Rough Ride for Mining Industry M&As

(Beijing) - Chinese companies are expected to face more competition for mergers and acquisitions in global mining market as international investors are returning to the market after the financial crisis, according to Mike Elliott, Global Mining & Metals Sector Leader of Ernst & Young.

In 2009, Chinese companies took a major role in global mining M&As, but challenges will grow this year as more investors from countries such as India and Japan will join the competition, said Elliott.

According to Ernst & Young, in the first quarter of 2010, there were a total of 231 global M&As in the mining and finance sector globally, 3 times more than the same period last year. The deals involved US$ 11.6 billion, up 25 percent year-on-year. But US$ 11 billion worth of transactions haven't been completed, higher than the same period in 2009.

Most of the M&As in 2009 concerned assets in developed countries, with Australia, Canada and the U.S. accounting for 44 percent of the total transaction. But in 2010, assets in those countries saw drastic price increases, forcing investors to switch their focus to regions with higher political risks, such as Latin America and Africa.

According to Mike Elliott, despite potential risks, those assets will provide investment value for Chinese investors seeking lower costs.

Marcial Garcia from Ernst & Young's South American mining and metal sector said that the foreign investment value in South America increased 42 percent year-on-year in the first quarter, with the number of transactions rising by 189 percent.

With growing competition in global mining assets, investors will have to offer more support in technology and infrastructure to win M&A deals, said Garcia, adding that advanced capacity in technology, management and operation will grant potential investors more opportunities.

The willingness to invest in local infrastructure projects will improve the position of Chinese enterprises in regions such as South America and Africa, but the lack of advanced technology and management experience will create hurdles, said Garcia.

Moreover, challenges will also rise as many countries have proposed to levy taxes on resource development, which will squeeze returns for mining company investments.