Merger and acquisition (M&A) activity declined in 2012, and raising money was a tough slog, especially for juniors. Meanwhile, actors from outside the mining industry. Portfolio managers at NewGen Asset Management expect a significant amount of mining M&A throughout 2012 and into 2013, and have positioned their portfolios accordingly. Digging deeper: Chinese cross-border mining M&A steals the spotlight. While the commodity super cycle is a distant memory, which is the largest amount since 2012.
Mining M&A and the Risk-off Environment. June 12, 2012. the difficulties junior mining companies face in the M&A space and the ways in which they can raise capital;. Glencore, Xstrata may start mining M&A fad anew So “get ready for a lot of developments in industrial and precious metal mining in 2012,” Handwerger said. Merger and acquisition (M&A) activity declined in 2012, and raising money was a tough slog, especially for juniors. Meanwhile, actors from outside the mining industry. Portfolio managers at NewGen Asset Management expect a significant amount of mining M&A throughout 2012 and into 2013, and have positioned their portfolios accordingly. Digging deeper: Chinese cross-border mining M&A steals the spotlight. While the commodity super cycle is a distant memory, which is the largest amount since 2012.
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Any solid group should have two things: big deals and lots of them.
A colleague of mine once put it more colorfully: “I’m not a big deal. I just close them.”
Most bankers would agree that they got into the field to affect great change in a sector through strategic decisions (e.g. mergers and acquisitions) – or at least, that’s what they told the interviewers.
And it’s amd rx 550 mining to beat the basic materials sector if you want to make big changes: where else could you buy and sell entire gold or diamond mines?
“Basic materials” refers to discovering raw materials and processing them; the 3 main sectors are i)metals and mining, ii) paper, packaging and forestry products, and iii)chemicals.
It’s sort of like a collaboration between industrials and natural resources, with an emphasis on cross-border transactions.
In the first part of this mini-series, we’ll cover the metals and mining m a 2012 angle and you’ll learn:
- How to break in
- What goes down in Team Mining
- How the coverage universe is broken down, including industry and valuation drivers
- Analytical topics, including operating and valuation mining m a 2012 for both companies and mines
- Life after getting out of the most underground banking department
Now, off to the mines…
Out of the Classroom and Into the Mines
Q: Where do metals/mining bankers come from?
A: Canada (laughs). And Australia!
Most mining m a 2012 in my group king of kings mining company placed here through the campus recruiting process, and some of the senior bankers lateraled over from other banks’ M&A departments.
One guy I know was even recruited from the Colorado School of Mines.
The backgrounds here really run the gamut, and a geology background is neither necessary nor sufficient.
It may help to shape your story, but that can easily be accomplished with other means (ex: extracurriculars).
I read an article about how a senior financial institutions banker was inspired to pursue the calling based on her family’s ownership of a private banking business. And there are plenty of other examples – such as a US Marine Corps officer joining an aerospace/defense banking coverage group.
Really, the sky is the limit when it comes to your story, so put on your thinking cap and learn to spin your way into sounding relevant.
Metals and Mining 101: Scoping the Project to Assure Value
Q: So what does your coverage universe look like? And where do you find metals and mining groups at banks?
A: My group can be found in the industrials group, the natural resources group, or in a team called basic materials – so really, we could turn up anywhere.
Geopolitical factors aside, the main demand-side factor with any mineral is end use, while supply-side factors include operational issues, production constraints, and capacity.
Production constraints aren’t a limit on machinery; it’s a limit imposed by a sort of collusion among producers.
For example, mining m a 2012, if there’s too much aluminum in the market, producers will agree to limit production to prevent further declines in the mineral’s price. It’s similar to what OPEC does for oil, only it doesn’t seem as controversial since aluminum prices attract less attention.
Moving to a broader perspective, the universe can be divided into these sectors:
Diversified: (key players: Glencore, Vale, BHP Billiton, Anglo American)
BMO Capital Markets noted that holding companies such as Glencore trade at a discount to the sum of their asset values due to a lack of specific access to cash flow, the fact that any bid to subsidiaries would result in a share ownership transfer, and the fact that subsidiaries’ dividend tax is relegated to the parent.
(NB: For an in-depth overview of the market for any of the following minerals, please refer to the US Geological Surveys Mineral Information)
Aluminum: (key players: Alcoa, UC Rusal, mining m a 2012, China Aluminum Corp – CHALCO)
Historically, producers in this area have selected capacity such that price is equal to the marginal cost mining bitcoin with antminer s9 production. In the case of alumina, the input costs include fuel oil, natural gas, caustic soda, and bauxite.
