There is movement on the initial public offering front, and speculation is rife on the prospects of increased merger and acquisition activity in the mining sector.
There are some fairly basic reasons why M&A activity will be a priority in the final three months of the year.
Given that the first rule of business is to increase market share, because organic growth is difficult in the current economic environment, the only real alternative is to buy growth.
And while a healthy bank account might impress some, companies sitting on cash need to do something productive with it other than collecting the miserable bank interest on offer to impress shareholders.
According to Brisbane-based resource consultancy Xstract Mining Consultants, many companies are looking to insulate themselves from further pain from the global financial crisis by positioning themselves for growth when markets eventually improve.
General manager corporate services Jeames McKibben said that while mineral asset prices had fallen from their 2008 highs, the prospect of M&As remained a popular strategy for companies seeking to improve their growth prospects and improve profitability.
“M&A strategies were widely used in the late 1990s and early 2000s when a decline in coal prices and corporate profitability provided Australia’s larger coal producers with the opportunity to acquire high-quality coal assets in a depressed market,” he said.
“During that period, the profile of Queensland’s coal industry changed radically, resulting in the concentration of production with a few large producers and lower coal volumes from smaller producers.”
McKibben believes several factors contributed to this, including:
The precarious position of many coal producers at the time and the need for consolidation in order to survive;
The attractiveness of Australian coal assets to international resource companies as a result of labour productivity gains in the late 1990s;
The drive towards increased market power of the remaining coal suppliers through concentration of ownership; and
Efficiency gains from acquisition targets through cost-cutting, production synergies and economies of scale.
He said much of the acquisition during this period was led by the two largest producers, BHP Billiton and Rio Tinto, while two new and significant mining companies were also active at this time – Anglo American and Xstrata.
The main divestments were by Shell, Oakbridge, Peabody Resources, QCT Resources and Exxon-Mobil.
“Between 2003 and 2008, coal prices trended higher when China and India entered the market as major purchasers, providing a bonanza for Australia’s coal exporters,” McKibben added.
“In response, many of the larger producers expanded, corporate activity increased, new coal exploration/mining companies emerged and interest in coal seam gas and underground coal gasification technologies accelerated.
“As Queensland’s premier coal province, the Bowen Basin has been the focus for significant recent M&A activity.”
The Table (click through at the bottom of the story) shows transaction values moved sharply higher between 2006 and 2008.
In 2006, the values implied by market transactions were generally less than A50c per tonne of in-ground coal resource.
By 2008, the implied value had risen to between $1.50 and $4.00/t of in-ground coal resource, but could be as high as $5.37/t.
Kevin Irving, a coal specialist with Xstract, said that from a valuation perspective, the multiples paid for coal deposits within the Bowen Basin provided a top-end benchmark for the entire Australian coal industry.
“Where else in Australia is such a range of high-quality thermal and coking coals supported by proximity to an extensive rail network and multiple ports?” he asked.
Irving believes there is an interesting dynamic between the major Asian coal importers that will have a bearing on the outlook for the Bowen Basin coal industry.
“Japanese, Korean, Indian and Chinese consortiums remain on the acquisition trail and are regular visitors to Australia to evaluate potential coal opportunities,” he pointed out.
“The Japanese were early entrants into the industry and have secured interests in high-quality, long-life assets.
“However, the Chinese and Indians were somewhat late on the scene and have struggled to secure adequate coal supplies.
“Certainly China’s appetite for coal remains strong driven by domestic steel production and continued constraints on Chinese coking coal production.
“The prospects for recovery outside of China have also improved recently with leading indicators suggesting that demand is improving and that destocking should come to an end in late 2009.”
Irving believes that outside the traditional coal blends, the Bowen Basin’s potential for CSG and UCG remains largely untapped despite recent attention, and this was likely to persist for some time yet.
“The decision by Hong Kong-based commodity trader Noble to raise its bid for Gloucester Coal suggests that acquirers are willing to pay healthy premiums in order to secure supply,” he added.
“All in all, this bodes well for ongoing M&A and joint venture activity in the Bowen Basin, particularly for producing assets.”