Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young

Mergers, acquisitions and capital raising in mining and metals

2012 trends2013 outlook

When opportunity knocks, who answers?

2 Mergers, acquisitions and capital raising in mining and metals

3

About this study• The data is primarily sourced from ThomsonONE.com.• Unless otherwise stated, all values are in US dollars.

This Ernst & Young study examines transactions and fi nancing in the mining and metals sector in 2012, and discusses the outlook for 2013.

It provides an in-depth analysis of the major global mining and metals transactions, capital markets and resulting capital fl ows, by considering mergers and acquisitions (M&A), initial public offerings (IPOs), secondary equity offerings, bonds and loans. It also provides an analytical breakdown by country and commodity.

Mergers, acquisitions and capital raising in mining and metals — 2012 trends, 2013 outlook

Mergers and acquisitions (M&A)

• Only completed deals are included. Deals identifi ed as incomplete, pending, partly incomplete, conditional or intended as of 31 December 2012 were excluded.

• The acquirer country is based on the ultimate owner’s geographic headquarters. The target country is determined by where the primary targeted asset or company is located.

• Country-based refers to domestic and inbound deals.

• A country’s acquisition refers to domestic and outbound deals.

• Commodity analysis is based on the company’s primary commodity focus.

• The value of M&A activity by commodity includes deals where the given commodity is the acquirer and/or target’s primary commodity. Commodity charts illustrate the value of deals where the given commodity is the target.

• The data does not capture the value of transactions where this information is not publicly available.

• ‘Mega deals’ refer to all deals with a value equal to, or greater than, $1b.

Capital raising

The primary source for this data is ThomsonONE. Certain details have been supplemented with information from company and stock exchange websites and major business press. Only completed transactions are included.

• Only original Initial Public Offerings (IPOs) — the fi rst time that a company issues equity to the public — are included in the IPO analysis. Proceeds are allocated to the primary exchange of listing.

• Equity issues are geographically categorized by the primary exchange where the issuer’s stock trades, except where stated. Where a company offers Global Depositary Receipts or American Depositary Receipts, the issue is allocated to the destination market of those shares.

• Loan data and proceeds include refi nancing and amendments to existing debt, and are as per Thomson ONE intelligence. Proceeds are allocated to the geography of the borrower.

• All credit rating references are to Standard & Poor’s long-term issuer ratings, unless otherwise stated.

Notes on the data:

Mergers, acquisitions and capital raising in mining and metals

This report was authored by:

And thank you to the Ernst & Young Global Mining & Metals team for their support.

Mike Elliott Global Mining & Metals LeaderErnst & Young, AustraliaTel: +61 2 9248 [email protected]

Lee Downham Global Mining & MetalsTransactions LeaderErnst & Young, UKITel: +44 20 7951 [email protected]

Paul Murphy Asia-Pacifi c Mining & MetalsTransactions LeaderErnst & Young, AustraliaTel: +61 3 9288 [email protected]

Nicky Crabtree Assistant Director, Mining & MetalsTransactions Advisory Services, UKITel: +44 20 7951 [email protected]

Kunihiko TaniyamaJapan Mining & Metals Transactions LeaderTel: +81 3 4582 [email protected]

Emily Colborne Strategic Analyst, Mining & MetalsErnst & Young, UKITel: +44 121 [email protected]

Sameera SandhuSenior Analyst, Mining & MetalsErnst & Young, IndiaTel: +91 124 470 [email protected]

Robert StallAmericas Mining & Metals Transactions LeaderTel: +1 404 817 [email protected]


Contents Themes Commodity

analysis Spotlight — Africa 48

Spotlight — Latin America 51

Australia 53

Canada 54

China 55

India 57

Indonesia 58

Japan 59

Russia 60

South Korea 61

United Kingdom 62

United States 63

Country analysis

Aluminium 37

Coal 38

Copper 39

Gold 40

Iron ore 41

Nickel 42

Potash/Phosphate 43

Silver/Lead/Zinc 44

Steel 45

Uranium 46

06 Executive summary|

12 Spotlight — The rise of a new class of investor

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16 Mergers & acquisitions|

10 Q&A with China Investment Corporation

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25 Capital raising|

34 Outlook|

5Mergers, acquisitions and capital raising in mining and metals


Executive summary

“ As traditional sources of capital and M&A have contracted, a new class of investor has grown in importance, both as a source of capital and a driver of M&A activity during 2012.”

Lee DownhamGlobal Mining & Metals Transactions Leader,

Ernst & Young, UKI Capital raising by asset class — proceeds (2007–2012)

Proc

eeds

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2007 2008 2009 2010 2011 20120

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IPOs Follow ons Convertibles Bonds Loans

2012: the emergence of a two-tier capital environmentDuring 2012, we witnessed a fall in overall capital raising proceeds for the fi rst year since 2009.

Economic uncertainty created volatility and risk aversion among investors, limiting capital raising options for mid-tier and junior mining and metals companies, but generating unique opportunities for the industry’s relative safe havens — the investment grade producers.

2012 saw unprecedented demand from high-grade investment funds for primary debt issuance. Such demand was the result of substantial capital infl ows from an increasingly risk averse investor universe, set against a backdrop of volatile markets and fragile economic news fl ow. Investment grade borrowers took full advantage of this fl ight to quality as they issued long-dated bonds at pricing levels many banks struggled to match. Investment grade issues totaled $73b for the year, comfortably exceeding the 2011 fi gure of $57b, as the large-cap producers raised capital for organic growth and to refi nance existing debt.

The high yield1 bond market was volatile due to its sensitivity to news-driven sentiment. This limited capital fl ow to the sector’s mid-tier companies, and increased the cost of borrowing, with average spreads on high yield debt widening by some 200 basis points (bps) compared with 2011.

1 Sub-investment grade (“junk” or high yield) debt, considered to have signifi cant speculative characteristics, holding a higher risk of default. High yield is defi ned as an issue with an S&P rating equal to or less than BB+ and a Moody’s rating equal to or less than Ba1.


Traditional M&A

Non-traditional investorsTraditional M&A

Pre GFC:

Primaryinvestmentdrivers

Examples

Post GFC:

ExpansionConsolidation

providers

Non-traditionalinvestors

Illustration of the growth of non-traditional investors’ share of industry fi nancing/M&A (not to scale)

Equity markets suffered in the face of economic and political turbulence. Initial Public Offering (IPO) markets were practically closed on anything other than highly-dilutive terms, with a year-on-year 40% fall in volume and 81% decline in proceeds (even excluding Glencore). The $305m IPO of Ivanplats on the Toronto Stock Exchange (TSX) in October was the year’s bright spot and brings hopes of a revival in confi dence.

We also saw a signifi cant fall in total loan proceeds to $106b from $187b in 2011, as banks reduced their exposure to risk assets in response to increased capital requirements under Basel III. This was met with less demand from investment grade companies, opting to secure bond fi nance often on more favorable terms. The reduced availability of bank loans increased borrowing costs and restrictive covenants for all but the largest companies, with average spreads on leveraged loans widening to 389bps above the benchmark, from 266bps in 2011.

M&A itself was used as a source of fi nance during 2012, with a new class of investor emerging Traditional M&A and fi nancing has become increasingly marginalized following the global fi nancial crisis (GFC), as corporates focused less on pure M&A and as access to capital

via debt, lending and equity markets became increasingly constrained. As a result, non-traditional sources of fi nance have grown in prominence — injecting much needed capital into the sector and driving M&A activity. The share of deal value for these acquirers has grown year-on-year to account for 31% of total 2012 deal value, compared with just 21% in 2011.

In the presently constrained capital environment, management are seeking alternative funding options and are increasingly innovative and resourceful in identifying funding solutions.

In value terms, state-backed and fi nancial investors accounted for the largest proportion of M&A by non-traditional acquirers during 2012, as this growing class of investor increasingly participates in, and facilitates, the growth of the industry.

In addition to the state-owned enterprises (SOEs) and sovereign wealth funds (SWFs), which are primarily looking to secure the strategic supply of materials, other fi nancial investors, believing the sector to be currently undervalued, appear to be seeking pure fi nancial returns from anticipated future upside to the current cycle.

The motivations for investment differ from deal to deal and are discussed in more detail in our spotlight analysis, The rise of a new class of investor.


Volume and value of deals by size (2003–2012)

Relative commodity price performance (rebased at 1 January 2012)

An emerging valuation gap has stunted overall M&A activityBuyer and seller agreement on deal valuation has become increasingly diffi cult to bridge in 2012 due to the volatility of commodity prices and growing divergence between mining and metals equities and commodity prices. Sellers have been unwilling to accept lower valuations based on their depleted share prices in 2012, looking back at 52-week highs and expecting healthy premiums.

This divergence is causing longer, more complex deal negotiations, resulting in sluggish M&A at best. Chinese private equity fi rm Cathay Fortune’s now lapsed hostile takeover bid for Australian copper junior, Discovery Metals, is a prime example of the valuation gap that emerged in 2012. As a result of these factors, both the value and volume of M&A completed in the mining and metals sector has decreased; 941 deals completed during 2012, amounting to $104b, representing a year-on-year decrease of 7% and 36%, respectively.

Challenging trading conditions created an era of capital optimization for producing minersThe mining and metals sector is facing some of the most challenging trading conditions since the GFC. Commodity prices have softened and operating and capital costs have soared, resulting in squeezed margins.

Additionally, the safe havens (the investment grade producers) have become victims of their own success. The prior years of strong growth, prudent balance sheet management and exposure to emerging market demand attracted a new breed of investor to share registers. During 2012, these investors have shown greater conservatism and are demanding shorter return timeframes for new investments.

Applying this mindset to investment decisions in a capital-constrained and challenging trading environment prompted many mining and metals companies to re evaluate their priorities during the second half of 2012, and a capital strike was declared. Capital projects were rationalized and deferral plans were implemented on all but the most important top-tier projects.

Companies also continued to review their portfolios and announced the divestment of non-core assets. Vale, Rio Tinto and BHP Billiton all announced divestment plans. M&A activity, for the most part, was lower down the agenda for the mining and metals majors. The M&A that did complete primarily took the form of the consolidation of existing stakes in assets, such as Rio Tinto’s acquisition of Richards Bay Minerals and Anglo American’s acquisition of De Beers.

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Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12

LMEX Index Iron ore Gold Coal

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Volume<$200m Between $200m and $1b >$1b

Source: Thomson Datastream


The Capital AgendaBased around four dimensions, the Capital Agenda helps mining and metals companies consider their issues and challenges and understand their options to make more informed capital decisions.

1. Preserving capital: reshaping the operational and capital base

2. Optimizing capital: driving cash and working capital and managing the portfolio of assets

3. Raising capital: assessing future capital requirements and assessing funding sources

4. Investing capital: strengthening investment appraisal and transaction execution

How organizations manage their capital agenda today will defi ne their competitive position tomorrow.

Ernst & Young works with our clients to help them make better and more informed decisions about how they strategically manage capital and transactions in a changing world. Whether you’re preserving, optimizing, raising or investing capital, Ernst & Young’s Transaction Advisory Services bring together a unique combination of skills, insight and experience to deliver tailored advice attuned to your needs — helping you drive competitive advantage and increased shareholder returns through improved decision-making across all aspects of your capital agenda.

Outlook — a new wave of capital raising options as companies refocus on growthLong-term demand for the sector will continue to be driven by China and other BRIC (Brazil, Russia, India and China) and developing nations. The rapid cut-back of expansion and capital spending by many organizations is expected to slow long-term supply and prolong a “super-cycle” scarcity premium. Consequently, those with access to capital and a long-term view will seek to invest.

The capital strike is expected to continue until commodity prices recover suffi ciently to encourage new investment. For example, we believe that the iron ore price would need to exceed $130/tonne for a prolonged period of time to unlock the next wave of expansion projects. Hence, M&A of iron ore juniors below that level represent an option over future supply shortfalls.

This capital strike will also impact the majors as a consequence of their 2012 asset reviews. A number of high-cost mines are high cost because they have been starved of capital in recent years. We expect a good number of these mines to be divested by the majors to owners with capital available for acquisition and reinvestment.

The 2013 capital raising environment is expected to be shaped by the continued shift from traditional capital markets funding to non-traditional capital providers.

The announcement in January 2013 of a delay to full implementation of, and changes to, Basel III liquidity requirements is unlikely to herald a signifi cant change in lending behavior in the year ahead. As a result, we believe there will be a continued scarcity of longer-term commercial bank lending under Basel III, with private, strategic lenders, equipment providers and national and development banks taking the role of project fi nanciers.

A slow and steady revival in equity markets is anticipated as confi dence returns and a strong pipeline of cross border IPOs eagerly await the return of the market.

Corporate bonds will remain a popular source of fi nance during the year ahead, and we see the potential for an increased fl ow of funds into the high yield sector, supporting the industry’s mid-tier growth as the investment grade market becomes saturated and investors chase greater yields.

Shareholders’ demands for greater dividends may threaten growth during 2013, where investors have been increasingly

frustrated by weakening share prices and lower profi tability. Shareholders are calling for companies to rethink capital allocation decisions, and this will inevitably result in a greater focus on capital recycling.

As a result, leaner business models and stronger balance sheets will emerge during the second half of 2013 as companies continue to rationalize portfolios, unlock capital through divestments and drive cost savings. We anticipate that companies will look to re-focus on growth in late 2013 as the pressure to replace depleting reserves and maintain production mounts — but the question remains as to whether this will take the form of building or buying.

While it is likely to be both, we expect to see a stronger buy-cycle during 2013, underpinned by lower valuations and in response to large cost overruns at several greenfi eld projects. Buying opportunities will be pursued by those companies that emerge fi nancially stronger and are able to access capital to drive M&A.

“ We expect 2012 to represent the peak of the capital strike. Stronger balance sheets are expected to emerge during the the second half of 2013, driving greater corporate activity.”

Nicky CrabtreeAssistant Director, Mining and Metals

Transaction Advisory Services, UKI

Q&A with China CorporationQ: CIC has invested in a number of

mining and metals companies through the acquisition of minority interests. What are the key characteristics of the mining and metals sector that are attractive to CIC?

A: We look at the long-term fundamentals and investment merits instead of focusing on the near-term prospects of certain commodities and how to manage the short-term volatility. If you buy into the growth prospects of the BRIC countries — in particular, China — you will invest in the positive long-term fundamentals of the sector. China’s rapid growth in urbanization has increased the demand for commodities, putting pressure on the supply side (especially for high quality assets). This in turn results in a favorable investment environment.

When evaluating investment opportunities in the mining and metals sector, we focus on the quality and location of the assets, including the geopolitical environment where the assets are located. Given the increasing concerns over cost infl ation and resource nationalism, we are quite discerning as to the location of potential assets and in particular, we scrutinize the ease of extraction, the grade, the required infrastructure development, as well as the stability of the jurisdiction.

In addition, as a minority fi nancial investor, we need to partner with an established operator with strong fundamentals. For example, we invested in Teck Resources during 2009 — one of the few integrated mining companies located in Canada (a stable jurisdiction and a developed country), which met all of our key criteria.

Q: During the past year, state-owned enterprises, sovereign wealth funds and fi nancial investors have been increasingly active in the mining and metals sector. There is also a growing trend in “toehold” investments or acquisitions of minority interests. How would CIC differentiate itself as the partner of choice in conducting overseas investments?

A: CIC is mandated to focus on investment opportunities out of China. While we pursue signifi cant minority investment opportunities, we do not take control or conduct hostile takeovers. Our key differentiators from other investors are:

1. Our ability to accelerate the growth plan of our investee companies with respect to China which could result in a “halo effect” on the valuation, be it developing key relationships or identifying and pursuing synergistic opportunities in China

2. Our ability to co-invest in growth opportunities and bring in other sources of fi nancing (such as debt fi nancing and project fi nancing, if required)

In today’s capital-constrained environment and where growth opportunities in China are of strategic importance, CIC offers compelling strategic value to our investee companies as a signifi cant minority investor.

Q: The mining & metals sector is confronted by many challenges today, such as resource nationalism, cost infl ation, skill shortages, to name a few. As a minority investor, you do not have the operational control of the business to actively manage the underlying risks

Q&A with Felix P. Chee, Chief Representative, China Investment Corporation’s Representative Offi ce in Toronto.

Ramona Cheng Americas Markets LeaderChina Business NetworkErnst & Young, Canada

Mr. Felix P. CheeChief Representative, CIC Representative Offi ce in Toronto

Questions&

Interviewed by Ramona Cheng


Investment

and volatility of a business. What are the key considerations when you evaluate prospective opportunities in this sector and how do you manage the risks/volatility in such an investment?

A: We focus on three main criteria when evaluating an investment opportunity:

1. Attractive fi nancial returns over 7 to 10 years of our ownership

2. Certain strategic elements (such as a “China angle”) where CIC can effectively leverage or help capitalize

3. Ability to structure the deal in a way that can be mutually benefi cial – we evaluate a prospective opportunity not as a portfolio investment but a strategic partnership, focusing on areas where CIC can add value as a provider of long-term, patient capital

As a minority investor, conducting upfront, robust due diligence is key to ensuring that we team up with a strong operational partner. With a long-term perspective, we can ride out the volatility of a sector if we make the right investment with the right partner.

Q: How would you compare today’s investment climate vs. 2009 (when you invested in Teck Resources) in the mining and metals sector? Would you pursue opportunities independent of CIC’s investee companies in this sector?

A: Opportunities to invest in similar high-quality, large-scale assets in the developed countries as a minority investor are few and far between today (compared with 2009 when CIC invested in Teck Resources, for example). Most of the “low hanging fruit” is gone or about to be snapped up in this sector so there is a scarcity factor for large-scale, high-quality assets. Unlike 2009 (the

period immediately after the GFC), the strategic acquirers and the majors now have much stronger balance sheets with lots of liquidity to conduct acquisitions, resulting in more competition for quality assets. You need to move faster and stay ahead of the curve in today’s environment.

In areas where we can leverage the sector insights and operational expertise of our investee companies, we would pursue opportunities either through our existing investments in our investee companies or co-investments with them.

Q: China became the most acquisitive country during 2012 and has been very active in both domestic consolidation as well as overseas acquisitions. Do you expect this trend to continue in 2013? Would China focus more in domestic consolidation (structural adjustments in the industry) vs. acquisitions abroad?

A: The urbanization and demographic trends in China suggest that the strategic needs for resources will continue unabated. In general, given the terrain in China, it is often more diffi cult and therefore expensive to extract in China, and the quality of the commodities may not be as high as those available abroad. As such, I expect China will continue to be quite active in conducting both overseas acquisitions as well as domestic consolidation.

Q: It was reported in Wall Street Journal (“China’s CIC Makes Investing Shift”, 19 September 2012) that CIC is making an investment shift to take a more active role in its investments overseas by co-investing with other private equity funds. What are the implications of such an investment shift, if any, for prospective investments by CIC going forward?

A: We have always adopted a two-pronged approach:

1. Direct investments, such as our investments in Teck Resources and The Shanduka Group in the mining sector and Penn West in the oil and gas sector

2. Investments in other private equity funds as a LP [i.e. limited partner]

We are increasingly active in evaluating co-investment opportunities with other private equity funds since high-quality direct investment opportunities are few and far between for minority investors.

Q: What is your outlook for M&A activity or investment opportunities in the mining and metals sector in 2013?

A: The macro environment globally remains quite uncertain and volatile — whether it is the fear of the fi scal cliff in the US, or the unresolved Eurozone crisis. These are symptoms of fundamental issues that have yet to be fully resolved. And these fundamental issues are expected to continue to impact the global economy, resulting in an uncertain investment environment.

Again, it is increasingly mission-critical to “do your homework” upfront. While you may come across opportunities available at an attractive valuation in a volatile environment, more in-depth due diligence is often required. The uncertain global economy, coupled by a capital-constrained environment, will likely result in more M&A opportunities. The question is whether buyers would have the courage to do the deals.

&Answers


SpotlightThe rise of a new class of investorA key characteristic of 2012 deal activity was the increasing role of state-backed and fi nancial investors in funding the growth of the mining and metals industry through M&A.The mantra across the mining and metals sector over the last decade has been growth fi rst, growth second and growth third. As a result, capital has been consumed in eye-watering volumes; initially debt-fueled and driving scale and consolidation, followed by commissioned mega-projects that have strained balance sheets and questioned commitment to shareholder returns.

