Highlights:

• Low gearing, strong earnings and good capital availability supported an ideal environment for mergers & acquisitions (M&A) in the first half of 2011. However, jittery markets and dropping confidence caused activity to slow in the third quarter.
• While deal values in the first nine months of 2011 are up 67% on the same period in 2010, macro economic issues and resource nationalism are making M&A decisions difficult. This is reflected in the fact that volume of deals is actually down on 2010.
• Synergistic, strategic and ‘one chance’ deals are being undertaken, and more speculative deals are being deferred. But with a number of large deals in the pipeline, and companies with access to cash in an environment where targets appear to be undervalued, we could see the year finish strongly.

Uncertainty is Having an Impact on Execution

The current level of political and economic volatility is making it harder to evaluate and execute M&A:

• There is a scarcity of new large scale, quality assets particularly in traditional resource geographies
• This is driving greater interest in frontier markets
• Resource nationalism is spreading globally making valuations more complex and deal execution more uncertain
• Meeting vendor price expectations whilst also delivering shareholder value is increasingly challenging, given increased risks for projects
• Volatile markets are making it more difficult for companies to price risk

Regional Overview

Asia Pacific Regains its Position as Most Active Acquirer

North America has extended its lead as the preferred destination for mining and metals M&A targets, while Asia Pacific regained its title as the most acquisitive region. Australia and China dominated by activity.

Gold and fertilizer consolidation by Russian-based companies saw CIS step into third place as a target destination and acquiring region.

Country Overview

US Takes the Lead

The US has taken the lead ahead of both Australia and Canada as the most active acquirer, supported by intense domestic coal consolidation.

The US has also taken the lead as the preferred destination, although not all deals were for mining targets, e.g., BHP Billiton’s acquisition of Petrohawk Energy Corp ($11.8b) and Chesapeake Energy Corp’s Fayetteville Shale assets ($4.6b)1.

Inflated asset prices in Australia relative to other countries have led acquirers with greater risk appetites to look elsewhere. This has resulted in Australia dropping to fifth rank destination.

Commodities

Coal Dominates M&A Activity

Coal continued to dominate the M&A landscape by a wide margin, accounting for over $30b of deal value. There are strong strategic drivers for coal :

• Majors buying assets to boost production capacity to meet increasing demand from China and India
• Power utilities, steel companies and governments integrating into raw materials
• Economies of scale to manage risk and regulatory compliance

There have been a large number of gold deals but at a relatively low average deal value.

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M&A and Capital

Raising Outlook

The first six months saw the ‘first wave’ of M&A: bolt-on, ‘one chance’ and strategically important deals. But Q3 saw even these deals put on ice as economic turbulence found its way into commodity prices.

Companies are well positioned to undertake M&A, and targets appear undervalued, but the global economic backdrop is making M&A decisions more difficult than ever. If these factors stabilize, we may see a resurgence of M&A activity.

Volatility on equity markets will make life difficult for juniors once again, with the need to increase capital raising options and consider preservation of strategies.

Risk aversion may see a tightening of bank credit, an increase in the cost of borrowing, and a flight to ‘safe’ investments in the bond markets, leaving mid-tier and sub-investment grade companies potentially exposed.

Capital management is more important than ever in a rapidly changing and volatile funding environment.

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