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IndustriesEnergy, Utilities & Mining

Mining Deals*Mergers and acquisitions activity in the mining industry

2007 Annual Review

Contents

Methodology

Mining Deals 2007 is based on published transactions from the Dealogic ‘M&A Global’ database, December 2007. Analysisencompasses announced deals, including those pending financial and legal closure and those which are completed. Deal values arethe consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stakepurchased and are not multiplied up to 100%. The geographical split of the deals refers to the location of the purchased asset(s).Where this is not clearly identified or relates to multiple geographical regions, the deal region is stated based on the location of thetarget company. The analysis relates to the extractive mining sector and therefore excludes related sectors such as the steelindustry and metals trading sectors. The sector and subsectors analysed include: precious metals (e.g. gold, silver, platinum), basemetals (e.g. iron ore, nickel, copper, aluminium), diversified (companies with a wide range of mining activities across subsectors)and other (includes coal, uranium, mineral sands, mining services). A full list of transactions throughout 2007 is available by visitingthe Mining Deals website at www.pwc.com/mining.

01 Introduction 02 Report highlights 04 Deal totals 07 Deal makers 10 Deal places

12 North America

14 Asia Pacific

16 Russian Federation

18 Africa and South America

20 Looking ahead 21 Contact us

We examine both the rationale behind theoverall trends and look at the key individualdeals. We look at the year under review, thecontext of the preceding two years, andahead to the future direction of deal-makingin the sector. We also highlight, in a series ofdeal dialogues throughout the report, someof the critical issues for companies engagingin deal activity within the sector. Drawing onour global experience as an adviser to miningindustry M&A players, our commentaryaddresses all key markets in the sector.

Looking ahead, we examine the effect of amore uncertain economic outlook on deal-making in the sector. We look at theimperatives that will continue to underpinactivity as well as the factors that will inhibitdeal-making. Our conclusion is that miningdeal activity is set to remain strong. Whateverits size, no company will be able to becomplacent about their M&A strategies asthe industry continues to chart a dynamicM&A path.

Introduction 01

The mining industry isexperiencing an unprecedentedperiod of change driven by M&Aactivity that is running at recordhighs at all levels of the sector.The very biggest companies are

positioning themselves to achieve super-consolidated global scale. They faceconsiderable competition from fast-growingcompanies emerging from India, Russia andChina. The industry landscape is set to changedramatically. These changes are accompanyingconsolidation among all sizes of company and,in some parts of the world, vertical integrationmoves by metals and power companies are also shaping the sector.

Mining Deals 2007 reviews deal activity in themining industry. The report is a new companionpublication to PricewaterhouseCoopers’ wellestablished Power Deals and O&G Dealsreports. Together the trio provides acomprehensive analysis of M&A activity acrossthe extractive and power industries worldwide.

Tim GoldsmithGlobal Mining Leader

02 Report highlights

Mining M&A totals reach recordlevels

Deal numbers and total deal valuereached record highs in 2007. Thenumber of deals rose 69% from their2006 level to 1,732 in 2007. Totaltransaction value was US$158.9bn, up by 18% on the previous year. Both thenumber of deals and their total valuewere more than double the level recordedjust two years earlier in 2005. The surgein deal value is being driven by both thenumber of deals and the escalating valueof the biggest deals. The number of‘US$1bn plus’ deals trebled in just twoyears, from eight in 2005 to 25 in 2007.

Chinese and Russian companiesmake their mark

Competition for deals is intense and isbeing given further momentum byincreasing international activity fromChinese and Russian companies. Thetotal value of mining deals conductedby entities from these two countriesrose six-fold, from just US$5.3bn in2005 to US$32.7bn in 2007, accountingfor a fifth of total mining deal valueworldwide. Much of the activity isdomestic but the early 2008 high profileintervention by Chinalco in the battle forRio Tinto highlights a growing series ofexpansionist moves. Foreign purchasesby Chinese and Russian companiesgathered momentum in 2007 withChinalco’s US$789 million purchase ofPeru Copper, a Canadian-based miningcompany; Sinosteel’s US$1.1bn bid forMidwest Corporation, an Australian ironore explorer; and Russia’s NorilskNickel’s US$5.4bn all-cash purchase ofCanadian nickel miner LionOre.

03

‘Eat or be eaten’ becomes the new reality

The mining sector is in a phase of majorstructural change, with consolidation inthe mid-tier and among smallercompanies and the emergence of super-majors among the biggestdiversified companies. Upstreamintegration moves by companies inindustries such as metals, particularlysteel, and power are also on theincrease. Mining companies cannotafford to be bystanders in M&A activity.Deals are a key mechanism for filling thepipeline of development projects,bringing forward new developmentprojects and diversifying corporateportfolios in terms of both commoditiesand geography.

