Escalating costs and economic instability may be the two main reasons why mining companies worldwide are acquiring existing projects instead of starting their own, shows the latest report from global firm Ernst & Young.
According to the firm’s Global Mining & Metals Transaction Leader, Lee Downham, capital that has been earmarked for organic projects is increasingly under review as returns no longer compare favourably to mergers and acquisition, particularly in the past six months.
Many miners have built up strong balance sheets and this, together with lower valuations and expectations of robust long-term commodity demand, is creating "an attractive environment for M&A," the study says.
"Synergistic and 'one chance' deals continue to be undertaken, while more speculative deals are being deferred," Downham says. "Those companies with a bullish outlook on China, and that can work with volatility, will be the dealmakers this year," he adds.
There were a total of 470 deals committed globally at a value of $55.7 billion during the first half of 2012, down 19% and 38%, respectively, on-year, the report shows.
But the study also shows there was a robust increase in the number of "mega-deals," worth $1 billion-plus, which rose by one-third, to 20.
China and Australia dominated deal activity in the first-half of the year.
Beijing-based companies acquired domestic and cross-border targets in deals worth $17 billion.
Australia was the second main protagonist of mining deals, largely driven by consolidation among domestic coal companies.
There has been a wave of deals in Australia's coal industry over the past two years, including Rio Tinto Ltd. (LON:RIO) and Mitsubishi Corp.'s decision to take full control of Coal & Allied Industries Ltd., as well as Peabody Energy Corp.'s (NYSE:BTU) acquisition of Macarthur Coal Ltd. (PINK:MACDF).
Ernst & Young is a global leader in assurance, tax, transaction and advisory services.