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10 New Golds

contrarian
strategy
14 Smart money mining
rock bottom valuations
Gareth Turner, Head of
Randall Oliphant, Mining & Metals Private Equity,
Executive Chairman and Apollo Global Management
Director, New Gold Inc.

Deals in
the dumps
Global Mining Deals
Mid-Year Report
September 2013

www.pwc.com/ca/miningdeals
Authors: Researcher:

Amy Hogan Madison Pearlstein


+1 416 941 8221
amy.hogan@ca.pwc.com

Stephen Mullowney
+1 416 687 8511
stephen.r.mullowney@ca.pwc.com

John Nyholt
+1 416 815 5086
john.nyholt@ca.pwc.com

* A special thanks to writer/editor, Brenda Bouw

B Global Mining Deals


Contents
Executive summary 2

H1 2013 deal analysis 4

Analysis and commentary 7

Top 10 Global Mining Deals in 2013 8


Russian oligarchs switch it up at Polyus Gold 9

FEATURE: New Golds contrarian strategy


New Gold: Randall Oliphant 10

Deal outlook for H2 2013 12

FEATURE: Smart money mining rock bottom valuations


Apollo Global Management: Gareth Turner 14

Mining Excellence at PwC 16

PwC 1
Executive summary
Downturn tests miners
John Gravelle, PwC Global Mining Leader

Despite a recent prolonged stretch of growth, the mining industry


is fundamentally a cyclical business. It is especially during the
downturns that companies are forced to remember this reality,
and adjust to the risks.
So far in 2013, there have been a number of reminders from
falling commodity and equity prices to multi-billion-dollar write
downs across the sector. Neither golds reputation as a haven nor
Chinas steady hunger for commodities have been able to hold
back the bears, as the global economy continues to try to find a
solid footing.
Theres been a confidence crisis with big mining companies
because they havent been able to deliver the levels of profitability
shareholders have grown used to in recent years, even after the
global finance crisis, says John Gravelle, PwCs global Mining
leader. The substantial write offs weve seen from many of the
big producers around the world have caused investors to leave
the market and move on to other things.
The current volatility in the mining sector has had a noticeable
impact on merger and acquisition (M&A) activity in 2013. While
some companies have taken advantage of lower prices to pick up
assets, the number of deals across the global mining sector fell by
31% in the first half of 2013 compared to the same time last year,
which was already considered to be a slow time for deal activity.
While majors continue to invest in their operations, projects have
been deferred and capital spending has been curbed.
The real challenge in the current M&A market is finding buyers.
Juniors are not seeing the same level of takeovers theyve come to
expect at a certain stage in their growth, while majors are mostly
looking to divest assets, not pick up more. Meantime, mid-tier
consolidation interest has waned due to tight financing conditions
and fewer buyers overall.
What we have seen so far in 2013 is somewhat of an anomaly in
the industry, skewing results for what is shaping up to be a
sluggish year in mining M&A.
Equities across the sector have fallen by between about 20% and
30% so far this year, which has also impacted the size of deals.
Deal value fell 70% to US$22.9 billion between January and June
2013 versus the same period last year, which was a period
highlighted by Glencore International plcs US$54-billion
purchase of Xstrata plc (GlenX), the largest-ever takeover in the
sector. Even without the blockbuster GlenX agreement, deal
values were down 21% for the first half of 2013 as compared with
a year earlier. Gold and copper continued to be the most active for
buyers and sellers in the first half of 2013. That trend is expected
to continue as depressed prices create opportunities for companies
that can afford to buy, and may force others to sell.

