LONDON (Reuters) - Merger and acquisitions activity in the global mining sector is expected to accelerate in 2011, fueled by strong commodity prices and repaired balance sheets, advisory and accountancy firm Ernst & Young said on Wednesday.
Early signs that bank lending may recover this year will give a further boost to the level of deals this year, it said.
Total M&A deal value surged 89 percent to $113.7 billion last year, with a jump in cross-border deals in emerging markets, even with limited access to debt funding.
"As de-leveraged companies compete for shrinking resources, we expect merger and acquisition activity to continue to pick up, characterized by larger deals and bolt-on acquisitions," said Michael Lynch-Bell, Global Mining & Metals Transactions Advisory Leader at Ernst & Young.
He told Reuters that he also expects a stronger recovery in initial public offerings this year.
"We are certainly busier than we've been for a long time in terms of preparing companies for IPO: it's iron ore, it's coal, it's platinum," he said.
He expects London to continue to have the edge over rival exchanges when it comes to primary listings.
Mining and metals companies could return this year to earnings levels close to the 2007 peak, he said.
BHP Billiton (BHP.AX)(BLT.L) and Rio Tinto (RIO.AX) (RIO.L), flush with cash as demand from China leads a commodity price boom, announced billion dollar buybacks and strong expansion plans alongside recent results.
However, BHP's Chief Executive Marius Kloppers said last week that the commodity cycle had raised price expectations for potential assets.
"That makes it more difficult to do a deal, it almost widens the gap between the seller and the acquirer," said Lynch-Bell, adding that mergers or the partial sale of projects could be more attractive.
Miners are more cautious over debt levels this time around, he noted, so they can better manage the downside if prices fall.
Resource-hungry companies have started taking on more political risk by venturing into riskier regions such as West Africa and the Asian Pacific, specifically Papua New Guinea and Mongolia, and that this trend is expected to continue, he said.
"If you are looking for new projects, new assets then you have to go to those countries that are perceived to be riskier," he told Reuters.
Even war-torn countries such as Afghanistan have attracted attention, mainly from Chinese and Indian firms, interested in developing large copper and iron ore deposits.
Lynch-Bell said commodities such as copper, coal, and iron ore will continue to be a focus for M&A deals, although he said there will be some wariness over gold as potential buyers try to asses if gold prices are at the top of the market. <TOP/MTL>
Canada, Australia and Brazil led deal activity in 2010 while acquisitions from developing countries accounted for about 43 percent of the total.
(Editing by Hans Peters)