Mergers, acquisitions and capital raising in the mining and metals sector 1H 2011

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1 Mergers, acquisitions and capital raising in the mining and metals sector 1H 2011 BHP Billiton quarterly briefing 1

2 Mergers, acquisitions and capital raising in the mining and metals sector 1H 2011 M&A Activity Low gearing, strong earnings and good capital availability are creating an ideal environment for M&A. In 1H 2011 mining & metals companies completed 19 megadeals (>$1b), twice as many as 1H The average deal value has more than doubled year-on-year a result of commodity prices driving higher valuations and a shift towards larger transactions as capital becomes less constrained. Momentum is growing, with $33.8bn of deals completed in June. However, macro-economic issues, rising resource nationalism, and an uncertain pricing environment have increased volatility and risk for M&A and are therefore making decisions difficult. This is reflected in the fact that the volume of deals is actually down on Strategic and one chance deals are being undertaken whilst more speculative deals are being deferred. Greater time is being taken to complete deals due to higher market uncertainty and greater political complexity. In 1H 2011 we have seen $17.1b share buy-backs (the majority of which was from Minera Frisco SAB de CV, BHP Billiton and ArcelorMittal), with an additional $3b buyback still pending from Vale. North America has taken the lead as most active acquiring region, and also the preferred destination, attracting $39b, or 40% of activity in 1H Two large deals contributed to this: Alpha Natural Resources takeover of Massey Energy for $7.2b and Cliffs Natural Resources Inc acquired Consolidated Thompson Iron Mines Ltd for $4.1b. In 1H 2011 Europe-based companies have returned to the deal table, completing almost a fifth of deals in 1H ($17b). Number and value of deals Change 1H H 2011 Change Number 1,047 1,123 7% % Value ($m) Average value ($m) 60, ,706 89% 47,886 96, % % % Value of deals by target region ($b) North America 35.9 Asia Pacific 19.2 Africa 12.9 Latin America 11.8 CIS 10.0 Europe 6.5 Value of deals by acquiring region ($b) North America 39.0 Asia Pacific 24.4 Europe 16.7 CIS 10.0 Latin America Africa Middle East Source: Ernst & Young Analysis 2 Mergers, acquisitions and capital raising in the mining and metals sector 1H 2011

3 Commodities For 1H 2011, coal dominates the M&A landscape, accounting for almost 30% of deal value. There are strong strategic drivers for coal: Large players are buying coal assets to boost production capacity to service growing demand Power utilities, steel companies and governments integrate into raw materials Economies of scale to manage risk and regulatory compliance There were a large number of gold deals during the first half, but they were of a relatively low average deal value ($62m). Competition for fertilizer assets has intensified and we expect this to continue into 2H M&A Outlook The announced transaction pipeline suggests the upward trend in deal values will accelerate in As at 1 June 2011 around $100b of deals had been announced in the sector. We expect Africa to feature prominently as a focus for deal making in 2H 2011 as it remains a key destination where management believe value can be identified. We also expect China s 12th Five Year Plan to continue to drive domestic consolidation. Transformational deals may not return this year, although we expect some to complete in 2012 as management pursue alternatives to organic growth and shareholder cash distributions. Mergers, acquisitions and capital raising in the mining and metals sector 1H

4 Capital Raising Trends The mining and metals sector is heading for another record year of financing as the industry s growth story continues. Access to capital is no longer a major concern for mid-tier and major companies, and proceeds are up in all asset classes except convertibles. IPOs grow, but volatility constrains There has been an increase in volume of IPOs in 1H2011 primarily from a strong flow of junior listings in Australia and Toronto, and also a number of Chinese listings (including Hong Kong) which were largely domestic issues by steel and aluminium companies. The $10b IPO of Glencore in London is the stand-out for 2011 so far and a test of the market. Excluding Glencore, proceeds are down significantly y-o-y, reflecting the extent that volatility is deterring activity has seen some high profile postponements, but the pipeline remains strong, suggesting companies are holding out for a better pricing environment and for capacity to return following the Glencore IPO. Capital raising proceeds, H2011 Proceeds $b 350 Loans Source: Ernst & Young Analysis H2010 1H2011 Bonds Convertibles Follow ons IPOs Strong secondary equity issuance in 1H2011 The materials sector was the most active globally by volume of issues, and raised the second highest proceeds after the financial services sector. Proceeds increased y-o-y, with some large fundraisings by mid-tier miners and metals producers for capital investment and acquisitions. Junior companies accounted for around a third of proceeds raised and 94% of volume of issues, raising, on average, proceeds of $6m for working capital and project development. Steel, gold, iron ore and coal attracted the most investment but rare earths also emerged. There is a strong pipeline of spin-off IPOs to unlock value in standalone projects or product groups going into 2H Mergers, acquisitions and capital raising in the mining and metals sector 1H 2011

