spRING 2011 GlobAl MARKETs INTERNATIoNAl - Willis

InterVIew on m&a and rIsk management
Tom: “You’ve touched on a point there that is just as applicable
for the insurance market as it is the capital market – with
multiple entities becoming business partners and forging a longterm
relationship, that trust and understanding is essential and,
generally speaking, the earlier you enter into a dialogue, the
more favourable the outcome. So moving on, what lessons have
those companies transacting in the Mining sector learnt as a
result of the financial crisis and subsequent recovery?”
Lachy: “Mining companies have learnt a number of valuable lessons
having experienced the financial crisis and the rapid changes in market
conditions that abounded, including:
1 Timing is everything, as delays in the process can erode value and
it is not always within the control of the buyer. Most recently Norsk
Hydro’s acquisition of Vale’s bauxite and alumina assets was deferred
until first half of 2011 due to mining rights and regulatory approval
processes in Brazil. Whilst not expected to have a significant impact
on the value of the transaction, Norsk Hydro’s shares responded
negatively to the news given negative sentiment to the deferral.
2 There is a need to consider unfamiliar investment structures such as
unincorporated joint ventures and other innovative approaches to
bridge a sometimes wide spread between buyer and seller expectations.
3 Flexibility is required to get a deal ‘across the line’ in uncertain markets.
4 Acquirers need to be sensitive to increasing concern over foreign
ownership and the need for alternative structures and/or measures to
ensure appropriate economic value is delivered to all stakeholders (not
just target shareholders) to appease these concerns.
5 A better understanding of changing tax and regulatory laws is critical
if an acquirer is to develop a true understanding of a deal’s real value.
6 Companies need to focus on the widest stakeholder group and empathy
with differing cultures can make or break a deal.
7 The value of local knowledge when transacting cross border should not
be underestimated.”
| Willis | Mining Market Review 2011
Tom: “Valuable lessons. Lachy, finally,
what is the outlook for the Mining sector,
transactions wise, in 2011?”
Lachy: “The sector has recovered strongly from
the financial crisis, with gearing now below
historic averages. Demand has held up well, with
downside risks on the supply side likely to keep
commodity prices buoyant and boosting cash
flows. There has to be some doubt as to whether
there will be large scale transformational deals
(given the organic growth plans of the major
mining groups and the difficulties associated
with deal execution). However, I would expect to
see a continuation of the bolt on acquisitions that
were a feature of 2010. The interesting aspect
will be whether mid-tier and junior companies
will make themselves targets, or seek to hold on
and continue to add value by developing projects.
We can expect to see competition for the best
assets and management teams.
There is a healthy pipeline of IPO candidates
so I would expect to see plenty of activity in the
equity capital markets in 2011. There will also be
companies actively seeking secondary listings,
such as the planned Kazakhmys listing and
Vale’s December listing in Hong Kong.
Another feature of the public markets is likely to
be further spin outs similar to African Barrick
Gold (in London) and IRC (in Hong Kong)
during 2010. The anticipated London float of
Severstal’s gold unit and Vedanta Resources
intention to float Konkola Copper Mines in
London are two examples of what we might
expect in 2011. Mining companies are seeking
to maximise their portfolio value and spinning
out assets, notably gold and copper which are
performing strongly, is one way to do that thus
enabling a valuation uplift by comparison to
‘pure play’ peers.”
Compiled by Ernst & Young