M&A activity depletes Australian projects

M&A activity depletes Australian projects

Although the boom keeps booming it seems the gap between the Australian mid-cap sector and the majors is growing.

According to Citi Investment Research and Analysis Metals and Mining analysts, Australia, over the last ten years, has basically been acting as a clearing house of its quality mining assets.

Of the $114 billion worth of deals involving Australian companies over this period 43 per cent of the total value came from foreign investment.

Domestic Merger and Acquisition activity accounted for 35 per cent, while 22 per cent was money invested beyond our shores.

Although the activity has probably been a boon for shareholders it has resulted in a widening cavernous pit between the existence of mid-cap and major mining houses.

“With the shrinking relative size, Australian midcap miners lack the scale to become global players and as such we see the divide between the goliaths and the rest continuing to widen,” Citi Investment said.

“Foreign M&A is likely to continue to flow into Australia, but at a slower rate given the premium quality assets have already been cherry picked out of this market.”

Although the Foreign Investment Review Board tries to keep one vigilant eye on Chinese involvement in Australia its other eye has watched on powerless to stop the former’s burgeoning domestic sector.

China has gone from having eight listed mining companies with a total Enterprise Value (EV) of $19 billion in 2004 to boast 33 companies today worth over $320 billion.

If the two powerhouses of the Australian bourse, BHP Billiton and Rio Tinto, were to slip off the boards, the EV of what would be left of the Australian mining market would just surpass that of India.

Citi Investment Research and Analysis analysed over 800 M&A deals in the global mining market, with the minimum deal size set at $250 million, to assess where capital has been flowing and what regions have been responsible for the acquisitions.

It found there had, in the past decade, been over $709 billion of completed deals.

Of that value, around 42 per cent has been M&A activity conducted in the domestic sphere, while the remaining 58 per cent, around $410 billion, has been acquisitions made from outside Australia’s girt.

The traditional mining hubs of Australia, Canada, USA and South Africa have not been the buyers in these situations.

They have rather been the targets of buyers from China and, perhaps surprisingly, the United Kingdom market, where companies such as Xstrata, Anglo, BHP and Rio have been busy.

“Australia and Canada have effectively been the hunting ground for the large cap miners as well as the Chinese,” Citi Investment said.

“Australia has seen a ‘net’ outflow of mining money to the tune of around $30 billion whilst Canada has had an outflow of $65 billion.

“China has been the biggest region of foreign cross border M&A with a net offshore deal flow of $33 billion.”

One important aspect to arise from the Citi Investment study is that while there has been a large outflow of market capitalisation from the Australian mining sector, this void has not been replenished with projects of the same quality.

Citi Investment found there has been 588 Initial Public Offerings in the Australian market raising around $4.3 billion, with the average IPO just hitting the $7 million mark.

Although the number appears large the new listings have not, according to Citi Investment, provided the quality and scale of the assets that have been removed from the sector through the M&A activity.

“And unless there is some more domestic consolidation, we expect that gap to continue to widen,” Citi Investment said.

“As we see it, the relentless M&A of Australian assets has some potentially interesting ramifications on the Australian mining equity market.”

The ramifications identified by Citi Investment include Australia losing relevance on an international scale as stocks lack size and liquidity to attract large cap international investors.

This will not stop M&A altogether, but it could possibly slow down as the local sector’s quality assets have already been picked out of the market.

“Some M&A targets remain in Australia. Namely those with large, long life, scalable assets,” Citi Investment said.

“Australia’s significant contribution as a target in region in global M&A is likely to see the region as a base for future deals.”

The table below lists Citi Investment’s top M&A picks.

Company

Likelihood of

being acquired

(0-low 10-high)

Rationale

BHP Billiton

0

Too big.

Rio Tinto

1

Too big and BHPB unlikely to make another offer.

Fortescue

2

Unlikely to be acquired given size and FIRB issues but attractive iron ore plug and play for likes of Xstrata or Anglo.

Atlas Iron

8

Most open register of emerging iron ore stocks with no controlling shareholders. Port capacity allocation at Port Hedland through

NWIOA could be the catalyst.

