Firms face stronger competition in mining M&A transactions: Report

By Zhang Qi (China Daily)
Updated: 2010-10-29 13:25
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BEIJING - China, which dominated the global mining and metals transactions market in 2009, has faced stronger competition this year, being ranked fourth in global market share in the first three quarters, the consultancy firm Ernst & Young said on Thursday.

"China is still very significant in global mining and metals deals, but it cannot return to the days of the global economic downturn when traditional investors were not in a position to buy assets," said Ernst & Young Global Mining & Metals Leader, Mike Elliott.

The latest report from Ernst & Young indicated that the value of China's mining and metals deals running up to Sept 30 surged 53 percent to $8.9 billion and the number of outbound deals rose 108 percent to 49.

The value of deals in global mining and metals transactions to Sept 30 was $78.9 billion, up 87 percent from the same period in 2009, while the number of deals increased 10 percent to 827.

"Competition for assets has been a lot stronger, and deals are no longer just about cash but about what else an investor can bring to the deal," said Elliott.

He said the most successful Chinese companies in the merger and acquisition (M&A) market this year understand this fact, and have used access to debt finance, new technology and lower cost structures as additional incentives.

Although China's current focus is mostly on countries with low political risk, Elliott said he has seen global investor interest shifting to new regions like Latin America and Africa.

"Mining asset prices in developed countries like Canada and Australia have been bid up, which means assets in some higher-risk, new-mineral countries are good value, providing a great opportunity for Chinese companies looking for lower-cost assets," he said.

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China's outbound M&A investment continues to be driven by the country's need to secure reliable sources of raw materials to support its rapid economic growth, and urbanization plans.

In contrast to 2009 when cash was king, Chinese bidders need to bring more than cash to the table, said Peter Markey, Ernst & Young's China Mining and Metals Leader.

"Debt finance in particular has a strong appeal to vendors, given the lack of bank finance available to miners. That has certainly been a differentiator for some Chinese companies this year, whose special relationships with domestic banks has helped provide debt-financing," he said.

The report said bringing Chinese technology to the deal table, along with and access to equipment and supplies with lower operating costs has proved a winning formula for some of the most successful Chinese acquirers this year.