Mining Deals Final New 2

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*connectedthinking

IndustriesEnergy, Utilities & Mining

MiningDeals*Mergers and acquisitions activityin the mining industry

2008 Annual Review


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Contents

Methodology

Mining Deals 2008 is based on published transactions from the Dealogic M&A Global database, December 2008. Analysisencompasses announced deals, including those pending financial and legal closure and those which are completed. Deal values arethe consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stakepurchased and are not multiplied up to 100%. The geographical split of the deals refers to the location of the purchased asset(s).Where this is not clearly identified or relates to multiple geographical regions, the deal region is stated based on the location of the

target company. The analysis relates to the extractive mining sector and therefore excludes related sectors such as the steel industryand metals trading sectors. The sector and subsectors analysed include: precious metals (e.g. gold, silver, platinum), base metals(e.g. iron ore, nickel, copper, aluminium), diversified (companies with a wide range of mining activities across subsectors) and other(includes coal, uranium, mineral sands, mining services). Throughout the report, both for 2008 and previous years, we classify theRussian Federation, Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Tajikistan and Armenia as Russia and the Commonwealth ofIndependent States (CIS). A full list of transactions throughout 2008 is available by visiting the Mining Deals website atwww.pwc.com/miningdeals.

01 Introduction

02 Report highlights

04 Deal totals

07 Deal makers10 Deal places

12 North America

14 Asia Pacific (excluding Australasia)

15 Australasia

16 Russian Federation and CIS

18 Africa and South America

20 Looking ahead21 Contact us


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We also highlight, in a series of dealdialogues throughout the report, some of thecritical issues for companies engaging in dealactivity within the sector. Drawing on ourglobal experience as an adviser to miningindustry M&A players, our commentaryaddresses all key markets in the sector.

Looking ahead, we examine the effect ofcontinuing uncertainties on deal-making in thesector. We look at the consequences of thevery different environment. We consider thepotentially sector-transforming opportunitiesthat will arise and the key role of China indeal-making.

Our conclusion is that, while the short-temoutlook for mining deal activity from western

companies is subdued, the constraints andcontrasts in the market will create their ownimpetus for deal momentum. Indeed, thosecompanies that have funds available maywell find 2009 to be a year when they canutilise their financial strength and achieveacquisitions at long-term bargain basementprices.

Introduction 01

After the rise comes the fall.The mining industryexperienced a violentdownward tailspin in the lastthree months of 2008 whichhas turned much of the

deal-making in the sector upside down. After

two years of record M&A activity, 2008 turnedout to be a year of extremes with the earlierpart of the year following a pattern establishedin previous years before plunging in a suddenand dizzying vortex in the closing months.

Mining Deals 2008 reviews deal activity in themining industry. The report is a companionpublication to PricewaterhouseCoopersPower Deals, O&G Deals and RenewablesDeals reports. Together the four reports

provide a comprehensive analysis of M&Aactivity across the extractive and powerindustries worldwide.

We examine both the rationale behind theoverall trends and look at the key individualdeals. We look at the year under review, thecontext of the preceding three years, andahead to the future direction of deal-makingin the sector.

Tim GoldsmithGlobal Mining Leader


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02 Report highlights

Deal or no deal

As well as being a year of very high dealactivity, 2008 was also the year of whatmight have been. The potentially sector-

transforming bid by BHP Billiton grabbedthe headlines but there were many otherannounced transactions that did notcomplete. Each of the many bids had itsown reasons for running aground but,ultimately, the September 2008 burstingof the commodity price bubble andintensification of the financial crisis killedoff activity. The deals that were not dealsgrabbed the 2008 headlines just as

much, and in many cases even more,than those that actually reached fruition.

Before and after the fall

For much of the year, companiescontinued to maintain faith in thebuoyancy of commodity prices. Deal

volume in the first half of 2008 wasabove or comparable with the previousyears level. The third quarter saw somewaning of activity but it was thecollapse of Lehman Brothers inSeptember 2008 that sounded ashattering and sudden alarm call to thesector, triggered a rapid fall in most keycommodity prices and sent dealvolumes crashing down 61% in the

fourth quarter towards levels last seenin 2005. Many companies that hadspent the earlier part of the year doingdeals or resisting unwelcome overturesfinished the year looking atoverstretched balance sheets, preparingfor write-downs, and welcoming backpotential buyers with open arms.


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03

Brazil deal value rises fivefold

The most significant surge in dealactivity came in Brazil. Total deal value inSouth America as a whole rose

dramatically from US$8.7bn in 2007 toUS$22.8bn in 2008. US$17.7bn of theregions deal value was centred on Brazil up nearly fivefold from the US$3.6bntotal Brazilian mining deal value of 2007 as companies made strategic moves tosecure valuable iron ore resources.