Gindalbie

3

Ansteel already own 36% of GBG and 50% of project. Any bid could face difficulties getting FIRB approval.

Murchison

6

POSCO own ~14% and Sinosteel 5.8%. May be cheaper for Mitsubishi to take out MMX rather than proceed with current 50:50 JV for Jack Hills and Oakajee Port and Rail.

Mount Gibson Iron

4

Entities associated with Shougang already control ~40%. FIRB approval could be barrier for any further increase.

Grange Resources

2

Shagang and associated entities control 2/3rd of register already and are unlikely to move to take full control.

OZ Minerals

4

Short mine life. Can’t see buyer paying M&A premium for cash.

PanAust

8

A bite size copper acquisition with good growth. Only negative is 20% cornerstone stake Chinese has.

Sandfire

8

A bite size copper acquisition. OZL and Posco already shown interest.

Western Areas

5

Great ore body, but lacks scale and mine life.

Mirabella Nickel

9

The ‘Equinox of the nickel world’. Long life, low cost scalable assets.

Alumina Ltd

4

Alcoa logical acquirer but selling assets to raise cash. Acquisition by Chinalco/Chalco/Chinese small probability to form an alumina JV with Alcoa – have co-invested before in Chalco and Rio Tinto stake.

Iluka Resources

5

Unique position as the largest zircon and 2nd largest feedstock producer, commodities that China is increasingly short. Register is very open and could potentially spin out MAC iron ore royalty to partially offset cost.

Lynas Corporation

2

FIRB blocked the last deal and given the strategically sensitive nature of REO’s we don’t think it is likely any new deal will be approved unless by a ‘known’ western world miner.

Macarthur Coal

IN PLAY

 

Whitehaven Coal

9

Has been under-bid conditions before. Large reserve base, growing production and port/rail problems have been sold. Only a matter of price for WHC.

Coal & Allied

IN PLAY

 

New Hope Coal

8

WH Soul Pattinson (60%) and Mitsubishi (11%) are long-term holders but could be sellers of assets at the right price. Good quality coal with scale that would appeal to a foreigner looking to get access to the Australian market.

White Energy

5

May be part of ongoing industry consolidation. Large resource base and 3.5Mtpa port access differentiate it from most other emerging coal companies but register has several strategic interests.

Cockatoo Coal

8

Large, long-life resource would be attractive to a utility. CESC has already invested and similar deals in the same coalfield have recently taken place in Botswana at US$0.16/t resource. Infrastructure solutions will increase its attractiveness.

Resource Generation

1

More likely to be an acquirer with ~A$2bn cash. WH Soul Pattinson (60%) and Mitsubishi (11%) are long-term holders.

ERA

1

We do not think RIO is a seller of the ERA stake on the basis of its hedge against energy it provides for aluminium/mining assets.

Paladin Energy

7

One of few uranium companies producing, with production likely to triple over the next 5 years. Operating assets in Africa, but undeveloped projects in Australia could be problematic from a regulatory stand point.

Aquarius Platinum

2

Unlikely target as too small a player to be an entry point into PGM market.

Newcrest Mining

1

Too big.

Medusa

8

Cheap, volume growth, growing reserve base and big exploration potential. All an acquirer would want from a gold company.

Kingsgate

7

Good assets in Thailand make KCN a target for any gold company looking to move into S.E. Asia.

Beadell Resources

3

Lacks scale.

Alacer Gold

8

If Alacer can hit its production targets of 800koz it may be a target for a larger gold company looking to buy cheap production and resource ounces.

Gryphon Minerals

7

Good exploration potential in West Africa. Attractive for acquirer looking to consolidate on the continent.

Regis Resources

7

Best of the available Australian assets. A bit expensive vs. some of the other gold producers.

Resolute

4

Has scale, but historical production issues.

Perseus

8

Good entry point into West African Gold space. Good size, exploration profile and cost base.

Oceana Gold Corp

2

Good value, but unlikely assets will attract many buyers.

St Barbara Mining

2

Short mine life and high costs make it an unlikely target.

Source: Citi Investment Research and Analysis