The era of super-consolidationarrives

In 2007, Rio Tinto set a new top deal barwith its US$43bn purchase of Alcan andits substantial mining assets. 2008 looksset to see mining deals reach very highrecord levels as super-consolidationtakes place in the market. Early in 2008,BHP Billiton announced a takeover offerfor Rio Tinto with a potential deal valueover the US$150bn mark that wouldshatter all previous records. The era ofsuper-consolidation is also being furtherevidenced by rumours of a Vale bid forXstrata in a deal that could be worthUS$90bn.

Source: PricewaterhouseCoopers, Mining Deals Annual Review 2007

04 Deal totals

The surge in deal value is being driven by both thenumber of deals and the escalating value of thebiggest deals. Deal numbers rose 69% to 1,732 in2007 – more than double their 2005 level. The intensityand extent of deal activity is evidenced by the strongupward trend of deal numbers among miningcompanies of all sizes (Figure 2). Over 90% of all dealsinvolved transactions of US$250 million or less and thenumber of such deals doubled from 2005 to 2007. Atthe other end of the scale, there has also been agrowing number of US$1bn plus deals. Indeed, thenumber of US$1bn plus deals trebled in just two years,from eight in 2005 to 25 in 2007.

At the very top of the scale, the trend towards mega-deals in the mining sector has become firmlyestablished. Each year is bringing yet bigger top dealvalues. In 2005, the biggest deal was Inco’sUS$13.8bn move for Falconbridge. In 2006, it wasFreeport-McMoran’s US$25.8bn purchase of PhelpsDodge. In 2007, Rio Tinto set a new top deal bar withits US$43bn swoop for Alcan and its substantialaluminium assets. The year 2008 looks set to seemining deals reach new mega-mega deal levels assuper-consolidation takes place in the market. BHPBilliton began the year bidding to takeover Rio Tintowith a potential deal value over the US$150bn markthat would shatter all previous records. Such a dealwould offer considerable synergies from combining thetwo companies’ west Australian iron ore operations butwould, of course, be subject to competition clearance.The era of super-consolidation is also being furtherevidenced by rumours that Vale will bid for Xstrata in adeal that could be worth US$90bn.

Deal activity in the miningindustry is running atunprecedented high levels. Total deal value reached a newhigh in 2007 with transactionsworth US$158.9bn, up by 18%on the previous year and morethan double the total valuerecorded just two years earlier(Figure 1). Consolidation, both inthe pursuit of a diversifiedmining base and to achievescale, is a key deal driving forcewith further momentum beingadded by the growingimportance of Russian andChinese companies.

Figure 1: Total mining deals, 2005-2007 (year on year % change in paranthesis)

2005 2006 2007

Total number of deals 762 1026 (+35%) 1732 (+69%)

Total value of deals US$69.8bn US$133.9bn (+92%) US$158.9bn (+18%)

Average value (based on deals where value is reported) US$125.6m US$196.6m (+58%) US$137.5m (-30%)

05


Figure 2: Size of mining deals by value, 2005-2007

Below US$250m

200

400

2005 2006 2007

600

732

970

1644

US$250m – US$1bn

20

40

2005 2006 2007

60

22

38

63

Above US$1bn

5

10

2005 2006 2007

15

8

18

25

800

1000

1200

1400

1600

1800

80

100

120

20

25

30

Underpinning these trends is the quest for world scale,resource acquisition and resource diversification. Highcommodity prices, buoyant market capitalisations andoptimism about the industry’s long-term growth andprofitability, with sustained demand in Asiaoutstripping fluctuations in western demand, haveseen mining companies embarking on ambitious long-term growth strategies. Alongside this, companiesfrom down the supply chain, particularly in the steelsector, and state-owned enterprises are makingsignificant moves to acquire mining assets. Thiscombination of forces from both within and outside theimmediate sector is creating huge buying power that isfuelling M&A demand.

M&A is being used to gain greater diversification by the biggest players and to acquire resources to meetdemand by all players. With less recent exploration,resource pipelines need filling. At the same time,exploration costs are at all-time highs, permitting istaking longer and companies also face skills’ shortages.These are significant barriers to meeting what is a majorupturn in world demand. With companies sitting on bigcash positions, M&A is an important way of overcomingthese challenges. In addition, it is key to enablingcompanies to diversify portfolios, both acrossgeographies and commodities.

06 Deal totals

The mining sector is in a phase of majorstructural change, with consolidation in the mid-tier and among smaller companies and theemergence of super-majors among the biggestdiversified companies. These trends arereflected in the pattern of M&A activity within theindustry with the major growth in deal activitycoming from the base metals, diversified andother sectors (including coal, uranium andmineral sands) and less dramatic changescoming in the precious metals sector where adifferent set of economic metrics apply (Figure 3). There was little evidence of aslowdown in deal activity as a result of the creditcrunch. Indeed the number of mining dealsannounced in the fourth quarter of 2007 wasmore than double the level recorded in thecorresponding quarter of 2006 (Figure 4).