5 Buoyant bond market supports high yield issues Corporate bonds remained in demand in 1H2011 as market conditions continue to be buoyant, keeping down the cost of issue at 2010 s record low levels. There was a rush to market in May, ahead of an expected rise in benchmark rates, but persistent market volatility and economic uncertainty in June eroded risk appetite. The coupon on high yield issues fell to a new low of 6.64% in May (across all sectors) Vedanta Resources took advantage, issuing one of India s largest ever bonds by a non-financial issuer at a coupon of 6.75%. The proportion of high yield issuance increased, reflecting appetite for higher risk/higher return investments. Three of the top 10 issues were high yield, while the Mining & Metals sector was the second largest issuer of high yield notes (ex. financial services). A greater proportion of proceeds was used for purposes other than financing in 1H2011, but refinancing is still a primary driver. Loans: bank support for M&A Loan proceeds and volumes are ahead of the same period a year ago, reflecting growth in M&A activity some of the industry s biggest acquirers have borrowed to part-finance their acquisitions. There is a greater availability of bank debt, but it is an issue of affordability. Interest rates, while moving in the right direction, remain high compared with the previous debt cycle. Loans to junior companies were few and far between the risks generally too great for commercial banks. Juniors instead relying on equity investors and multilaterals/development banks for project finance. A large proportion of loans were for refinancing, a trend reflected across all sectors only 35% of global issuance represented new loan assets in Q The year s largest loan so far was by Glencore borrowing $12b prior to the IPO, for refinancing purposes. Asian and Western European producers in the steel sector dominated the loans market, borrowing for acquisitions, project finance, capital expenditure, working capital and refinancing. Capital Raising Outlook We expect significant IPO activity in the second half of 2011, carrying through to There are signs of willingness by banks to lend for acquisitions again this willingness will be tested if transformational deals do make a return. Volatility is likely to be a key theme throughout the remainder of 2011, influencing investor sentiment and appetite for risk. Timing will be critical. This volatility is likely to impact valuations and increase the cost of borrowing. Junior companies, reliant largely on equity markets to deliver growth, will be highly vulnerable to investor sentiment and volatile reaction to global events (e.g., uranium). Mergers, acquisitions and capital raising in the mining and metals sector 1H

6 Ernst & Young s Global Mining & Metals Center With a strong outlook in the sector, the global mining and metals industry is focused on future growth through expanded production, without losing sight of operational efficiency and cost optimization. The sector is also faced with the increased challenge of changing expectations in the maintenance of its social license to operate and meeting government revenue expectations. Ernst & Young s Global Mining & Metals Center brings together a worldwide team of professionals to help you achieve your potential a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector. The Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately it enables us to help you meet your goals and compete more effectively. It s how Ernst & Young makes a difference. Area contacts Global Mining & Metals Leader Mike Elliott Tel: michael.elliott@au.ey.com Oceania Scott Grimley Tel: scott.grimley@au.ey.com China Peter Markey Tel: peter.markey@cn.ey.com Japan Kentaro Nakamichi Tel: kentaro.nakamichi@jp.ey.com Europe, Middle East, India and Africa Leader Mick Bardella Tel: mbardella@uk.ey.com Africa Adrian Macartney Tel: adrian.macartney@za.ey.com Commonwealth of Independent States Evgeni Khrustalev Tel: evgeni.khrustalev@ru.ey.com France and Luxemburg Christian Mion Tel: christian.mion@fr.ey.com India Anjani Agrawal Tel: anjani.agrawal@in.ey.com United Kingdom & Ireland Lee Downham Tel: ldownham@uk.ey.com Americas and United States Leader Andy Miller Tel: andy.miller@ey.com Canada Tom Whelan Tel: tom.s.whelan@ca.ey.com South America and Brazil Leader Carlos Assis Tel: carlos.assis@br.ey.com Service line contacts Global Advisory Leader Paul Mitchell Tel: paul.mitchell@cn.ey.com Global Assurance Leader Tom Whelan Tel: tom.s.whelan@ca.ey.com Global IFRS Leader Tracey Waring Tel: tracey.waring@uk.ey.com Global Tax Leader Andy Miller Tel: andy.miller@ey.com Global Transactions Leader Lee Downham Tel: ldownham@uk.ey.com Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit EYGM Limited. All Rights Reserved. SCORE Retrieval File OC This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.