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Rising development costs and softening metal prices are changing the way mining companies view mergers and acquisitions, according to a report released Tuesday by consultants Ernst & Young.
Look for less building and more buying, said Richard Crosson, partner in Ernst & Young’s Transaction Advisory Services practice.
Traditional sources of capital such as equity markets are drying up, Crosson said in an interview, leading to less exploration and more mining mega-mergers.
Further, resource nationalism is on the rise, with governments seeking a greater share of the mineral wealth, Crosson said. As a result, companies that have grown wealthy during the strong commodities cycle, are being more selective about where they invest. Mergers and acquisitions are more desirable than new developments, he said.
“Predicting markets in the uncertain environment we are in right now is difficult, but we see that the conditions exist for a more robust merger and acquisition environment,” Crosson said.
Resource nationalism is the No. 1 business risk faced by miners, according to Ernst & Young. As a result, the shrinking pool of exploration dollars is being focused on regions with good geology and stable governments.
“What you will see is that British Columbia will become a more interesting place to invest,” he said.
Despite lower commodity prices, long-term fundamentals remain strong in the mining sector, he said. That, coupled with lower stock valuations — shares in some of the major Canadian mining companies are off 35 to 50 per cent — is creating an attractive M&A environment.
The growing trend in mega-mergers comes at a time when overall M&A activity has been in decline. In the first six months of 2012, the value of deals within Canada, where the number of junior mining companies is high, fell by 41 per cent. The number of deals dropped by 26 per cent.
The number and value of mergers declined globally as well, according to the Ernst & Young report, Mergers, Acquisitions and Capital Raising in the Mining and Metals Sector. There were 470 global deals with a deal value of $55.7 billion US, down 38 per cent in numbers and 19 per cent in value from the same period of 2011.
Crosson said he expects to see an end in the coming months to the current decline in the overall number of mergers and acquisitions. A telling sign is that the number of mega-deals worth over $1 billion, was up — from 15 for the first half to 2011, to 20 for the first half of 2012.
For the rest of this article, please go to the Vancouver Sun website: http://www.vancouversun.com/business/Cash+rich+mining+companies+prefer+buying+building+metal+prices+decline/7054746/story.html