Traditional capital providers have reduced their exposure to the sector, and, as a result, a funding gap has opened that increasingly seems to be fi lled by a new class of investor. These investors tend to operate in the gray area between M&A and fi nance, often driving much needed capital into the sector through complex and innovative M&A structures.

Share of deal value by acquirer (2011 and 2012) Share of “non-traditional” deals by acquirer (2012)

0% 20% 40% 60% 80% 100%

2012

2011

Financial investorsCommodity tradersOther

Industry acquirersState-backed acquirersOther sectors

Financial investorsCommodity traders

State-backed acquirersOther sectorsOther

0% 20% 40% 60% 80% 100%

Volume

Value

Our analysis shows that while industry-to-industry M&A unsurprisingly dominated deal activity in 2012, the share of deal value by “non-traditional” acquirers has grown year-on-year to account for 31% of total deal value, compared with just 21% in 2011. State-backed and fi nancial investors account for 69% and 15% of this proportion, respectively.

Furthermore, 88% of outbound deal value by this group refl ects cross border acquisitions by Asian buyers (predominantly from China, but also from Japan, South Korea and Singapore). This may not come as a surprise: Chinese investment in global

• State-backed acquirers (e.g., SOEs and Japanese Trading Houses (JTHs))

• Financial investors (e.g., sovereign wealth funds (SWFs), private capital, hedge funds and real estate holdings)

• Commodity traders

• Acquirers from other sectors such as automotive, technology, fertilizer and utility companies, and industrial conglomerates

Investor categories:

natural resources has been making the headlines in recent years. However, the growth in the share of investment by such buyers, during a slower year for M&A globally and the latest commodity cycle downturn, may be attributed to the following industry developments:

• The contraction of traditional funding sources.

• Introspective behaviors of the large-cap producers, reducing their focus on cross-border M&A.

• Greater focus by mining and metals companies on fi nancial returns and return on capital employed, rendering them less acquisitive on a relative basis.

• An “outward” focus by SOEs. State entities, as mandated by their government owners, are increasingly looking overseas for both investments in mineral resources and expansion of their own operating capabilities.

• The perceived value gap between management and market valuations. Strategic buyers, particularly state-backed and commodity traders, may have better visibility over the real long-term demand situation in their respective markets. This potentially enables them to compete in the gap between the value placed on the business or project by the owners and the value attributed by the market.

• Counter-cyclical or through-cycle investment. Chinese buying of assets and commodities tends to be counter-cyclical, as was demonstrated by a surge in outbound M&A after the fi nancial crisis of 2008. Chinese investors tend to have long-term investment horizons and buy at what they perceive to be bottom of the cycle to stockpile or secure future supply at lower prices, at a time when other competitors may lack the capital or shareholder support to make acquisitions.

• Price volatility. Price volatility promotes the need to lock in raw material supply at stable or predictable prices. Furthermore, strategic buyers may be looking to secure positions that give them greater infl uence over pricing through market share.


Target level by share of deal volume (2012)

Stake acquired by share of deal volume (2012)

Minority stake Controlling stake

Financial investors

Commodity traders

Other sector acquirers

State-backed acquirers

0% 20% 40% 60% 80% 100%

Company level Asset level

Financial investors

Commodity traders

Other sector acquirers

State-backed acquirers

0% 20% 40% 60% 80% 100%

SOEs — the global miners of the future?At face value, state-backed investors are commonly motivated by the need to secure a stable, long-term supply of raw materials, technology or production capacity for national benefi t. Typically, SOEs from high consuming nations such as China, Japan and South Korea are tasked with securing minerals (e.g. iron ore or uranium) either through offtake or equity ownership to supply national demand (e.g., for steel or power).

SOEs, particularly from China, have typically been perceived as a common group — “China, Inc” — with single purpose, bottomless fi nancial backing, and the unquestioning patronage of an all-powerful shareholder. Some well-publicized misadventures in outbound M&A have done little to dispel this perception.

However, a closer look at some of the major SOE acquirers in 2012 reveals a different picture: the ultimate objective may not have changed, but their broader strategic goals are transforming. SOEs today are pursuing internationalization, independence, integration, commerciality and global competitiveness. They consider themselves the global mining and metals companies of the future. Like publicly-listed mining companies, they have to compete with other SOEs for assets and for access to state funding, and must demonstrate profi tability and return on investment.

As a result, SOEs are increasingly commercially-focused, aiming to:

• Buy at a price that refl ects shareholders’ best interests (which includes knowing when to walk away)

• Use investments to educate local management on best practice and transfer knowledge and skills to the domestic workforce

• Invest in more than offtake — SOEs are learning from early mistakes, with stated intentions of investing in local stakeholders, knowledge and social development

• Operate as more than import/export vehicles by building their own operating capability and resource base

• Integrate and expand along the value chain — internationally (via a global footprint), vertically (through raw materials supply), and laterally (through business diversifi cation — mining through to fi nancing and trading)

Despite these intentions, there is often a lack of agility due to drawn out regulatory processes. Timing of a deal in a volatile market is critical: what looks like an attractive investment at the point of initial offer may look very different a year later. There is concern by vendors that doing a deal subject to SOE regulatory approval has provided the acquirer with a free option to renegotiate the deal if commodity prices fall. The protracted, ongoing negotiations for the acquisition of Sundance Resources by Hanlong (Africa) Mining Investment saw Sundance accept a revised offer in August.

“The funding gap is being fi lled by private investors and SOEs who may not be dislodged from their newfound positions once the cautionary investment environment recedes and traditional investors return to the sector.”

Mike Elliott Global Mining & Metals Leader

Ernst & Young, Australia

The buyers in 2012 There are subtle but important differences between the various buyer groups — different motivations, different approaches to deal making, and different acquisition techniques. We look here at some of the groups that have been prominent buyers this year.


The deal has been subject to delay in receiving regulatory approval, leading to a reduced offer price that refl ected “the change in fi nancial markets since the original agreement was struck in October 2011”2. Some SOEs are attempting to address this by making approaches when state support for the deal has largely already been secured.

Activity by Japanese trading houses was relatively muted in2012. We expect an increase in activity as many set out their new multiyear investment cycles in 2013, looking to Asian customers for demand, and international markets and partners for supply.

Financial investors taking minority stakes In 2012, fi nancial investors (such as private capital, investment funds, SWFs and real estate holding companies) were predominantly looking to secure toehold positions in listed mining and metals companies in order to generate investment returns. Nearly 80% of deals by this group were for minority (non-controlling) stakes at the company level, with average stake sizes of 12%. Gold, coal and copper were the most-targeted commodities. The value and share of investments by this group actually declined year-on-year to $4.8b (5%) from $10.4b (6%), perhaps counter-intuitively given that mid-2012 would seem to indicate the bottom of the cycle. This may be a refl ection of seller reluctance, and also an element of risk aversion among investors amid price volatility in key commodities.

Investors in this group were varied in form and geographically widespread, including Weather Investments II, the investment vehicle of prominent Egyptian investor Naguib Sawiris, which acquired Canadian gold producer La Mancha Resources for $494m, at a 55.6% premium to the reference price3. The acquisition of close to a 5% stake in Polyus Gold by Chengdong Investment Corporation, a subsidiary of CIC International Co., Ltd., signaled the fi rst major foray (albeit via a minority stake) into one of Russia’s strategic sectors — perhaps the beginnings of future inbound investment into Russia. CIC has reportedly set aside $1b for Russia-China co-investments via the Russian Direct Investment Fund4.

2 “Sundance accepts revised Hanlong offer of 45¢ a share,” Sundance Resources regulatory announcement, 24 August 2012.3 “La Mancha reaches defi nitive agreement,” La Mancha Resources investor press release, 13 July 2012.4 “Sale of shares and GDRs,” Polyus Gold International press release, 30 April 2012; “The Russian Direct Investment Fund (RDIF, 60%) and China Investment Corporation,” WPS: Banking and Stock Exchange, 13 June 2012, via Factiva.

SWFs have increased their investment activity, driven by a confi dent view about the long term fundamentals for the sector and attractive asset prices in the broad absence of traditional buyers. Temasek of Singapore, for example, has stakes in Turquoise Hill, Inmet Mining and Mosaic. However, there is also growing evidence of the use of specialist funds, such as a reported $500m fund set up in Australia, co-managed by an Australian fund and the local arm of a global investment bank5.

Private capital also stepped in to fi ll the funding gap faced by juniors in 2012. US-based investment fund manager Luxor Capital made a cornerstone, controlling investment in gold junior Crocodile Gold, with a view to exiting via a future refl oating of its shares in the public market — at a higher price6. We expect an increase in activity by private equity in 2013 as fi rms opportunistically acquire assets that present the prospect of relatively quick returns as commodity prices begin to recover. However, without some visibility over near-term future returns, it is diffi cult for traditional private equity to manage their risk of exit in three to fi ve years.

Some high-profi le private fi nance acquisitions this year met with contention and turned hostile. The hostile joint bid for Botswana-focused copper miner Discovery Metals by Chinese private equity fi rm Cathay Fortune and investment fund China-Africa Development Fund was one such example. Discovery Metals’ directors advised shareholders to vote against an offer they deemed “neither fair nor reasonable”7. The bid has now lapsed. More generally, such hostility perhaps refl ects a broader perception by sellers that fi nancial investors are looking to exploit the current weakness in valuations, and bring little technical or industry expertise to the table. Financial investors argue that their interests are aligned with those of the shareholders: maximizing per share shareholder wealth, which means ensuring that projects grow and are successfully delivered. Interchina Resources Holdings addressed its own lack of industry experience by entering the sector via a joint venture with a Chinese investment fund experienced in the operational and technical aspects of the mining industry8.

5 “China’s top fund changing strategy,” Canberra Times, 27 July 2012, via Factiva.6 “Luxor Capital Group issues open letter to shareholders of Crocodile Gold”, Luxor Capital Group press release, 16 February 2012. 7 “DML Board recommends shareholders reject takeover offer,” Discovery Metals ASX announcement, 23 November 2012. 8 “Discloseable Transaction,” Interchina Holdings Company regulatory announcement, 2 May 2011.

“The Japanese trading houses will be looking to return investment to the sector, which will contribute to an expected uptick in M&A in 2013.”

Kunihiko TaniyamaJapan Mining and Metals Transactions Leader

Ernst & Young, Japan


Commodity traders — more than toe-dipping Commodity traders have traditionally secured supply through offtake and sourcing agreements. However, the model is changing, with traders seeking greater integration and operational infl uence through direct ownership of producing assets for commercial long-term benefi t. Glencore International is setting the bar in respect of integration, not least through its merger with Xstrata that will see a signifi cant share of its business made up of controlled industrial assets supplying commodities for its marketing activities. Trafi gura’s increase to 100% of its holding in Iberian Minerals this year represented its own efforts to build strategic holdings in mining assets to complement its trading activities — building a “standalone mining concern”9 to improve market access.

Commodity traders accounted for only a small proportion of deal value by “external” acquirers at $1.1b (1%), compared with $7.3b (4%) in 2011. Iron ore, copper and coal were the most targeted commodities, with traders preferring to make outbound investments via the relatively lower-risk acquisition of minority stakes in listed Australian and Canadian juniors. Noble Group entered into a proposed strategic agreement with Australian junior Aspire Mining in early 2013, which could see a series of debt- and equity-funded initiatives ultimately designed to deliver port and rail solutions for the Ovoot coking coal project in Mongolia.

“Other-sector” investors — managing volatilityPrice and supply volatility drove integration deals by acquirers from other industries, just as we have seen in the steel industry. Coal, rare earths, lithium, iron ore and copper were targeted, with buyers from the power, automotive, chemicals and renewable energy sectors, among others, acquiring stakes through company (rather than asset-level) takeovers.

The strategic investment and offtake agreement between Norwegian fertilizer distributor Yara International and North American IC Potash was one such example. Yara sought upstream exposure to mitigate the fi nancial impact of being structurally short in its value chain. State-backed South Korean energy company KEPCO acquired a strategic 14% stake, including a future offtake provision, in Canada’s Strathmore Minerals to secure supply for South Korea’s nuclear power industry.

9 “Developing new production sources and diverse income streams,” Trafi gura, http://www.trafi gura.com/investments/exploration-and-mining-group/exploration-and-mining-group-case/

What does this mean for the industry?We expect to see a continued and growing role for strategic and fi nancial buyers in the years ahead. Many of the characteristics that have driven or facilitated this growth in 2012 are likely to continue in 2013, not least the overarching need to secure long-term sources of mineral supply.

These types of deals are natural and not new to the sector. The real question is whether such deals would have been consummated had traditional debt or equity capital been available to the host investee. On a case-by-case basis it is diffi cult to judge; but what is clear is that these types of investment will only grow in popularity if capital markets continue to be constrained in 2013.

Sustained price volatility is likely to drive the continued pursuit of vertical integration by metals companies via direct equity holdings in mining companies to secure supply and manage costs. An integrated steel and mining business is likely to be more bankable and command higher investor confi dence because of its potential for relatively higher margins, lower volatility of earnings, lower effective tax outfl ow and stability of overall cash fl ows. However, Ernst & Young research has revealed that vertical integration by steel into mining also brings in the risks of the mining business and may not always have a positive impact on enterprise value10. Alternatives to legally owning mining businesses may be explored, such as commodity price hedging and long-term supply contracts for security, or capping the level of shareholdings in mining businesses.

As the ambitions of state-backed entities become increasingly international and independent, competition for quality projects will intensify. Junior companies are, through lack of choice, becoming progressively more innovative in their pursuit of funding. With this may come higher value expectations and increased confi dence in the negotiation of investment terms; owners of quality projects will be reluctant to sell if competition is high. This will be matched by increasing sophistication on the part of state-backed investors as they learn to transact across the borders of the global mining and metals industry.

10 “Global steel 2013: a new world, a new strategy”, Ernst & Young, January 2013, www.ey.com/miningandmetals.


Mergers & acquisitions

Commodity analysis

Country analysis


in the world’s largest titanium dioxide producer, Richards Bay Minerals (RBM), by acquiring BHP Billiton’s divested stake, is one such example.

A few large deals focused on geographical expansion were also completed, involving acquisitions of assets in traditional (low risk) mining jurisdictions. Among the other mega deals, downstream businesses and Asian sovereign investors acquired assets overseas to secure long term supply of raw materials.

Global macro-economic uncertainties took center stage in 2012, creating volatility in the equity and commodity markets. This severely hampered M&A activity as capital became constrained and greater uncertainty found its way into deal valuations.The decline in commodity prices exposed margins to rampant industry-wide cost infl ation. It is estimated that the industry experienced cost infl ation of between 10% and 15% in 2011, with overall cost infl ation averaging roughly 5%–7% in the last 10 years11. Furthermore, cost overruns at upcoming capital projects, running into billions in some cases, have become commonplace.

As a consequence, companies shifted gear from “growth for growth’s sake“ to “capital optimization“ during 2012, beginning with a review of existing portfolios. With low cost, long life assets (tier-one) the priority, investments in massive capital projects were revisited (e.g., BHP Billiton’s Olympic Dam), non-core assets were earmarked for divestment (e.g., Rio Tinto’s Diamonds business) and M&A activity slowed.

Major $10b-plus deals have remained elusive since the GFC, with the exception of BHP Billiton’s $11.8b acquisition of oil and gas company, Petrohawk Energy, in 2011 — such transformational deals gave way to low risk and strategic M&A in 2012. However, this could change in 2013, with the closing of the Glencore International-Xstrata merger and Freeport-McMoRan Copper & Gold’s proposed oil and gas foray12.

Non-core asset divestitures gathered pace in the second half of 2012, as companies pushed to unlock capital. Only the largest players were in a position to capture the “once-in-a-decade” buying opportunities. Rio Tinto’s move to double its interest

11 “Cost infl ation is major theme for metals production: Deutshe Bank,” Commodity Online, 16 April 2012.12 “Freeport-McMoRan Copper & Gold Inc. to Acquire Plains Exploration & Production Company and McMoRan Exploration Co. In Transactions Totaling $20 Billion, Creating a Premier U.S. Based Natural Resource Company,” Freeport-McMoRan Copper & Gold news release, http://www.fcx.com/ir/news_releases.htm, 5 December 2012.

Volume and value of deals (2003–2012)

Volume and value of deals by size (2003–2012)

Volu

me

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

200

400

600

800

1,000

1,200

0

50

100

150

200

250

Valu

e ($

b)

Volume<$200m Between $200m and $1b >$1b

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2011–2012 growth

Volume 475 596 564 701 903 919 1,047 1,123 1,008 941 -7%Value ($m) 46,182 26,350 65,430 175,713 210,848 126,884 60,035 113,706 162,439 104,014 -36%Average value ($m) 97 44 116 251 233 138 57 101 161 111 -31%Median value ($m) 4.4 3.1 4.8 6.2 7.2 6.0 3.2 5.2 5.6 5.0 -12%

Share of mega deal value by M&A theme (2011 and 2012)

0% 20% 40% 60% 80% 100%

2012

2011


Mega deals (2012)

Rank Value ($m)

Type Target Name Target Country

Target commodity

Acquirer Acquirer Country Acquirer commodity

Share (%)

1 9,432 Domestic Sumitomo Metal Industries

Japan Steel Nippon Steel Japan Steel 100.0

2 5,200 Cross border De Beers South Africa Diamonds Anglo American UK Diversifi ed 40.0

3 3,735 Cross border Inoxum Germany Steel Outokumpu Finland Steel 100.0

4 3,344 Cross border Quadra FNX Mining Canada Copper KGHM Polska Miedz Poland Copper 100.05 3,309 Cross border Roy Hill Holdings Australia Iron ore Posco; STX Corp; Marubeni South Korea; Japan Steel; Trading

company25.0

6 2,900 Domestic/Cross border

Anglo American Sur Chile Copper Codelco; Mitsui Chile; Japan Copper 29.5

7 2,823 Cross border Usiminas Brazil Steel The Techint Group Argentina Steel 27.78 2,345 Cross border European Goldfi elds Greece Gold Eldorado Gold Canada Gold 100.09 2,299 Domestic Aston Resources Australia Coal Whitehaven Coal Australia Coal 100.0

10 1,910 Cross border Richards Bay Minerals

South Africa Titanium Rio Tinto UK Diversifi ed 37.0

11 1,521 Cross border Gloucester Coal Australia Coal Yankuang Group China Coal 100.012 1,500 Cross border Tonkolili Iron Ore Sierra Leone Iron ore Shandong Iron & Steel Group China Steel 25.013 1,483 Cross border Minefi nders Mexico Silver/lead/

zincPan American Silver Canada Silver/lead/zinc 100.0

14 1,411 Cross border Kazzinc Kazakhstan Zinc Glencore International Switzerland Trading company 18.915 1,335 Cross border Exxaro’s mineral

sands operationAustralia Titanium Tronox US Titanium 100.0

16 1,288 Cross border Neo Material Technologies

Canada Rare earths/lithium

Molycorp US Rare earths/lithium

100.0

17 1,283 Cross border Anvil Mining Democratic Republic of Congo

Copper China Minmetals Corporation China Trading company 100.0

18 1,271 Cross border Extract Resources Namibia Uranium China Guangdong Nuclear Power Holding

China Power and utilities

42.7

19 1,250 Cross border First Quantum Mineral’s residual assets

Democratic Republic of Congo

Copper Eurasian Natural Resources UK Diversifi ed 100.0

20 1,201 Domestic Laiwu Steel China Steel Jinan Iron & Steel China Steel 100.0

21 1,172 Domestic Yima Coal Industry Group — coal assets

China Coal Henan Dayou Energy China Coal 100.0

22 1,128 Cross border BASF’s fertilizer plant

Belgium Fertilizer MKHK YevroKhim (EuroChem)

Russia Potash phosphate

100.0

23 1,037 Domestic Geotransgaz and Urengoi Gas Company

Russia Oil and gas AK Alrosa Russia Diamonds 90.0

24 1,034 Domestic Eramet France Magnesium FSI France Financial investor

25.7

25 1,012 Cross border Grande Cache Coal Canada Coal Winsway Coking Coal Holdings; Marubeni

China; Japan Coal; Trading house

100.0

26 1,009 Cross border Kalahari Minerals Namibia Uranium China Guangdong Nuclear Power

China Power and utilities

100.0

27 1,000 Domestic Bumi Indonesia Coal Borneo Lumbung Energi Indonesia Coal 23.8


Minority stake acquisitions in junior companies*

Acquirers of minority stakes in junior companies, by share of dealvalue (2011 and 2012)*

Two main themes dominated M&A across the sector in 2012:

1) Low risk M&A

This type of deal focused on domestic consolidation for synergies and pooled resources, in response to cost infl ation and fund raising diffi culties. Quite often, low risk M&A transactions were pursued to achieve synergies in shared facilities, infrastructure, blasting etc. — for instance, the merger of Australian coal producers, Whitehaven Coal and Aston Resources. Alternatively, low risk deals were aimed at gaining greater control over an asset where a stake was already held, such as Anglo American’s acquisition of an additional stake in the world’s largest diamond producer, De Beers.

