The mining boom that drove record dealmaking in Western Australia last year is sputtering, depriving investment banks of fees just as Goldman Sachs Group Inc. (GS:US) and Deutsche Bank AG (DBK) set up offices in Perth.
Goldman Sachs opened an office in the state’s capital in August and hired former Macquarie Group Ltd. (MQG) banker Peter Watson for its natural resources team. Deutsche Bank, Germany’s biggest lender, will return to Perth in coming months after closing an office there in 2001, said Sydney-based spokesman Adrian Cox.
The firms’ arrival in the region, home to some of the world’s biggest mineral and gas deposits, coincides with a drop in raw material prices that has curtailed mergers and caused companies including BHP Billiton Ltd. (BHP) to scrap multibillion- dollar projects. As China’s and India’s economies slow, slicing demand for Australia’s resources, the “boom in commodity prices is over,” said Resources Minister Martin Ferguson on Aug. 23.
“The challenge for the big, integrated banks is that Perth will always be a cyclical place and we believe it has switched to the downside in the last six months,” said Justin Mannolini, a Perth-based managing director at boutique firm Gresham Advisory Partners Ltd.
Acquisitions involving Australian natural resource companies have more than halved this year from the same period in 2011 to A$19.8 billion ($20.2 billion), putting deals on pace for the slowest year since 2009. Takeovers peaked in 2011 at almost $60 billion, data compiled by Bloomberg show. Share sales by such companies have fallen to $4.2 billion from $8.6 billion.
One casualty of the commodity slowdown was mining billionaire Nathan Tinkler’s A$5.3 billion bid for Whitehaven Coal Ltd. (WHC), which would have been Australia’s biggest takeover this year. That deal failed after Tinkler was unable to make a firm offer by an Aug. 24 deadline, according to Whitehaven.
Tinkler was advised by UBS AG (UBSN), which along with JPMorgan Chase & Co. (JPM:US) and Barclays Plc had pledged to provide A$2.5 billion in loans for the purchase, people familiar with the matter said June 18.
Bank of America Corp.’s Merrill Lynch unit and Zurich-based UBS are among international securities firms that established offices in Perth in the last decade. Macquarie, Australia’s biggest investment bank, has been in the city for more than 20 years. UBS’s Swiss rival Credit Suisse Group AG (CSGN) established permanent staff in its Perth office at the start of this year and Lazard Ltd. (LAZ:US) has been operating there since 2010.
Morgan Stanley, Citigroup Inc. and JPMorgan run their Western Australia operations from offices in Sydney and Melbourne.
To be sure, the additional cost of setting up shop in Perth may be small for global banks. Goldman Sachs, Credit Suisse, Bank of America and Lazard each have fewer than 10 investment banking employees in their offices there, according to people with knowledge of the firms’ operations who asked not to be identified.
In a July 16 internal memo announcing its Perth office, Goldman Sachs called the city a “critical business and financial center in Australia.” Perth accounts for significant mergers and fundraising activity, the New-York based bank said. Goldman Sachs plans to add equity sales, investment research and wealth management workers in Perth, according to the memo.
Hayley Morris, a spokeswoman for Goldman Sachs, declined to comment on the firm’s expansion in Western Australia beyond the memo. Officials at UBS, Credit Suisse, Deutsche Bank and Bank of America declined to give further details on expansion plans.
Western Australia became the epicenter of a resources bonanza as China began stepping up raw-materials purchases for its soaring economy about 10 years ago. The state, with about a 10th of Australia’s population, accounted for nearly half of the country’s exports in the 12 months to June 30. Some 37 percent of companies listed on Australia’s stock exchange are based there.
Much of the mining wealth has flowed to Perth, as workers flocked to the liquid natural gas plants and iron ore mines being constructed more than 800 kilometers north in the resource-rich Pilbara region. BHP relocated management of its iron ore unit to a new office in Perth, which opened in August, while the Australian heads of international oil companies Royal Dutch Shell Plc (RDSA) and Chevron Corp. are based there.
Yet the cooling of China’s and India’s economies that started in early 2010 has hurt prospects of resource companies, and the investment banks servicing them.
A variety of projects have been put on hold as spot prices for iron ore, Australia’s biggest commodity export and a raw material used to make steel, fell 21 percent in 2012, according to The Steel Index Ltd. The price has rebounded since touching a three-year low in September.
BHP in August put approvals for about $68 billion of projects on hold -- including the Olympic Dam copper and uranium mine, which Deutsche Bank estimated would cost $33 billion to build. The world’s biggest miner also mothballed the expansion of an iron ore port in Western Australia and said it would halt output at the Gregory coking coal mine in Queensland state.
Fortescue Metals Group Ltd. (FMG), Australia’s third-biggest iron ore shipper, last month cut its full-year spending forecast by 26 percent, delayed expansion plans and refinanced debt to avoid breaching terms on previous loans. Woodside Petroleum Ltd. delayed drilling at its Pluto gas project in Western Australia, the company said Aug. 22.
Despite the slowdown, Tim Day, head of UBS’s Perth office, said Australian companies will continue to need the services of the big banks as cross-border M&A deals increase and they seek more diverse ways of financing.
“The companies have become more sophisticated in the way they seek to fund their activities so it’s important to have links into other areas in the region, including China,” Day said. UBS was the top-ranked adviser on acquisitions including Australian companies over the past five years, ahead of Macquarie and Goldman Sachs.
The question is whether the global banks have the will to stay through a prolonged slump. Big securities firms have opened offices in Perth before, only to close them again when business slowed, said Michael Ashforth, a lawyer who opened the Perth office of Gresham Advisory in the 1990s and now runs Macquarie’s business there.
“Perth is still a relatively small town and the number of companies that will regularly need investment banking services is likely to remain pretty small,” Ashforth said. “I’m just not sure the banks would be willing to sustain those costs in this market.”
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