2 Global Mining Deals


One shift so far in 2013, as compared to its stake in the Ekati diamond mine in Europe, as opposed to Asia. You may not
previous years, is in the geography Canadas Northwest Territories, as well as see as many of the write downs relating to
behind some of the top deals, and whos its Pinto Valley copper mine in Arizona. companies in a country such as China,
making them. Unlike in previous years, Capstone Mining Corp. bought Pinto says Ken Su, lead Mining partner at PwC
when deals were dominated by players Valley for US$650-million, and China. Many assets are held by state-
in countries such as Australia and acknowledged it was a rare opportunity. owned or private companies which do not
Canada, top M&A activity so far this The majors dont sell assets very often, need to disclose such information.
year is coming from former Soviet Union Capstone CEO Darren Pylot told The These write downs have contributed to
states, namely Russia and Kazakhstan. Financial Post. Ive been CEO of Capstone the current confidence crisis in the
Russia accounted for about a quarter of for over 10 years, and Ive seen more assets mining industry. As companies work
deal value by geography in the first half for sale in this six-month period than I had through the impacts of rising costs and
of 2013, followed by Kazakhstan. The in the [prior] 10-year period. volatile markets, deal activity is expected
United States rounded out the top three. GlenX is also looking to sell its Las to remain muted for the remainder of
Thats a new lineup compared to last Bambas copper project in Peru, as a 2013. Expect to see more sales of non-
year when Canada, the United Kingdom, condition of approval for its merger core assets from the major mining
Switzerland (thanks to GlenX) and imposed by Chinas Ministry of companies, and more interest from sellers
China dominated the top spots for deal Commerce. GlenX said it has received including state-owned enterprises (SOEs)
activity by geography. Deals by Russian numerous expressions of interest, from a and potentially private equity, which is
and Kazakhstan oligarchs led M&A diverse group of international mining showing an increasing interest in the
activity for the first half of 2013. Two companies and potential investors. sector given todays lower valuations.
Russian billionaires are behind the top Companies will also continue to get
deal, which was for a stake in Polyus These transactions and pending sales
follow a surge in acquisitions over the past creative in how they fund the transactions
Gold International Ltd., the countrys through joint ventures and royalty and
largest gold miner, while Kazakhstan several years. Times have changed.
Thanks to rising production and operating streaming agreements, for example, given
billionaires were behind the second and the continued uncertainty in equity and
third-largest transactions for the costs and slumping values for
commodities amid slower global economic debt markets.
January-to-June period.
growth, many of the worlds major mining Due to the cautious climate in the
Meanwhile, the mining industrys major companies have taken significant write mining sector right now, its hard to see
public companies are taking different downs over the past couple of quarters. the return of mega deals like GlenX in
positions on the M&A field. Many have Some of these write downs have been due 2012, or even large hostile bids such as
switched from buyers to sellers as they try to premium prices paid for deals between such as BHPs unsuccessful play for
to reduce debt, raise capital and improve 2007 and 2012. Gold miners alone have Potash Corp. of Saskatchewan Inc. in
both balance sheets and shareholder taken write downs totaling about 2010. Mining investors arent looking for
returns. Rio Tinto plc has its for sale sign US$25billion in the second and third companies to take big risks. Right now,
up on a number of assets to help pay down quarters of 2013. It should be noted that theyre looking for signs of a discernable
about US$19 billion in net debt. In June, many of these write downs have been turnaround in performance.
Rio sold its Michigan-based Eagle nickel reported mainly by companies in North,
and copper project to Lundin Mining Corp. South and Central America as well as
for US$325 million. In July, it announced
the sale of its 80% stake in the Northparkes
copper mine in Australia to a Chinese
buyer. But selling hasnt been easy. Rio
cancelled the proposed sale of both its
diamonds business as well Pacific
Aluminium after being unable to find
buyers or investors willing to pay the
required price. However, Rio continues to
pursue a buyer for its 59% interest in Iron
Ore Company of Canada, according to
media reports.
Other miners selling off assets include BHP
Billiton Ltd., which unloaded its 15%
interest in the Jimblebar iron ore mine in
Australia in the first half of 2013. The
worlds largest mining company also sold

PwC 3
H1 2013 deal analysis
Big losses lead to M&A reluctance

The billions of dollars in write Deal volume and value: 1H 2013 The three largest deals for the first half of
2013 involved the sale of portions of
downs across the mining sector, light on deal making
companies and not complete takeovers.
alongside market uncertainty and There were 649 deals in the first six They include: the US$3.62 billion two
volatile commodity prices, led to months of 2013, which is down 31% from Russian oligarchs paid for the 37.8% stake
a slowdown in M&A activity from the same period last year, when there were in Polyus Gold; the US$4.6 billion paid by
a total of 940 transactions. Both are three founding shareholders of Eurasian
January to June 2013. While 2012 considerably lower than the 1,371
Natural Resources Corp. for a 26% share;
was considered a slow year for transactions in the first six months of 2011, and the $1.65 billion paid by National
mining M&A, following a very which was one of the busiest half years for Welfare Fund Samruk-Kazyna for a 29%
busy 2011, this year is proving to M&A activity in the mining sectors history. stake in Kazzinc from Verny Capital.
be even tougher for deal making. Total deal volume from January to June When all transactions for the half-year
2013 was US$22.9 billion, down 70% from period are tallied, the average value is
Investors are finding it difficult a year earlier when the US$54 billion US$52.2 million. That is only slightly
to attract enough financing to GlenX deal is factored in. Without GlenX, higher than the average value of
fund growth and are nervous the average deal value was still 21% lower US$47million for the same period in
about overpaying for assets. At the at $26 billion in the first half of 2013 as 2012, excluding GlenX, which largely
same time, sellers are reluctant to compared with the same time last year. skews any comparisons.
approve transactions when their While both deal value and volume were
down significantly in the first half of 2013
valuations are at multi-year lows.
compared with the same period in 2012,
the stratification of deal sizes in
600 80,000
percentage terms was largely unchanged.
70,000 There were 5 deals valued at more than
500 US$1 billion in the first half of 2013, as
60,000 compared with 8 in the same period in
400 2012 and 11 in 2011. Three deals in the
Value (US$mm)