2) Strategic M&A

Such deals focused on more than just the transaction. The myriad of state-owned and sovereign wealth investors looking to acquire assets in return for security of supply via offtake are such examples, as in the case of Shandong Iron & Steel’s minority stake acquisition in Tonkolili Iron Ore. Strategic M&A deals provided much needed capital to the target entity in a capital-constrained market, with larger companies acquiring “toehold” stakes in prospective junior explorers. Such deals enabled acquirers to take advantage of equity devaluation in the junior segment to secure future growth options — a strategy that HudBay Minerals actively pursued in Peru, for example.

Another emerging trend in 2012 was the increase in the number of deals done for minority stakes rather than full-takeovers, which were very much the domain of the debt-fi nanced consolidation phase that took place between 2005 and early 2008. Consequently, these minority stake acquisitions increased options for juniors, be it exit through an outright sale, or funding via a strategic investment that lends confi dence to a project and enables future fi nancing to be arranged. This trend is likely to continue as fi nancing options remain tight and large-cap producers look to recycle capital — both being factors that will drive the pursuit of juniors, as well as strategic partners on projects.

2011

2012

State-backed acquirersIndustry acquirers — Major/Mid-tier

Financial investorsIndustry acquirers — JuniorCommodity tradersOther sector acquirers

0% 20% 40% 60% 80% 100%

*Represents deals where the stake acquired, and aggregated stake owned after, was less than 50%.

2010 2011 2012

Volu

me

Valu

e $m

VolumeValue $m

0

50

100

150

200

250

0

1,000

2,000

3,000

4,000

5,000


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

66% 65% 65%60% 59%

43%

67%

55%52%

34% 35% 35%40% 41%

57%

33%

45%48% 48%

52%

Share of domestic Share of cross border

Share of domestic and cross border deals (2003–2012)

Valuation gapThe changing industry landscape in 2012 made deal execution diffi cult, with some major deals falling through or facing delays due to mismatched expectations on deal valuations and/or funding diffi culties. In one such deal, the privately-owned Tinkler Group made a $5.5b takeover bid for Australia’s Whitehaven Coal, at a time when the latter’s share price had dropped to nearly three-year lows. However, the bid was eventually abandoned as deteriorating coal market conditions jeopardized efforts to secure funding for the deal13.

Buyer and seller agreement on deal valuation became diffi cult to achieve in 2012 due to the growing divergence between mining and metals equities and commodity prices. Macro-economic risks weighed heavily on mining and metals equities and commodity prices alike, but this is where the similarities ended. Commodity prices eventually found support from positive long-term fundamentals, especially once the industry’s capital strike took a sizable chunk of planned future supply off the market. On the other hand, mining equities were penalized for challenges and risks at the producer-level, particularly escalating operating costs and capital cost overruns. As a result, share prices fully refl ected the negative impact of commodity price falls, but did not benefi t from an equivalent upside when commodity prices recovered, leaving many sellers searching for large premiums which were diffi cult for buyers to swallow.

Sellers were unwilling to accept lower valuations based on their depleted share prices in 2012, on the grounds that this unfairly refl ected near-term uncertainties, rather than the long-term potential of their assets. Consequently, negotiations are taking longer and becoming more complex, resulting in sluggish M&A at best.

13 “Australia’s Tinkler pulls $5.5 billion Whitehaven bid,” Reuters, 24 August 2012; “Tinkler lobs late bid for coal miner,” The Sydney Morning Herald, 14 July 2012.

Cross border activityThe growing scarcity of large, quality resources in traditional mining jurisdictions has led to increasing cross border activity over the years. Companies have increasingly ventured into emerging and frontier regions to secure metal in the ground, taking on greater political risk and even partnering with host governments for social and infrastructure development.

The year 2008 marked a cross-over, with cross-border deal activity overtaking domestic consolidation, following a long period of convergence. However, the GFC reversed this trend dramatically as companies looked toward domestic consolidation, seeking synergies and greater fi nancial viability. With such signifi cant capital fl ows out of Asia, post the GFC, this trend appears to have reversed once again, boosting cross-border deal share to more than 50% of deal volume in 2012.

The risks associated with resource nationalism are no longer restricted to the frontier and emerging markets alone. The introduction of the Mineral Resources Rent Tax (MRRT), a carbon tax and increases in state royalties in Australia during 2012 is case in point. Infrastructure bottlenecks have also become a concern in mature mining countries, including South Africa and Australia. Furthermore, the mining-led capex boom in traditional mining and metals regions has made cost infl ation in these countries far more pronounced compared with general industry levels. Therefore we are beginning to see a more level playing fi eld for M&A across traditional low risk countries and medium risk destinations.


Target destinations in cross border deals by risk level (2011 and 2012)

Market share (by proceeds $m)

2007 2008 2009 2010 2011 2012 Y-o-Y growth

Asia Pacifi c 18,045 29,611 20,505 38,955 38,297 41,055 7%Africa 7,271 1,844 3,285 16,657 20,282 19,940 -2%Latin America 16,147 16,924 12,139 23,957 22,084 13,872 -37%North America 143,369 48,520 15,420 22,200 54,187 13,306 -75%Europe 22,976 26,432 4,608 6,613 3,564 10,424 192%CIS 3,040 3,553 3,836 3,718 23,894 5,418 -77%Middle East - - 242 1,605 131 -Total 210,848 126,884 60,035 113,706 162,439 104,014 -36%

Value of deals by target region (2007–2012)

Meanwhile, companies held back from making investments in higher risk countries in 2012, suggesting that these deals were possibly harder to justify amid greater shareholder scrutiny on capital allocation. The activity across frontier regions, as a result, tended to be conducted by Chinese SOEs for resource security. Frontier markets hold the promise of robust demand from an emerging middle class and are also home to tier-one mineral assets. Competition for the latter has greatly intensifi ed, particularly among BRIC and emerging market players, with strong and steady support from their respective governments. China and India’s push for bilateral trade agreements with several African nations is testimony to this. The Democratic Republic of Congo (DRC), Sierra Leone and Namibia followed South Africa as top African destinations — primarily targeted by Chinese SOEs for copper, iron ore and uranium, respectively.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Shar

e by

val

ue

2011

24%

22%

54%

2012

20%

53%

26%

Low risk Medium risk High risk

Note: numbers may not sum to column totals due to rounding.


Australia was the top destination for mining and metals M&A in 2012, where M&A targeting Australian assets (inbound and domestic) accounted for 13% ($14b) of global deal value, driven by increased domestic consolidation, particularly among mid-cap coal miners to achieve synergies and mitigate rising costs. Although subdued by announcements of capital cost blow outs, inbound deal activity in Australia was driven by investments from Asian acquirers into coal and iron ore. China was the second most targeted destination, due to Government-led domestic consolidation to centralize control over China’s fragmented coal and steel industries.

We are also beginning to see growing interest in many of Europe’s resource-rich countries, driven by growing political support in the region to develop the mining industry in these low-risk jurisdictions, including Turkey, Sweden and Spain. Processing and manufacturing facilities in Germany were targeted by players looking to forward-integrate, with the added benefi t of access to technological know-how.

Inbound M&A in Latin America was subdued by intense community opposition to mining, large capital cost blow outs, water and energy constraints, and growing protectionism across the region.

Increasing demand for raw materials in the Asia-Pacifi c region drove Asian acquirers overseas to secure supply, with China and Japan, respectively, emerging as the most acquisitive countries in 2012. Asian SOEs and trading houses dominated this outbound activity. China, Japan and South Korea, together, accounted for over a third (37% or $39b) of global deal value in 2012.

North America was notably quiet in 2012, falling behind Europe as an acquiring region. The marked decline in the region’s M&A activity can be partly attributed to reduced domestic coal consolidation in the US due to diffi cult market conditions, resulting from weak demand, depressed prices and the threat of cheap natural gas. The overall slowdown in Canadian M&A activity was characterized by fewer inbound investments from the US, subdued domestic consolidation and smaller overseas acquisitions.

Market share (by proceeds $m)

2007 2008 2009 2010 2011 2012 Y-o-Y growth

Asia Pacifi c 18,965 46,148 20,197 49,688 58,924 47,903 -19%Europe 90,084 24,074 11,182 7,528 28,438 23,035 -19%North America 77,886 35,057 13,661 35,481 48,964 16,961 -65%Latin America 7,653 8,079 8,181 14,799 3,987 9,287 133%CIS 12,348 13,015 5,248 4,196 19,457 4,131 -79%Africa 3,526 511 1,419 1,480 2,437 2,633 8%Middle East 375 - 72 533 231 53 -77%Unknown 12 - 75 - - 9 Total 210,848 126,884 60,035 113,706 162,439 104,014 -36%

Value of deals by acquiring region (2007–2012)



Commodity analysisSteel led global deal value as the most targeted commodity, with domestic consolidation being the main theme, characterized by strategic moves to protect margins and remain competitive, including access to high growth markets, consolidation and vertical integration. The all-share merger of Japanese steel majors Sumitomo Metal Industries and Nippon Steel was the largest deal of the year, valued at $9.4b, which was driven by the need to remain competitive and achieve cost saving synergies, as well as to gain leverage over raw material suppliers14.

Coal deal activity was also largely driven by domestic consolidation this past year in the Asia-Pacifi c, compared with 2011 when the majority of this activity took place in the US.

14 “Nippon Steel & Sumitomo to Push Cost Cuts Amid Competition,” Bloomberg, 1 October 2012

21.4

Other*

Rare earths/lithium

Uranium

Titanium

Silver/lead/zinc

Diamonds

Iron ore

Gold

Copper

Coal

Steel

14.2

13.4

7.3

5.3

4.0

3.9

3.6

2.3

10.6

17.9

142

20

26

30

33

47

49

58

78

101

339

Other*

Rare earths/lithium

Nickel

Mineral exploration

Uranium

Steel

Silver/lead/zinc

Iron ore

Copper

Coal

Gold

Value of deals by target commodity ($b) (2012) Volume of deals by target commodity (2012)

*Other: includes potash/phosphate, nickel, tantalum, vanadium, aluminum, nickel, potash, diamonds, limestone, PGMs, tungsten, chromite, molybdenum, graphite, tin, silica, gypsum, molybdenum, magnesium, niobium etc.

*Other: include potash/phosphate, nickel, tantalum, vanadium, aluminium, nickel, potash, diamond,limestone, PGMs, tungsten, chromite, molybdenum, graphite, tin, silica, gypsum, molybdenum,magnesium, niobium etc.

Power utilities and trading companies were also active acquirers of coal assets to secure supply. Looking ahead, an energy crisis in India in early 2012 highlights the country’s acute shortage of coal, making it a strong contender for overseas coal assets in competition with China, Japan and South Korea. Gold M&A activity has been dominated by domestic consolidation for years, but interestingly witnessed a shift in focus to outbound growth in 2012. Copper also witnessed a marked increase in cross border acquisitions, driven by the need for resource security amid growing competition for scarce, quality assets.

Vertical integration was the key driver for deals targeting rare earths and lithium, as well as energy-and-steel-making raw materials. Asian acquirers actively pursued uranium and iron ore assets overseas to secure their long term supply chains.


M&A outfl ows for key nations

5.1

9.9

1.74.5

9.1

2.2

Canada

China

Australia

Colombia

Outbound (bubble size = deal value)Domestic (bubble size = deal value)

Greece

Namibia

2.3

9.1

12.6

0.4

US

1.31.80.5

DemocraticRepublic of Congo

1.3

1.5

Argentina

Chile

PapuaNew Guinea

0.6

1.5

2.3

0.4

0.9

7.1

Sierra Leone

0.71.4

Kazakhstan

1.1

Switzerland

Japan

0.80.6

0.1

0.8

2.5

0.5

2.8

Mexico

2.3

South Africa

10.8

UK

3.0


Capital raising

A changing investmentlandscape BondsSyndicated loansIPOsFollow on issuesConvertible bonds


Capital raising by asset class — proceeds (2007–2012)

Debt and equity proceeds by month (2012)Economic uncertainty created volatility and risk aversion among investors, limiting options for higher risk capital raisers, but generating unique opportunities for the industry’s relative ‘safe bets’ — the investment grade.The fall in overall capital raised in 2012, to $249b from $340b in 2011, refl ects changing investment appetite:

• Scaling-back of capital outlay (both organic and inorganic) by the majors

• A volatility-led structural shift in investor preferences from equity to fi xed income instruments

• A fundamental, if gradual, shift in the makeup of funding sources, from traditional capital markets to alternative investors and unconventional funding structures

This change manifested itself in 2012 in the form of record bond proceeds (largely by investment grade issuers), a withdrawal from the prohibitive commercial loans market, and the decline of traditional equity funding in the face of punishing market valuations.

Proc

eeds

$b

E qui

ties

inde

x m

ovem

ent

Jan Feb Mar Apr May Jun Jul Aug Sep Oct DecNov300

400

500

600

700

800

900

1000

0

50

100

150

200

250

300

350

HSBC Global Mining & Steel indexDebt Equity

“ For the fi rst year since 2009, we witnessed an overall decline in the amount of capital raised by the industry — a consequence of the complex and evolving capital raising environment that emerged in 2012.”

Emily ColborneStrategic Analyst, Mining & Metals

Ernst & Young, UKI

2007 2008 2009 2010 2011 2012

IPOs 21,400 12,406 2,987 17,948 17,449 1,388

Follow ons 66,802 48,751 73,806 49,705 49,745 25,950 Convertible bonds 12,865 12,238 14,431 5,477 2,365 3,537 Bonds 36,358 38,146 61,016 72,502 83,804 112,539

Loans 110,787 171,691 62,420 183,875 187,059 105,981 Total 248,212 283,232 214,660 329,507 340,422 249,394



Changing behaviorsThe implications of these various characteristics and drivers are manifold. The new investment landscape requires preparation, agility and innovation from all participants.

Companies need to ensure the right balance between focus on short-term returns and investment in longer term growth. The rise of long-term counter-cyclical investors, including streaming companies, should see better alignment of funding to the strategic objectives of borrowers/issuers. Both parties are mutually dependent on the success of the project.

Smaller companies need to be realistic in their projections about fi nancing needs. Smaller funding requirements, linked to achievable, phased development targets, are more likely to attract investors, and less likely to result in disappointment of the market further down the line.

A thorough understanding of the range of funding structures and sources available, and their associated benefi ts and risks, is required.

• Are the costs of capital commensurate with the immediate funding need?

• Are shareholders comfortable with the proportion of ownership of your business you are conceding?

• On what terms are you locking in offtake of your future supply, and what are the implications on your long-term growth?

• What impact will this funding partner or structure have on your ability to secure other sources of fi nance?

Diversifying sources and types of funding will help to spread risk, drive effi ciency and limit exposure or loss of control to any one single party. Building of relationships with the widest range of potential capital providers will help to secure the right funding at the right price.

A changing investment landscape The drivers and implications of this changing environment are best understood from the differing perspectives and interdependent relationships of the industry’s various players.

The major producers 2012 saw a shift in focus by the major miners, from capital expenditure to capital optimization. Shareholders have become increasingly frustrated by weakening share prices and lower profi tability in the face of huge planned capital spending. As a result, companies have faced pressure to rethink their capital allocation decisions — a pressure that may manifest itself in 2013 as a greater call for dividends. Companies have responded in 2012 with a focus on capital recycling through ongoing appraisal of portfolios, redistribution and diversion of capital from higher cost to higher return projects, and divestments of non-core assets. We see the industry going through a phase of proving it can provide shareholders with appropriate returns before longer term growth options are really back on the agenda.

This shift also refl ects the possibility that we are entering the next phase in the commodity and capital cycle: from a period of price-driven volume growth, to a new chapter of price-moderated margin growth. As a result, the investment grade majors are raising capital, predominantly in the bond markets, to take advantage of favorable terms for refi nancing, rather than to fund major acquisitions or capex programs. The focus in 2013 will be on maximizing returns on capital while maintaining credit rating strength.

The steel producersSteel producers faced further tough conditions in 2012, as reduced demand led to squeezed margins and deterioration in credit quality. As a result, steel producers are largely focused on restructuring rather than growth, through the likely route of asset sales, external fundraising via the bond and loan markets, and emergency rights issues in an effort to repair balance sheets.

The mid-tiers and advanced juniorsCompanies are typically high yield or unrated, limiting access to the corporate bond and loans markets, and with little appetite to dilute existing shareholdings in the equity markets. That said, a number of companies in this group have benefi ted from the swing to a “stock selective” mindset by institutional investors looking for quality, de-risked investment opportunities presenting relative visibility over potential near-term returns. Companies have also exploited limited but expedient opportunities to access the high yield and US private placement markets. Long-term investors are playing an important role, securing toehold positions in the mid-tiers via equity and offtake fi nancing to help fi ll the funding gap.

The early-stage explorersThe capital strike by risk-averse equity investors meant that early stage junior companies were faced with very few options in 2012. “Last resort” funding options are coming to the fore, often bringing loss of control over projects or onerous terms. Companies are in survival mode once again, with a symptomatic number of companies exhibiting signs of fi nancial distress.


Bonds

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Bond volume and proceeds (2000–2012)The credit environment in 2012/2013Standard & Poor’s (S&P) has predicted a tough year ahead for mining and metals companies in 2013. Credit rating action ratios swung to the negative over 2012 (more downgrades than upgrades). However, the downgrades and negative outlook largely refl ect challenging market conditions for European and Asia-Pacifi c steel makers and North American coal producers. Many of the major diversifi ed mining producers have been given stable outlooks, underpinned by continued strong cash fl ows, manageable debt to equity ratios, and in light of the scaling back of planned capital expenditures.

Credit rating quality is a strategic priority in the capital agendas of many mining and metals companies, given the attractive pricing and access to capital that the highest-rated issuers have been able to exploit in the bond and commercial debt markets. ArcelorMittal reportedly said that a downgrade to sub-investment grade status would result in increased interest costs of $100m per year15.

A lower commodity price environment can quickly weaken credit ratios and we may see incidences of emergency fundraising among leveraged mid-tiers exposed to unexpected price weakness and among steel producers in the face of continued challenging market conditions.

15 “ArcelorMittal’s debt cut to junk by S&P on steel weakness,” Bloomberg, 2 August 2012. ArcelorMittal’s long-term issuer ratings were downgraded by S&P to BB+ from BBB — in August; by Moody’s to Ba1 from Baa3 in November; and by Fitch to BB+ from BBB — in December.

S&P ratings migration — mining and metals companies (2012)

Q1–12 Q2–12 Q3–12 Q4–12

65

2

4

7

1718

DowngradesUpgrades

16

Mining and metals companies raised bond proceeds of $113b in 2012, using bond markets to diversify away from their past reliance on bank debt. Bond issues by the top six diversifi eds16 alone, at $42b, comfortably exceeded all previous records.

The corporate bond market witnessed a virtuous cycle of historically low benchmark rates encouraging demand from investors for yield, which in turn is reducing borrowing costs for investment grade issuers. The average coupon on 5–10-year US dollar notes issued by investment grade mining and metals companies fell to 3.9% (from 4.7% in 2011), masking individual bond coupons as low as 1% on shorter tenors. In addition to favorable pricing, demand is enabling issuers to refi nance existing debt and extend maturities.

Glencore International (rated BBB/stable by S&P) issued its fi rst bond since its 2011 IPO. The €1.25b notes attracted an order book in excess of €5b, allowing material price tightening and a fi nal print at 240bps over mid-swaps. BHP Billiton, which launched its only US dollar issuance early in the year (achieving the lowest pricing of all mining issuers on equivalent bonds at 1%), launched an AU$1b 3.75% bond due 2017 in October. This represented the largest ever single-tranche Australian dollar bond by an Australian company outside of the banking sector17, with over 80% of the order book comprised of domestic investors. The issue, aimed at diversifying its investor base and tapping local investor demand, reportedly attracted an order book of over AU$8b and may trigger a revival of the Australian bond market for both domestic and international borrowers.

