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Coal and platinum listings are heating up South Africa’s resources sector

Posted on 6 Aug 2010

Despite depressed global sentiment as a result of Europe’s sovereign debt, the South African resources sector continues to see a rise in deal activity, particularly in the coal sector which remains extremely active and platinum deals which show a month on month increase. According to Reginald Demana, Mining and Resources Principal in Nedbank Capital’s Corporate Finance division, if the European financial situation stabilises, it is likely that we will see an increase in listings in the resources sector after the World Cup, and a strong round of mergers and acquisitions to take place in Q3 and Q4.

“That said, I believe it is unlikely that we will reach the heady heights achieved in 2006/2007 in the near future.”

Ursula van Eck, Partner with BDO, the South African member firm of the world’s 5th largest Audit and Accounting network, says demand for coal is being driven by the establishment of new power plants in South Africa and India and demand from the manufacturing powerhouse China. She says “Platinum is feeding off reviving demand from the automotive industry in the US, China and Japan as well as an increase in demand for jewellery made from platinum in Asia. Demand for platinum is strong positioning its price in the market well. This is encouraging mining houses to resuscitate projects that were put on hold when the price of platinum plummeted”.

Demana and van Eck agree that while South Africa has seen some improvement in merger & acquisition activity across the major mining houses, as they shed commodities and refocused their business, activity amongst junior mining houses is showing the strongest growth as junior miners add weight and scale to their businesses.

Demana says: “Now that we have a degree of stability in the local economic environment, companies have become bolder and more willing to undertake acquisitions they have longed for. Executives are confident enough to invest in expanding their operations and are also on the hunt for acquisitions due to clearer earnings visibility. Valuations are more realistic and funding is becoming easily available for quality assets. That said, closure of deals is still taking time due to more stringent due diligence requirements from potential investors and funders.”

He believes that junior miners are looking to engage in transformational deals which will set their business up to compete against the majors. “Operations that are growing, are profitable and have strong balance sheets are actively looking to acquire assets that will transform the destiny of their entity fundamentally and strengthen their positions in the market. This is also true for companies that have conserved cash resources during the economic downturn and are now investing in projects, which require funding,” says Demana.

Increasingly junior miners are entering into joint ventures or acquiring competitors that operate in the same industry sectors where they can leverage their own IP and experience. “Ambitious players are likely to look to raise capital post the World Cup through equity – either embarking on a listing, or if they are already listed rights offers – or are exploring debt finance. “Companies with operating cash costs that are lower than their industry averages and positioned in the first or second cost quartiles, are in a strong position to attract financing.”