Figure 3: Analysis of mining sector by value (US$bn), 2005-2007

US$bn

2005

2006

2007

10 20 30 40 50 60 70

Precious metalsOtherDiversifiedBase metals

24.312.813.8

18.9

81.911.1

9.931.0

64.544.1

29.121.2

80


Figure 4: Quarterly tracking of mining deals by value (US$bn) and number of deals, 2005-2007

20062005

By value (US$bn)

Q4

Q3

Q2

Q1

By number

30 90 150 210 270

228130

299189

273238

226 205Q4

Q3

Q2

Q1

20 40 60 80 100

17.8

3.9

6.0

17.6

26.9

43.8

45.6 42.1

14.2

33.4

66.7

44.6

279

519

424

510

2007

330 390 450 510 570

07

These heavyweight manoeuvres by leading players in themining and metals industries reflect the trends discussedin the previous chapter. The moves also reflect the strongposition that leading mining companies are in due to highcommodity prices. The Rio Tinto Group was reported assaying that it would pay for the Alcan deal with its cashpile and bank debt and that high commodity prices meantthat it was generating US$1bn of cash each month(Financial Times, 11 July 2007). The purchase wasprincipally designed to gain significant aluminiumoperations for Rio Tinto and, indeed, it quickly signalledits intention to explore options for divesting non-coreassets, including the engineered products and packagingparts of the former Alcan, while retaining its bauxite,alumina and primary metal smelting assets.

Considerable deal volume is coming from companies inRussia and China, including the second and third largestdeals in 2007 (Figure 5). The total value of mining dealsconducted by entities from these two countries rose six-fold, from just US$5.3bn in 2005 to US$32.7bn in2007, comprising a fifth of total mining deal value worldwide (Figure 6). Much of this activity is domestic innature, again reflecting a strong trend to consolidationwhich, in the case of the second largest deal of 2007 –Rusal’s US$13.3bn investment for a 25% stake in NorilskNickel – could produce giants to rival the likes of BHPBilliton and Rio Tinto.

2007’s table-topping US$43bnsuccessful bid by Rio Tinto for Alcan was the first move in a wave of super-consolidation that is takingplace within the mining industry. The deal was quickly followed up in2008 with a bid by BHP Billiton forRio Tinto that could prove to befour times as large as the Rio/Alcandeal. The prospect of a BHPBilliton/Rio colossus, in turn,prompted China’s state-ownedmining company, Chinalco, toweigh in with US$14bn-worth ofstake-building in Rio Tinto in a jointexercise with Alcoa. Alongsidethese moves, Brazilian group, Vale,and Anglo-Swiss mining company,Xstrata are rumoured to be in talksthat could lead to a deal wortharound US$90bn.

No. Value of Date Buyers Sellers Primary Continenttransaction announced(US$m)

Source: PricewaterhouseCoopers, Mining Deals Annual Review 2007, based on published transactions from theDealogic ‘M&A Global’ database, December 2007

Figure 5: Top Ten – mining deals 2007

42,957

13,272

5,447

3,862

3,410

2,888

2,872

2,716

2,665

2,366

11 Jul 07

23 Nov 07

03 May 07

03 Jul 07

28 Jun 07

12 Feb 07

29 Oct 07

07 Feb 07

05 Oct 07

15 Jun 07

Rio Tinto plc

UC Rusal

Norilsk Nickel OAO

Teck Cominco Ltd

Yamana Gold Inc

SXR Uranium One Inc

Xstrata plc

BHP Billiton Ltd & plc

Market Purchase

AREVA SA

Alcan Inc

Norilsk Nickel OAO (25%)

LionOre Mining International Ltd

Aur Resources Inc

Meridian Gold Inc

UrAsia Energy Ltd

Jubilee Mines NL

BHP Billiton Ltd & plc (4.03%)

AngloGold Ashanti Ltd (22.028%)

UraMin Inc (94.5%)

North America

Russian Federation

North America

North America

North America

Asia Pacific

Asia Pacific

Asia Pacific

Africa

Africa

1

2

3

4

5

6

7

8

9

10

Deal makers

08 Deal makers


Figure 6: Deal making by Russian and Chinese entities, 2005-2007 (Total value of deals by acquirer nation)