16 Anglo American, BHP Billiton, Glencore International, Rio Tinto, Vale and Xstrata17 “BHP sells fi rst Aussie dollar bonds in more than a decade”, Bloomberg, 9 October 2012.

“ Corporate bonds were the story of the year as companies took advantage of unprecedented investor demand for high grade debt to raise record proceeds.”

Nicky CrabtreeAssistant Director, Mining and Metals

Transaction Advisory Services, UKI

Source: S&P Ratings Direct. Represents foreign long-term issuer credit rating.


Coupon ranges on US dollar and Euro bonds by tenor (2012)

High yield bonds (volume of issue, 2011–2012)

1.72.8

4.8 5.0

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High Low Average

Investment grade High yield

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The high yield market was a more fi ckle play, heavily infl uenced by macroeconomic news fl ow as investors frequently shifted between “risk on” and “risk off” trading periods. The chart below illustrates a clear correlation between market volatility (as represented by the CBOE Volatility Index) and the timing of high yield bond issuance.

Preparation and market timing proved critical, as evidenced by Hudbay Minerals, which elected to postpone a high yield bond issue in July due to challenging market conditions, patiently holding out for a return in market sentiment. The company reissued in September with an upsized issue of $500m maturing in 2020.

High yield issues accounted for just 17% of total bond proceeds in 2012, compared with 24% in 2011, while average spreads on high yield debt (the premium investors demanded above the government benchmark rate) widened by some 200bps compared with 2011.

2012 saw an increase in the share of bond proceeds raised by emerging market companies. Latin American issuers — notably Codelco and Vale — issued US dollar bonds to take advantage of

lower borrowing rates compared with the domestic market. The issues were met with strong demand, interestingly from Latin American investors with signifi cant funds held overseas. Codelco’s bonds made history with the reportedly lowest ever coupon by a Latin American issuer on its 10-year and 30-year notes at 3% (T+165bps) and 4.25% (T+180bps), respectively, raised to fund the company’s investment program.

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HY bonds CBOE Volatility index

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Loan volume and proceeds (2000–2012) Primary use of proceeds, by share of proceeds (2012)

2012 witnessed a signifi cant, but not unexpected, fall in loan proceeds to $106b as banks continue to reduce their exposure to riskier assets in order to manage their reserve capital requirements under Basel III. The announcement in January 2013 of a delay to full implementation of, and changes to, Basel III liquidity requirements18 is unlikely to herald a signifi cant change in lending behavior in the year ahead, albeit providing more time for banks to put required Basel III-compliant systems in place. Many banks are already complying with minimum regulatory capital requirements, but the markets are pushing for better standards, demanding considerably higher Core Tier 1 capital ratios than regulators’ minimum stipulations. As a result, banks remain focused on maintaining strong relationships with quality corporates — the highest grade borrowers and “national champions”.

For mining and metals companies, the reduced availability of bank debt inevitably increased borrowing costs with increasingly restrictive covenants for all but the largest companies or those offering clear opportunities for ancillary business. Average spreads on leveraged loans widened to 389bps above the benchmark, from 266bps in 2011. This perpetuated a two-tier market that has been taking shape for some time now: the largest borrowing large, the rest borrowing little, or, indeed, not at all. Glencore International exemplifi ed the “large” for a second year, with $19b of loans closed for refi nancing and in respect of its merger with Xstrata.

18 “Group of Governors and Heads of Supervision endorses revised liquidity standard for banks,” Bank for International Settlements (BIS) press release, 6 January 2012. Key elements of the revised liquidity standard includes delay of full implementation from 2015 to 2019 (with 60% of requirements to be met by 2015), and a change to the qualifying assets

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Syndicated loans

Of the loans that were closed in 2012, more than half were “extend and amend” transactions for existing facilities (usually on better terms), meaning that relatively little new bank debt fl owed into the sector in the form of project or acquisition fi nance.

Project fi nance is increasingly being provided by non-traditional lenders such as sovereign wealth funds, equipment providers, national/development banks, and strategic offtakers, in the form of pre-fi nance arrangements. However, among the projects for which traditional bank-syndicated project fi nance was closed in the year were First Quantum’s Kansanshi copper mine in Zambia ($1b led by Standard Bank), KGHM Polska’s Sierra Gorda SCM Chilean copper project ($1b with a consortium of Japanese banks) and Tharisa Minerals PGM/chrome mine expansion ($132m, led by HSBC, Absa Capital and Nedbank).

Outside of the syndicated loans market, we are increasingly seeing customers providing fi nance in return for offtake arrangements. For example, in August, Paladin Energy secured a $200m prepayment from a major utility for a long-term offtake contract of uranium oxide. The prepayment was secured by the interest in a Canadian uranium project.

$10b

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$59b

Debtor in possession


Volume of IPOs by primary exchange (2012)IPO volume and proceeds (2007–2012)

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The value and volume of IPOs in 2012 retreated to their lowest levels since at least 2007, and 2009, respectively, with a year-on-year 40% fall in volume and 81% fall in proceeds (even excluding Glencore). Given the period of extreme and unprecedented crisis that 2009 represented, it is diffi cult to fi nd logic in the indiscriminate nature of the pull-back from equities and the apparently sentiment-driven behavior of the equity markets in 2012.

The $305m listing of Ivanplats on the Toronto Stock Exchange (TSX) in October was the year’s bright spot and brought late hope of a revival in confi dence among equity investors and issuers alike.

IPO volume was made up of small-scale listings by junior companies that opted to raise low proceeds with a view to securing a public platform from which to raise future funds. Toronto and Australia were the markets of choice for domestic IPOs.

IPOs

Cross border capital fl ows saw traditional developed markets continue to fund exploration in Africa, South America and Asia-Pacifi c. Some companies secured the advantage of cornerstone investors with a vested long-term interest in the success of the project. Equipment, power and infrastructure companies were among those gaining strategic toeholds in coal and copper projects. In a fi rst of its kind, China Nonferrous Mining, an Africa-based, Chinese-owned exploration company spun out of China Nonferrous Metal Mining Group, listed in Hong Kong to raise proceeds for the development of a copper project in Zambia. Perhaps this will prove the fi rst of an emerging new method of securing access to Africa’s resources by Chinese investors.

For the IPO markets to return in 2013, we will need to see relative macro-economic stability driving momentum in equity markets. The signs during 4Q 2012 are promising, and we expect 2013 to be a turning point for equity capital raising.

9

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Other

London AIM

Hong Kong

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TSXVenture


Convertible bondsFollow on issues

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Metals — all Mining — >$1b Mining – <$200mMining — between $200m and $1b

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Follow on proceeds by company type/size of issue (2008–2012) Convertible bond volume and proceeds (2000–2012)

Widespread risk aversion culminated in a 48% reduction in secondary equity proceeds to $26b, and a reduction in average proceeds raised by junior companies to just $4m (from $6m in 2011). Furthermore, around 20% of issues by junior companies were ultimately priced below their fi ling range, indicating the extent of the challenging funding conditions.

With many companies trading below their net asset values, the issue of equity is a tough sell to existing shareholders resistant to further dilution of ownership and future earnings per share. However, many early stage juniors are faced with few alternatives and are raising small amounts to cover the costs of staying above water. As a result, we saw a sustained volume of issues, providing short-term lifelines.

Despite the prevailing market conditions, demand proved resilient for quality stories, with a number of advanced developers reporting oversubscribed and upsized placings to raise capital for project development and acquisitions.

Strategic investors, including the majors, downstream producers, fi nancial investors and state representatives, partook in public and private placements to secure toehold positions and access to supply.

The volume of convertible bonds issued in 2012 increased to 113, refl ecting a wider pick-up in the global market for convertibles. But low proceeds, at $3.5b in total (despite a pick-up from $2.4b in 2011), refl ected the shift in function towards junior-end fi nancing, in the face of a lack of realistic alternatives for juniors.

Convertibles can present attractive investment options in periods of volatility, providing downside protection but also the potential for participation in future upside. The convertibles market is also open to unrated issuers — and given the squeeze on other sources of fi nancing, it is perhaps inevitable that juniors are taking advantage of any available demand.

However, convertibles are not without their risks and costs. The dilution impact is merely delayed (assuming the bond converts), while investors are demanding higher coupons to compensate for the additional risk associated with unrated issuance. This is diminishing the traditional advantage that convertibles had over straight bonds in the form of lower pricing to refl ect the equity elements. Average coupons on unrated convertible issues, at 9%, were on a par with those paid on straight high yield that do not hold the risk of future dilution.

Companies also face risk of default if they are unable to meet the principal repayments when the debt matures. A number of companies returned to the markets to this year for that very reason — to raise emergency capital for looming repayments on existing convertibles as market conditions deteriorated.

While convertibles have a role to play in an environment of limited choices, we do not expect this class to become an option of fi rst choice in the year ahead.

Divestments — are you leaving value on the table? There is a strong appetite for divestments in the sector, where 43% of mining & metals respondents of Ernst & Young’s recent Global Corporate Divestment Study revealed that they expect to initiate divestment plans over the next two years.

This enthusiasm is tempered by caution around the economic environment, and stakeholder and buyer scrutiny.

Globally, 73% of respondents surveyed (across all sectors) are leaving value on the table when divesting assets. In our experience, there are fi ve leading principles which should be applied by mining and metals companies in order to maximize value and achieve speed of execution — even in the current challenging environment.

Valu

e ex

pect

atio

n

Behind schedule but signifi cantly above price expectations

9%

Behind schedule but either near or below price expectations

42%

Ahead of schedule and signifi cantly above price

expectations

18%

Ahead of schedule but either near or below price expectations

31%

Speed expectation

High performers

Key survey fi ndings

are leavingmoney on the

table

73%

1. Regular review portfolio

2. Consider all potential buyers

3. Tailor the story to each buyer

4. Prepare rigorously

5. Understand separation planning

1. Greater likelihood of closing the deal

2. Increased value

3. Greater buyer confi dence

4. Greater control over the process

5. Reduced risk of disruption to business as usual

6. Accelerated divestment process

Read more in the Global corporate divestment study.


We expect 2012 to represent the peak of the capital strike across the sector, with a more stable economic outlook likely to support an increasingly growth-oriented investment sentiment. During 2013, we expect earnings to strengthen across the mid- and large-cap producers as projects come to market, cost-saving programs begin yielding results and metals prices strengthen; thus enabling companies to demonstrate that they can provide the returns that shareholders in the sector require. This will, in turn, encourage greater corporate activity that may see the traditional players begin to restore the balance that shifted toward private and state-backed acquirers in 2012. However, a huge resurgence in M&A and capital raising is unlikely.

Long-term demand for the sector will continue to be driven by China and other BRIC and developing nations. The announced cutback of capital spending by many will slow the long-term

Investing capital — strengthening investment appraisal andtransaction execution

We expect to see companies undertake smarter capital restructuring programs to strengthen balance sheets as they look to strike the balance between achieving long-term growth objectives and satisfying a greater demand for returns on capital, in a manner which preserves highly protected credit ratings. The risk of suboptimal allocation of capital can have a signifi cant long-lasting impact and while we may see more capital return to shareholders during 2013, this is unlikely to be at the expense of long-term growth plans.

During the fi rst half of 2013, management across the board will be focused on cost cutting and capital restructuring. However, companies exposed to certain commodities will be put under greater pressure during 2013:

• Nickel operations are likely to be scaled back further, with the global market expected to remain in surplus.

• We see a mixed outlook for the steel industry, with European steelmakers in particular expected to continue to idle production in the face of further demand weakness.

• A question mark hangs over the future of thermal coal due to competition from natural gas and emerging greener initiatives. While operational and capital restructuring is part of the solution, we may also see further consolidation, which has become a cost cutting mechanism in this market.

Preserving capital — reshaping the operational and capital base

We anticipate that leaner business models and stronger balance sheets will emerge during 2013. This, in turn, will fuel the sector’s return to growth, driven by the pressure to replace depleting reserves and maintain production. We predict a stronger buy-cycle during 2H 2013, underpinned by lower valuations and an environment where organic growth plans have been damaged by large cost overruns.

Large-scale debt-fi nanced M&A will be scarce at the outset of 2013 as cash generation is prioritized. We instead expect to see value-adding mid-tier and opportunistic M&A pursued, with a focus on deals that reduce overall cash costs and have a low infrastructure burden.

An expected stabilization in the equity markets would also go some way to realigning buyer and seller expectations, where the valuation gap became a key blocker to successful M&A during 2012. Against a more stable economic backdrop, the potential for mining and metals companies to undertake M&A is far greater.

While we hope for economic stabilization, one industry shake-up that is eagerly anticipated is the emergence of the merged Glencore and Xstrata entity, which is expected to complete during Q1 2013.

This combined group may prompt further large-scale consolidation, although this is unlikely to play out fully during 2013.

Changes in iron ore pricing mechanisms and large trading volumes may lead commodity traders to enter or increase their footprints in the iron ore space, which is currently dominated by Vale, Rio Tinto and BHP Billiton and may present buying opportunities.

We expect to see an increase in Chinese demand for gold assets during 2013 as the economy picks up pace with insuffi cient domestic resources. We expect to see an increase in outbound M&A activity, partly driven by a greater appetite from Chinese mining companies and SOEs looking to grow reserves, secure supply and increase international footprints; and partly driven by demand from Chinese private capital investors seeking strategic stakes for investment purposes.

supply of scarce materials. Consequently, those with access to capital and a longer-time investment horizon will seek to invest as prices stabilize at higher levels.

Capital recycling, through asset divestitures or partial stake divestments to strategic and fi nancial partners, will remain a key priority for the large producers focused on shareholder returns. Equity stakes sales will increasingly become a capital raising option for mining and metals companies, presenting M&A opportunities for those with access to capital.

As we enter 2013, the threat of an imminent breakup of the Eurozone has eased, and hopes of economic recovery in the US should go some way to abate uncertainty. A more economically- stable backdrop for the sector’s capital raising decisions in 2013 could emerge.


Outlook

An industry-wide focus on capital recycling or portfolio optimization, to reduce costs, release capital or improve

valuations, is likely to drive spin-outs in a number of forms:

• Large cap mining and metals companies are likely to consider spin-out IPOs

and trade sales for assets that are considered non-core, underperforming

in terms of return on capital or seen as ratings dilutive, such as the announced spin-off by Gold Fields of selected South African assets.

Raising capital — assessing future capital requirements and assessing funding sources

Optimizing capital — driving cash and managing the portfolio of assets

The 2013 capital raising environment is expected to be

shaped by the continued shift from traditional capital market funding to

non-traditional capital providers. As a result, capital raising options are becoming

broader for mid-tier and advanced junior mining and metals companies. Non-traditional

capital providers (equipment and infrastructure providers; national and development banks; strategic

offtakers in the form of pre-fi nance arrangements; royalty companies; streaming companies and specialist funds) are

increasingly replacing traditional project fi nance.

There is a possibility that we have reached saturation point in the investment grade market. The degree of bond raisings by the majors during 2012, combined with their scaling back of capital spend, suggests limited need for issuance on the same scale in the year ahead (though opportunities to lock-in more favorable pricing are unlikely to be overlooked). The continued focus by governments on maintaining low

interest rates may increase demand for higher yielding opportunities among investors. We witnessed pockets of yield-seeking during 2012 and short bursts of confi dence for the sector, which may translate next year into more sustained periods of demand. Such demand would prove invaluable to the capital-hungry growth engine of the industry, the mid-tier developers.

A slow and steady revival in equity markets is anticipated as confi dence returns and prices recover on the back of corrective actions taken by the industry. A year-on-year improvement in equity markets is expected to enable growth at the mid-tier level supported by smaller-scale funding and supplemented by greater use of funding sources open to unrated issuers.

Announced and expected portfolio divestments and asset privatizations have created a strong pipeline of cross-border IPOs, while the successful listing of Ivanplats during Q4 2012 may pave the way for others to follow.

• We may see further IPOs result from the continued privatization drive in Eastern Europe and the CIS.

• While it is early days, China’s transition of leadership may bring a new focus to China’s SOEs. We could potentially see an increased role for the private sector and Chinese SOEs may look to raise capital for state purposes through partial stake sales. While this may not occur in 2013, it appears to be an inevitable development.

• Advanced juniors and mid-tier mining and metals companies will look to reduce costs, prioritize the allocation of capital to the most promising projects, and unlock value from assets that are hidden in a diversifi ed portfolio.


“ Equity markets are likely to remain challenging in early 2013 and traditional project debt will continue to be available for only the lowest risk, highest quality projects. While we may see increased bond activity amongst the high yield issuers, ultimately the fi nancing game has changed.”

Lee Downham Global Mining & Metals Transactions Leader

Ernst & Young, UKI


AluminiumCoalCopperGoldIron oreNickelPotash/PhosphateSilver/Lead/Zinc

UraniumSteel

Commodity analysis


Aluminium

Readers will recall the $4.9b purchase of Vale’s aluminium assets by Norsk Hydro as being the standout M&A deal in the sector in 2011. By comparison, 2012 saw no such signifi cant deals, and in fact very little M&A or capital raising activity. However, this lack of M&A activity failed to mask continuing efforts by aluminium producers to restructure their portfolios in light of challenging industry conditions (despite robust demand). There was a defi nite focus on operational improvements and cost reduction as producers sought to protect already slim margins by lowering their cost curve position as aluminium prices traded within the top end of the cost curve.Notable examples of these restructuring efforts, which led in some cases to signifi cant impairments to asset value, included:

1. Further restructuring of Rio Tinto’s portfolio following the establishment of Pacifi c Aluminium (Oct 2011), including closure of the Lynemouth smelter

2. Consolidation of BHP Billiton’s Aluminium and Nickel commodity groups and sale of its stake in a Guinea alumina project

3. Restructuring of Alcoa’s Global Primary Products business including permanent closures and curtailments covering alumina refi ning and smelting capacity

Despite increasing concern over systemic oversupply, there was little incentive for producers to cut smelting capacity due to record premiums on offer. Starting the year at c. $112/t, Asian premiums more than doubled to reach a high of c. $255/t in Q4 2012. Despite record LME (and off-exchange) inventory levels, premiums responded to widespread inventory fi nancing deals and warehouse load-out queues that severely restricted availability of physical metal.

Premiums were all that kept many high cost producers fi nancially viable throughout 2012. Chinese producers also benefi ted from power tariff subsidies and “strategic purchases” by the State Reserves Bureau.

We expect producers to continue to focus on cost and effi ciency initiatives throughout 2013. However, there are two potential catalysts for M&A activity:

1. Non-integrated producers seeking equity participation to secure strategic supplies of bauxite and/or alumina

2. Efforts to divest non-core assets notably by larger Western producers; in this regard, it will be interesting to observe which assets fl agged for divestment offer suffi cient value and strategic fi t to attract the non-integrated producers and other potential investors

2012 deal characteristics

Aluminium

39 Copper

37 Aluminium

38 Coal

40 Gold

41 Iron ore

42 Nickel

43 Potash/Phosphate

44 Silver/Lead/Zinc

46 Uranium

45 Steel

2011 2012Value ($m) 6,535 383 Volume 10 6 Cross border (%) 40 9

Value and volume of Aluminium deals



Coal

Copper 39

Aluminium 37

Coal 38

Gold 40

Iron ore 41

Nickel 42

Potash/Phosphate 43

Silver/Lead/Zinc 44

Uranium 46

Steel 45

Coal

Despite signifi cant price volatility, coal remained one of the hottest commodities in 2012 in terms of value, with $18.6b of deals either targeting coal or undertaken by coal companies.However, deal volume was subdued, with signifi cant price drops and volatility in both metallurgical coal and thermal coal. Most of 2012’s mega deals were announced in 2011 before the volatility began in earnest, while the majority of deals with a value above $500m completed within the fi rst six months.

Recent coal price volatility has been driven by the emergence of low cost natural gas in the US and a slowdown in the global steel market. Additionally, rising costs caused the review and closure of many mines around the world. As a result, consolidation has become a cost cutting mechanism. For some companies, diversifi cation is becoming important as they look to increase their exposure to,

or expand into, metallurgical coal to hedge against thermal coal price falls. However, diffi cult times also mean coal companies are looking to divest selected assets in order to concentrate on core operations. Vale disposed of its thermal coal assets in Colombia to focus on its coking coal operations. We saw these trends emerge in 2012, and expect them to continue in 2013.

