Wednesday, October 7, 2009

New wave of African mining M&A tempered by risk

October 5, 2009 - 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 mineral-rich 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 miners like Kazakhstan-based ENRC, West African-focused Randgold Resources, and South Africa's AngloGold Ashanti, which have all recently snapped up small miners 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 like BHP Billiton and Rio Tinto, both of 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 (of M&A activity in the African minerals sector), but it won't be a 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 remain wary about political stability and the security of mining licences -- an issue highlighted during the recent spat between Guinea and Russian aluminium company RUSAL.

EMERGING MINERS

Miners 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.

Kazakh group ENRC agreed last month to buy Central African Mining & Exploration Co Plc (CAMEC) for $955 million while Randgold Resources, currently operating in war-ravaged Ivory Coast, and South Africa's AngloGold teamed up to buy Moto Goldmines for C$546 million ($502.8 million).

"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, 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 has said it would look for further acquisitions in Africa.

However, China, which needs to secure raw materials for a massive infrastructure building programme, would likely continue to seek strategic stakes and offtake deals rather than full takeovers since it is 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.

Small- and mid-cap takeover targets for the emerging market miners could include Southern and Central African-focused Metorex, Congo-focused Tiger Resources and Sierra Leone-focused African Minerals.

First Quantum Resources, with a market value of $5 billion, could also be attractive once it sorts out problems with the DRC government, which ordered the closure of its key Kolwezi copper project last month, analysts said.

ANTOFAGASTA DIPS TOES

Another emerging market miner keen to expand into Africa is cash-rich Chilean copper producer Antofagasta.

On Friday, it finalised a deal to pay $5 million for a 18 percent stake in Sunridge Gold, which is developing projects in Eritrea, and analysts said more deals could be on the cards.

"It's very interesting to see Antofagasta wading into what most people would have thought is a pretty obscure part of Africa," said Tim Williams, director of mining and metals at accountancy firm Ernst and Young.

"I think that's quite a bellwether when you see such highly respected names as Antofagasta beginning to invest in Africa, it also demonstrates, I suppose, that all the easy-to-find stuff in South America has pretty well been found.

"If you want copper, the number of places where you can go to get it are pretty limited."

While this more than anything could bring diversified miners back as buyers, for now, at least, most are happy to avoid big M&A action in favour of boosting existing exploration plans.

Rio, which last year acquired exploration licences in the DRC from junior firms that had been looking for gold and diamonds, converted the titles so the firm could probe for iron ore, while BHP Billiton will start prospecting in copper-rich Zambia this month.

"The potential rewards of resource development in emerging countries is enormous," Eric Finlayson, head of exploration for Rio Tinto, told a mining conference last week. "(However) this trade-off between prospectivity and sovereign risk is one that faces the entire resource industry."