50,000 first half of 2013 were valued between


Volume

US$500 million and US$1billion, which


300 40,000
compares to 2 in 2012 and 12 in 2011. As
30,000 in previous years, most deals were valued
200 below US$500 million. Between January
20,000 and June 2013 there were 24 deals
100 between US$100 million and US$500
10,000
million, compared with 36 in 2012 and
0 0
42 in 2011. The number of smaller deals
Q12012 Q22012 Q32012 Q42012 Q12013 Q22013 valued at less than US$100million
dropped to 341 for the first half of 2012,
down from 394 in 2012 and down further
from 591 in 2011.
4 Global Mining Deals
Deals by commodity: Gold and
copper most attractive for M&A
Lower commodity prices appeared to be
the catalyst behind what few deals were
done in the first half of 2013, as the
companies able to acquire assets
lookedcarefully for mines at todays
discount prices.
Producers were particularly interested in
buying and selling gold and copper in the
first half of 2013, which was similar to By volume of M&A transactions for 2012 for these companies that produce
what took place during the same period the first half of 2013, gold was again at steel-making ingredients. A drop in the
in 2012. In both periods, gold and copper the top with 33% representation, versus prices of coal and iron ore is to blame for
accounted for nearly half of the 29% for the same period a year earlier. the waning interest. That said, it has
transactions in the sector by both value Copper came in at 14%, which was the opened doors for some buyers. The
and volume. Acquisition targets are same as the first half of 2012. Diversified largest coal deal in the first part of 2013
shifting, says Ken Su, lead Mining metals accounted for about 22% of deals was Indias Jindal Steel & Power Ltd.s
partner at PwC China. Where iron ore by volume, versus 8% last year, US$553-million offer for Gujarat NRE
and coal were the focus before, gold and excluding GlenX. Coking Coal Ltd. as part of its plan to
copper are the hot commodities now. increase production.
Alongside the Polyus deal, another
For the first half of 2013, gold was the notable gold transaction in the first half While not a standout on the list of top
leader by value, representing 32% of of the year was Hecla Mining Co.s mining transactions, uranium was also
transactions from January to June. That US$775-million takeover of Aurizon in play in the first half of 2013. Russias
compares with 26% for the first half of Mines Ltd., beating out hostile bidder state uranium firm ARMZ Uranium
2012. Copper accounted for 11% of deals Alamos Gold Inc. There was also New Holding Co. (JSC Atomredmetzoloto)
by value, down from 23% a year earlier. Gold Inc.s takeover of exploration made a bid to take Canadas Uranium
These comparisons exclude the GlenX company Rainy River Resources Ltd., in One Inc. private in a US$1.3 billion deal.
deal, which falls into the diversified adeal valued at about US$310 million. The deal comes as uranium prices
metal ores category. Diversified metals, struggle to recover from the 2011
After dominating deal activity in 2011,
which include such commodities as earthquake and tsunami in Japan, which
transactions in the coal and iron ore
nickel and zinc, represented about 25% created distrust for nuclear power and in
space continued to fall by the wayside in
of M&A by value for the first half of turn a drop in prices and valuations of
2013. That followed a similarly slow
2013, compared to 6% in 2012, companies that produce it.
excluding GlenX.
Diversified
metal ores 25 Gold 33
Others 30
Others 27

Platinum ores 4
Gold 32
Copper 11
Diversified Copper 14
metal ores 22

PwC 5
Deals by geography: Russia flexes Kazakhstan accounted for 27% of the Russias top ranking was due largely to
deals from January to June 2013, followed the decision by Mikhail Prokhorov, one
its M&A muscle, Kazakhstan steps
by Russia at 23% and the United States at of Russias wealthiest oligarchs, to sell
further into spotlight 10%, with Canada and China representing his entire 37.8% stake in Polyus to two
The former Soviet Union isnt usually top 6% and 5% respectively. For the first half billionaire bidders from the same
of mind when it comes to deal making in of 2012, Canada was the busiest place for country. Kazakhstan had the second and
the mining sector. However, Russia and M&A with 16% of transactions (not third-largest deals, and ranked second
Kazakhstan surprisingly took the top two including the GlenX deal), followed by the highest on the list thanks to the
spots for most active M&A value by United Kingdom at 14% China with 13%, US$4.6billion buyout of Eurasian
geography in the first half of 2013. Chile at 11% and the United States at 8%. Natural Resources Corp. by the three
Canada and China, which took the top founders of the company. Another top
spots last year (excluding GlenX), took a deal out of Kazakhstan was state-owned
few steps back in the rankings. National Welfare Fund Samruk-Kazynas
US$1.65billion bid for a 29% stake in
Australia 2
Kazzinc from Verny Capital. Samruk-
Canada 6 Kazyna, Kazakhstans sovereign wealth
Other 26 China 5 fund, bought into the zinc producer to
add to its mining holdings in the
country. Analysts told Reuters at the
time the deal was struck in February
Kazakhstan 27
2013 that it was a strategic investment
and a smaller stake wouldnt have been
of interest to the Kazak government.
United States 10

