coal prices and improve the pricing leverage for big exporters such as Xstrata, BHP and Rio Tinto.

In fact, that renewed clamour for coal will result in an addition to the FTSE 350 mining constituents come April, following a deal that was initiated by Nathanial Rothschild - a scion of the merchant banking dynasty. He has agreed to channel $3bn through Vallar PLC, his Jersey-incorporated investment vehicle, in order to secure stakes in two Indonesian coal companies. That will mean taking a 75 per cent slice of PT Berau Coal Energy and a 25 per cent stake in PT Bakrie & Brothers' PT Bumi Resources. Following that reverse takeover, Vallar's name will be changed to Bumi PLC.

ANGLO AMERICAN3309.54368823.90.515.6
BHP BILLITON251755355212.219.9
HOCHSCHILD MINING592200138.50.469.4
KENMARE RESOURCES. (LON)32.157730.064.3
RIO TINTO44376772219.41.322.1
VEDANTA RESOURCES2494661418.91.2-11.9

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