Mining M&A Activity May Get Heated

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"M&A activity in the mining sector. . .will likely become increasingly competitive."

Merger and acquisition activity in the mining sector could gain pace this year, and will likely become increasingly competitive, experts from BMO Capital Markets said on Wednesday.

Strategy adviser Don Coxe told reporters that sovereign-wealth funds and government controlled firms are prowling around mining companies for opportunities, while, within the industry itself, consolidation will likely follow the theme of 'big buying small'.

While it may be a difficult task to acquire a publicly listed entity outright, government-controlled companies—most notably from China—are coming in and taking minority positions in Western mining firms.

"They know what their demand is, and if they see that these stocks remain really cheap then they are going to try and buy them."

And sovereign wealth funds are also becoming an important factor, Coxe commented.

"There is no question that these buyers have enormous cash flows, no debt and are accumulating great supplies of American dollars, on which the short-term interest rates are near zero.

"The temptations to take advantage of the bargains in the marketplace must be nearly irresistible. And so there are buyers out there with deeper and deeper pockets, who also buy what they produce."

Many producers have not expanded their exploration budgets much, and growth pipelines across the industry are not particularly impressive.

"What you are going to see is more and more deals being done for these small mining companies, where a big company can pay up," Coxe said.

"I've had quite a few CEOs tell me: 'look, we're quite content to leave exploration and early development to the small companies.'"

In the copper business, producers have by and large used cash flow in 2009 to improve their balance sheets. . .they are well positioned to become more active in pursuing acquisitions, said BMO Capital Markets metals and mining analyst David Radclyffe.

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