Russia 23

6 Global Mining Deals


Analysis and commentary

While 2013 has been an exceptionally slow Buyers will continue to team up to pick
year so far in M&A, deals are getting done. up assets being sold off by miners,
Of course, they look a lot different than including the three taking over Barricks
some of the mega transactions from the energy assets that were put on the block
recent past. What is more, traditional this spring. Venturion Oil, Whitecap
takeovers of entire companies are taking a Resources and Canadian Natural
back seat to joint ventures, spinoffs and the Resources are together paying $455
purchase of company stakes by sovereign million for the Alberta oil business as
wealth funds. There are also more private Barrick sheds non-core assets. Other
equity funds expressing interest in mining joint-effort examples include the various
assets in recent months. parties that came together to carry out
Private equity is taking a particularly the Polyus Gold and ENRC deals in the
hard look at mining assets. According to first six months of the year.
various media reports, funds are looking Royalty and streaming agreements havent
for long-life, low-cost projects and want proven as popular so far in 2013 as they
to pick them up at lower prices, which were in 2012, but companies continue to
todays market offers. The difference look at the arrangement as a way to
between private equity and mining finance future growth. Alternative
companies is they have more money to financing will continue to be a trend in the
spend, and in some cases without the mining sector in the near future as
same level of public scrutiny by companies work through the downturn in
shareholders. As miners line up to sell off the cycle and prepare for the next phase,
operations to reduce debt and raise which they hope will be an upward swing.
capital, funds are circling assets around
the globe to see if now is the time to jump
in. High-profile private equity firms such
as Blackstone Group LP, Apollo Global
Management Inc., The Carlyle Group LP
and Kohlberg Kravis Roberts & Co. have
all been cited as potential bidders for a
range of assets put on the market
recently. The interest highlights how
attractive mining investments are today
to those who have money to spend.

PwC 7
Top 10 Global Mining Deals in 2013
(by value, $US million, historical rate)

Total gross Target stock


Announced Target/issuer transaction Target Acquirer Transaction premium one
date Target/issuer headquarters value ($USmm) resource type Acquirer headquarters status Month prior (%)
02-22-2013 Polyus Gold United Kingdom 3,616 Gold Zelimkhan Mutsoev Russia Closed 3.79
International Limited andGavril Yushvaev
05-17-2013 Eurasian Natural United Kingdom 4,600 Diversified Samruk-Kazyna National Kazakhstan Announced 5.89
Resources Corp Plc Metal Ores Welfare Fund JSC;
Alexander Machkevitch;
Alijan Ibragimov;
Patokh Chodiev;
The State Property and
Privatisation Committee
of the Ministry of Finance
of the Republic of
Kazakhstan
02-07-2013 Kazzinc Ltd. Switzerland 1,650 Copper Ores Samruk-Kazyna National Kazakhstan Closed
Welfare Fund JSC
06-21-2013 BHP Iron Ore Australia 1,500 Iron Ores ITOCHU Corporation Japan Announced
(Jimblebar) Pty Ltd. andMitsui & Co. Ltd.
01-14-2013 Uranium One Inc. Canada 1,351 Uranium Ores ARMZ Uranium Russia Announced
HoldingCo.
01-11-2013 Zimbabwe Platinum South Africa 971 Platinum Ores National Indigenisation Zimbabwe Announced
Mines (Private) andEconomic
Limited Empowerment Fund

03-04-2013 Aurizon Mines Ltd. Canada 775 Gold Hecla Mining Co. United States Closed 2.87
01-31-2013 Gujarat NRE Coking India 553 Diversified Jindal Steel & Power Ltd. India Announced
Coal Limited Metals and
Mining
06-28-2013 Canyon Fuel United States 435 Bituminous Bowie Resources United States Announced
Company, LLC Coal And Partners,LLC
Lignite Mining
05-29-2013 Goldbell Holdings British Virgin Islands 412 Gold Newtree Group Macau Announced
Limited HoldingsLimited

8 Global Mining Deals


Russian oligarchs switch it up
at Polyus Gold
The largest mining deal in the first half of 2013 was the sale of Mikhail
Prokhorovs 37.8% stake in Polyus Gold International Ltd. for $3.6 billion to
fellow Russian billionaires, Zelimkhan Mutsoyev and Gavril Yushvaev.

Polyus Gold is the largest gold producer in Russia and one of the top 10 gold
miners globally in terms of production, with more than 83 million ounces of
proven and probable reserves. Its principal operations are located in eastern
Russia, with 5 operating mines and several advanced development projects.