Steel companies were less active in their acquisitions of coal for vertical integration in 2012, perhaps refl ecting market uncertainty or lack of available capital for such acquisitions. Instead, fi nancial investors were a signifi cant investor group that emerged, accounting for over 20% of deals by volume.

Overall deal activity is likely to remain subdued in the near future, with a question mark over the future of thermal coal due to competition from natural gas and also from emerging greener initiatives which are making coal-fi red operations increasingly less viable. Likewise, uncertainty over future demand, supply and pricing of metallurgical coal means this market is also likely to remain subdued.

High costs in the US and Australia in particular will drive investors overseas to gain greater exposure to Chinese demand via assets in Indonesia, Mongolia and potentially Mozambique. However, permitting and regulatory uncertainties could adversely impact deals targeting these regions.

Value ($m)


Acquirer Name Acquirer Country

Stake (%)

2,299 Domestic Aston Resources Australia Whitehaven Coal Australia 100.01,521 Cross border Gloucester Coal Australia Yankuang Group China 100.01,172 Domestic Yima Coal Industry

Group’s coal assetsChina Henan Dayou Energy China 100.0

1,012 Cross border Grande Cache Coal Canada Winsway Coking Coal Holdings; Marubeni

China; Japan 100.0

1,000 Domestic Bumi Indonesia Borneo Lumbung Energi

Indonesia 23.8

Value and volume of coal deals Top 5 coal deals (2012)

2011 2012Value ($m) 42,078 18,562 Volume 161 107 Cross border (%) 53 46

Value of deals targeting coal by destination ($m) Value of deals targeting coal by acquirer ($m)

899

650

890

945

1,463

2,273

4,883

5,981

US

Other

Kazakhstan

South Africa

Canada

Indonesia

China

Australia

629

672

864

1,035

1,205

1,649

1,287

3,424

7,218

Other

UK

Switzerland

Thailand

Indonesia

US

Japan

Australia

China


Canada, Australia and Chile led copper deal activity by volume, but these mining-friendly jurisdictions fell behind the DRC in value terms. Traditional copper mining regions have become increasingly saturated and are dominated by a handful of major copper producers. As a result, frontier markets such as the DRC and Mongolia are emerging as prime investment destinations. We expect the following trends to emerge in 2013:• Delays to major copper projects bode well for juniors with near-

term production potential, making them attractive takeover targets.

• Backward integration into mines by Japanese and Chinese smelters is expected for self-suffi ciency in copper concentrate.

• Joint ventures and consolidation among smaller companies are likely as they struggle to develop projects in the face of escalating costs and subdued commodity prices.

• Larger producers will acquire minority stakes in prospective juniors and satellite deposits around existing operations.

• The scarcity of potential copper targets, versus long gestation periods and capital cost infl ation, will remain a major issue for pure-play copper producers. We believe widespread diversifi cation into other commodities is unlikely — shareholders manage their own diversifi cation objectives. Instead, we expect companies to push ahead with brownfi eld expansions, releasing capital via strategic stake sales to manage costs.

Copper


Copper

39 Copper

37 Aluminium

38 Coal

40 Gold

41 Iron ore

42 Nickel

43 Potash/Phosphate

44 Silver/Lead/Zinc

46 Uranium

45 Steel

Value of deals targeting copper by destination ($m) Value of deals targeting copper by acquirer ($m)

926

276

299

538

1,024

3,339

3,408

3,563

Other

Spain

Mongolia

Peru

China

Democratic Republicof Congo

Chile

Canada

1,181

481

505

1,454

1,804

2,138

2,431

3,379

Other

Switzerland

Peru

Japan

UK

Chile

China

Poland

Value and volume of copper deals Top 5 copper deals (2012)


Value ($m)

Type Target Name Target Country Acquirer Name Acquirer Country

Stake (%)

3,344 Cross border

Quadra FNX Mining Canada KGHM Polska Miedz Poland 100.0

2,900 Domestic Anglo American Sur Chile Codelco; Mitsui Chile; Japan 29.51,283 Cross

borderAnvil Mining Democratic Republic

of CongoChina Minmetals Corporation

China 100.0

1,250 Cross border

First Quantum Minerals’ residual assets


Eurasian Natural Resources

UK 100.0

940 Domestic Prosper Well Group China China Daye Non-Ferrous Metals

China 100.0

Supply concerns remain at the heart of copper deal-making, with deal volume in 2012 increasing year-on-year despite persistent global macro-economic uncertainties. The long term fundamentals for copper remain positive as urbanization in emerging markets continues to drive demand (albeit at a slower pace in the near term), while the need to secure copper supply is becoming increasingly acute. Escalating costs, the intensifying risk of community opposition and wage strikes at the producer-level saw most copper equities underperform the copper price in 2012. The majority of copper deals completed in 2012 were announced post the equity market sell-off in August 2011, which had lowered company valuations. This contributed to the decline in overall deal value for 2012, with average deal size down 36% year-on-year.


Gold


Gold

Copper 39

Aluminium 37

Coal 38

Gold 40

Iron ore 41

Nickel 42

Potash/Phosphate 43

Silver/Lead/Zinc 44

Uranium 46

Steel 45

Value ($m)


Acquirer Name

Acquirer Country

Stake (%)

2,345 Cross border European Goldfi elds Greece Eldorado Gold Canada 100.0777 Cross border Minera Andes Argentina US Gold Canada 100.0750 Domestic AuRico Gold — certain Mexican assets Mexico Minera Frisco Mexico 100.0597 Domestic Trelawney Mining & Exploration Canada IAMGOLD Canada 100.0590 Domestic Shandong Tiancheng Mining;

Shandong Shengda MiningChina Shandong Gold

Group China 98.5

Value and volume of gold deals Top 5 gold deals (2012)

2011 2012Value ($m) 43,270 14,638

Volume 450 384 Cross border (%) 48 55

Value of deals targeting gold by acquirer ($m)Value of deals targeting gold by destination ($m)

1,233

494

527

558

750

1,657

2,238

6,750

US

Other

Egypt

South Africa

Mexico

Australia

China

Canada

2,842

505

688

570

738

1,047

1,181

1,204

1,336

1,752

2,345

Other

Cote d’Ivoire

Russia

Papua New Guinea

South Africa

Canada

China

Mexico

Australia

Argentina

Greece

Deal value and volume in 2012 fell year-on-year, despite current market conditions suggesting a seemingly attractive buying environment. Cross border activity continued to rise as companies ventured into frontier and emerging markets hoping to fi nd promising new gold deposits, in the face of increasingly challenging economics from declining ore grades and higher strip ratios at existing gold mines.The disappearance of much of the gold equity premium over the gold price in 2012 made companies comparatively more attractive than in prior years. The underperformance was attributed to the on going decline in cash margins in the gold sector, concerns about capital-cost infl ation and an expectation of higher taxes and royalties. Low valuations of smaller producers and development

companies presented an opportunity for mid-tier producers for acquisitive growth. The investment market, however, was looking for capital returns and dividends.

Miners are focusing on challenges around larger development projects both from a timing and cost perspective. The focus is turning to a critical review of asset portfolios with a view to deferring projects and evaluating whether divestitures and acquisitions will improve shareholder returns. We expect larger gold miners to peruse divestments in the year ahead to optimize risk-adjusted returns, enhance cash fl ow and ultimately support higher dividend yields.

We expect deal activity to increase during 2013 along with the gold price, with more strategic joint ventures formed as smaller companies look for ways to minimize project risk and increase access to capital. The likelihood of major deals, as seen in 2010, is lessened, with the large producers more focused on optimization of their existing assets rather than the addition of signifi cant capacity. This may change if valuation gaps narrow. In addition, we expect to see Chinese mining companies and SOEs make overseas acquisitions to grow reserves, secure supply and increase international footprints, and Chinese private capital investors acquire strategic stakes for investment purposes.


Iron ore


Iron ore

39 Copper

37 Aluminium

38 Coal

40 Gold

41 Iron ore

42 Nickel

43 Potash/Phosphate

44 Silver/Lead/Zinc

46 Uranium

45 Steel

Value and volume of iron ore deals


Value ($m)



Stake (%)

3,309 Cross border Roy Hill Holdings Australia Posco; STX Corp; Marubeni South Korea, Japan

25.0

1,500 Cross border Tonkolili Iron Ore Sierra Leone Shandong Iron & Steel Group

China 25.0

318 Domestic Shandong Hualian Mining

China Shandong Dacheng Pesticide

China 100.0

318 Cross border Roy Hill Holdings Australia China Steel Corporation Taiwan 2.5316 Cross border African Iron Limited Republic of

CongoExxaro South Africa -

Top 5 iron ore deals (2012)

289

191

193

239

316

405

1,500

4,182

Other

Liberia

Canada

India

Republic of Congo

China

Sierra Leone

Australia

588

316

318

335

1,655

1,971

2,132

Other

India

South Africa

Taiwan

South Korea

Japan

China

Value of deals targeting iron ore by destination ($m) Value of deals targeting iron ore by acquirer ($m)

Falling prices in the second half of 2012, concerns over demand for steel from China, and demands from shareholders to slow activity have translated into very subdued transaction activity in 2012 for iron ore. Excluding the large $3.3b Roy Hill Holdings acquisition, deal value more than halved compared with 2011.

The year’s two largest deals refl ected continued investment by steel companies into iron ore to manage supply and price risks. However, there was a clear fall in such activity compared with previous years, refl ecting the uncertainty in the market over the future of iron ore and a potential supply glut. The most active acquirers of iron ore by volume were fi nancial investors, taking mostly minority stakes in relatively safe destinations such as Australia and Canada.

Outside of the two largest deals, acquisitions were valued at less than $350m and were predominantly focused at the project-level to facilitate large-scale funding and risk-sharing.

While iron ore prices have recovered in early 2013, there is uncertainty over the sustainability of these gains and over the short- to medium-term outlook for the commodity. Despite this, continued growth from emerging markets supports positive longer term fundamentals for the sector. In particular, future steel demand from India, combined with iron ore export restrictions from the country, may drive India to seek access to further reserves through M&A activity. We may also see steelmakers investing in infrastructure development for upcoming iron ore projects in frontier markets in return for greater offtake.

Emerging regions, such as relatively politically-stable West Africa, will continue to be targeted for iron ore, though in most cases these will be seen as long-term new supply options.

Looking ahead, changed pricing mechanisms and large trading volumes may lead commodity traders to enter, or increase their footprints in, iron ore, which is presently dominated by Vale, Rio Tinto and BHP Billiton. Large non-ferrous miners may also seek to add iron ore to their portfolios for further diversifi cation. This is likely to increase competition for quality iron ore assets.


Nickel


Nickel

Copper 39

Aluminium 37

Coal 38

Gold 40

Iron ore 41

Nickel 42

Potash/Phosphate 43

Silver/Lead/Zinc 44

Uranium 46

Steel 45

The drastic fall in nickel prices over the fi rst nine months and an uncertain outlook for stainless steel led to investor caution in 2012. Accordingly, large-scale investments in the nickel sector have taken a back seat. Australia was the most acquisitive nation largely on account of domestic consolidation. China remained an active acquirer of nickel in 2012, despite slowing economic growth, securing overseas supply mainly in Canada. We expect Chinese activity to continue as China looks to lock in nickel assets to supply its own rising nickel pig iron (NPI) capacity. Over January–October, China imported 50.6 million tonnes of nickel ore, a rise of 35% year-on-year.

However, globally, nickel is expected to remain under pressure in 2013. Global stainless steel demand, the main driver

for nickel consumption, contracted by 0.5% during the fi rst half of 2012, with few drivers in the pipeline to accelerate growth in the near term. Furthermore, the global nickel market is expected to remain in surplus due to weak demand, a large increase in supply from major project ramp-ups, and the impact of China’s NPI refi neries coming on-stream to supply the global market.

The slowdown in global demand has prompted large/diversifi ed miners to review their nickel operations for the next year. Vale plans to close its nickel mine at the Frood site, due to market volatility, declining metal prices and falling demand for the product. Xstrata has also announced the suspension of operations at its Cosmos nickel mine in Western Australia due to adverse market conditions, including the prolonged nickel price weakness and a strong Australian dollar19.

The restrictions implemented on Indonesian nickel ore exports in early 2012 reduced shipments later in the year, a development that could continue well into 2013. Indonesia’s new mining policy includes an average 20% export tax, along with new export quota on 14 minerals, including nickel. These restrictive policies by some nations could be instrumental in the revival of nickel M&A deals over next few years as countries may try to secure raw material supply of nickel for stainless steel sector.

19 “Sudbury nickel mine stops operations at year’s end due to falling prices,” The Canadian Press, 19 October 2012, via Factiva; “Xstrata Nickel Australasia puts Cosmos on care and maintenance,” Metal Bulletin, 21 September 2012, via Factiva.

Value and volume of nickel deals

Value of deals targeting nickel by destination ($m) Value of deals targeting nickel by acquirer ($m)

Top 5 nickel deals (2012)

2011 2012Value ($m) 1,465 433 Volume 28 29 Cross border (%) 29 45

Value ($m)



Stake (%)

86 Cross border Goldbrook Ventures Canada Ji lin Ji En Nickel Industry China 100.073 Domestic Kagara Mining’s

nickel assetsAustralia Western Areas Australia 100.0

69 Cross border ENK Turkey DMCI Holdings; D&A Income Philippines; UK

-

47 Domestic Magma Metals Australia Panoramic Resources Australia -26 Cross border Continental Nickel Tanzania IMX Resources Australia 62.8

22

19

26

33

69

85

111

Vietnam

Other

Tanzania

Philippines

Turkey

Canada

Australia

10

16

17

21

92

99

112

US

Other

Switzerland

Canada

Philippines

China

Australia


Value and volume of potash/phosphate deals


Top 5 potash/phosphate deals (2012)

Value ($m)



Stake (%)

1,128 Cross border BASF’s fertilizer plant Belgium MKHK YevroKhim (Eurochem) Russia 100.0502 Domestic Qinghai Salt Lake

MagnesiumChina Qinghai Salt Lake Industry China 31.0

405 Domestic Severneft-Urengoy Russia MKHK YevroKhim (Euro Chem) Russia 100.0344 Domestic Apatit Russia PhosAgro Russia 26.7209 Domestic Verkhnekamskaya

Kaliynaya KompaniyaRussia Eurasian Development

Bank; Raiffeisenbank; Bank for Development and Foreign Economic Affairs (Vnesheconombank)

Kazakhstan; Russia

38.0

Potash/Phosphate


39 Copper

37 Aluminium

38 Coal

40 Gold

41 Iron ore

42 Nickel

43 Potash/Phosphate

44 Silver/Lead/Zinc

46 Uranium

45 Steel

Potash/Phosphate

It has been a tough year for potash. Delayed negotiations with Chinese and Indian contracts, coupled with an overstocked market, created an unsteady supply and demand environment. Not surprisingly, M&A activity for 2012 was tinged with an air of caution and many investors focused on long-term strategic advantage ahead of the unclear short-term market outlook.Oversupply and weak demand were the key market concerns in 2012. Many of the world’s largest potash and phosphate producers found it necessary to curtail production in an effort to reduce existing inventories. Prices have fl uctuated considerably and reports of new projects with more supply coming online down the track provided buyers with an incentive to hold out for the best deals on big purchases.

Against a wider backdrop of rising industry costs, several potash/phosphate

companies used M&A to drive effi ciencies and reduce costs through vertical integration.

Consolidation and strengthening of existing market positions also drove transaction activity this year. All major transactions made by Canadian or US companies, for example, stayed within the continent.

The large number of new investors securing investment and strategic stakes in the potash/phosphate industry is striking.

With industry players confi dent in the strength of long-term fundamentals for potash and phosphate, we may see moves to acquire or build on existing stakes to obtain greater control or ownership of strategic resources. This will be most important for Asian and South American markets to secure their own supply, but also for North American investors looking to maintain their stronghold. In the short term, prices are likely to remain fl exible as suppliers attempt to reduce stocks. The settlement of lower value contracts between Canpotex and China should reignite global demand and place Asia and South America in better positions to negotiate. As demand increases, the downward pressure on existing reserve volumes may reduce the need to curtail production. However, the threat remains of new projects (and hence greater supply) coming on board, as investors seek to take advantage of the growing demand.

Value of deals targeting potash/phosphate by destination ($m) Value of deals targeting potash/phosphate by acquirer ($m)

21

33

24

30

37

207

553

Other

Ethiopia

Namibia

US

Spain

Russia

Brazil

120

83

150

553

US

Other

Australia

Russia


Silver/Lead/Zinc2012 deal characteristics

Copper 39

Aluminium 37

Coal 38

Gold 40

Iron ore 41

Nickel 42

Potash/Phosphate 43

Silver/Lead/Zinc 44

Uranium 46

Steel 45

Struggling supply growth and the expected closure of large operations in the next couple of years will lead to an increase in prices in the medium term. This defi cit in the zinc market will result in increased M&A activity.Excluding the year’s two largest deals (the $1.5b acquisition of Minefi nders by Pan American Silver and Glencore International’s $1.4b deal to buy 18.9% in Kazzinc), deal activity in the silver/zinc/lead sector was characterized by smaller deals in 2012, with an average deal value of about $19m. These deals were undertaken to expand asset bases or unlock value through divestment of non-core assets. Junior explorers made private placements to raise capital for advancing exploration-stage projects.

Some of the larger deals were driven by silver companies looking to geographically diversify their operations, generate cash fl ow from producing mines and consolidate into bigger players.

Silver is used in industrial applications and also as a fi nancial investment to hedge against infl ation. Interest in silver is expected to increase as monetary loosening by central banks leads to infl ationary concerns.

By comparison, there were fewer zinc and lead deals as zinc prices remain weak due to lack of demand from China and high inventory levels. The outlook for zinc remains strong in the medium term as supply growth will lag demand growth. We expect to see zinc smelters backward integrate to secure concentrate supplies. Emerging markets such as China and India will continue to drive demand for the two metals.

The traditional markets of Mexico, Peru, China and Canada will continue to attract investment, but increasing competition for resources in these regions may force investors to look to non-traditional markets as well.

Silver/Lead/Zinc

Top 5 silver/lead/zinc deals (2012)Value and volume of silver/lead/zinc deals

Value of deals targeting silver/lead/zinc by destination ($m) Value of deals targeting silver/lead/zinc by acquirer ($m)

51

82

60

68

90

209

1,411

1,982

Other

Poland

China

Australia

Argentina

Peru

Kazakhstan

Mexico

68

31

73

86

225

1,429

2,041

Other

Poland

China

Australia

US

Switzerland

Canada


Value ($m)



Stake (%)

1,483 Cross border Minefi nders Mexico Pan American Silver Canada 100.01,411 Cross border Kazzinc Kazakhstan Glencore International Switzerland 18.9250 Cross border El Cubo mine; Guadalupe y

Calvo projectMexico Endeavour Silver Canada 100.0

147 Cross border Silvermex Resources Mexico First Majestic Silver Canada 100.0139 Domestic XingAn IEMR Mining China Chengtun Mining Group China 51.0


Steel

Market and price volatility is driving deals in the steel sector as steelmakers seek to protect margins and remain competitive.Market conditions have remained challenging in 2012 as global construction and automotive demand remains weak. European steel demand was weak throughout the year and with predictions of another 10% decline in demand in 2013, several European steelmakers continue to idle production. A return to pre-crisis levels of steel demand in Europe is unlikely in the short to medium term. However, North American steel demand from the automotive and energy sectors is improving, and despite mixed predictions, Chinese steel demand continues to be strong.

While the volume of deals in 2012 declined by 22%, deal value in the sector increased by 160% compared with 2011. The major

motivation for M&A in the steel sector was cost-focused synergies rather than growth.

Raw material price volatility remains a major concern in the industry; as a result, steelmakers have continued to integrate raw material mines into their supply chains, allowing them to control supply, cost and quality of raw materials.

Gearing in the sector is high — the average of the top 20 steelmakers is 88% — which could impact credit ratings. This has resulted in the strategic divestment of assets.

Weak economic conditions may also see more steelmakers divesting assets as they seek to arrest deterioration of their fi nancial positions. ArcelorMittal, for example, intends to divest a $1.2b (15%) stake in its Canadian iron ore operations in 201320.

There was signifi cant domestic consolidation in China’s steel sector, as the Chinese Government prioritized mergers and restructuring among high-cost producers in the country’s fragmented steel sector. We expect this consolidation to continue as the 12th fi ve year plan aims to have 60% of steel production in the hands of the top 10 steelmakers by 2015.

