July 2, 2010 / 10:47 AM / 9 years ago

Australia mining tax deal seen unlocking M&A

SYDNEY (Reuters) - The Australian government’s compromise mining tax deal is expected to unlock a stalled pipeline of mergers and acquisitions in the booming resources sector, although some political hurdles for big deals remain.

The tax agreement announced on Friday means work could resume on billions of dollars worth of expansion, acquisitions and capital raisings, which bankers say have been shelved by uncertainty over Australia’s future tax regime for months.

While dealmakers were already crunching the numbers on some suspended transactions Friday, many acquisition strategies could stay on ice until after a likely Australian election this year and the new laws are passed by parliament.

Deals in sectors excluded from the new tax regime, including gold, nickel and copper, were also expected to flourish.

“When you went through the pipeline in December it looked fantastic and then the RSPT (resources super profits tax) came in and killed that pipeline stone dead. I don’t think everything will start moving as of today,” one investment banker said.

“For the coal miners where everything was put on hold things will slowly getting moving again in the next month or two.”

There were $3.3 billion worth of deals targeting Australian companies in the metals and mining sector in the first half of 2010, according to Thomson Reuters data.

This was down from $63.8 billion in the first half of 2009, although that data included BHP Billiton (BHP.AX) and Rio Tinto’s (RIO.AX) iron ore joint venture.

There has been speculation U.S. miner Peabody Energy (BTU.N) might come back for another tilt at Australian miner Macarthur Coal MCC.AX once the tax dispute was resolved.

Peabody walked away after Macarthur rejected Peabody’s fourth bid in May, ending a $3.5 billion bidding war for the miner. Peabody reduced its previous offer, blaming the tax.

Macarthur shares rose on Thursday after news broke a tax deal was imminent. However, the stock cooled on Friday, falling 1.5 percent.

Deals in sectors excluded from the new tax regime, including gold, nickel and copper, were also expected to flourish.

“For large parts of the mining sector for them the tax is dead and they can move forward,” Ernst & Young Global Mining & Metals Sector Leader Mike Elliott told Reuters.

“The removal of large amounts of that uncertainty now means

that some of those deals that have lived in a state of suspension ... could be reactivated.”

LIHIR DEAL

Australia’s Newcrest Mining (NCM.AX) expects to complete an $8 billion deal to buy rival Lihir Gold LGL.AX by September this year. The tax debate had little impact on that deal as Lihir derives the bulk of its production from Papua New Guinea.

However, bankers said Friday the agreement reached Friday made it less likely that AngloGold Shanti (ANGJ.J), Barrick Gold (ABX.TO) and Newmont Mining Corp (NEM.N) would come in with rival bids.

This was due to less favorable exchange rates for North American buyers and coal prices compared to a month, along with the removal of a tax threat for gold miners.

“Those things have put the ball firmly back in Newcrest’s sight. If a third party proposal had a 50 per cent probability a few weeks it would probably have a 10 percent probability today,” one person familiar with the deal told Reuters.

The amount suitors were willing to pay for Australian assets could also rise once the uncertainty was removed, bankers said.

“If there is uncertainty they have to factor that into the valuation. If you get a more bullish market people might be a little more generous in the way they discount those risks,” said another banker who declined to be named as he was not authorized to speak to the media.

However, others said the mining tax impact had been used as an excuse by some bidders as most deals had such long lead times. (Editing by Valerie Lee)

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