Mr. Prokhorov, through his holding company Onexim Group, indicated in


September 2012 that he was considering the sale of all or part of his stake in
Polyus Gold. Speculation on his rationale for exiting at this time included
growing concerns over mine delays, and also possibly connected to his
unsuccessful run for the presidency of Russia earlier in2012.

Regardless of the motivation, the sale of his interest still leaves 40.2% of the
ownership of Polyus Gold with yet another Russian billionaire oligarch,
Suleiman Kerimov. Interestingly, one of the new shareholders in Polyus Gold,
Mr. Mutsoyev, is a partner with Mr. Kerimov in potash giant, Uralkali. The
remaining 22% of the company are publicly held, through its listing on the
London Stock Exchange.

At the time of the deal, analysts expected the move to lead to higher dividends.

In the past there were two key shareholders who had differing views on
strategy. Now the strategy will be driven by Mr. Kerimov alone, so Polyus
can start paying higher dividends, said UBS metals and mining analyst
Alexei Morozov.

This view was echoed by Barry Ehrlich, metals and mining senior analyst of
Moscow-based Alfa Bank who said: The transaction was likely to be heavily
leveraged so the new shareholders priority now is to boost cash flow and
dividends to reduce that leverage.

These comments were obviously made before the price of gold fell by more than
$300 per ounce in the first two weeks of April, with further declines thereafter.
That will likely make increasing dividends in the short term quite challenging.

PwC 9
New Golds contrarian strategy

Randall Oliphant
Executive Chairman and Director
New Gold Inc.

10 Global Mining Deals


If it were not for the billions of dollars in
write-downs being announced by miners
around the world lately, the M&A bender
of 2011 would seem like a distant memory.
Mining companies acquired too much in
2011, says Randall Oliphant, Executive
Chairman and Director of New Gold Inc.
There was an acquisition binge
valuations were high, gold prices were at
peak levels and everybody went out
seeking more growth with the thought,
bigger is better.
It has been quiet ever since. Deal activity in
the sector has fallen 31% in the first half of
2013, after falling 30% in all of 2012.
Companies today are more cautious, and
have less money to spend.
New Gold is one of the exceptions. Its
$310million acquisition of Rainy River
Resources Ltd. surprised the market given If we see something compelling we are Over the past year, investors have fled the
many of its industry peers are busy ready to move, but if we dont acquire mining sector and while companies are
divesting assets. anything for five years we are perfectly making changes to their business strategy,
comfortable with that too, he says. a rebirth of investment interest isnt
Randall believes New Golds timing is
While austerity is the industry buzzword, expected any time soon. Randall believes
right, while the rest of the industry is off.
as miners reduce capital expenditures, cut two things need to happen before investors
Our industry is doing things at the regain interest in gold mining stocks: gold
dividends and hold off on acquisitions,
wrong time, he says. It is buying assets price needs to rise and the industry needs
Randall believes the situation will become
when they are expensive and now that to rebuild its credibility by delivering on
more acute in 2014.
things are less expensive our peers are promises of greater shareholder returns.
trying to divest. I think we could see more hostile or
forced deals as shareholders look for In the meantime, New Gold is going to
While he is frustrated by the impact such carry on with its contrary strategy.
greater returns, Randall says.
decisions are having on the industrys
He also expects additional pressure will We know what generates strong returns
credibility with investors, New Gold is
be placed on boards and management long-term, says Randall, pointing to New
looking at this period of lower prices and
teams if they dont take action to improve Golds status as an intermediate company
valuations as an opportunity for the
their performance, despite volatile with below average cost of production, low
company to find future growth.
market conditions. political risk and strong production upside.
That said, given the companys
Shareholders arent as patient and are That is exactly what we are aiming at,
reputation as having one of the best
calling for change, says Randall. says Randall.
growth profiles in the industry, Randall
says New Gold does not feel pressured to
make any hasty purchases.