US$bn 5

2005

2006

2007

10 15

ChinaRussia26

6.7

15.73.5

4.90.4

20 25 30

Increasingly, there have also been significantinternational moves by Russian and Chinese companies.The high profile intervention by Chinalco in the battle forRio Tinto is the most headline-grabbing of a series ofmoves by Chinese companies that began in 2005 withChina Minmetals’ unsuccessful quest to buy Canada’sNoranda, at the time the world’s third largest zinc andninth largest copper producer. Since then, however,Chinese and Russian companies have been makingsmaller value but, nonetheless, very significantpurchases. These have included US$796 million worth ofstake-building in Anglo American in 2006 by China VisionResources, an investment vehicle of Larry Yung, one ofChina’s richest men; Chinalco’s US$789 million purchaseof Peru Copper, a Canadian-based mining company,completed in July 2007; China Minmetals and JiangxiCopper’s agreed US$450 million cash bid for Canadian-listed company Northern Peru Copper inDecember 2007; Sinosteel’s 2007 US$1.1bn bid forMidwest Corporation, an Australian iron ore explorer; andRussia’s Norilsk Nickel’s US$5.4bn all-cash purchase ofCanadian nickel miner LionOre in 2007. Anglo-Swissmining company Xstrata had missed out in thecompetition to acquire LionOre. Later in 2007, it securedAustralian nickel miner Jubilee’s agreement to aUS$2.9bn cash takeover.

09

Mining deal dialogue:

Cash is king from a tax perspective in Australia

International competition for Australian miningassets has reached record levels. An addedincentive has come from the introduction of taxconsolidations in Australia in 2001. Today,when acquisitions are structured appropriately,the tax consolidation rules provide good taxopportunities for the acquirers, with the cost ofthe transaction effectively being reflected in thetax cost base of the underlying assets of theacquired entities. This has often led to a bigstep-up in tax values of these assets, meaningthe acquirers can benefit from significantlyhigher tax depreciation deductions than thosebeing claimed prior to the acquisition.

However, one of the last acts of the departingJohn Howard Liberal Government was to issuea press release that threatened to take awaythis beneficial ‘cost base resetting’ for certainscrip for scrip deals. The new Government hasrecognised that this has created considerableuncertainty and significantly reduced share-based bids. However, they are yet togive clear guidance as to the status of the lawin this area. This means that there is somedoubt about whether purchases by shares nowget the same tax outcomes as cashtransactions. This element of doubt currentlymakes a share-based bid far less competitivethan a cash bid.

This tax change, allied to the credit crunchissue, whereby cash is harder to come by,currently places those that hold significantcash balances at a definite advantage. Inaddition, in recent years we have seen thearrival in Australia of buyers of assets fromChina, India and Russia. In all instances suchacquisitions have been for cash. Thereforethese buyers arguably have a significantcomparative advantage over a rival suitor thatwishes to move forward using its shares ascurrency.

The PwC tax team in Australia has enabledmany companies to structure their acquisitionsin an optimal manner, to maximise the benefitsavailable under the Australian tax laws,resulting in real value generation for the buyer.

A significant number of deals in the top ten miningdeals table of 2007 featured consolidation movesamong Canadian and US mining companies. These arediscussed in more detail in the North American sectionon page 12. Elsewhere in the top ten table, UK-basedmining company, Anglo American, sold a 22% stake inSouth African-based gold producer, AngloGold AshantiLtd, to institutional investors for US$2.7bn as part of amove by the mining group to balance its portfolio byreducing its reliance on gold. During 2007, AngloAmerican struck various deals to increase its iron oremining assets. The remaining deal in the top ten tableof 2007 was the first US$2.7bn instalment in a series ofshare buy-backs by BHP Billiton, reflecting confidencein the company’s cash position and market outlook.

In large part, private equity buyers are not so active inthe mining sector as in other sectors. The risk-rewardequation in the mining industry limits the scope forusing debt and the need for specialist mining expertiseprohibits the additional management value that can beinjected. Nonetheless, US-based private equityinvestment firm Apollo Management acquired theNoranda Aluminium Assets from Xstrata in a deal worthUS$1.15bn. The assets came to Xstrata as part of itsUS$20.2bn acquisition of Canada’s Falconbridge in2006. The purchase was Apollo’s first move into metals.

10 Deal places

Figure 7a : All mining deals by region, 2005-2007

North America, and in particularCanada, remained the primary focusfor mining deal activity in 2007 witha total deal value of US$77.1 billion.Although, overall, North Americandeal value dipped in 2007 comparedto 2006, the number of deals morethan doubled, from 310 to 695reflecting intense competition formining assets with a larger numberof smaller transactions.

Total deal value across all territories leapt by US$64.1bnin 2006 compared to 2005 and by a further US$25bn in2007. In 2006, North America accounted for 75% of theincrease with the Russian Federation and South Americaproviding the remainder. In 2007, however, the motor forgrowing total deal value switched to the Asia Pacificregion where deal value grew by US$24.2bn offsettingdips in growth elsewhere. The big leap in Asia Pacificdeals was fuelled by intense worldwide competition forAustralian resources. Seven out of the top ten Asia Pacificdeals were for Australian resources with all but twobuyers coming from outside Australia. Elsewhere,increases in deal values in the Russian Federation andAfrica also contributed to the overall increase in total deal value in 2007.


