Wednesday, October 7, 2009

Emerging market firms lead charge for Africa's minerals

October 6, 2009 - By Eric Onstad in Business Report

Mining firms digging for Africa's untapped riches are attracting renewed interest, but takeover deals are likely to be dominated by emerging market players that are prepared to assume greater levels of political risk.

In contrast, Western mining giants, which have long held a presence in the continent, have spent the last year weathering the economic downturn and are expected to remain more cautious about taking on high-risk deals.

Leading the charge have been top emerging market mining firms like Kazakhstan-based ENRC, west Africa-focused Randgold Resources, and South Africa's AngloGold Ashanti, which have recently snapped up small mining firms with rich assets in places such as the Democratic Republic of Congo (DRC).

This compares sharply with the more cautious approach of major diversified companies such as BHP Billiton and Rio Tinto, which have chosen to, instead, quietly expand exploration programmes into countries such as the DRC and Zambia.

"I think we're on to the next wave, but it won't be the huge free-for-all that some people expect it to be," said analyst Cailey Barker at RBC Capital Markets in London. "There are a limited number of buyers and a limited number of decent assets and companies up for sale."

Buyer scarcity is partly down to the need by companies such as Rio Tinto and Xstrata to pay off the debt built up during previous buying sprees, while other majors are wary of political instability and the insecurity of mining licences.

Mining firms from emerging nations were involved in the two biggest takeovers on the continent recently, however, and seem much more willing to assume increased political risk.

ENRC agreed last month to buy Central African Mining & Exploration Company (Camec) for $955 million (R7.3 billion). Randgold Resources and AngloGold teamed up to buy Moto Goldmines for C$546m (R3.9bn).

"I feel most of the acquisitions are actually going to be by people outside of the majors, such as the Chinese and Indians," said Andrew Hayes, the head of mergers and acquisitions at Renaissance Capital. "You've also got the Russians, who were severely handicapped during the downturn, but now they seem to be coming back. They're a lot more positive about overseas acquisitions."

Renaissance advised Camec in the deal with ENRC, which said it would look for further acquisitions in Africa.

However, China was likely to continue to seek strategic stakes and offtake deals rather than full takeovers since it was wary about operating mines overseas, Hayes added.

Last month, a Chinese firm bought half of Weatherly International, which will allow the firm to reopen mothballed copper mines in Namibia.

Takeover targets for the emerging market players could include central Africa-focused Metorex, Congo-focused Tiger Resources and Sierra Leone-focused African Minerals.

First Quantum Resources could also be attractive once it sorted out problems with the DRC government, which ordered the closure of its key Kolwezi copper project last month, analysts said.

Another emerging market mining firm keen to expand into Africa is Chilean copper producer Antofagasta. It finalised a deal on Friday to pay $5m for an 18 percent stake in Sunridge Gold, which is developing projects in Eritrea.

"I think that's quite a bellwether when you see such highly respected names as Antofagasta begin to invest in Africa. It also demonstrates that all the easy-to-find stuff in South America has pretty well been found," said Tim Williams, a director of mining and metals at Ernst & Young.