For primary aluminum, the inputs are alumina, electricity, carbon, and materials (source: Alcoa company data).
Compared to other base metals, aluminum is a dominant component used in transportation and packaging. If you’re asking about the price of aluminum, you’ll need to refer to the London Metals Exchange.
Copper: (key players: Freeport McMoran, Southern Copper)
In contrast to aluminum, the New York Mercantile Exchange (COMEX) and the Shanghai Futures Exchange (SHFE) also influence the price of this mineral.
Not surprisingly, diesel, coal, natural gas, and electricity are important inputs. Copper demand reflects construction and industrial production.
Mining operations’ output and recycled scrap material contribute to the supply of copper (source: Newmont Mining company filings). Copper is a dominant component used in infrastructure and electrical applications (source: Brook Hunt).
Iron/Steel: (key players: Arcelor Mittal, Gerdau, Nucor)
These producers compete on quality, cost, and innovation (research for new uses of the minerals).
The demand-side factors, as with any industrial item, include inventory levels, currency fluctuations, and import/export activity. The raw materials here include iron ore, mining m a 2012, sinter ore, coal, coke, and steel scrap (source: US Steel company filings).
Flat rolled products are a dominant component used in automotive parts and construction products. Tubular goods are heavily used in oil/gas operations.
Nickel: (key players: Norilsk Nickel)
Applications include the production of stainless steel and in the creation of alloys. Compared to other base metals, nickel is a mining m a 2012 component used in consumer durables and industrial equipment.
Zinc: This mineral can be used in batteries or in the creation of alloys; it’s also used as a catalyst and in the production of white paint. Compared to other base metals, zinc is a dominant component used in construction.
Gold: (key players: Barrick, Goldcorp, Newmont Mining)
This might come as a surprise to you, but the end product of a gold miner is not gold, but doré bars.
These items are made of gold, silver, and other minerals, and are then sent off to refiners to be finished into what you and I would expect to see.
The applications for gold include investment and fabrication (ex: jewelry and decorative uses). Gold owned by governments, corporations, and individuals contribute to the gold supply supported by mining operations.
Silver: (key players: Silver Wheaton, Pan American Silver Corp, Coeur D’Alenes)
The mining m a 2012 for silver is fueled by its most common uses – coins and awards, household wares, industrial uses, and photography.
Q: That was a pretty thorough walkthrough of your coverage universe. But the name of the game is “metals and mining” – where are diamonds in all this? Were they stolen in a heist?
A: Some banks have a coverage team devoted to this area.
You know how San Francisco is home to technology investment banks, and New York has plenty of financial institutions groups (FIG) bankers; South Africa is where it’s at when it comes to diamonds.
Standard Chartered actually has a hardware mining hashrate there devoted to diamonds and jewelry coverage.
Mining Equipment Equivalents: Your Transferable Skills
Q: So how do analysts and associates compare mining companies or mining projects to each other?
A: Let’s start with a few trading multiples and operating metrics:
Comparable company metrics include:
- Price / NAV (Net Asset Value): With this one, you value the mining company’s assets (gold, silver, etc.), subtract its liabilities and divide by the share count to get NAVPS.
- Price / NPV: (Shown as a percent)
- Dividend Yield
- Commodity Exposure (see pg. 7): Portfolio summary of what a mining company’s business entails.
- Reserves and Resources: Reserves are minerals that are more certain to be extractable and to hold value that’s confirmed by an assessor. You go through a process of converting metals into “equivalent” units so you can compare, for example, a copper producer to a gold producer.
And you would use the following multiples for Reserves and Resources:
- Enterprise Value / Mineral. Eq. (Ex: Cu, mining m a 2012. Eq. = Copper Equivalent) Reserves
- Enterprise Value / Mineral. Eq. Resources
With mining, there is also a distinction between “Resources” and “Reserves” – Reserves are more likely to be extracted from the ground.
Reserves can be split into “Measured” and “Indicated” categories (often abbreviated to M&I, how fitting), while Resources can be split into “Measured,” “Indicated,” and “Inferred.”
Technical reports are based on Reserves because they are more conservative, mining m a 2012, but investors also look to Resources for a truer picture of what the company’s assets might be worth.
It’s similar to what oil & gas companies do with their reserves, but there are more categories and sub-categories here because there’s more subtlety with determining whether or not mining hardware resources are truly viable – and there may be more steps to complete when extracting them.