North America 2005 2006 2007 % change

Value of deals (US$bn) 36.2 83.2 77.1 -7.3%

Number of deals 225 310 695 124.2%

South America 2005 2006 2007 % change

Value of deals (US$bn) 1.4 8.6 8.7 0.6%

Number of deals 53 115 174 51.3%

Russian Federation 2005 2006 2007 % change


Number of deals 38 87 40 -54.0%

Europe 2005 2006 2007 % change

Value of deals (US$bn) 2.1 3.8 1.5 -61.5%

Number of deals 63 71 67 -5.6%

11Figure 7b: All transactions by continent by value of transactions, 2005-2007

2005 (total US$70.2bn)


2006 (total US$135.5bn)

North America 48.6%

Asia Pacific 22.2%

Russian Federation 12%

Africa 8.5%

Eurasia & Middle East 2.3%

South America 5.5%

Europe 0.9%

North America 62.1%

Russian Federation 12.3%

Asia Pacific 8.3%

Africa 7.4%

Europe 2.9%

South America 6.4%


North America 51.8%

Asia Pacific 21.1%

Africa 13.7%

Russian Federation 7.1%

South America 2.0%

Europe 2.9%


2007 (total US$158.9bn)

Asia Pacific 2005 2006 2007 % change


Number of deals 298 368 634 72.3%

Africa 2005 2006 2007 % change



Eurasia & Middle East 2005 2006 2007 % change



12 Deal places: North America

The US$5.4bn purchase of LionOre by Russia’s NorilskNickel added to a trend of foreign takeovers of Canadianmining interests, most notably, of course, Rio Tinto’spurchase of Canada’s largest aluminium producer, Alcan.In 2006, Inco and Falconbridge, Canada’s largest nickelproducers, were bought by CVRD (now Vale) and Xstratarespectively. In 2007, there were a number of major movesfor North American companies by foreign bidders. As wellas the Alcan and LionOre deals, two other inbound movessaw French nuclear company, Areva, purchase Canadianminer Uramin for US$2.4bn, and Rio Tinto increase itsinterest in Canadian mining company Ivanhoe Mines in adeal with a potential value of US$1.8bn if the MongolianGovernment gives final project approval to Ivanhoe’s OyuTolgoi project. Uramin has substantial uranium assets inAfrica. Later in 2007, Areva agreed to supply 35% ofUramin’s production to China’s state-owned GuangdongNuclear Power Corporation, highlighting the importance oflong-term security of resource supply to China’s economy.

Deal-making by NorthAmerican mining companiescontinued at a very high levelin 2007, even without a repeatof the clutch of mega-mergersthat had characterised 2006.Canadian companies, inparticular, proved attractive toforeign buyers drawn to theadvantages of investing in apolitically stable environment.Alongside this, there wasconsiderable consolidation asmid-cap North Americanmining companies took theopportunity to scale up with anumber of mutually strategicfits with counterpartcompanies.


Figure 8: North America mining deals by sector

2005 2006 2007By value (US$bn) By value (US$bn) By value (US$bn) % share

Base metals 19.2 66.1 45.5 59%

Diversified 0.9 0.9 16.8 22%

Precious metals 14.5 15.2 8.5 11%

Other 1.6 1.1 6.4 8%

Total US$36.2bn US$83.2bn US$77.1bn 100%

13

Much of the North American deal-making in 2007 took theform of mutual interest consolidations and these, togetherwith the LionOre deal, accounted for much of the bigincrease in diversified deals (Figure 8). Teck Cominco’sfriendly US$3.9bn purchase of fellow Canadian miner Auradded considerably to the company’s copper productionand, in particular, to its copper reserves and resources.The deal was an example of a diversified company, TeckCominco, taking over a company largely focused on onesector with over 90% of Aur’s revenue derived fromcopper. Another friendly all-Canadian deal saw twouranium miners merging to create the world’s secondlargest uranium producer with UrAsia Energy’s agreementto a US$2.9bn reverse takeover by smaller rival SXRUranium One. The deal enabled UrAsia to diversify awayfrom an asset base that had been concentrated inKazakhstan.

Over 90% of North American mining deal value was in thediversified, base metals and other segments of the marketwith deals involving gold mining companies falling off.However, a significant move in the gold sector was thethree-way deal whereby Yamana Gold acquired fellowCanadian company Northern Orion Resources for US$1bnand then both companies moved for US companyMeridian Gold in a US$3.4bn acquisition. The deals placeYamana Gold among the leading intermediate goldproducers.

