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South Africa: Mining Deals
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Business Day (Johannesburg)
EDITORIAL
14 May 2008
Posted to the web 14 May 2008
Johannesburg
FURTHER evidence that SA is far from the action on the global mining stage comes in the latest Ernst & Young survey of mergers and acquisitions in mining and metals. In a record year of deal making, the value of SA's mining deals declined.
And with 20 mergers and acquisitions worth about $6bn, SA accounted for only 3% of the global value of mining deals, which last year hit almost $211bn in 903 deals.
High commodity prices and the search for secure supplies of resources, especially by countries such as China and India, have been among the key drivers of merger and acquisition activity in the sector. Players have also sought to diversify risk and boost their marketing muscle. The largest of last year's deals was Rio Tinto's $43,9bn purchase of aluminium producer Alcan, but there were 36 "mega deals" worth more than $1bn.
SA did make an appearance on that list, with a French acquisition of UraMin and the deal between Royal Bafokeng and Impala Platinum. SA was also rated as the sixth-largest target country and the 10th largest acquiring country. But in dollar terms, activity involving South African companies lagged by far Canada, the US and the UK.
It's not clear what the outlook is for SA. The decline in the value of merger and acquisition activity here last year was off the high base of 2006, when iron producer Kumba was unbundled. But one good sign is that there was quite lively activity on the exploration front, with major mining companies buying juniors that had developed new mineral resources, under new mining licences issued since 2004. This bodes well for the expansion of the mining industry in coming years.
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And apart from the wheeling and dealing, what's important is that new investment in the mining industry has been rising quite steeply in real terms in the past two years, as the industry expands existing ore bodies and develops new ones. Reserve Bank figures show fixed investment in mining and quarrying increased a real 25% last year. That's slower than the 42% recorded in the previous year but still a big turnaround compared with 2004 and 2005, when investment in the industry was on a steep downward path.
The question is whether the environment for mining industry investment will continue to be favourable. The capping of mining royalty rates announced yesterday by the treasury is definitely a good sign, indicating again that the government is willing to address the industry's concerns about the royalties. When the treasury switched, in effect, from a sales-based tax to a profit-based one, it did not anticipate that soaring commodity prices would mean that the new formula it proposed would result in even higher rates than under the old formula. That has now been addressed, allaying concerns about the impact of the royalties on the industry.
The big uncertainty though is the impact of the power crisis on the industry's prospects in the longer term. Though mining output declined more than 8% in the first quarter because of the power crisis, mining companies are now relatively upbeat about their ability to restore production using less electricity. But they have to be guaranteed of reliable power supplies in coming years if they are to invest in expanding their mines -- and the jury is still out on that one.
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