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Deals to dig Down UnderThe year ahead promises fierce competition for Australian mining assets, with Japanese, South Korean and US firms challenging Chinese buyersReuters in Sydney18 January 2012Asian and US companies racing to snap up coal, iron ore and uranium assets to meet booming energy and steelmaking demand will give dominant Chinese buyers a run for their money in what is likely to be another bumper year for Australian mining mergers and acquisitions.Frozen credit markets and a slowing Chinese economy may check Beijing’s buying spree, but there are Japanese, South Korean and US companies, and cash-rich global miners, ready to bet on Australian minerals.Coal is likely to be the No 1 target, along with firms that have port access and resources in Africa, where assets are of high quality and cheaper to develop. That puts companies such as Atlas Iron, a merged Aston Resources-Whitehaven, and uranium miner Paladin Energy in the spotlight. Other potential targets are coal miner Bathurst, with assets in New Zealand, and gold miners Perseus Mining and Regis Resources, bankers and analysts said. State-run Chinese firms, they add, will probably run up against competition from Xstrata, Japan’s Mitsubishi, South Korea’s Posco and US-based Alpha Natural Resources in chasing those assets.“We expect to see appetite from Japanese, US and Chinese companies for Australian mining assets,” said David Wood, resources banker at Bank of America Merrill Lynch, who advised Peabody and China’s Hanlong in Australian acquisitions last year. “A number of US companies are interested ... in high-margin assets with a strong operational track record. Australia remains an attractive investment destination.”BHP Billiton and Rio Tinto are expected to have combined earnings of some US$55 billion, putting them in a strong position to bid for assets.Australia was a standout last year, with a 12 per cent rise in M&A activity to US$173 billion against a 12 per cent drop for Asia. Resource deals made up 44 per cent of all Australian inbound deals.Australia’s stubbornly high dollar, trading near parity with the US dollar, has not put off offshore buyers as it has been offset by the battering that miners’ shares have suffered due to worries over global growth.The metals and mining index slid 28 per cent last year, nearly twice as much as the broader market.“The market has a myopic view, but some of these corporates and customers are more likely to take a long-term view and take advantage of these beaten-up prices,” said Prasad Patkar, a portfolio manager at Platypus Asset Management.Three deals announced late last year - the auction of A$5 billion (HK$40 billion) coal miner New Hope, Yanzhou Coal’s bid to merge with Gloucester Coal, and Whitehaven’s A$2.7 billion bid for Aston - will set the pace for the first half of 2012.“Despite some concern about the Chinese economy, the Chinese and Indians, [among] others, are still very interested, particularly in coal assets on the east coast of Australia,” said John Tivey, lead partner on mining at law firm Freehills.At the same time, tough credit markets mean some smaller Australian miners are struggling to line up debt to fund projects, so are looking for partners or suitors with cash.“There are pockets of substantial cash out there waiting to be deployed. This, coupled with volatile equity valuations and more challenging funding for targets can open up deal flow,” said Merrill’s Wood.Bankers and lawyers expect Japanese and South Korean firms to feature in more deals as they look to secure resources before China ties them all up.“They’ve seen how successful the Chinese have been [at] taking big chunks of equity,” said Freehills’ Tivey. “The Koreans and Japanese are back in the market.”
Mitsubishi has started the ball rolling with a bid for its partner Murchison Metals’ stakes in the A$3.7 billion Jack Hills iron ore expansion project and the A$5.9 billion Oakajee port and rail project in Western Australia. Once it takes over those projects, it will look to sell stakes to Chinese and South Korean steelmakers, including Posco.Atlas Mining will be on buyers’ radars as it expects to double its annual iron ore production in Western Australia’s Pilbara region to 12 million tonnes this year. The A$2.8 billion company also has a range of undeveloped prospects in Western Australia.Uranium producers and explorers are also in the frame following global miner Rio Tinto’s recent C$654 million (HK$4.87 billion) takeover of Canadian prospector Hathor Exploration, and China Guangdong Nuclear Power’s planned A$2.2 billion bid for Extract Resources.Paladin Energy, producing uranium in Namibia, looks a potentially cheap target as its shares have slumped 70 per cent since Japan’s Fukushima disaster sparked worries over nuclear energy demand, and Perseus Mining, worth A$1.3 billion, looks ripe now that its gold mine in Ghana has begun production.Copper miner OZ Minerals could pounce on Sandfire Resources, in which it already has a 19.9 per cent stake. PanAust, with assets in Asia and Chile, or Discovery Metals with an asset in Botswana, would also fit OZ’s criteria, JPMorgan’s hedge fund sales desk said in a note.The one disappointment for bankers may be the New Hope auction. While New Hope is attractive as it owns a port for exporting its thermal coal, a sale may be complicated by its majority shareholder’s interest.
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