14 Deal places: Asia Pacific

There was a significant increase in the number of bigdeals. In 2007, there were seven US$1bn plus deals forAsia Pacific mining assets and a further eight US$0.5bnplus deals. In contrast, in 2006, there had been just twodeals above US$1bn and no others above US$0.5bn.Intense competition for Australian mining assets laybehind much of the deal growth, with foreign buyersattracted by the politically stable environment and thepotential to fill their resource pipelines.

Anglo-Swiss mining company Xstrata headed the list ofAsia Pacific deals with its US$2.9bn purchase ofAustralian nickel company Jubilee Mines. The deal wasone of no fewer than six moves by Xstrata during 2007 toacquire Australian mining companies. Among the otherUS$1bn plus foreign moves for Australian mining assetswas Palmary Enterprises’ US$1.2bn takeover ofmanganese miner Consolidated Minerals. Palmary – ledby Gennadiy Bogolyubov, the Ukrainian billionaire – won abidding competition against Pallinghurst Resources, aninvestment vehicle run by Brian Gilbertson, former BHPBilliton chief executive. Sinosteel’s US$1.1bn bid for ironand steel feedstock company Midwest Corporationcompleted a trio of foreign plays for Australian miningassets.

Deals for Asia Pacific miningassets surged in 2007. Dealnumbers were up by 72%from 368 in 2006 to 634 in2007. Total deal value rose216% from US$11.2bn toUS$35.3bn. Numbers andtotal value were up in allsegments of the miningindustry with the biggestsurge coming in the basemetals and other resourcescategories.


Figure 9: Asia Pacific mining deals by sector


Base metals 1.4 2.6 10.6 30%

Diversified 10.0 3.8 9.0 26%


Other 2.2 3.6 12.2 34%


15

The Sinosteel pursuit of Midwest is, as discussed earlier,just one example of major international expansion activityby Chinese companies. As shown in Figure 6, purchasesby Chinese entities rose from just US$0.4bn in 2005, toUS$3.5bn in 2006 and US$6.7bn in 2007 – a sixteen-foldincrease in just two years. Six out of the top ten dealsinvolving Chinese buyers were purchases of foreignassets. In addition, though, there was also considerableconsolidation activity within China. Indeed, domestic dealswithin China comprised the vast majority of all deals byChinese buyers. This reflects the very fragmented state ofmuch of the mining sector within China, particularly ingold. There is a very active phase of consolidation inChina with companies seeking to gain the necessary scaleto compete globally. In the coal industry, there is theadded imperative of government-directed safety andenvironmental initiatives that have necessitated smallerenterprises to scale up in order to be best placed torespond to the new requirements.


Outbound China deals: maximising seniorcommitment and expertise post-deal

Developing the right strategies for harnessingand supplementing existing senior managementskills and commitment post-deal is a challengefor all deals. It needs special care when dealsare international in nature, bringing togethercompanies with different cultures and practicesor where key people in the target companyhave done well from deal proceeds but theircontinuing commitment still needs to bemaximised. These challenges are even greaterwhere there is a language barrier which can bethe case, for example, with many Chinesecompanies making ‘outbound’ mininginvestments.

The specialist expertise and knowledge ofsenior management is particularly critical in themining industry where specific experience ofthe mineral resource segment, deposit orlocation can be the difference between successand failure. Often the key people with thisinsight will have benefited significantly from dealproceeds. Chinese deal-makers often wish tofind a way to retain and incentivise suchpersonnel. Often, key players on both sidesmay be working on completing their first cross-border deal and have to adapt their day-to-daywork lives and organisational behaviours tofunction within the framework of a larger, morefully integrated organisation.

It is very important for the acquirer to be wellinformed about the implications of this type ofsituation and begin planning for this key post-deal success factor well before the dealnears completion. Indeed, many interactionsduring diligence, negotiation and closing willinfluence the target management’s decisionabout whether to stay post-deal, how willingthey are to collaborate with the new parent, andthe amount of energy they put into these post-deal efforts.

PwC is in the unique position of havingperspective on the inner workings of the target’sorganisation from our role in due diligence work.As a key facilitator between the acquirer andtarget, we can assist the former in theidentification of key people, provide insight intothe operating practices of the target team,design effective retention/incentive schemestailored to the specific local market, and assistwith negotiating ongoing service agreementsand future compensation packages.