PwC 11
Deal outlook for H2 2013

The renewed austerity in the mining sector assets at todays lower prices. An example
has led to more measured M&A activity. is New Golds $310 million purchase of
Companies are being held back by a lack of Rainy River Resources in late May. I think
debt and equity financing and lower we did, as an industry, way too many
margins as a result of a drop in commodity acquisitions in 2011 when things were
prices. Theres also a fear of overpaying for expensive, and were not doing nearly
certain assetsa mistake history shows enough now when things are inexpensive,
was made by many of the big miners in the New Gold executive chairman Randall
recent past. Oliphant told the Financial Post.
To regain investor confidence, the industry The pace of Chinese demand for
must begin to show that it can deliver resources is also expected to continue to
increased profits and cash flow in the drive M&A. While China seems to have
coming quarters. To get there, some miners shifted its focus more towards consumer
will continue selling non-core assets to spending, the worlds largest consumer of
help reduce debt and raise capital. metals is still hungry. Even though
Companies with cash are expected to economic growth has fallen from years in
capitalize on todays low valuations and try the double-digits, growth between 7%
to purchase assets at discount prices. Given and 8% is still significant and comes from
tight financing conditions, buyers will also a much bigger economic base now than in
continue to seek creative ways to strike the past. This steady growth will continue
deals. As this alternative investment trend to serve as the backbone of demand for a
continues, expect to see more private wide range of resources such as copper,
money coming into the market, as well as coal and iron ore. Theres also strong
joint ventures, royalty and streaming growth coming from such emerging
agreements and Asian-based SOEs. nations as India and Brazil, which gives
Junior mining companies will continue to mining companies reason to continue
be challenged to raise money. That is developing their longer-term plans.
expected to result in more takeovers of Despite what were seeing with equity
smaller companies later this year and into prices today, the demand story is still
2014. A sale to a larger player may be the there, particularly from countries such as
only way for many juniors to generate China, India and Brazil, said John
some shareholder value, or even avoid Gravelle, PwCs global mining leader.
financial collapse. While many large and We just need to get over this confidence
medium-sized mining companies have crisis to be able to move forward.
vowed to stay out of the M&A game for a Investors need to see signs of a
while to satisfy frustrated shareholders, turnaround before they can get
some may see a rare opportunity to buy comfortable with the industry again.

12 Global Mining Deals


In the meantime, its up to mining Australian unit of Chinas Zijin Mining regain interest given lower prices. Potash is
companies to demonstrate that they can Group Corp. said it was considering another sector that could see an increase in
adjust to the cyclical nature of the bidding for three gold mines in Australia M&A activity now that one of the two
industry. That includes responding put on the block by Barrick. During the largest cartels is being dismantled,
appropriately to rising costs and volatile same month, Qixing Group Company Ltd.s following Russian potash miner Uralkalis
commodity prices by cutting costs, Shenzhen-listed subsidiary Shandong decision to walk away from its marketing
delaying projects and selling off assets Qixing Iron Co. agreed to a conditional partnership with Belarusian Potash Corp.
where necessary. Many will also need to $140 million deal to acquire the assets of That is expected to increase competition in
seek alternative sources of financing. Debt Australia-listed Stonewall Resources Ltd. the sector, and in turn lower prices.
was popular last year, and joint ventures, Miner MMG, majority owned by China Uralkali CEO Vladislav Baumgertner told
but those arent as readily available today. Minmetals Corp. confirmed recently its The Wall Street Journal in August that his
Miners will need to look at selling non- also on the hunt for acquisitions. We can companys move could lead to a round of
core assets and hold off on any big get the funding but we have to be able to consolidation in the potash sector. He also
acquisitions. Instead, they will need to demonstrate that what we are looking at to told the Vedomosti newspaper that
focus on the projects they have and buy has good economic returns, MMG consolidation would be a logical step
operate them with a strong focus on the CEO Andrew Michelmore told investors in when the price falls to a level of marginal
bottom line. a conference call in July 2013. We dont producers.
This industry realignment is expected to want to blow that by doing something silly For the rest of 2013 and into 2014, M&A in
propel M&A in the near term. Given how just for the sake of doing an acquisition. the mining industry is expected to remain
financially strapped many mining Added Michelmore, We are seen as one of lethargic. However, deals will come
companies are right now, more M&A those that are contrarian: we have been together for companies that have enough
activity is anticipated to come from private focusing on costs but we are actually out cash to seize the opportunity and as their
players, including sovereign wealth funds. there looking for an opportunity to buy peers unload assets that are no longer
That includes potentially increased interest We are like a duck on water, serene on top, considered a fit in the renewed cost-
in assets purchased from resource-hungry peddling away madly underneath, looking cutting environment. One thing is certain;
nations such as China and India, or for that opportunity. the deals that do get done over the next
perhaps even Russia and Kazakhstan. As Copper and gold are expected to remain several months will help to shape the
the recent past has shown, China may be the top commodities on the block in the future of the mining industry and to
slower to act in the M&A field, but its months ahead and coal is also expected to determine its key players.
interest has not waned. In May, an

PwC 13
Smart money mining
rock bottom valuations
Gareth Turner
Head of Mining & Metals
Private Equity
More of the same, a very difficult evolution from private equitys experience
Apollo Global Management
environment was Gareth Turners investing in other resource opportunities
response when asked what he thought the like oil and gas which has been very active
mining deals market would look like in for well over 10 years. China and Indias
2014. But the Senior Partner and Head of desire to purchase quality long-term
Mining and Metals Private Equity at Apollo assets have made them a very strong
Global Management added two major competitor, says Gareth. However, he
predictions: one, miners can expect the believes private equity offers miners
separation between the winners and the distinct advantages over more popular
losers to become more distinct and two, forms of alternative financing.
private equity will make a notable entry While miners may receive slightly
into the sector. higher prices from a foreign investor in
A wall of capital needs is building, some limited cases, execution risk
explains Gareth. There are a lot of associated with these deals can be much
companies lining up to push projects higher, he says. Deals with foreign
ahead and you can only delay those investors are notorious for their
decisions for so long. With public markets complexity and the length of time
essentially closed to mining companies, required to close. Transacting with a
and few signs of windows opening in the foreign buyer is not a sprint, but instead a
next year or two, miners have been forced marathon that requires patience and
to pursue alternative forms of financing to persistence. In comparison, Apollo
push their companys vision forward. believes it is able to close a deal in three
Competing with the likes of Asian to four months, noting any elongation to
investors and streaming companies, the process tends to be a factor of the
private equity has decided to throw its hat design of the process itself or a mining
into the mining ring which is a natural companys internal approval procedures.

