Niche Deals to Increase in Mining Sector; Some Smaller Mega-Deals

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"Ernst & Young's annual review of M&A and financing in the mining sector forecasts that mining megadeals will continue to slow, while niche deals will increase."

In their report, which was made public Sunday, Ernst & Young also predicted a renewed focus on the mining sector by specialist funds.

"We believe that two events will signal a change in sentiment," Ernst & Young's global mining and metals country leaders advised. "Firstly, inventories will reduce sharply as higher cost mines are shut or suspended and the current deferral of capital expenditure starts to have an impact. Supply is a casualty of bottoming commodities prices, rising production cuts and suspended exploration plans."

"Secondly, the details of the infrastructure stimulus packages are merging," they noted. "When the exact nature of the planned infrastructure is known, analysts will be able to more reliably determine the nature of the metals demand. On average, infrastructure represents between 30% and 40% of the stimulus packages. This may create a new supply-demand imbalance with metal prices increasingly sharply and, accordingly, deal prices following."

The total number of recorded mining transactions in 2008 increased 2% to 919, while the total value of deals fell 40% from $211 billion in 2007 to $127 billion. E&Y's analysis also revealed many proposed or contemplated deals "that were delayed, damaged or destroyed by the effects of the credit crunch and the associated collapse in metal prices. . ."

The number and value of megadeals dropped significantly to 27 transactions valued at more than $s1 billion with a combined value of $79.3 billion, compared to 36 transactions with a total value of $166.6 billion in 2007. Russian companies carried out the most megadeals by volume, while Chinese companies dominated deals measured by value.

However, E&Y found North America was the hub of mining activity last year with Canadian deals accounting for 20% or $25.2 billion of global transactions. The majority of Canada's deals were domestic with 25% made by gold companies.

The global mining and metals team forecast an increase of mining and metals transactions in Australia this year. "Australia remains a low-risk environment where it is cheaper to acquire new production than develop it. We will likely see countries like China, Japan and Korea taking advantage of large government funding to support their investments."

In South Africa the total value of mining and metals transactions dropped substantially by 86% to a total value of $810 million last year. "South Africa's outlook for 2009 remains uncertain. There will need to be a greater degree of predictability and certainty before sellers re-enter the market," E&Y suggested.

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