16 Deal places: Russian Federation

It was the size of the biggest deals rather than the extentof deal activity that pushed up the totals. Heading the listof deals for Russian assets was Rusal’s US$13.3bnacquisition of a 25% stake in Norilsk Nickel. Rusal isalready one of the world’s biggest aluminium producersand many commentators feel that the move is the firststep in a consolidation that could deliver a Russian miningand metals giant to rival the likes of Rio Tinto and BHPBilliton. Indeed, Alexander Bulygin, Rusal chief executive,was reported as saying: “we intend to create Russia’s firstglobal diversified metals and mining company. Ourcompany will join the ranks of the world’s top five mininggiants” (Financial Times, 23 November 2007). NorilskNickel’s earlier US$5.4bn purchase of Canada’s LionOre,the biggest Russian overseas acquisition, was thusperhaps just a harbinger of bigger expansion to come.Rusal itself grew significantly with its 2006 US$6.6bnacquisition of SUAL and the alumina assets of Swisscompany Glencore International. It was the biggestRussian mining deal of that year and highlighted a trendtowards a Russian ownership of resource assets.

A big increase in deals fordiversified assets in theRussian Federation, combinedwith a step change ininternational expansion byRussian companies, putRussia firmly on the miningM&A world map in 2007. Total deal value for RussianFederation assets was up16% to US$19.1bn in 2007and Russian buyer activityrose 66% to account forUS$26bn of assets, up fromUS$15.7bn in 2006.


Figure 10: Russian Federation mining deals by sector


Base metals 2.3 8.3 0.1 0%

Diversified 0.7 3.0 14.7 77%


Other 0.5 1.5 3.8 20%


17

The second largest Russian domestic deal in 2007 wasMechel Steel’s winning US$2.3bn bid in the privatisationauction for stakes in Russian coal mining companiesYakutugol and Elgaugol. The deal is the latestmanifestation of a strong trend toward vertical integrationin the Russian steel industry with companies keen tosecure good iron ore and coking coal resources.Previously independent iron ore and coal miners havebeen progressively acquired by steel companies over thepast four to five years. Similar vertical integration is takingplace elsewhere with Gazprom, for example, on theacquisition trail for steaming coal assets. Inbound dealsfrom foreign companies were few in number. The largestsuch deal was a US$40million switch of foreign ownershipwith South Africa gold producer, AngloGold Ashanti,agreeing to acquire Russian peer companies, Amikan andAngara Mining, from UK gold exploration company, Trans-Siberian Gold.


Russian infrastructure investment: openingup a rich mining seam

Russia is one of the richest countries in termsof mineral resources. However, the productionto reserves ratio is low. Most of the large basemetals and precious metals deposits are inremote areas of Eastern Siberia and theeastern end of the country where severeinfrastructure deficiencies exist. Some mineshave lain idle for decades. Infrastructureconstraints have also partially preventedforeign investments into the sector.

Changes in recent years give hope for morestate investment in infrastructure. Thegovernment has used high cashflows from energy prices to build up a large stabilisationfund and announced payments to support infrastructural projects. A number have beenfiled by private mining companies forgovernment financing. The remote areas,containing the most attractive mining reserves,have also been approved for massive statefinancing over the next 5-15 years as part ofregional development programmes.Infrastructural projects are also beingconsidered for private-public partnerships(PPPs), one of the most discussed tools tostimulate investments.

PwC is carefully monitoring the trends and haslaunched a PPP initiative to the market,assembling a group of experts established tofacilitate such projects. The group has alreadycompleted a biofuel plant construction project.Together with our existing Project Financegroup, PwC is well prepared to advise theinfrastructure development market.

18 Deal places: Africa and South America

Four US$1bn plus deals boosted the African total dealvalue. The largest was Anglo American’s US$2.7bndivestment of a 22% stake in South African-based goldproducer, AngloGold Ashanti Ltd, to institutional investors.The second largest involving African assets was Areva’sUS$2.4bn purchase of Canadian-owned Uramindiscussed on page 12. A US$2bn merger of London AIM-listed Nikanor and Canadian company Katangabrought together adjacent mines in the DemocraticRepublic of Congo and placed the merged company in astrong position to become a copper leader in Africa. Thefourth US$1bn plus deal for African assets saw Xstrataacquire South African company, Eland Platinum Holdings,for US$1.1bn.

In the rest of the world, thebiggest number of deals andtotal deal value came in Africaand South America. There werebig increases in deal numbers forassets in both continents – up by81% from 52 to 94 in Africa and51% from 115 to 174 in SouthAmerica. Africa accounted forthe largest total deal value withUS$13.5bn worth of deals, up by38% from US$9.8bn in 2006.South American total deal valuerose slightly from US$8.6bn in2006 to US$8.7bn in 2007.


Figure 11: Africa mining deals by sector


Base metals 0.1 0.3 2.7 20%

Diversified 0.3 0.3 0.5 4%


Other 8.2 0.5 3.7 28%


19


Figure 12: South America mining deals by sector


Base metals 0.5 3.7 4.2 49%

Diversified 0.2 0.5 1.4 17%


Other 0.0 2.2 1.4 16%


In South America, there were no deals to rival the 2006purchase of Caemi Mineracao e Metalurgia by CVRD (nowVale) for US$2.6bn. The biggest 2007 deal was forUS$1.6bn and saw Anglo American gain a 49% stake inBrazilian iron ore mining exploration company, MMXMinas-Rio Mineracao e Logistica. The deal is part of AngloAmerican’s stated aim to acquire greater bulk in iron ore.

