(Repeats item issued earlier. The opinions expressed here are
those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, April 19 (Reuters) - Wanted: One
mine, just started or close to production, preferably gold, must
be in secure country with high-quality ore body and low costs.
Also, must be cheap.
The above shopping list was the most common response from
investors when quizzed as to what they are looking for in the
commodity sphere during last week's Mining Investment Asia
conference in Singapore.
The near impossibility of satisfying the requirements
probably explains why there aren't that many mining deals
actually being done, despite the low prices for many
commodities.
While the big companies often grab the headlines with large
acquisitions (think Rio Tinto (LON:RIO) buying Alcan, BHP merging with
Billiton and later spinning most of it off in South 32), the
engine room of the mining sector tends to be among the juniors.
It's in this space that private equity, family offices and
mid-tier miners play, looking for cash to develop projects
either through deals or taking a punt on raising money through a
public listing.
It was evident at the Singapore conference that there's
plenty of money looking for investment opportunities, but it was
also equally evident that the bar for any decision is being set
too high for the current market.
Investors showed little interest in providing seed capital
for exploration projects, taking the view that it would take too
long for them to generate any return, even if the potential rate
of return is very high.
Also, investors weren't interested in higher risk
jurisdictions, such as Mongolia or Myanmar, with the main
argument being these projects don't offer a high enough premium
over similar ventures in safer locations, such as Canada and
Australia.
"Ideally, you want a gold mine that's just started output,
located in Western Australia near good transport. Trouble is,
even if you can find that, it's not cheap," said one investor,
preferring not be named as he isn't authorised to speak to the
media.
It may sound somewhat counter-intuitive, but the rout in
commodity prices for the past few years has made mergers and
acquisitions (M&A) considerably harder, as potential investors
now have to factor in the possibility of an extended period of
low prices and the consequent impact on project economics.
This means that while there are numerous mines and projects
available, very few are sitting in the lowest quartile on the
cost curve, and this reduces their appeal in the current market.
Distressed assets for sale tend be distressed for a good
reason, most likely because their cost base is too high and they
are only viable in the longer term if the investor has a bullish
view of future prices.
PRICE GAINS WILL BOOST ACTIVITY
It will take a sustained rise in commodity prices to make
assets that sit higher on the cost curve more attractive, or an
increase in risk appetite.
In the fourth quarter of last year, mining M&A reached the
lowest levels recorded since consultants KPMG started monitoring
the sector in 2012, according to the latest quarterly
newsletter.
"The new lows touched both deal value and deal volume," KPMG
said. "Eleven major deals were announced worldwide, eight of
which exceeded $100 million. Total global deal value amounted to
$3.2 billion, 70.5 percent below the previous quarter."
Gold was the leading sector for M&A in the fourth quarter of
last year, accounting for 51 percent of the deals by value, with
a single iron ore deal making up 21 percent of the value and
coal taking third spot with 10 percent of the value.
If the smaller players are waiting for an improvement in
commodity prices and sentiment, are the majors doing the same?
BHP Billiton (LON:BLT) BHP.AX Chief Executive Andrew Mackenzie told
The Australian newspaper that the world's biggest miner is
"ready to pounce," but he also expects any deals to be "few and
far between."
"We don't want to be too precious about that and if there's
a deal of the century we will go for it, but we don't want to
buy back complexity and we certainly don't want to buy back a
whole raft of assets that if they had been sitting in the
portfolio four or five years ago we would have divested," he
said in an interview, published on April 12.
In other words, if BHP sees a great opportunity, it will
take it, but it's not really the current focus for the company.
Anglo American AAL.L , the London-listed miner that emerged
from South Africa, is trying to shrink itself to success by
putting several assets up for sale.
So far there has been some interest expressed in the group's
Australian coal assets, which may be worth $1.5 billion, but a
firm offer has yet to emerge.
Glencore GLEN.L is also seeking to divest Australian coal
assets, this time trains rather than mines, with the commodity
producer and trader hoping to close a deal by the third quarter.
Glencore has managed to sell a 40 percent stake in its
agricultural unit for $2.5 billion as it seeks to cut debt.
Overall, the mining sector is still battling to attract
significant M&A, and it's instructive that gold, one of the best
performers so far this year, is the preferred choice of many
investors.
This suggests that a pre-condition for more M&A activity is
a recovery in prices, or at least a sense that they have
bottomed.
(Editing by Richard Pullin)