Operating Metrics for Mining Projects include:
- Mineral Eq. Grade: Essentially the concentration of the desired mineral. It’s just the ratio of the amount of mineral desired / (amount of industrial mining lighting desired + unwanted ore).
- Stage: How far along the mining project has progressed. If you’re interested in equity capital markets, or equity origination, less certain projects might be of interest to traders and speculators; more stable projects are of interest to institutional buyers (ex: endowments, pensions funds, etc.). The stages include Scoping Study (for early-stage projects – includes inferred resources), Pre-Feasibility (Stricter calculation requirements and includes reserves and resources), Feasibility, Construction, and In-Production.
- Average Mineral Production
- Reserves and Resources Composition
- Cash Cost of Net Product Sold, By Product (Currency / Mineral): This is similar to Cost of Goods Sold for manufacturing or retail companies – it would include all of the expenses for producing each unit of mineral, plus potentially other payments such as royalties.
- Development CapEx
Then there are different ways of looking at transaction metrics for both mining projects and mining companies. For mining projects, mining m a 2012, you might look at Precedent Premium Analysis (for 1-month, 1-week, 1-day, and so on).
The numbers there would be affected by the Approach – Hostile deals usually have higher premiums than Friendly deals – the Stage (Development, Production, or Mix) – you would pay more for a more certain cash flow stream – and the Commodity (Copper, Gold, Aluminum, etc.).
The following metrics and multiples are specific to company acquisitions:
- Tangible Asset Backing: Corporate acquirers use this framework to determine the value-add of what was acquired. This approach assumes the target’s machinery is still in use.
- Multiple of Net Assets
- Market Price / Gross Cash Flow
For the diversified companies, it may be useful to compare the NPV (asset sum taking out debt and cash) to a Sum-of-the-Parts analysis.
I’ve seen a couple variations on the latter; some analysts like to compute a DCF value for each division (NB: use EBITDA – Capex as a proxy for FCF), while others like to collect a set of trading comparables and multiply their range by the EBITDA of the mining in colorado departments.
Q: Wow, I can’t imagine that anyone will actually mine for more metrics or multiples after all that. What really drives valuation for mining companies, though?
A: Cash flow. You see there are a lot of approximations around how much of a mineral a mining company can produce, and that’s because they’re using the production levels to approximate cash flow.
The values of these individual mining projects contribute to the total value of the company.
If you are going to acquire mining engineering in china mining company, you’re essentially buying land, equipment, and the management know-how to tap resources – assuming, of course, that the top brass stays at the firm following the integration.
A press release on the discovery or confirmation of a mine’s potential will lead a company’s stock price to pop up.
Q: Got pitch books?
A: Sure, here are a few you can look at:
Also, refer to the following valuation letters and fairness opinions:
As you can see in the Alpha Natural Resources / Massey Energy pair of fairness opinions, the valuation metrics can be very similar to those used in the industrials sector.
You’ve got EV / EBITDA and Price opal mining towns EPS. To the list of valuation approaches, you could add:
- Illustrative Future Stock Price: Start with Historical Enterprise Value / NTM EBITDA, and find out the average share price. Use a multiple to find the future enterprise value, and from there calculate the average share price again. Convert it into today’s currency data mining r d the Cost of Equity (see: page 105 of Alpha Natural Resources / Massey Energy).
- Implied Exchange Ratio Analysis: Essentially you assume an all-stock transaction and divide the target’s price per share by the acquirer’s price per share.
Out of the Mines and Into the Molehill?
Q: So what oil sands mining canada our readers look at if they’re interested in metals and mining?
A: For starters, the Bloomberg command METT <GO> provides mining sector news.
Financial Times, The Economist, Wall Street Journal, and the book Fisher Investments on Materials are all good resources.
Going beyond the usual suspects, Big Four accounting firms such as Ernst & Young do publish thought pieces on the sector.
In terms of industry newsletters, you should look at Metal Miner, Metal Bulletin, and Platts.
If you want something from an investment bank, run a search for ‘HSBC Metals Quarterly.’
Also check out Miningfeeds.com – as you probably know, the internet provides way too much data that can be analyzed. So you’ve got to pick and choose for yourself what you think is relevant.
In your industrials article, you mentioned primers on aerospace and defense. Here’s a rather dated, but similar and still high-quality primer: “Hard Rock to Heavy Metal Amid Scarcity” by UBS.
For a fundamental perspective, you can try Ian R. Campbell’s series on mining m a 2012 company valuation, which discusses in great detail the more qualitative aspects (read: risks, macro-view, etc.) of mining company analysis.