20 Looking ahead

Economic slowdown in the US, continuingfinancial market uncertainty and fears ofactual recession will inevitably cast acloud of uncertainty over the periodahead. From the macro-economic point ofview, much will depend on the continuedsustainability of Asian demand. Instabilitiesare likely to deliver a bumpier deal-makingride although the fundamentals for M&Aactivity in mining remain strong.

At the very top end of the market, 2008 looks set to bethe year of super-consolidation as the giants of themining and metals sectors seek combinations that willincrease their worldwide scale. Such moves arethemselves a huge signal of market confidence. The super-consolidation race may include players fromChina and Russia as well as the establishedinternational mining and metals majors. The landscapeof the sector is set to look very different once thecoming wave of mega-mega-deals is settled.Moreover, the super-consolidation deals will spawn around of related deal activity as companies reorganiseportfolios and divest non-core assets.

The strength of the mining M&A market will alsocontinue to be influenced by moves from state-ownedenterprises and companies from outside the immediatemining sector moving upstream to secure miningassets. Further down the industry scale, consolidationhas a long way to run in many sectors and, indeed, thetrend towards super-consolidation will add to theconsolidation imperative. The quest for diversificationand filling resource pipelines will continue to be astrong overriding factor. There is considerable scopefor deal-making in fragmented sectors such as copperand lead/zinc as is the case with other sectors inparticular territories, such as gold in China.

There is potentially more political risk in the miningsector than previously with aggressive expansion interritories such as the Democratic Republic of Congo,Ecuador and Bolivia. The 2008 election year in Russiamay slow down the flow of domestic mining deals inthat country as companies await clarity on politicaldevelopments. Many of the significant deals in Russiahave already been undertaken although there remainsscope for further privatisations, particularly of goldand copper deposits. However, as noted above, wecan expect Chinese and Russian companies tocontinue to be active bidders on the internationalmining scene.

The struggle that some exploration companies face togain funding for development potentially opens thedoor to friendly deals with big companies or end userswishing to secure inputs. Also, among smallercompanies, the stock market falls of early 2008 havemade some targets much cheaper and may lead to aspate of hostile offers.

In conclusion, mining deal activity is set to remainstrong. A series of landmark deals may reshape thetop tier and consolidation will continue to be a strongdeal driver among mid-tier and smaller companies.Whatever its size, no company will be able to becomplacent about their M&A strategies as the industry continues to chart a dynamic M&A path.

Contact us 21

AustraliaTim Goldsmith Global Mining LeaderTelephone: +61 3 8603 2016Email: [email protected]

Jock O’CallaghanTelephone: +61 3 8603 6137Email: [email protected]

CanadaPaul MurphyTelephone: +1 416 941 8242Email: [email protected]

ChinaKen SuTelephone: +86 10 6533 7290Email: [email protected]

IndiaKameswara RaoTelephone: +91 40 233 00 750Email: [email protected]

Latin AmericaAnthony DawesTelephone: +56 2 940 0064Email: [email protected]

Russia David GrayTelephone: +7 495 967 6311Email: [email protected]

Victor SmirnovTelephone: +7 495 967 6296 Email: [email protected]

Global Mining Deals Team

South AfricaHugh CameronTelephone: +27 11 797 4292Email: [email protected]

Peter McCrystalTelephone: +27 11 797 5275Email: [email protected]

United KingdomTony Skrzypecki Telephone: +44 20 7804 5500Email: [email protected]

Jason BurkittTelephone: +44 20 7213 2515Email: [email protected]

Paul HennessyTelehone: +44 20 721 32441Email: [email protected]

Adam Warren Telephone: +44 207 804 0150Email: [email protected]

United StatesSteve RalbovskyTelephone: +1 602 364 8193Email: [email protected]

Further informationOlesya HatopGlobal Energy, Utilities & Mining MarketingTelephone: +49 201 438 1431Email: [email protected]

© 2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms ofPricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is atrademark of PricewaterhouseCoopers LLP.

PricewaterhouseCoopers (www.pwc.com) provides industry-focusedassurance, tax and advisory services to build public trust and enhancevalue for its clients and their stakeholders. More than 146,000 people in150 countries across our network share their thinking, experience andsolutions to develop fresh perspectives and practical advice.

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Acknowledgments

We would like to acknowledge the assistance of Rio Tinto for providing images used in this report.Front cover, pages 1, 2 and 3 © Rio Tinto

This report cover is printed on FSC Profisilk 300gsm. The text pages are printed on FSC Profisilk 170gsm.

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