Bloomberg News

Mining Companies Shun ‘Transformational’ M&A, Ernst & Young Says

October 25, 2011

Oct. 26 (Bloomberg) -- Mining companies are eschewing “transformational” deals for acquisitions that complement existing businesses as short-term demand for commodities wanes, according to Ernst & Young LLP.

The European debt crisis and China’s cooling economy are eroding near-term demand, and may put a stop to deals that “change the fundamental structure of your business,” Lee Downham, global mining and metals transaction leader at Ernst & Young, said in a telephone interview from Perth. “What it doesn’t stop is the smaller bolt-on type of transactions. You can afford to do those out of existing cash-flow.”

Copper prices in London have slumped 19 percent this year, while iron ore fell to the lowest level since February 2010. Mining companies have cut debt over the past three years and are in a stronger position to deal with volatile prices for their products, Ernst & Young said in its Global Capital Confidence Barometer report released today.

“Most of the companies we talk to are still of the view that over the long term, the growth is there in China, and the outlook for the bulks and base metals is strong,” Downham said.

Mining deals totaled $136 billion in the first three quarters, including BHP Billiton Ltd.’s purchase of Petrohawk Energy Corp. for $14.9 billion. This compares with $104 billion a year earlier, data compiled by Bloomberg show.

Diversified mining companies may acquire smaller rivals for as much as $5 billion, according to Downham. Rio Tinto Group, the world’s second-biggest mining company, bought coking coal developer Riversdale Mining Ltd. in a A$3.4 billion ($3.6 billion) deal in August.

--Editors: Ryan Woo, Indranil Ghosh.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net.


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