* Deal value, volume down sharply against last year
* Excluding Glencore Xstrata, completed deals down a third
By Sonali Paul and Clara Ferreira-Marques
MELBOURNE/LONDON, Sept 12 Bankers trying to move
a mountain of mining assets for sale are being tested to the
limit by unreliable buyers, stubborn sellers and a widening gap
between them that has already caused billions of dollars' worth
of deals to be shelved.
Global mining firms are under pressure from investors to
slim down after boom-year expansion ended badly for many of
them. However, with demand from China's steel mills holding up
the iron ore price, big miners are unwilling to sell assets
cheap - unwanted or no - while potential buyers want a bargain.
The result has been a sharp dip in the value of deals
announced in the metals and mining sector so far this year -
just over $64 billion, roughly half the value of announced deals
at the same time last year, according to Thomson Reuters data.
The number of deals is down by more than a quarter.
"There is some pressure to put assets into the market, but
those that have been coming down the pipe so far have been more
difficult for buyers to get comfortable with," Julian Vickers,
co-head of the global natural resources group at Barclays said.
Rio Tinto , for example, has been trying to
sell more than $30 billion worth of assets from diamonds to iron
ore to slash costs, cut debt and focus on their best assets.
So far, miners have succeeded in offloading copper, gold and
nickel mines, most either in developed countries or in
commodities where questions over supply linger. However sales of
aluminium, diamonds, and coal assets, with fewer specialised
buyers and in some cases a weak market, have been scrapped for
lack of offers, or disappointingly low ones.
The result for bankers who have long profited from their
close relationships with mega miners is that they have
sacrificed manpower for auctions that have dragged on for over a
year. Many are now taking on deals they know will be tough or
impossible to seal, just to preserve client relationships.
"People are throwing themselves at fairly difficult mandates
for nothing," said Robert Dunlop, global head of natural
resources at Macquarie Capital.
If not for the $46 billion takeover of Xstrata by
commodities trader Glencore announced last year and
completed in May, the value of deals completed in 2013 would
have dropped over a third to $50 billion.
For bankers advising potential buyers, the environment is
just as tough. Not only do they face the challenge of sifting
serious bidders from bargain hunters, from those who may be
ultimately too wary to seal any deal, they are also negotiating
in an environment where the price of iron ore has held up above
$130 a tonne - meaning the biggest sellers aren't desperate.
"(Major miners) are not forced sellers, they are trying to
realise value," said Jason Burkitt, UK mining leader at PwC.
Traditional private equity funds dipping their toe in the
water are moving forward only very slowly, while industry buyers
are finding it tough to raise equity funding from investors wary
after $75 billion of writedowns across the mining sector in the
past two years. Even Chinese buyers - the go-to solution in many
auctions - have been cautious.
Ernst & Young forecasts the standoff to continue for at
least another two years.
"It's not about availability of assets or the availability
of capital, it's about bridging the gap on price expectations,"
said Mike Elliott, global mining and metals leader at Ernst &
He suggested that bankers would have to start working extra
layers into deals - such as contingency payments tied to
commodity price moves - in order to get things moving.
SUFFERING FOR RIO
This year has been most painful for bankers close to world
no.3 miner Rio Tinto, which over the summer pulled the sale of
its diamonds and Pacific Aluminium units - valued on its books
at $1.3 billion and less than $1.7 billion respectively - after
auctions that dragged on for more than a year.
Credit Suisse, no.4 on the league tables for
announced metals and mining deals this year, advised on both of
those abandoned auctions and is also advising on another that
bankers expect to be shelved next - the sale of Rio's majority
stake in Iron Ore Company of Canada (IOC), for which the miner
wants more than $3.5 billion. Canadian Imperial Bank of Commerce
(CIBC) is also advising on the IOC sale.
Rio is also expected to pull the sale of its 29 percent
stake in Coal & Allied in Australia, in what would be a painful
move for Deutsche Bank, which has been advising it on
the deal that had been valued at $1.7 billion.
Morgan Stanley missed out on potential fees from a float of
Rio's diamonds business. But because it advised Glencore
on the takeover of Xstrata and Dubai Aluminium (Dubal)
on the $15 billion merger of the Dubai and Abu Dhabi state
aluminium producers, it tops the global league tables for
announced and completed metals and mining deals this year.
Macquarie, notably absent from the top 20 advisers on
announced and completed deals, worked for more than eight months
advising Fortescue Metals Group on the sale of a
minority stake in its port and rail unit, with no deal in sight.
It's a situation bankers are still willing to go along with
in the hopes of better times ahead with major clients.
"When you are dealing with the big companies, you have to be
careful about trying to cherry-pick," one senior industry banker
said. "If you only want the great stuff, you won't last long."