Lastly, a more academic perspective can be found published by Basinvest.
Q: Wow, thanks for all that. If you’re reading this, you have no excuse for not performing well in any IB interviews with metals & mining groups.
What are the most common deal types in your group?
A: Metals and mining is definitely known for cross-border mergers and acquisitions.
You’ve got to deal with currency fluctuations and, of course, the legal aspect of whether the target is a “strategic asset” in the eyes of the government.
If you’re looking for a strong investment banking experience (e.g., advisory and capital markets assignments), look no further than JP Morgan, Citi, and Goldman Sachs – in that order.
Q: So do people in your group really come from Canada? And if so, where do they go afterward?
A: Many mining bankers can be found in Canada (Toronto), United States (Chicago, New York), mining m a 2012, and the UK (London). Australia is also a huge center for mining, with a lot of activity in Perth but also in Melbourne and Sydney.
As with any other group, mining m a 2012, activity will be strong where mining companies are active – you don’t exactly see any mines in Manhattan, mining m a 2012, but there are mines in some of the surrounding areas on the East Coast.
A good number of commodity funds specifically ask for a mining background. Some other buy-side shops also appreciate the background.
At the same time, I’ve seen former metals/mining bankers move into corporate strategy within an investment bank, or join or start a start-up in the sector (not exactly a capital-efficient industry, but hey, it’s an interesting ride nonetheless).
As you may already know, it’s not so much what you do in an investment banking division, but how much you can accomplish with what’s on your plate.
Q: Thanks so much for your help!
A: Anytime. Mining m a 2012 you have questions, please leave your comments below.
About the Author
Luis Miguel Ochoa
has facilitated a variety of strategic initiatives from corporate acquisitions to new market development. He earned his B.A. in economics from Stanford University where he was a member of the varsity fencing team.
Mining M&A to be focus for 2012: Experts | Industries | chinadaily.com.cnDigging deeper: Chinese cross-border mining M&A steals the spotlight. While the commodity super cycle is a distant memory, which is the largest amount since 2012. Metals & Mining Investment Banking: December 12, 2012. Thanks for adding those. Really not sure about valuing royalties as I’m not an expert on mining. Blakes has one of the largest and most active M&A practices in Canada. We are frequently retained by major domestic and international mining companies, financial. Dec 29, 2017 · Year's Best Commodities Fund Is Betting on 2018 Mining M&A By. Susanne Barton down from $74 billion last year and less than half the levels of 2012. Chinese mining companies will continue to increase both purchases and investment in the overseas resources market in 2012, even though costs and challenges in the.
Chinese mining companies will continue to increase both purchases and investment in the overseas resources market in 2012, even though costs and challenges in the. Glencore, Xstrata may start mining M&A fad anew So “get ready for a lot of developments in industrial and precious metal mining in 2012,” Handwerger said. Portfolio managers at NewGen Asset Management expect a significant amount of mining M&A throughout 2012 and into 2013, and have positioned their portfolios accordingly.
Author: Gordon Platt
CORPORATE FINANCING NEWS: MERGERS & ACQUISITIONS
By Gordon Platt
More than 2,600 mergers and acquisitions worth $149 billion were announced in the global mining industry last year.
They represented an increase of 33% from 2010, making 2011 the busiest year for mining M&A since 2006, when $152 billion in deals were announced, according to PwC. And 2012 looks set to continue the trend.
"We anticipate a record year of mining M&A ahead, primarily driven by cash-rich senior [mining companies] and [financial] intermediaries hungry for projects," says Tim Goldsmith, PwC's global mining leader.
Activity will be underpinned by the continued need for base and precious metals by the world's rapidly industrializing nations, he says. Sovereign wealth funds, specialized private equity and large pension funds eager to deploy capital will reevaluate their approach to the resource sector, he adds.
The year 2012 will also be remembered for the emergence of Africa as one of the most important locations for mining deals, Goldsmith says. Africa will take over from last year's leaders—Canada, the US and Australia—which, together, accounted for 53% of annual acquisition values.
Africa's unparalleled resource potential and an increasingly friendly investor climate will bring it to the fore in 2012, Goldsmith says. "Of course, we have, and will continue to see, many deals for African assets and note that emerging nations, such as China, already have a major footprint in the mining industry throughout the continent," he says.
NEW AGE DAWNING
As the center of gravity of the global economy shifts from west to east, the traditional economics behind mining mergers will need to be reconsidered, Goldsmith says. "The roads ahead—those in the frontier markets—are not those that have been mastered by many of the miners of our age," he says.
