Chinese and Indian companies increase investment in global mining
Chinese and Indian firms are increasingly snapping up mining assets as the credit crisis sidelines Western rivals, according to a leading sector investment banker.The turmoil will spark consolidation in areas such as gold, emerging-market steelmakers, and junior miners, said Richard Horrocks-Taylor of RBC Capital Markets (RY.TO: Quote), though the era of huge cash-funded mergers and acquisitions (M&A) is over.Until about a year ago bidders from Asia’s two emerging giants economies were often too slow, or too price-conscious, to win auctions, said Horrocks-Taylor, a managing director for global metals and mining at the Canadian bank.But now, they were increasingly sophisticated players in M&A, focused on garnering control of supplies in key areas like iron ore, he told the Reuters Global Mining Summit in London."Groups that would’ve been in second-place or not getting into the second round of M&A processes are the ones now succeeding," Horrocks-Taylor said on Monday."When we come down to a shortlist we’d expect probably half the list now to be based out of India and China for certain assets," he said.He cited Chinalco’s $19.5 billion deal to buy convertible bonds from Rio Tinto (RIO.L: Quote) (RIO.AX: Quote) and take stakes in key mines as "a great example of the Chinese locking into assets which are world-class.""While we have a severe situation at the moment, (China and India) don’t want to go back to the position they’ve been in the last few years: beholden to a handful of Western-owned, managed groups that have got very large market positions in the key commodities," he said.As credit flowed freely and commodities prices soared earlier in the decade, mining deals exploded: sector M&A totaled $271 billion between 2003 and 2008, according to Morgan Stanley. But after the bubble burst companies including Rio and Xstrata (XTA.L: Quote) were forced to raise fresh capital to pay down debt. Horrocks-Taylor said the era of $1 billion-plus cash deals was over and share-for-share deals across borders would be tricky. "Not surprisingly, the large cash deals are dead for now," he said. Smaller miners may have to agree to tie-ups with cash-rich competitors or to equity or convertible-debt investments by private equity firms such as Switzerland’s Pala Investment AG and Boston-based Denham Capital Management LP."Many junior companies do not have access to finance so either they’ve got to look creatively from an M&A perspective or they’ve got to look to private equity," he said. And after the boom sparked a huge rise in investment bankers specializing in the sector, Horrocks-Taylor said some banks had cut back."The competition has definitely eased off from the larger investment banks," he said, adding that redundancies and bonus cuts were prompting many to seek new jobs. "Life is changing in investment banking in the mining sector like everywhere else.