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Mixed signals on M&A
April, 06th 2010

In my 23 December blog, I made the prediction that mergers and acquisitions activity would climb in 2010, thanks largely to a bounce back in the resources sector.

As we finish the first quarter of 2010 it seems the jury is still out on this prediction.

Thomson Reuters released data last week that showed announced M&A deals rose 18 per cent worldwide when compared to the first quarter of 2009. However, on the downside, M&A this quarter was down 16 per cent when compared with the last quarter of 2009.

What is apparent though is that the resources sector and China are still largely driving existing M&A activity. This was demonstrated once again by the recently announced Rio Tinto and Chinalco non-binding memorandum of understanding covering the development and operation of the Simandou iron ore project in Guinea.

The Thomson Reuters figures show that the resources sector represented 21 per cent of deals announced and generated US$99.6 billion in proposed deal-making during the first quarter, up 9 per cent from last year. It also showed that the Asia-Pacific was the number one region for deals in the first quarter.

So it seems the factors that we looked to at the end of 2009 to help drive M&A activity are there a strong China, a rebounding resources sector but that it has not ignited M&A activity at this early stage as had been hoped.

So what is the outlook or the next nine months?

According to a recent Ernst & Young report entitled 2009: the year of survival and revival, continued demand from China and India is expected to fuel economic development and be a positive for the mining and minerals sector's longer-term fundamentals.

The report says that 2010 has begun strongly, with an expectation that the number and size of deals would increase, but with megadeals being scarce. It predicts that 'many mining and metals companies that are preoccupied with debt reduction are looking to organize growth and strategic bolt-on acquisitions before valuations become too expensive'.

The report also details the growing economic ties between China and Australia. In 2009, Australia was the number one target country for M&A, while China was the number one acquiring country.

The Ernst & Young report then outlines its outlook for Australia, which contains both good and troubling news.

The good news is that Ernst & Young sees the resources industry continuing to lead Australia out of the downturn, with our undeveloped mineral resources continuing to be attractive to nations seeking resource security such as China, India, Japan and South Korea.

However, the report warns that there will need to be clarity on how mining infrastructure will be funded between governments, mining operators, inbound investors and off-takers if Australia is to continue to unlock mineral wealth.

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