The forecast increase in both steel production and demand in emerging markets will lead to an increase in strategic joint ventures for access to new markets and technological know-how.

2011 2012Value ($m) 10,582 27,480Volume 60 47Cross border (%) 45 36

Value ($m)



Stake (%)

9,432 Domestic Sumitomo Metal Industries

Japan Nippon Steel Japan 100.0

3,735 Cross border Inoxum Germany Outokumpu Finland 100.03,309 Cross border Roy Hill Holdings Australia Posco; STX Corp; Marubeni South Korea;

Japan25.0

2,823 Cross border Usiminas Brazil The Techint Group Argentina 27.71,500 Cross border Tonkolili Iron Ore Sierra

LeoneShandong Iron & Steel Group China 25.0

Value and volume of steel deals Top 5 steel deals (2012)

Value of deals targeting steel by destination ($m) Value of deals targeting steel by acquirer ($m)

108

177

437

622

2,400

3,593

4,467

9,750

Other

US

Germany

South Africa

Brazil

India

China

Japan

107

138

437

622

632

2,400

3,593

3,735

9,790

Other

South Africa

India

US

Brazil

Argentina

Finland

China

Japan


Steel

39 Copper

37 Aluminium

38 Coal

40 Gold

41 Iron ore

42 Nickel

43 Potash/Phosphate

44 Silver/Lead/Zinc

46 Uranium

45 Steel

20 “ArcelorMittal agrees to sell a 15% interest in ArcelorMittal Mines Canada for $1.1bln to a Consortium led by POSCO and China Steel Corporation,” ArcelorMittal press release, 2 January 2013.


Uranium

Uncertainty surrounding the restart of Japan’s nuclear reactors led to a year of two halves for uranium M&A. During the fi rst half of the year, M&A activity accelerated as acquirers took advantage of lower valuations to secure strategic access ahead of expectations of a rebound in demand following Japan’s predicted move to restart its nuclear reactors.

However, delays to the restart createduncertainty, causing the spot uraniumprice to fall through the $50/lbmark to $41/lb in November21, closing the year at around $43.5/lb22. As a result, newer projects were canceled, existing projects reconsidered and deal activity put on the backburner.

The outlook is more promising, however. While the uranium market is currently oversupplied, it is heading toward a supply crunch primarily driven by growing

21 Uranium Weekly, RBC Capital Markets, 20 November 2012.22 Uranium Weekly, RBC Capital Markets, 2 January 2013.

demand, expiry of the US-Russia HEU supply agreement (due in late 2013/early 2014) and project cutbacks.

Looking ahead, clarity from Japan over its nuclear policy, new reactor approvals in China, stated support in advanced countries for nuclear power generation, and clarity on Russian supplies should help to improve investor confi dence in the sector. Furthermore, against the backdrop of India and Australia entering a nuclear fuel supply agreement, the Australian Queensland Government’s decision to lift the ban on uranium mining in the State unlocks $18b of deposits23. Commercial mining of uranium has been banned since 1982 (although exploration was permitted). The decision to allocate mining leases may require additional capital and attract funding through debt and equity investments.

In the near term, prevailing uncertainty may drive opportunistic deals as acquirers look to take advantage of the disconnect between supply and demand fundamentals that in turn is leading to lower valuations of companies. Opportunistic buyers are likely to take the form of power companies seeking integration, and strategic investors from China, India and Russia, which are all seeking to secure future uranium resources.

23 “Newman lifts uranium ban in bid to tap $18b deposits,” The Australian, 23 October 2012.

25

25

153

172

458

744

2,282

US

Other

Sweden

Australia

Tanzania

Canada

Namibia

89

590

898

2,282

Other

UK

Canada

China

Value of deals targeting uranium by destination ($m) Value of deals targeting uranium by acquirer ($m)


Value and volume of uranium deals Top 5 uranium deals (2012)

Value ($m)



Stake (%)

1,271 Cross border Extract Resources Namibia China Guangdong Nuclear Power Holding

China 42.7

1,009 Cross border Kalahari Minerals Namibia China Guangdong Nuclear Power Holding

China 100.0

590 Cross border Hathor Exploration Canada Rio Tinto UK 94.3430 Cross border BHP Billiton’s

Yeelirrie depositAustralia Cameco Canada 100.0

150 Cross border Mantra Resources Tanzania Uranium One Canada 13.9


Uranium

Copper 39

Aluminium 37

Coal 38

Gold 40

Iron ore 41

Nickel 42

Potash/Phosphate 43

Silver/Lead/Zinc 44

Uranium 46

Steel 45


Country analysis

AfricaLatin America

AustraliaCanada

ChinaIndia

IndonesiaJapanRussia

South KoreaUnited Kingdom

United States


Michael BosmanMining & Metals Transactions LeaderErnst & Young, South Africa

There was a strong contrast between the drivers for M&A in South Africa and those for the rest of Africa in 2012. Relatively untapped African nations continued to attract growth-driven investment for resource security. Conversely, deal activity in South Africa’s mature mining and metals sector largely stemmed from industry reorganization in response to widespread labor unrest, growing resource nationalism, and higher-than-infl ation wage and energy cost increases, together with a number of transactions restructuring previous black economic empowerment (BEE) deals during the year.Although South Africa was the top African destination for M&A, we do not believe this to mark resurgence in investment. This $8.5b of activity was largely the outcome of portfolio optimization by major mining and metals companies, which prompted decisions to mothball high-cost operations, divest non-core assets and build on existing stakes in key assets to achieve the right risk-return balance. Anglo American and Rio Tinto consolidating their existing stakes in De Beers and Richards Bay Minerals, respectively, were two such examples.

Outside of the two largest deals, South African coal assets were actively targeted for M&A, underpinned by a strong year of export earnings owing to the depreciation of the Rand. This helped to offset price falls and cost infl ation. Meanwhile, extensive social and political unrest during the year deterred new investment in South Africa’s platinum and gold sectors. We expect the ongoing domestic consolidation to continue, together with substantial balance sheet restructuring as seen during the last quarter of 2012.

Capital raising activity in South Africa continued to be scarce during 2012. Loan proceeds for the year primarily refl ect AngloGold Ashanti’s $1b early refi nancing, which extended existing loan maturities by three years to 2017, and Gold Fields’ reported $1.5b facility as the company proposes to demerge its South African KDC and Beatrix mines into a separately listed entity, Sibanye Gold24. However, Petra Diamonds successfully closed $244m of new debt facilities to fi nance its expansion plans, particularly at the Cullinan and Finsch diamond mines. The facilities were arranged with FirstRand Bank, Absa Corporate and Investment Banking and the International Finance Corporation.

OutlookLooking ahead, efforts to reduce exposure to South Africa are expected to continue. Gold Fields’ planned spin out is aimed at improving its credit rating, deemed by analysts to be adversely impacted by exposure to South Africa. We expect companies with a track record of operating in South Africa to be the likely buyers, as political stability in the country must improve before signifi cant new investment returns.

Spotlight on Africa’s frontier nationsAfrica’s relative wealth of untapped mineral resources continued to attract deals for resource security in 2012, despite a contraction of investment from the large-cap producers. This contraction was the outcome of efforts to optimize capital amid increasing shareholder scrutiny. Such scrutiny made it harder for these companies to justify large investments into higher-risk African jurisdictions for a number of reasons, including:

• Continued fi scal instability in Guinea, Zimbabwe, Ivory Coast, Tanzania and Burkina Faso, with Governments in these countries targeting the mining and metals sector for further participation/economic benefi t in one form or another. The increase in capital gains tax in Mozambique to effective 32% from 1 January 2013, announced late in December 2012, is an example of increased regulatory uncertainty. (See Risk 9 — Sharing the benefi ts from Ernst & Young’s Business risks in mining and metals report.)

• Concerns around political stability across the continent, although this risk depends on the level of sophistication of the mining legislation and the Government’s ability to monitor and implement legislative changes.

24 “Emerging markets syndicated loans – news in brief,” Euroweek, 13 December 2012, via Factiva.

Africa

Australia 53

Africa 48

Latin America 51

Canada 54

China 55

India 57

Indonesia 58

Japan 59

South Korea 61

United Kingdom 62

United States 63

Russia 60

Africa“In 2012, the African continent attracted investment as traditional mining regions become increasingly saturated and risk differentials began to narrow globally. Increasingly, Africa is being looked to in order to provide mineral supply to meet the world’s future growth.”


Top 10 African deals (2012)

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)5,200 Inbound De Beers South Africa Anglo American UK 40.01,910 Inbound Richards Bay Minerals South Africa Rio Tinto UK 37.01,500 Inbound Tonkolili Iron Ore Sierra Leone Shandong Iron & Steel Group China 25.01,283 Inbound Anvil Mining Democratic Republic

of CongoChina Minmetals Corporation China 100.0

1,271 Inbound Extract Resources Namibia China Guangdong Nuclear Power Holding China 42.71,250 Inbound First Quantum Minerals’

residual assetsDemocratic Republic of Congo

Eurasian Natural Resources UK 100.0

1,009 Inbound Kalahari Minerals Namibia China Guangdong Nuclear Power China 100.0550 Inbound Camrose Resources Democratic Republic

of CongoEurasian Natural Resources UK 49.5

494 Intra-regional La Mancha Resources Côte d’Ivoire Weather Investments II Egypt 100.0480 Inbound Samref Overseas Democratic Republic

of CongoGlencore International Switzerland 24.5

• Security issues, as was seen in the DRC in November 2012, with rebels seizing a provincial capital in the country, consequently weakening the Government, exacerbating regional tensions, and alarming investors.

Despite these obstacles, Africa will continue to be an attractive destination for the large-cap producers as it is home to tier-one mineral resources, competition for which is expected to intensify in the coming years. Furthermore, mining and metals investment in developing African economies is the key to much-needed infrastructure development in these countries — a prerequisite for unlocking the value of the mineral wealth they hold. Many African governments recognize this need and have shown an inclination toward creating an investment environment conducive to foreign direct investment (FDI) in the sector. Outside of the traditional mining and metals producers, Chinese and Indian investors have exhibited a higher risk tolerance through willingness to invest in infrastructure to bring greenfi eld projects to production and secure offtake. In 2012, Chinese SOEs were the most active acquirers in Africa’s frontier markets, leveraging China’s resource-for-infrastructure investment contracts with many African governments.

Glencore International also expanded its footprint in Africa, with a particular focus on securing long-term supply of commodities that are expected to head towards a structural supply defi cit in the medium to long term, particularly copper, uranium and iron ore. ASX-, TSX- and AIM-listed juniors, as well as fi nancial investors, showed keen interest in the same set of commodities, together with a focus on gold. This nearly doubled Africa’s inbound deal volume year-on-year. However, these were largely small deals (<$200m) focused on exploration stage assets, consequently almost halving average deal size to $182m in 2012.

While project fi nance was scarce across the sector, some frontier Africa projects attracted bank funds. For example, First Quantum Minerals signed a $1b fi nancing facility for its Kansanshi copper/gold project in Zambia to fund planned capital expenditure. And Shanta Gold secured $15m from FBN Bank to fund plant construction and mining costs at the New Luika and Singida projects in Tanzania, with a further $30m facility announced at the end of the year.

There was a strong appetite to acquire DRC-based assets in the fi rst half of the year. This is unlikely to be an indication of improved political stability, but rather refl ects the low cost scale of assets located in the DRC copper belt. Meanwhile, we witnessed a slowdown in exploration in West Africa — a trickle down impact of a scale back in investment from the majors on the back of softening iron ore prices highlighted by Vale’s announcement to put on hold plans for its $5b Simandou project in Guinea.

OutlookWe expect to see a rise in M&A targeting existing African assets, for those with a long-term view of the market. Asian interest in Africa’s mineral reserves will gain further impetus from improvements in the rail network that links mining and metals operations with the Africa’s East coast, thereby providing easier access to Asian markets.

In the longer term further investment is likely to follow from traditional investors as the impact on the region’s infrastructure from the investments made by Chinese SOEs and SWFs fi lters through, translating into future M&A opportunities.


Value ($m) Volume2011 2012 2011 2012

Outbound 426 220 5 2 Inbound 18,271 17,527 51 92 Domestic 2,010 2,413 9 17 Total Africa 20,708 20,160 65 111 Global share 13% 21% 7% 13%

Africa deals overview Africa capital raising by asset class

591

237

245

393

1,505

2,329

3,013

8,503

Other

Botswana

Tanzania

Mali

Sierra Leone

Namibia


South Africa

Value of Africa inbound deals by target country ($m)

235

1,109

1,143

1,792

1,910

5,202

3,700

2,436

Other

Gold

Coal

Iron ore

Titanium

Uranium

Copper

Diamonds

Value of Africa inbound deals by target commodity ($m)

Proceeds ($m) Volume2011 2012 2011 2012

IPOs - - - - - -Follow ons 378 1 6 1 Convertible bonds - - - - - -Bonds - 745 - 1Loans 3,032 5,707 12 11 Total Africa 3,410 6,453 18 13 Total Global 340,422 249,394 3,150 2,874


Latin America

Sergio Veloso deMenezes

Transaction LeaderErnst & Young, Latin America

Despite the strong growth prospects in Latin America, the region has not been immune to the general slowdown in M&A activity. In addition, some countries in Latin America, notably Argentina, Venezuela, Bolivia and Ecuador, are reluctant to approve projects from multinational companies seeking to gain control of their natural resources. Other barriers to entry, such as government regulations and bureaucracy, reduce the region’s attractiveness. Mexico, with good macroeconomic fundamentals, is well positioned to supply the North American market and offers one of the most competitive mining tax schemes globally. Chile, Peru and Colombia also offer attractive opportunities for investment.

The largest deal in the region in 2012 was Codelco and Mitsui’s $2.9b joint venture acquisition of a 29.5% stake in Anglo American Sur (‘AAS’), which brought conciliation proceedings relating to an option agreement to conclusion. AAS owns copper assets in Chile, including the large open pit Los Bronces mine, the open pit El Soldado mine and the Chagres smelter. The original acquisition by Mitsubishi in 2011, and the 2012 legal proceedings brought by Codelco, is evidence of the strong demand for scarce high quality copper assets globally.

Canadian companies, with a reputation for understanding the region, continued to be the most active acquirers in Latin America, seeking to expand geographical reach and obtain lower cost production. For example, Pan American Silver’s $1.5b acquisition of Minefi nders Corp. gave the Canada-based silver company scale and helped to balance its portfolio of development and producing

assets25. The acquisition comprised the Dolores mine in Mexico, along with other mines in Peru, Argentina and Bolivia. In addition, US Gold of Canada merged with Minera Andes of Argentina, bringing together producing mines and exploration projects in the US, Mexico and Argentina.

Inter-regional M&A was dominated by Argentinean companies seeking opportunities in the high growth Brazilian steel market. Techint Group’s acquisition of a 27.7% ($2.8b) share in Usiminas, the largest fl at steel producer in Brazil, was such an example. This alliance, which includes Nippon Steel, gives Techint Group access to iron ore mines in the Serra Azul region and strategically located facilities near the main consumers of steel in Brazil. Another example is Tenaris’ acquisition of a 56.0% interest in Confab Industrial for $771m.

There were two outbound deals of note in 2012:

• CSN’s acquisition of Stahlwek Thueringen for $632m, giving CSN access to a steel manufacturing plant in Germany

• Chile-based Molymet’s acquisition of a 13% stake in Molycorp of the US for $390m which provided the opportunity to diversify into other strategic minerals

Investment in Latin America is normally coupled with large infrastructure projects, requiring signifi cant levels of capital, which in the current environment is becoming more challenging to fi nd.

Companies are frequently seeking alternative sources of loan fi nance as demonstrated by the raising of $1b by Sierra Gorda SCM of Chile from the Japan Bank for International Cooperation (JBIC) ($0.7b) and four private Japanese banks. Sumitomo owns a 45% stake in Sierra Gorda SCM, a copper and molybdenum project, and has an offtake agreement for 50% of the copper concentrate produced from the Sierra Gorda copper mine. The funding issued by the JBIC was in line with the Japanese Government’s strategy of securing mineral resources overseas.

There are opportunities for Brazilian companies, or companies developing in Brazil, to source favorable loan rates from BNDES (the Brazilian National Development Bank). However, as with other providers of fi nance, the BNDES requires the project to be well advanced, with feasibility studies and geological and environmental surveys having been completed. As such, only well resourced companies are in a position to get projects to this stage of development.

25 “Pan American to Acquire Minefi nders for $1.5 Billion,” New York Times, 23 January 2012.

LatinAmerica

53 Australia

48 Africa

51 Latin America

54 Canada

55 China

57 India

58 Indonesia

59 Japan

61 South Korea

62 United Kingdom

63 United States

60 Russia

“Latin America offers huge opportunities for the sector, as the region has yet to be subjected to vast exploration. Local and regional regulation and legislations can be challenging to navigate and this, together with sizeable infrastructure needs, has slowed investment to date; but the opportunities are too big to ignore.”


Capital raising activity during 2012 was largely dominated by Yankee bond issues by the large cap producers, with Vale raising $4.8b and Codelco $2.0b to refi nance existing debt and fund investment programs. Issuers took advantage of the lower interest rates attached to US dollar bonds over domestic currency bonds — Codelco’s bonds made history with its 3% 10-year notes, reportedly the lowest ever coupon by a Latin America issuer on equivalent issues.

Value ($m) Volume

2011 2012 2011 2012

Outbound 124 1,095 9 9 -

Inbound 18,221 6,780 123 105

Intra-regional 3,864 7,092 17 23

Total Latin America 22,208 14,967 149 137

Global share 14% 16% 16% 16% -

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)2,900 Intra-regional; inbound Anglo American Sur Chile Codelco; Mitsui Chile; Japan 29.52,823 Intra-regional Usiminas Brazil The Techint Group Argentina 27.71,483 Inbound Minefi nders Corporation Mexico Pan American Silver Canada 100.0777 Inbound Minera Andes Argentina US Gold Canada 100.0771 Intra-regional Confab Industrial Brazil Tenaris Investments Argentina 56.0750 Intra-regional AuRico Gold — certain Mexican assets Mexico Minera Frisco Mexico 100.0632 Outbound Stahlwerk Thueringen Germany CSN Brazil 100.0505 Intra-regional Marcobre (Mina Justa) Peru Cumbres Andinas Peru 70.0423 Inbound Extorre Gold Mines Argentina Yamana Gold Canada 100.0407 Inbound Vale — Thermal Coal Operation Colombia CPC US 100.0

Latin America deals overview

Top 10 Latin America deals (2012)

112

169

191

264

796

1,329

1,550

2,370

Other

Panama

Peru

Brazil

Colombia

Argentina

Chile

Mexico

Value of Latin America inbound deals by target country ($m)

45

21

408

1,881

2,087

2,338

Other

Uranium

Coal

Copper

Gold

Silver lead zinc

Value of Latin America inbound deals by target commodity ($m)

Latin America capital raising by asset class

Value ($m) Volume

2011 2012 2011 2012

IPOs - - - - - -

Follow ons 4,340 160 6 5

Convertible bonds - 3 - 2

Bonds 2,149 10,266 5 14

Loans 8,052 3,728 12 10

Total Latin America 14,541 14,158 23 31

Total Global 340,422 249,394 3,150 2,874

Outlook Looking forward into 2013, we expect mining and metals companies in Latin America to continue to focus on portfolio optimization. Strong inbound investment is expected as companies target opportunities for low cost, high growth projects in the region, particularly in countries with a positive tax and legislative environment such as Mexico. In addition, the high quality copper deposits within the region are likely to be targeted for inbound or inter-regional investment. Companies are likely to be increasingly innovative with their approach to raising fi nance — for example, through strategic partners with the lure of offtake agreements.


OutlookDuring 2013, we expect domestic consolidation to continue between the remaining mid-tier companies, as they look to compete on an even standing, and between the remaining mid-tier and junior exploration companies. As capital raising options tighten, these companies may look to pool resources and gain scale.

Further acquisition opportunities are likely to arise during the second half of 2013 if commodity prices return to a level to justify resurgence in delayed and postponed capex projects. Companies may look to form strategic partnerships to secure capital and ensure balance sheets are not placed under pressure.

