Consolidation trends gather pace

Citigroup is predicting that consolidation trends in the mining sector will gather pace this year.

Mining and metals analysts at the bank estimate that there are potential resources of over Cdn $300 billion for mining mergers and acquisitions, and have named Xstrata, Teck Cominco, Oxiana, Newcrest, Vale and Kazakhmys as the companies most likely to make takeover bids.

Peter Hambro Mining, Peabody Energy, CONSOL Energy, and Sally Malay China Shenhua are other companies that could possibly enter the fray.

Xstrata, the Swiss-based mining group has also been identified as an acquisition target, along with Anglo American, First Quantum, Freeport-McMoRan Copper & Gold, NovaGold, Steel Dynamics and Foundation Coal.

Lonmin, Iluka, Alumina, Equigold and Oxiana are other companies likely to receive approaches.

The analysts noted that a number of recent mining mergers and acquisitions have given companies exposure in new locations, such as India, Russia, Central and West Africa and Kazakhstan.

All these regions contain significant resource potential and should therefore grow in importance as traditional mining countries, such as Australia, Chile and the United States, mature.

The analysts believe the consolidation will be driven by: “free cash flow yield premia, mounting cash balances, dwindling reinvestment opportunities, frictional barriers to new mine capacity, and aggressive forays by sovereign investors.”

They are also forecasting that by 2010, “the sector as a whole will be in a net cash position”.

In addition, the authors of the report warn that: “the scarcity of quality undeveloped copper project should not be underestimated, particularly after the slew of recent transactions by acquisitive majors and strategic Asian buyers.”