September 12, 2013 / 1:51 PM / 5 years ago

Mining M&A standoff tests bankers' patience and skills

MELBOURNE/LONDON (Reuters) - Bankers trying to move a mountain of mining assets for sale are being tested to the limit by unreliable buyers, stubborn sellers and a widening gap between them that has already caused billions of dollars’ worth of deals to be shelved.

A woman runs past the reception desk of the Rio Tinto Limited Shanghai Representative Office in Shanghai March 22, 2010. REUTERS/Stringer

Global mining firms are under pressure from investors to slim down after boom-year expansion ended badly for many of them. However, with demand from China’s steel mills holding up the iron ore price, big miners are unwilling to sell assets cheap - unwanted or no - while potential buyers want a bargain.

The result has been a sharp dip in the value of deals announced in the metals and mining sector so far this year - just over $64 billion, roughly half the value of announced deals at the same time last year, according to Thomson Reuters data. The number of deals is down by more than a quarter.

“There is some pressure to put assets into the market, but those that have been coming down the pipe so far have been more difficult for buyers to get comfortable with,” Julian Vickers, co-head of the global natural resources group at Barclays said.

Rio Tinto (RIO.AX) (RIO.L), for example, has been trying to sell more than $30 billion worth of assets from diamonds to iron ore to slash costs, cut debt and focus on their best assets.

So far, miners have succeeded in offloading copper, gold and nickel mines, most either in developed countries or in commodities where questions over supply linger. However sales of aluminum, diamonds, and coal assets, with fewer specialized buyers and in some cases a weak market, have been scrapped for lack of offers, or disappointingly low ones.

The result for bankers who have long profited from their close relationships with mega miners is that they have sacrificed manpower for auctions that have dragged on for over a year. Many are now taking on deals they know will be tough or impossible to seal, just to preserve client relationships.

“People are throwing themselves at fairly difficult mandates for nothing,” said Robert Dunlop, global head of natural resources at Macquarie Capital.

If not for the $46 billion takeover of Xstrata by commodities trader Glencore (GLEN.L) announced last year and completed in May, the value of deals completed in 2013 would have dropped over a third to $50 billion.


For bankers advising potential buyers, the environment is just as tough. Not only do they face the challenge of sifting serious bidders from bargain hunters, from those who may be ultimately too wary to seal any deal, they are also negotiating in an environment where the price of iron ore has held up above $130 a tonne - meaning the biggest sellers aren’t desperate.

“(Major miners) are not forced sellers, they are trying to realize value,” said Jason Burkitt, UK mining leader at PwC.

Traditional private equity funds dipping their toe in the water are moving forward only very slowly, while industry buyers are finding it tough to raise equity funding from investors wary after $75 billion of writedowns across the mining sector in the past two years. Even Chinese buyers - the go-to solution in many auctions - have been cautious.

Ernst & Young forecasts the standoff to continue for at least another two years.

“It’s not about availability of assets or the availability of capital, it’s about bridging the gap on price expectations,” said Mike Elliott, global mining and metals leader at Ernst & Young.

He suggested that bankers would have to start working extra layers into deals - such as contingency payments tied to commodity price moves - in order to get things moving.


This year has been most painful for bankers close to world no.3 miner Rio Tinto, which over the summer pulled the sale of its diamonds and Pacific Aluminum units - valued on its books at $1.3 billion and less than $1.7 billion respectively - after auctions that dragged on for more than a year.

Credit Suisse CSGN.VX, no.4 on the league tables for announced metals and mining deals this year, advised on both of those abandoned auctions and is also advising on another that bankers expect to be shelved next - the sale of Rio’s majority stake in Iron Ore Company of Canada (IOC), for which the miner wants more than $3.5 billion. Canadian Imperial Bank of Commerce (CIBC) is also advising on the IOC sale.

Rio is also expected to pull the sale of its 29 percent stake in Coal & Allied in Australia, in what would be a painful move for Deutsche Bank (DBKGn.DE), which has been advising it on the deal that had been valued at $1.7 billion.

Morgan Stanley missed out on potential fees from a float of Rio’s diamonds business. But because it advised Glencore (GLEN.L) on the takeover of Xstrata and Dubai Aluminum (Dubal) on the $15 billion merger of the Dubai and Abu Dhabi state aluminum producers, it tops the global league tables for announced and completed metals and mining deals this year.

Macquarie, notably absent from the top 20 advisers on announced and completed deals, worked for more than eight months advising Fortescue Metals Group (FMG.AX) on the sale of a minority stake in its port and rail unit, with no deal in sight.

It’s a situation bankers are still willing to go along with in the hopes of better times ahead with major clients.

“When you are dealing with the big companies, you have to be careful about trying to cherry-pick,” one senior industry banker said. “If you only want the great stuff, you won’t last long.”

Additional reporting by Jacqueline Range in SYDNEY; Editing by Sophie Walker

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below