Australia

Australia deals overview

Top 10 Australian deals (2012)

Australia capital raising by asset class

Paul MurphyAsia-Pacifi c

Mining & MetalsTransaction Leader

Ernst & Young, Australia

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)3,309 Cross border Roy Hill Holdings Australia Posco; STX Corp; Marubeni South Korea; Japan 252,299 Domestic Aston Resources Australia Whitehaven Coal Australia 1001,521 Cross border Gloucester Coal Australia Yankuang Group China 1001,335 Cross border Exxaro’s mineral sand operations Australia Tronox US 100

713 Domestic Boardwalk Resources Australia Whitehaven Coal Australia 100569 Cross border Allied Gold Mining Papua New Guinea St Barbara Australia 100444 Cross border Isaac Plains Coal Management Australia Ocean Coal Mining (Sumitomo) Japan 50430 Cross border BHP Billiton’s Yeelirrie deposit Australia Cameco Canada 100353 Cross border Aston Resouces’ Maules Creek project Australia J-Power Australia Japan 10318 Cross border Roy Hill Holdings Australia China Steel Corporation Taiwan 2.5

Value and volume of Australia deals (10 year trend)

6.5

2.8

11.4

6.6

14.4

16.6

10.6

23.5

15.7

22.1

38.6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Volume Value ($b) Value excluding BHP Billiton’s shale gas deals

128 206 188 185 316 239 293267 242 233

In value terms, inbound M&A was dominated by the joint acquisition of a 25% stake in Roy Hill Holdings by POSCO, STX Corporation and Marubeni for $3.3b. Outside of this deal, coal continued to reign as the most targeted commodity where Australian coal companies focused on gaining scale, improving margins, achieving synergies and strengthening their competitive position.

Infrastructure development remains a key determining success factor for any inbound investment decision. Cost infl ation, rising energy costs and labor shortages have driven up the cost of infrastructure projects by circa 50% relative to the rest of the world over the past fi ve years, forcing companies to think carefully before committing the high capital required for the development of Australian target.

During the year, BHP Billiton issued the largest AU$ bond issue ever by any company outside of the banking sector26. The AU$1b notes due 2017 were priced at just 90bps over the benchmark rate, and reportedly attracted an order book of over AU$8b. The bond issue may inject liquidity into Australia’s domestic bond market and act as a catalyst for other issuers outside of the banking market to follow suit during 2013.

26 “BHP sells fi rst Aussie dollar bonds in more than a decade”, Bloomberg, 9 October 2012.

Value ($m) Volume2011 2012 2011 2012

Outbound 19,063 1,707 67 78 Inbound 12,640 9,426 74 61 Domestic 6,892 4,544 101 94 Total Australia 38,594 15,677 242 233 Global share 24% 15% 24% 25%

Value ($m) Volume2011 2012 2011 2012

IPOs 501 140 64 28 Follow ons 8,757 5,660 607 754 Convertibles 130 867 23 39 Bonds 5,430 17,189 5 7 Loans 10,945 12,042 15 18 Total Australia 25,764 35,897 714 846Total Global 340,422 249,394 3,150 2,874

Australia

53 Australia

48 Africa

51 Latin America

54 Canada

55 China

57 India

58 Indonesia

59 Japan

61 South Korea

62 United Kingdom

63 United States

60 Russia

“ During 2012, Australia was the most targeted destination for M&A, despite infl ationary concerns, as investors continued to seek out opportunities in Australia’s well established mining and metals sector.”


effect on Canadian junior mining and metals companies that look to be acquired by non-residents. These rules could prove to be a signifi cant barrier to investment in Canada.

While overall equity market conditions were challenging, the Canadian market performance was relatively strong, with the TSX-Venture exchange hosting the highest share of IPOs by number.

Canada’s streaming companies had a strong year, with Franco-Nevada Corp., Silver Wheaton and Sandstorm Gold among those securing major agreements with, and providing an alternative source of funding to, advanced juniors and mid-tier producers.

OutlookIn 2013, we expect investment to continue, albeit at a slower pace, with Canadian companies looking to scale-up existing operations through the acquisition of largely “de-risked” assets. Consequently, Canadian mining and metals companies are expected to look close to home for potential M&A targets where mining and metals friendly Latin American countries such as Peru, Chile and Mexico are the likely investment destinations. The Canada-China Foreign Investment Protection and Promotion Agreement (effective November 2012) is expected to reignite Chinese SOE interest in the country’s resources sector, as Canada looks to stimulate economic growth in a move that will help offset ailing inbound investment from the US27.

27 “Investment agreement with China will benefi t Canada,” The Globe and Mail, 2 November 2012.

Canada

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012107 161 126 227 300 295 442 425 431 351

11.72.6 10.6

73.4

103.3

33.9

10.2

29.0 29.9

18.8

Volume Value ($b)

Value and volume of Canada deals (10 year trend)

Canada deals overview

Value ($m) Volume

2011 2012 2011 2012

Outbound 11,164 9,146 151 168

Inbound 12,524 7,476 45 35

Domestic 6,239 2,183 235 148

Total Canada 29,927 18,804 431 351

Global share 18% 18% - 43% 37%

Value ($m) Volume

2011 2012 2011 2012

IPOs 367 392 49 42

Follow ons 11,238 8,931 1,484 1,310

Convertible bonds 391 779 24 42

Bonds 8,442 11,926 7 18

Loans 16,982 14,742 16 18

Total Canada 37,420 36,769 1,580 1,430

Total Global 340,422 249,394 3,150 2,874

Canada capital raising by asset class

Top 10 Canada deals (2012)

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)3,344 Cross border Quadra FNX Mining Canada KGHM Polska Miedz Poland 100.02,345 Cross border European Goldfi elds Greece Eldorado Gold Canada 100.01,483 Cross border Minefi nders Corporation Mexico Pan American Silver Canada 100.01,288 Cross border Neo Material Technologies Canada Molycorp US 100.01,012 Cross border Grande Cache Coal Canada Winsway Coking Coal Holdings; Marubeni China; Japan 100.0

777 Cross border Minera Andes Argentina US Gold Canada 100.0597 Domestic Trelawney Mining & Exploration Canada IAMGOLD Canada 100.0590 Cross border Hathor Exploration Canada Rio Tinto UK 94.3537 Domestic Queenston Mining Canada Osisko Mining Canada 100.0450 Cross border Cabot Corporation’s Supermetals business US Global Advanced Metals Canada 100.0

Jay Patel Mining & MetalsTransactions Leader Ernst & Young, Canada

Despite year-on-year decreases in overall Canadian M&A during 2012, Canada maintained its 18% share of global M&A activity by value. Outbound deal value was driven by large, cross border strategic acquisitions by companies seeking to expand existing operations. With heightened concern around resource nationalism and country risk, inbound investors see Canada as a transparent, developed and attractive place to do business, suggesting that buyers view the move by the Canadian Government to block BHP Billiton’s bid for PotashCorp as an isolated event. However, buyers are concerned with Canada’s recently-enacted tax legislation, which is aimed at non-resident parent companies that undertake schemes with their Canadian subsidiaries to erode the income tax base and defer dividend withholding tax. While the general policy behind the legislation is reasonable, there could be a longer-term adverse

Canada

Australia 53

Africa 48

Latin America 51

Canada 54

China 55

India 57

Indonesia 58

Japan 59

South Korea 61

United Kingdom 62

United States 63

Russia 60

“ Canadian companies accounted for 37% of global transactions volume, refl ecting Canada’s high concentration of mid-tier and junior mining and metals companies, led by experienced executives with a strong drive for growth and the confi dence to pursue acquisitions in turbulent times.”


China’s M&A activity accounted for 21% of total sector M&A globally for the year, up from 9% percent in 2011. In value terms, 2012 marked the most signifi cant investment over the last 10 years, with the exception of 2008 — the year when Chinalco acquired a 12% stake in Rio Tinto for $13.4b. This growth is attributed to a number of factors:• The growing opportunities for Chinese

mining and metal companies to add value as strategic partners supporting infrastructure development is driving up M&A activity. Increasingly, large-scale low-cost expansion projects are being pursued in under-developed mining and metals markets, where the need for infrastructure development is great.

• Chinese acquisition of assets and commodities tends to be counter-cyclical as Chinese investors have long-term investment horizons and appear to be less impacted by economic factors outside of China. Chinese mining and metals companies buy at what they perceive to be bottom of the cycle to stockpile or secure future supply at lower prices, at a time when other competitors may lack the capital or shareholder support to make acquisitions.

• Chinese SOEs are increasingly adopting an “outward” focus. State entities, as mandated by their Government owners, are increasingly looking overseas for both investments in mineral resources and expansion of their own operating capabilities.

China

Eleanor WuChina Outbound

Transactions LeaderErnst & Young, China

Value and volume of China deals (10 year trend)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012107 161 126 227 300 295 442 425 431 351

11.72.6 10.6

73.4

103.3

33.9

10.2

29.0 29.9

18.8

Volume Value ($b)

• Outbound M&A activity has been further supported by an increase in non-state-owned entities pursuing an outbound M&A strategy, often supported by Chinese fi nancial backing.

• Large-scale Government-led domestic consolidation in the steel and coal sectors boosted M&A activity in 2012. The largest deal of this nature was the $1.2b merger of Shandong-based steelmakers, Laiwu Steel and Jinan Iron & Steel28.

Chinese investors have recently felt the impact of mining and metals cost infl ation in traditional mining and metals nations, where previous acquisitions reside. For example, China’s largest state-led investment in the Australian mining and metals sector, the Sino Iron project, is reported to be subject to delays and budget over-runs29. These pressures, together with a lack of availability of under-developed large-scale resources, are forcing China to consider options outside of the traditional mining and metals destinations. As a result, we saw China-based companies actively targeting Africa-based assets for growth during 2012.

Investment into Africa from China often takes the form of the acquisition of a listed mining and metals company with assets located in Africa. These deals are attractive as they offer increased transparency of information, greater standards of corporate governance and can take less time to complete if the terms are seen as favorable by shareholders.

Stand-out acquisitions of this nature include:

• China Guangdong Nuclear Power Holding’s acquisition of Extract Resources and related acquisition of Kalahari Minerals, in total paying $2.3b to gain access to the Husab uranium project in Namibia.

• Shandong Iron & Steel Group’s (SISG) acquisition of a 25% stake in Tonkolili Iron Ore, African Mineral’s Sierra Leone-based asset, for $1.5b. This provided part funding for the three-phase expansion program, including the development of a rail and port infrastructure. Under the terms of the deal, an offtake agreement was signed, providing SISG with a long-term supply of iron ore.

• China Minmetals Corporation’s $1.3b acquisition of JSE-listed Anvil Mining, which is developing copper projects in the DRC.

Debt as a funding option appears to be favored over equity in China, mirroring the wider global trend. Chinese capital markets were dominated by large-scale bond offerings by steel and coal

28 “Jinan Steel proposes new merger plan,” China Daily, 13 April 2011.29 “Sino iron starts concentrate output,“ Mining Journal, 26 November 2012.

China

53 Australia

48 Africa

51 Latin America

54 Canada

55 China

57 India

58 Indonesia

59 Japan

61 South Korea

62 United Kingdom

63 United States

60 Russia

“ Despite slowing global and domestic economic growth, China took the lead as the most acquisitive nation during 2012 in value terms, which is indicative of China’s counter-cyclical investment strategy.”


Top 10 Chinese deals (2012)

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)1,521 Cross border Gloucester Coal Australia Yankuang Group China 100.01,500 Cross border Tonkolili Iron Ore Sierra Leone Shandong Iron & Steel Group China 25.01,283 Cross border Anvil Mining Democratic

Republic of CongoChina Minmetals Corporation China 100.0

1,271 Cross border Extract Resources Namibia China Guangdong Nuclear Power Holding China 42.71,201 Domestic Laiwu Steel China Jinan Iron & Steel China 100.01,172 Domestic Yima Coal Industry Group’s coal assets China Henan Dayou Energy China 100.01,009 Cross border Kalahari Minerals Namibia China Guangdong Nuclear Power China 100.0

940 Domestic Prosper Well Group China China Daye Non-Ferrous Metals China 100.0731 Domestic Jiangxi Coal Industry Group China Anyuan Industrial Co. China 100.0687 Domestic Zhengzhou Coal Industry (Group)’s coal

assetsChina Zhengzhou Coal Industry & Electric Power China 100.0

Value ($m) Volume2011 2012 2011 2012

Outbound 9,079 9,127 62 61 Inbound 745 29 12 6 Domestic 5,618 12,560 48 80 Total China 14,932 21,716 122 147 Global share 9% 21% 12% 16%

Value ($m) Volume2011 2012 2011 2012

IPOs 2,645 711 12 6 Follow ons 8,749 3,714 34 20 Convertible bonds 584 294 4 5 Bonds 22,055 17,333 48 31 Loans 1,777 1,428 9 6 Total China 35,810 23,478 107 68 Total Global 340,422 249,394 3,150 2,874

China deals overivew China capital raising by asset class

companies looking to optimize their capital structures. China’s IPO proceeds dropped off considerably during 2012 at just $711m, compared with $2.6b in 2011, refl ecting weaker global sentiment.

During 2012, Chinese companies also undertook debt restructuring activity, a product of domestic consolidation. This is often used as a method for companies to address insolvency concerns, thereby avoiding the need for Government-backed banks to issue new debt, where terms can be renegotiated on the back of a stronger, merged entity.

OutlookAs we look forward to 2013, the world watches China undergo a transition of leadership. The new regime’s position on infrastructure development is likely to have a signifi cant impact on demand for resources. We are likely to see Chinese mining and metals companies look to make acquisitions of assets in the advanced exploration and development stages to support long-term growth plans.


India-based mining, metals and energy companies are actively pursuing cross border M&A, largely as the ability to expand resources domestically has been restrained. These companies are targeting resources across the globe, as securing a stable supply of raw materials for the growing steel and power markets remains the biggest priority.During 2012, there appeared to be a strong appetite for acquisitions among India-based coal and metals companies, particularly overseas. Yet completed deals were few and far between as management struggled to justify valuation premiums seen on deals during the year. Of the outbound deals that did go through, major industrial conglomerates targeted overseas coal assets for fuel security in the second half of the year, following a major country-wide power blackout in July 2012 that highlighted India’s looming energy crisis30.

The decision of the Reserve Bank of India (RBI) to cut interest rates during the second quarter of the year prompted some steel companies to refi nance existing loan facilities, securing improved rates. However, cash fl ows of Indian steel companies remained under pressure, owing to the subdued pricing environment together with rising raw material costs.

30 “Powerless In India: ‘World’s Biggest Blackout’ Leaves 600M In The Dark,” Forbes, 31July 2012.

Many of these companies are likely to pursue equity divestments to deleverage their balance sheets during 2013.

OutlookWe expect to see some deregulation of the coal industry during 2013 as the need to increase production and promote greater effi ciencies becomes more prominent in the face of critical power shortages. If successful, this is likely to encourage more domestic consolidation in India’s coal sector during 2013.

We do not expect the appetite for outbound M&A to subside during 2013, as companies continue to target not only steel and energy raw materials (iron ore, coal, manganese, chrome), but also base metals, rock phosphate and potash to support domestic growth.

India

Nitin Gupta Mining & Metals

Transactions LeaderErnst & Young, India

Value and volume of India deals (10 year trend)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0.1 0.10.9

0.6

3.9

0.4 1.0

6.6

4.9

2.2

0.7

7 8 12 17 12 11 16 20 24 19

Volume Value ($b) Value excluding Vedanta Resources’ oil and gas deal ($b)

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)179 Domestic Welspun Maxsteel India Welspun Corporation India 87.50120 Domestic Lloyds Steel Industries India Uttam Galva group companies India 58.35115 Cross border CIC Energy Corporation Botswana Jindal Steel & Power India 100.00

90 Cross border Western Cluster Liberia Sesa Goa India 51.0039 Cross border Navyug Special Steel India Mitsui; Sanyo Special Steel Japan 49.0036 Cross border Raykal Aluminium Company India Vedanta Resources UK 24.5034 Cross border Western Cluster Liberia Sesa Goa India 49.0031 Cross border Gujarat NRE Coking Coal Australia Jindal Steel & Power India 10.4025 Cross border Gujarat NRE Coking Coal Australia Jindal Steel & Power India 9.1520 Cross border Legacy Iron Ore Australia NMDC India 50.00

Top 10 India deals (2012)

Value ($m) Volume2011 2012 2011 2012

Outbound 1,415 315 12 7 Inbound 13 75 2 2 -Domestic 3,457 358 10 10 -Total India 4,885 748 24 19 Global share 3% 1% 2% 2% -

India deals overview


IPOs 19 - 2 -Follow ons 1,132 1,385 18 7 Convertible bonds 8 - 1 -Bonds 1,085 2,315 6 17 Loans 12,888 4,810 25 13 Total India 15,131 8,510 52 37 Total Global 340,422 249,394 3,150 2,874

India capital raising by asset class

India

53 Australia

48 Africa

51 Latin America

54 Canada

55 China

57 India

58 Indonesia

59 Japan

61 South Korea

62 United Kingdom

63 United States

60 Russia

“Raw material security for both the steel and energy sector will continue to be the key driver for cross-border investments by Indian companies in the mining sector. We expect mining-related outbound M&A and steel-related inbound M&A to be the themes for 2013.”


Indonesia

During 2012, the most signifi cant mining and metals regulation development in Indonesia was the Government’s move to limit long-term foreign ownership to 49% through mandated, staged divestments over the next 10 years. Additionally, the Government has implemented a ban on exports of raw material of certain commodity groups, including nickel and copper. The ban became effective from May 2012, although exempt companies are permitted to export ore until 2014, subject to a 20% export tax. One method for obtaining exemption is through demonstration of plans to build local processing facilities. This brings new challenges, as a relatively infant mining and metals nation’s local capability and technical knowledge to develop these facilities are scarce. Partnerships with experienced overseas players, in the form of joint ventures and strategic investments, are likely to fi ll this gap, and there may be opportunities for those who can work within the new regulatory framework.

OutlookDespite these challenges, foreign investment is unlikely to cease altogether: Indonesia’s mineral resources are too big a lure to ignore. Large-scale, profi table resources are likely to remain attractive. However, marginal investments, particularly those projects with heavy infrastructure investment requirements, are unlikely to be attractive to overseas investors.

Value ($m) Volume2011 2012 2011 2012

Outbound - - - -Inbound 5,204 1,199 30 21 Domestic 479 1,431 10 7 Total Indonesia 5,683 2,630 40 28 Global share 3% 3% - 4% 3%


IPOs 391 95 3 2Follow ons 428 64 2 1Convertible bonds - - - - - -Bonds 563 500 3 1 Loans 3,195 3,139 9 5 Total Indonesia 4,577 3,798 17 9 Total Global 340,422 249,394 3,150 2,874

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)1,000 Domestic Bumi Indonesia Borneo Lumbung Energi Indonesia 23.8

460 Cross border Sakari Resources Indonesia PTT Mining Thailand 10.0326 Cross border Sakari Resources Indonesia PTT Mining Thailand 45.6205 Domestic Multi Tambangjaya Utama Indonesia PT Indika Indonesia Resources; Indika

Capital Investment Indonesia 85.0

197 Cross border Manambang Muara Enim Coal Mine Indonesia Electricity Generating Thailand 40.0160 Domestic Nusa Halmahera Minerals Indonesia Aneka Tambang (Persero) Indonesia 7.5103 Cross border Universe Glory Indonesia Interchina Resources China 100.0

50 Domestic Indo Mines Indonesia Rajawali Group Indonesia 46.530 Cross border Kintap Coal Mine Indonesia Investor Group South Korea 30.029 Cross border South East Asia Energy Resources Indonesia Victory West Metals Australia 100.0

David RimboTransactions LeaderErnst & Young, Indonesia

Indonesia deals overview

Indonesia capital raising by asset class

Top 10 Indonesia deals (2012)

Indonesia

Australia 53

Africa 48

Latin America 51

Canada 54

China 55

India 57

Indonesia 58

Japan 59

South Korea 61

United Kingdom 62

United States 63

Russia 60

“ Increased regulation slowed investment into Indonesia during 2012 as the Indonesian Government looks to transform its mining and metals industry into a producer of higher value fi nished goods.”


Japanese trading houses adopted a cautious approach to M&A during 2012 on the back of global economic factors and weaker earnings. While these factors stunted large-scale M&A activity by these investors overall, competition for scarce copper resources continued apace. With their traditional long-term investment outlook, M&A opportunities for Japanese trading companies are increasing as mining and metals companies increasingly look to secure strategic partnerships.As domestic consumption of minerals and metals continues to fall, Japanese trading houses have been looking to the wider Asian markets for growth and to resource-rich geographies for supply. The need to secure resources, including copper, iron ore, coal, uranium and aluminium, could prompt more M&A activity during 2013 as many of the Japanese trading companies enter into their new investment cycle.