14 Global Mining Deals


There are not too many places you
cango to raise several hundred million
dollars of capital in relatively short
order, Gareth shares, when explaining
what makes private equity unique.
As for royalty and streaming deals, Gareth
does not deny that they too are strong
contenders. In the past year, the industry
has seen significant deals completed by
two major players in this space: Silver
Wheaton and Franco Nevada. Silver
Wheaton signed a US$1.9 billion deal
withVale and Franco Nevada closed a
US$1billion deal with Inmet. Gareth
saysstreaming companies have operated
transactions. There is a bias towards We believe we can be the most cost
largely unchallenged heretofore, but
assets in politically stable regions, which effective source of capital and miners need
hintsthings may be about to change.
also have high-quality geological bases to understand we can add a lot of value in
Streaming agreements subordinate and strong management teams. Apollos addition to just our capital, says Gareth.
cash-flow to the equity holders, says investment sweet spot tends to be in the One value add is Apollos institutional
Gareth. Equity holders take all the risk in $150-to-$500 million range, but has brand, which can help miners attract very
a streaming deal, as typically these deals recently closed deals in the energy space good terms for debt capital and another is
exist through the life of the mine and cash upwards of $1 billion. Gareth says they the firms network of advisors and
flow comes off the top it appears to be a are not interested in investing much less international institutional investors. Apollo
very high price to pay and unless a than $50 million in a single transaction. also takes an active role at the board level,
company literally has no other options it and often offers additional guidance and
We are commodity agnostic, opportunity
seems like a very sub-optimized capital support through its presence on a project
driven investors, says Gareth. Apollo is
structure solution. In comparison, private advisory committee.
actively combing the market for viable
equity is generally long-dated capital,
investment opportunities and has been a We will sit alongside the management
looking to keep its investment for up to 5
leading bidder in many recent divestment team, providing advice and support as
to 10 years. Unconstrained by the form of
processes according to various media the company moves from production to
their investment, private equity investors
reports. The relative deal-making silence to ramping to re-financing, says Gareth.
can also be more creative and flexible in
date among private equity in the mining We are not operators, we leave that to
the way they structure deals.
sector is said to be because valuations are management, but we have tremendous
Apollos investment model is to focus on still not low enough for them to jump in. experience in what has worked well and
cash-flow producing assets, but also to However, Gareth disagrees. You cannot what has not worked so well in other
blend in project development believe everything you read in the media. situations.
opportunities to round out their In fact, valuations are not the only factor Whatever the preference of mining
portfolio to a roughly 75/25 split. The that has held back private equity investing executives, they may have to start
risk is higher in development projects in the mining sector to date. Another key dropping off nice-to-haves from their
but so is the potential return, so on a barrier has been the lack of understanding wish list for new capital in-place of must
risk-adjusted basis we are prepared to and comfort level mining executives have haves as they look to try to progress their
invest in selected projects that satisfy about the pros and cons to private equity strategic ambitions and keep their
certain basic criteria says Gareth. They investment. When considering financing valuations from retreating further.
are also interested in completing options, mining executives and boards
so-called PIPE (Private Investment in need to better understand the value of
Public Equity) deals, allowing their working with private equity and how the
counterpart to raise significant equity industry operates.
capital to complete a transformational
balance sheet restructuring or M&A
PwC 15
Mining Excellence at PwC

Delivering local solutions to global challenges


The mining sector is facing a range of competing trends and a rapidly changing global
business environment. Against the backdrop of commodity price fluctuations, miners
need to balance shareholder dividend expectations whilst maintaining an investment
pipeline in the midst of increasing operating costs. Safety, environmental and community
principles also continue to shape the industry as miners look to achieve their licence to
operate and deliver on corporate responsibilities.
Mining Excellence at PwC has been designed to mobilise and leverage PwCs collective global
knowledge and connections to deliver an exceptional and tailored client experience, helping
our clients navigate the complex industry landscape and meet their growth aspirations. Our
team of specialists is exclusively focused on the sector and brings an industry-based approach
to deliver value for you and your organisation.