Western boards and shareholders will need to rethink the way in which the balances of risk and reward behind mining deals are weighed, Goldsmith says. "Despite the fact that growth markets are home to the majority of the world's population and that these same markets are the end users for the majority of the world's mining resources, buyers from growth markets led on only 17% of acquisitions [by volume] in the mining sector in 2011," he says.
Many developed-world buyers are playing it safe, PwC says in a report released last month on the global mining industry in 2011 and the outlook for 2012. Some 72% of Western-led deals last year involved acquisitions of projects in another developed world region, it says. This could be a barrier to long-term growth, given that three-quarters of known mining reserves lie in countries outside the developed markets, PwC says.
"Numbers don't lie," Goldsmith says. "Developed nations have to ask themselves what is the long-term cost of not doing business in the growth markets. They need to be more aggressive."
INDIA, INDONESIA ACTIVE
Although still representing only a small portion of the global mining M&A market, buyers based in India, Indonesia, South Korea and the Philippines made some notable moves in 2011, the PwC report notes. Indian buyers announced 26 mining acquisitions worth $1.6 billion, an increase of 1,300% in value from the peak global mining M&A year of 2006. Indonesian buyers announced 1.3 billion of mining buys in 2011, up from virtually zero in 2006.
Miners based in fast-growing emerging markets accounted for almost a quarter of global mining M&A by value last year. This was nearly 50% higher than the total deal value from these miners in 2006.
Sesa Goa, India's largest exporter of iron ore, announced recently that it will absorb Sterlite Industries (India) in an all-share deal. London firm Vedanta Resources, which owns both of the publicly traded Indian companies, is combining them to reduce its debt following its purchase of oil producer Cairn India.
In the biggest mining M&A deal of 2011, Virginia's Alpha Natural Resources outbid Arch Coal of Missouri to acquire Massey Energy, a major producer of metallurgical coal used in the steel industry, for more than $8.5 billion in cash and stock.
FAST START FOR 2012
With demand for new projects, rising production costs and declining developed-world reserves, miners will seek out targets to build scale and achieve cost efficiencies, according to PwC. Whether or not 2012 is a record year for mining M&A will depend in part on what happens to the proposed merger of equals of Swiss companies Glencore International and Xstrata, which was announced in February. If approved, the all-share merger, in which Glencore agreed to a purchase price of about €26 billion ($38 billion), would create a mining company with a market value of $90 billion and would be the largest mining transaction in history, surpassing the market value of Rio Tinto and Alcan after their $38 billion merger in 2007.
"Increased scale and diversity will improve our risk profile, enhance access to capital markets and allow us to participate in industry consolidation," says Xstrata CEO Mick Davis, who would become CEO of the merged company.
Glencore CEO Ivan Glasenberg insisted last month that the company's takeover offer for Xstrata is at a fair price, although some shareholders are holding out for a better offer. The new group would be the world's biggest exporter of coal for power plants, and the largest producer of zinc.
Technology was another hot area for M&A activity in 2011, but the sector could take a breather in 2012, according to Ernst & Young. The aggregate value of global technology deals rose 41% last year to $168 billion, even as the overall value of global M&A in all industries fell slightly amid global economic uncertainty, particularly in the second half.
The disruptive megatrends in technology of smart mobility, cloud computing, social networking, "big data" analytics for databases that are too large to handle using current systems, and the blurring of industry and sector lines have helped fuel a significant rise in global technology M&A activity since 2009, says Joe Steger, global technology transaction advisory services leader at Ernst & Young. One of the big technology stories of 2011 was the return of private equity deals, which rose 67% in value from a year earlier.
There was some pullback in technology M&A late last year due to macroeconomic pressures, Steger says. "The same pressures suggest we might be in for slow growth in 2012—but the long-term outlook for technology M&A remains strong due to ongoing disruptive technology innovation," he says. "M&A technology transactions will likely take a pause in the first quarter of 2012."
There were 34 technology deals of $1 billion or more last year, including eight in the fourth quarter. At the same time, a multitude of smaller deals demonstrated the strategic importance of certain technologies, especially social networking and security, but also healthcare information technology, online and mobile games, and advertising/marketing technologies, according to Ernst & Young.
"Dealmaking in the Americas represented slightly more than half of all 2011 global technology M&A volume, evidence that the region continues to play its traditional trendsetting role in the industry, even as other regions have risen to prominence," Ernst & Young notes. Volume and value growth in the Asia-Pacific and Japan region surpassed the global average last year.
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