In the Japanese steel sector, newly merged groups are seeking to realize synergies and scale back costs in the face of challenging market conditions, and are looking to access global markets for growth.

Japan

Value ($m) Volume2011 2012 2011 2012

Outbound 9,199 5,122 12 13 Inbound - - - -Domestic 99 9,922 4 5 Total Japan 9,298 15,045 16 18 Global share 6% 14% 2% 2% -


IPOs - - - - - -Follow ons 282 - 3 -Convertible bonds - - - - - -Bonds 3,752 1,370 21 7 Loans 7,350 4,236 42 21 Total Japan 11,385 5,606 66 28 Total Global 340,422 249,394 3,150 2,874

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)9,432 Domestic Sumitomo Metal Industries Japan Nippon Steel Japan 100.01,654 Cross border Roy Hill Holdings Australia Marubeni (excl. POSCO and STX) Japan 12.51,100 Cross border Anglo American Sur Chile Mitsui (excl. Codelco) Japan 5.0

444 Cross border Isaac Plains Coal Management Australia Ocean Coal Mining (Sumitomo) Japan 50.0405 Cross border Grande Cache Coal Canada Marubeni (excl. Winsway Coking Coal

Holdings)Japan 40.0

435 Cross border Xstrata Coal British Columbia Canada JX Nippon Oil & Energy Japan 25.0354 Cross border Antofagasta’s Antucoya project Chile Marubeni Japan 30.0353 Cross border Aston Resources’ Maules Creek project Australia J-Power Australia Japan 10.0316 Cross border Crosslands Resources Australia Mitsubishi Development Japan 50.0173 Domestic Toho Titanium Japan JX Holdings Japan 14.8

Japan deals overview

Value and volume of Japan deals (10 year trend)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1.80.8 0.6

2.3

1.1 1.1

5.3

9.3

15.0

5.6

34 16 22 22 22 2235 19 16 18

Volume Value ($b)

Japanese steel companies were active borrowers during 2012, capitalizing on local relationships to secure loans. While proceeds raised through Japan’s bond market decreased year-on-year, the Bank of Japan remained committed to facilitating low cost funding for domestic borrowers. Yen bond issues by steel companies paid average coupons of just 0.6%, with average spreads of 20bps above the benchmark rate. This compares with an average spread of 182bps above the benchmark on US dollar bonds of similar quality and maturities.

OutlookWhile M&A is likely to still take the form of strategic, minority investments, we have seen examples of trading houses looking to take on greater technical expertise as they seek more operational infl uence.

Japan capital raising by asset class

Top 10 Japan deals (2012)

Japan

53 Australia

48 Africa

51 Latin America

54 Canada

55 China

57 India

58 Indonesia

59 Japan

61 South Korea

62 United Kingdom

63 United States

60 Russia

Kunihiko TaniyamaJapan Mining & Metals

Transactions LeaderErnst & Young, Japan

“ The Japanese steel sector has shifted dramatically, with two major players emerging from the mergers of Nippon Steel Corp with Sumitomo Metals and Nisshin Steel with Nippon Metal Industry during 2012.”


Russia

Russia has a well-developed mining and metals industry which is dominated by a few large players. Exploration and development capabilities domestically are limited and geological exploration is declining. As a result, future growth of the sector is dependent on Russia’s ability to attract foreign exploration expertise into Russia, although this is unlikely to translate into increased inbound M&A in the short term.In value terms, M&A activity involving Russian mining and metals companies decreased during 2012, following a peak of domestic consolidation during 2011.

Russia’s over-leveraged steel companies have been under further pressure during 2012 due to challenging conditions in the global steel market, and are seeking to optimize capital structures. For many, however, access to capital is constrained and many steel companies may be forced to make divestments of non-core assets in order to raise the necessary funding to improve balance sheets, presenting future buying opportunities.

While not included in our IPO data31, both Polyus Gold and Nordgold listed their shares on the London Stock Exchange (LSE) in 2012, refl ectingcontinued attraction to the

31

market by Russian companies. Polyus Gold achieved a Premium listing on the LSE in order to gain access to international investors to fund its expansion program. Global Depositary Receipts (GDRs) in Severstal subsidiary, Nordgold, began trading on the LSE, representing 10.6% of its share capital, cementing Nordgold’s position as an independent pure-play gold producer.

OutlookThere is a strong IPO pipeline of Russian companies which are expected to pursue an overseas listing when the market reaches a period of stability, and we see a number of these coming to domestic and international markets during 2013. The fi rst half of 2013 is likely to continue to be challenging for the sector, where capital will remain constrained. We also see little appetite for further large-scale domestic consolidation but were it to prevail, it would most likely be in the form of paper deals.

Value ($m) Volume2011 2012 2011 2012

Outbound 2,246 1,503 7 5Inbound 6,119 553 8 11Domestic 17,159 2,628 15 16 Total Russia 25,523 4,684 30 32 Global share 16% 5% 3% 3% -

Proceeds Volume2011 2012 2011 2012

IPOs - - - - - -Follow ons 721 245 2 3 Convertible bonds - - - - - -Bonds 1,950 3,597 3 11 Loans 20,919 2,761 18 7 Total Russia 23,590 6,604 23 21 Total Global 340,422 249,394 3,150 2,874

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)1,128 Cross border BASF’s fertilizer Plant Belgium MKHK YevroKhim (Eurochem) Russia 100.01,037 Domestic Geotransgaz and Urengoi Gas Company Russia AK Alrosa Russia 90.0

425 Cross border Polyus Gold International Russia Chengdong Investment Corporation China 5.0405 Domestic Severneft-Urengoy Russia MKHK YevroKhim (Euro Chem) Russia 100.0344 Domestic Apatit Russia PhosAgro Russia 26.7211 Domestic Polyus Gold International Russia VTB Bank Russia 2.5209 Domestic Verkhnekamskaya Kaliynaya Komp Russia Investor Group Russia 38.0182 Cross border K+S’s nitrogen fertilizer business Germany MKHK YevroKhim (Euro Chem) Russia 100.0143 Domestic SUEK-Krasnoyarsk Russia SUEK Russia 10.4120 Cross border GPM Georgia Georgia Capital Group Russia 100.0

Russia deals overview

Value and volume of Russia deals (10 year trend)

25.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

2.61.9

7.2

16.4

12.5 14.2

4.3 4.5 4.7

8 12 17 20 21 37 21 33 30 32

Volume Value ($b)

Russia capital raising by asset class

Top 10 Russia deals (2012)

Russia

Australia 53

Africa 48

Latin America 51

Canada 54

China 55

India 57

Indonesia 58

Japan 59

South Korea 61

United Kingdom 62

United States 63

Russia 60

31 Only original IPOs are included in our data, per Thomson — the fi rst issue of shares in any market.

Evgeni KhrustalevCIS Mining & Metals LeaderErnst & Young, Russia

“Russia’s mining and metals sector is changing, following proposals to alleviate restrictions for the foreign acquisition of mid-tier assets and plans to improve investment climate by attracting foreign funds in the sector, especially in the Far East regions of Russia.”


The total value of deals completed in the sector by South Korean mining and metals companies increased during 2012 as a result of the joint acquisition by the POSCO, STX Corporation and Marubeni of a 25% stake in Roy Hill Holdings, with POSCO and STX Corporation’s share accounting for 12.5%.Excluding this deal, total South Korean deal value was $416m during 2012, representing a 59% decrease year-on-year. South Korean mining and metals companies have continued to be cautious in their approach to investing in the mining and metals sector, as they focused on cash preservation during 2012.

South Korean steel companies were placed under pressure during the year, where extensive competition from Chinese steel producers squeezed margins, threatened growth and resulted in credit rating downgrades and non-core asset sales.

The South Korean capital markets were comparatively strong against relatively low benchmark rates — we witnessed both investment grade and high yield steel companies issuing bonds (albeit raising relatively low proceeds) to supplement constrained cash fl ow. Combined with a

slowdown in M&A investment, these bond issues imply that steel companies are focused on improving balance sheet strength rather than spending cash on business expansion.

OutlookIt is unlikely that the slowdown in M&A will be sustained during 2013. South Korea is reliant on imports for nearly all of its mineral supply and the Korean Government is likely to drive strategic acquisitions to secure this supply, primarily of rare earth and uranium assets.

We expect the corporate bond market to remain open to South Korean mid-tier steel companies. However, investors are likely to seek higher coupons for steel makers to refl ect the increased risk associated with these raisings.

South Korea

Value ($m) Volume2011 2012 2011 2012

Outbound 910 2,020 13 8 Inbound 6 - 2 -Domestic 107 51 16 7 Total South Korea 1,023 2,070 31 15 Global share 1% 2% 3% 2%


IPOs - - - -Follow ons 23 405 3 4 Convertible bonds 148 155 2 2 Bonds 7,126 1,547 39 10 Loans 642 1,138 2 2 Total South Korea 7,939 3,245 46 18 Total Global 340,422 249,394 3,150 2,874

South Korea deals overview

South Korea capital raising by asset class

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)1,655 Cross border Roy Hill Holdings Australia Posco; STX Corp (excl. Marubeni) South Korea 12.5169 Cross border LS-Nikko Copper (Cobre Panama) Panama Korea Panama Mining South Korea 20.090 Cross border Minera y Metalurgica del Boleo Mexico Kores; LS-Nikko South Korea 21.058 Cross border Cambayas Mining Corp Philippines Investor Group South Korea 40.030 Cross border Kintap Coal Mine Indonesia Investor Group South Korea 30.019 Domestic Posmate South Korea POSCO South Korea 21.618 Domestic Steel Flower South Korea KoFC Posco Hanwha South Korea 11.68 Cross border Strathmore Minerals US Korea Electric Power Corporation (KEPCO) South Korea 13.96 Cross border PT Golden Hoder Indonesia Gibio South Korea 30.05 Domestic SPP Resources South Korea SeAH Steel South Korea 100.0

Top 10 South Korea deals (2012)

SouthKorea

53 Australia

48 Africa

51 Latin America

54 Canada

55 China

57 India

58 Indonesia

59 Japan

61 South Korea

62 United Kingdom

63 United States

60 Russia

Kwang Sun KwonMining & Metals Leader

Ernst & Young, South Korea

“ Securing supply to manage raw material costs continues to be the primary factor driving South Korean steel companies’ investment in overseas iron companies.”


The UK was among the more acquisitive countries in value terms, largely due to Anglo American’s $5.2b acquisition of an additional 40% stake in De Beers, increasing its total share to 85%. Other notable deals included, Rio Tinto’s acquisition of an additional 37% stake in Richards Bay Minerals (RBM) from BHP Billiton for $1.9b, increasing its total share of the mineral sands mining and processing company to 74%; and the legal settlement between First Quantum Minerals and Eurasian Natural Resources Corporation (ENRC), and related acquisition of residual assets in respect of the Kolwezi tailings project and the Frontier and Lonshi mines in the DRC for $1.25b32.

Capital raising was dominated by sizeable bond issues by the diversifi ed majors: a staggering total of $23b was raised by Rio Tinto, Xstrata, Anglo American and Glencore International.

Companies took advantage of historically low benchmark yields to issue US dollar, euro and sterling medium- and long-term notes with attractive coupons from as low as 1.1%. Outside of Glencore International’s exceptional $19b of bank funding (for refi nancing and in connection with its merger with Xstrata), bank lending was limited. ENRC signed up to a $2b loan facility to fi nance the DRC acquisitions and support the Group’s capex program33.

33

OutlookLooking forward to 2013, we expect UK mining and metals companies to continue to focus on portfolio optimization. Through this, we are likely to see the divestment of a number of non-core assets, such as the announced disposal by Rio Tinto of its diamond business, as well as the acquisition of further stakes in strategically valuable assets.

The merger between UK-listed Glencore International and Xstrata, is likely to change the competitive landscape for other listed diversifi ed mining and metals companies. It is expected to prompt further investment activity, although this is unlikely to play out fully during 2013.

A strong start to UK equity markets during the fi rst weeks of January 2013 is providing promise for the London IPO market, although there will need to be a period of sustained stability before UK IPO activity is fully back on the table.

UK

Lee DownhamGlobal Mining & Metals Transactions Leader Ernst & Young, UKI

Value ($m) Volume2011 2012 2011 2012

Outbound 12,459 10,773 35 37Inbound 605 5 4 3Domestic 117 - 2 -Total UK 13,180 10,778 41 40Global share 8% 10% 4% 4% -

UK deals overview

UnitedKingdom

Value ($m) Volume2011 2012 2011 2012

IPOs 10,886 25 7 5 Follow ons 1,553 2,059 106 104 Convertible bonds 110 362 1 4 Bonds 8,650 23,074 4 13 Loans 22,066 23,515 13 10 Total UK 43,264 49,035 131 136 Total Global 340,422 249,394 3,150 2,874

UK capital raising by asset class

Value and volume of UK deals (10 year trend)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

5.4 2.18.1

2.2

68.5

29.1

7.0

3.6

13.2

10.8

40 42 42 46 67 54 53 45 41 40

Volume Value ($b)

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)5,200 Cross border De Beers South Africa Anglo American UK 40.01,910 Cross border Richards Bay Minerals South Africa Rio Tinto UK 37.01,250 Cross border First Quantum Minerals’ residual assets Democratic Republic of Congo Eurasian Natural Resources UK 100.0

650 Cross border Shubarkol Komir Kazakhstan Eurasian Natural Resources UK 75.0590 Cross border Hathor Exploration Canada Rio Tinto UK 94.3550 Cross border Camrose Resources Democratic Republic of Congo Eurasian Natural Resources UK 49.5299 Cross border Ivanhoe Mines Mongolia Rio Tinto UK 2.0

48 Cross border Auzex Resources Australia GGG Resources UK 91.536 Cross border Raykal Aluminium Company India Vedanta Resources UK 24.531 Cross border Aviva Mining (Kenya) Kenya African Barrick Gold UK 100.0

Top 10 UK deals (2012)

Australia 53

Africa 48

Latin America 51

Canada 54

China 55

India 57

Indonesia 58

Japan 59

South Korea 61

United Kingdom 62

United States 63

Russia 60

“A number of signifi cant deals took place during 2012 by UK acquirers. However, the majority of deal value represented transactions where a stake was already held, illustrating the risk-averse nature of M&A right now.”

32 “First Quantum reaches agreement with ENRC...”, First Quantum Minerals press release, 1 May 2012.33 “US$2 billion loan facility”, ENRC press release, 28 February 2012.


2012 was an uncharacteristically quiet year for a nation which has traditionally dominated M&A and capital raising activity in the sector. US M&A activity fell to just 7% of global deal value compared with 20% in the prior year, a fi gure adjusted for BHP Billiton’s US-based oil and gas acquisitions, or 31% without this adjustment. Aluminium smelting markets have been challenged as a result of weaker global demand, while US-based copper and gold companies have fared better, viewed as a safe haven in light of rising US debt obligations and the European sovereign debt crisis.

Domestic consolidation remains important for the US mining and metals sector, despite the signifi cant reduction in domestic deals in 2012. Gaining scale is key to achieving competitive advantage and keeping operating costs to a minimum. As a result, we expect to see these deals, mostly using paper rather than debt, returning in 2013. However, this will perhaps occur later on in the year and on a smaller scale as the immediate focus is on cost and capital optimization efforts.

Limited M&A activity drove reduced demand for capital. However, both high yield and investment grade companies took advantage of favorable bond market conditions, issuing bonds to reduce indebtedness.

OutlookLooking forward to 2013, we believe that the domestic coal industry will continue to be challenged, with higher costs, tougher regulation and weaker demand expected. Coal companies are likely to be in survival mode next year.

At the other end of the spectrum, US copper company Freeport-McMoRan Copper & Gold has announced plans to acquire its former holding in McMoRan Oil & Gas and independent oil and gas company Plains Exploration & Production, a bold move which will see Freeport diversify its asset base. While signifi cant to the mining and metals sector, it is unlikely to prompt others to follow a similar path as Freeport-McMoRan Copper & Gold has a past footprint in the oil and gas industry.

US

Value ($m) Volume2011 2012 2011 2012

Outbound 14,961 3,652 33 26 Inbound 18,875 1,667 63 68 Domestic 16,549 1,981 37 26 Total US 50,386 7,300 133 120 Global share 31% 7% 13% 13% -

Value ($m) Volume2011 2012 2011 2012

IPOs 24 - 2 -Follow ons 6,350 976 152 16 Convertible bonds 974 993 15 13 Bonds 12,637 13,143 18 20 Loans 49,856 15,254 68 31 Total US 69,841 30,366 255 80 Total Global 340,422 249,394 3,150 2,874

Robert StallAmericas Mining & Metals

Transactions LeaderErnst & Young, United States

Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%)1,335 Cross border Exxaro’s mineral sands operations Australia Tronox US 100.01,288 Cross border Neo Material Technologies Canada Molycorp US 100.0

605 Domestic Skyline Steel US Nucor Corporation US 100.0450 Cross border Cabot Corporation’s Supermetals business US Global Advanced Metals Canada 100.0407 Cross border Vale’s thermal coal operation Colombia CPC US 100.0390 Cross border Molycorp US Molymet Chile 13.0334 Cross border Prodigy Gold Canada Argonaut Gold US 100.0300 Domestic Youngs Creek Mining US Cloud Peak Energy US 100.0264 Domestic Whitesburg Friday Branch Mine US Universal Bioenergy US 40.0183 Domestic Remmele Engineering US RTI International Metals US 100.0

US deals overview

US capital raising by asset class

Top 10 US deals (2012)

UnitedStates

53 Australia

48 Africa

51 Latin America

54 Canada

55 China

57 India

58 Indonesia

59 Japan

61 South Korea

62 United Kingdom

63 United States

60 Russia

Value and volume of US deals (10 year trend)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

8.2

7.9

15.1

26.5

70.2

20.6

11.5

13.4

8.4

50.4

7.3

33.2

84 91 94 131 149 136 141 144 133 120

Volume Value ($b) Value excluding BHP Billiton’s oil/shale gas deals

“Mixed fortunes have been seen across the US mining and metals sector. Domestic coal companies have struggled in the shadow of the emergence of shale gas as a cheaper source of energy, whereas those with export capabilities have been less affected.”

Ernst & Young

Assurance | Tax | Transactions | Advisory

© 2013 EYGM Limited. All Rights Reserved.

EYG no. ER0048

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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Ernst & Young’s Global Mining & Metals CenterWith a strong but volatile outlook for the sector, the global mining and metals industry is focused on future growth through expanded production, without losing sight of operational effi ciency and cost optimization. The sector is also faced with the increased challenges of changing expectations in the maintenance of its social license to operate, skills shortages, effectively executing capital projects and meeting government revenue expectations.

Ernst & Young’s Global Mining & Metals Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector. The Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

Area contactsGlobal Mining & Metals LeaderMike ElliottTel: +61 2 9248 [email protected]

OceaniaScott GrimleyTel: +61 3 9655 [email protected]

China and MongoliaPeter MarkeyTel: +86 21 2228 2616 [email protected]

JapanAndrew CowellTel: +81 3 3503 [email protected]

Europe, Middle East, India and Africa LeaderMick BardellaTel: +44 20 795 [email protected]

AfricaWickus BothaTel: +27 11 772 [email protected]

Commonwealth of Independent StatesEvgeni KhrustalevTel: +7 495 648 [email protected]

France and LuxemburgChristian MionTel: +33 1 46 93 65 [email protected]

IndiaAnjani AgrawalTel: +91 982 061 [email protected]

United Kingdom & IrelandLee DownhamTel: +44 20 7951 [email protected]

Americas and United States LeaderAndy MillerTel: +1 314 290 [email protected]

CanadaBruce SpragueTel: +1 604 891 [email protected]

South America and Brazil LeaderCarlos AssisTel: +55 21 3263 [email protected]

Service line contactsGlobal Advisory LeaderPaul MitchellTel: +86 21 [email protected]

Global Assurance LeaderTom WhelanTel: +1 604 891 [email protected]

Global IFRS LeaderTracey WaringTel: +61 3 9288 [email protected]

Global Tax LeaderAndy MillerTel: +1 314 290 [email protected]

Global Transactions LeaderLee DownhamTel: +44 20 7951 [email protected]

Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young

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