Working in the sector for over 20 years, I have seen and


worked across the mining sector in both good times and
bad. Its fantastic to see our clients and PwC teams working
together to respond to the everchanging business dynamics
miners face today.
John Gravelle, PwC Global Mining Leader

16 Global Mining Deals


Mining Excellence at PwC provides our clients:


leading edge connections to our vast the delivery of an
knowledge and insight network of mining experts experience that meets our
With significant investment in the research and global client portfolio clients definition of value
behind our mining publications and a We have the widest network of industry With mining experts working around
comprehensive industry learning and experts who work out of strategic mining the globe, our award winning teams
development program, our professionals hubs across the globe to help better are helping clients deliver on specific
can share both industry and technical connect you to vital mining markets. projects and organisational growth
insight with our clients, such as: aspirations. We offer advisory, tax and
A library of industry publications designed Our connections provide: audit services to global corporations
to help challenge conventional thinking seamless client service delivered with and locally listed companies.
and delve into topical industry issues. This collaborative cross-border account
includes: management Mining Excellence at PwC
global thought leadership publications maximised deal potential through a well- complements this with:
including Mine and Mining Deals connected global community of mining a suite of niche mining consulting capabilities
flagship territory publications focused on leaders focused on optimising value across mining
regional and industry-specific issues a well-connected and mobile workforce to operations and effectively managing risk
ensure effective service delivery in even the to help our clients grow their business and
most remote mining locations.
www.pwc.com

www.pwc.com
Executing a
successful listing
deliver shareholder value
a comprehensive client feedback program
Markets for miners

to ensure we are always improving and


Mine
The growing disconnect
A PwC IPO Centre
publication helping
mining companies assess

delivering on individual client needs.


their choices

February 2012

Review of global
trends in the mining
industry2012

John Gravelle Toronto Ken Su Beijing

An extensive industry development program John Campbell


for our people and clients. This features our Kiev
Kameswara Rao
annual university-style courses: Hyderabad
Hard Hat: The Mining Experience
(Australia)
Americas School of Mines Jason Burkitt London
(North America)
London School of Mines Steve Ralbovsky Phoenix
(United Kingdom)
Ronaldo Sacha Winzenreid Jakarta
Asia School of Mines (India, 2013) An
Valino
extensive industry development program Rio de
for our people and clients. This features our Janeiro
annual university-style courses: Hein Boegman Johannesburg

Hard Hat: The Mining Experience


(Australia) Jock OCallaghan Melbourne

Americas School of Mines


(North America)
London School of Mines
(United Kingdom)
Asia School of Mines (India, 2013)

At the coalface

Hard Hat:
The Mining Experience

PwC 17
Contacts

John Gravelle Carlos Miguel Chaparro Ken Su


Canada Colombia China
Global Mining Leader Partner Partner
T: +1 416 869 8727 T: +57 (1) 634 05 55 ext 216 T: +86 (10) 6533 7290
E: john.gravelle@ca.pwc.com E: carlos. chaparro@co.pwc.com E: ken.x.su@cn.pwc.com

Jose Almodovar Fernando Gaveglio Ronaldo Matos Valino


Mexico Peru Brazil
Partner Partner Partner
T: +52 (55) 5263 6000 ext 7082 T: +51 (1) 211 6500 ext 7046 T: +55 (21) 3232 6015
E: jose.almodovar@mx.pwc.com E: fernando.gaveglio@pe.pwc.com E: ronaldo.valino@br.pwc.com

Colin Becker Michael Goenawan Simon Venables


Chile Indonesia South Africa
Partner Partner, Deals Partner, Deals
T: +56 (2) 940 0016 T: +62 21 5289 0340 T: +27 11 797 5660
E: colin.becker@cl.pwc.com E: michael.goenawan@id.pwc.com E: simon.venables@za.pwc.com

Mark Binney John Nyholt Leonardo Viglione


UK Canada Argentina
Partner, Deals Partner, Deals Partner
T.+44 (0)20 7804 0855 T: +1 416 815 5086 T: +54 (11) 48504690
E: mark.binney@uk.pwc.com E: john.nyholt@ca.pwc.com E: leonardo.viglione@ar.pwc.com

Hein Boegman Jock OCallaghan Sacha Winzenried


South Africa Australia Indonesia
Partner EU&M Industry Leader Partner
T: +27 11 797 4335 T: +61 (3) 8603 6137 T: +62 21 5289 0968
E: hein.boegman@za.pwc.com E: jock.ocallaghan@au.pwc.com E: sacha.winzenried@id.pwc.com

Jason Burkitt Steve Ralbovsky


UK U.S.A.
Partner Partner
T: +44 (20) 7213 2515 T: +1 (602) 364 8193
E: jason.e.burkitt@uk.pwc.com E: steve.ralbovsky@us.pwc.com

John Campbell Kameswara Rao


Ukraine India
Partner Partner
T: +380 (44) 490 6777 T: +91 40 6624 6688
E: john.c.campbell@ua.pwc.com E: kameswara.rao@in.pwc.com

2013 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network.
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18 Global Mining Deals