Playing the China card

There was a big increase in dealsinvolving Chinese buyers. The value ofsuch deals rose fourfold, from US$6.7bn

in 2007 to US$25.5bn in 2008. As theyear drew to a close and the impact ofthe downturn on the sector intensified,Chinese buyers played an increasinglyimportant role with opportunitiesavailable to them which would nototherwise be available in lessconstrained times. A number of

Australian mining companies opened upto Chinese deal- making in late 2008 and

early 2009 ahead of the most high profileChina move for an increased share ofRio Tinto.


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Source: PricewaterhouseCoopers, Mining Deals 2008 Annual Review

04 Deal totals

The year began with BHP Billiton bidding for Rio Tinto in amove worth a potential US$150bn plus that would haveguaranteed 2008s place in the Mining Deals record books.It was the super-consolidation deal that never happenedas BHP Billitons year-long pursuit finally fell victim tothe Competition Commissions requirements and thedeterioration in the financial and economic climate. Thecontrasting cash and debt positions of BHP Billiton andRio Tinto were the most high profile examples of a sector

characterised by balance sheet contrasts.

2008 proved to be a year of extremes.Commodity prices soared to recordhighs only to fall precipitously as thefinancial crisis intensified and economicconditions deteriorated. Deal volumetrumped 2006 and 2007 boom year

levels in the early part of the year only toplunge back towards 2005 levels by theend of 2008. Mining shares went fromrising star to falling asteroid status. Manyfell to earth intact but some are burningup. Companies that were resistingunwelcome overtures at the beginning ofthe year were welcoming them with openarms by the year end.

Figure 1: Total mining deals, 2005-2008 (year on year % change in paranthesis)

2005 2006 2007 2008

Total number of deals 762 1026 (+35%) 1732 (+69%) 1668 (-4%)

Total value of deals US$69.8bn US$133.9bn (+92%) US$158.9bn (+18%) US$153.4bn (-4%)

Average value (based on deals where value is reported) US$125.6m US$196.6m (+58%) US$137.5m (-30%) US$124.0m (-11%)


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05


Figure 2: Size of mining deals by value, 2005-2008

Below US$250m

200

400

2005 2006 2007

600

732

970

US$250m US$1bn

20

40

2005 2006 2007

60

22

38

Above US$1bn

5

10

2005 2006 2007

15

8

18

1644

63

25

800

1000

1200

1400

1600

1800

80

100

120

20

25

30

1572

66

30

2007 2008 2008

40

However, even without such a super-consolidation move,deal volumes in 2008 remained at levels not far below therecord highs reached in 2007. Taking the year as a whole,deal numbers and total deal value were 4% downyear-on-year (see Figure 1). Indeed, there was an increasein bigger deals with 30 US$1bn plus transactions comparedto 25 in 2007 (see Figure 2).

Iron ore was particularly sought after as global steel mills

scrambled to secure supplies. The total value of deals foriron ore assets nearly tripled up from US$7.5bn in 2007 toUS$21.4bn in 2008 and the number of deals rose from 40to 107. Similarly, demand for energy fuelled a 28% rise indeals for coal and uranium assets (in the other category inFigure 3 overleaf). The total value of such deals rose fromUS$29.9bn to US$54.2bn year-on-year.


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06 Deal totals

20072008

20072008


Figure 3:Analysis of mining sector by value (US$bn), 2007-2008

US$bn 10 20 30 40 50 60 70

Diversified

Base metals

20072008

Precious metals

26.721.7

20072008

Other

54.229.8

31.044.9

80

55.120.2

20072008

Ferrous

21.47.5


Figure 4: Quarterly tracking of mining deals by value (US$bn) 2007-2008

Q4

Q3

Q2

Q1

10 20 30 40 50

50.5

32.7

50.5

19.7

14.2

33.4

66.7

44.6

20072008

60 70 80US$bn

For much of the year, companies continued to maintainfaith in the buoyancy of commodity prices. Eventhough the credit crisis had been constraining thefinancial and economic outlook since mid-2007, thereremained a sentiment that this was a crisis whoseeffects would be contained and would not fatallycompromise the demand from China and India thatwas the key force behind the boom in the miningsector. With this belief underpinning activity, the quest

for world scale, resource acquisition, resourcediversification and sector consolidation that had driven2007 deal-making continued well into 2008. Indeed, forthe first half of the year, deal volume was above orcomparable with the previous years level(see Figure 4).

The third quarter saw some waning of activity but itwas the collapse of Lehman Brothers in September2008 that sounded a shattering alarm call to the sector,triggered a rapid fall in most key commodity prices andsent deal volumes crashing in the fourth quarter. Thetotal value of deals in the final three months of 2008 fell

61% sliding down toward the quarterly level last seenin 2005. Average deal value more than halved, fallingfrom US$119 million in Q3 to US$53 million in Q4.


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07

These three no deals alone would have potentially addedover US$250bn to 2008 deal totals taking deal volume toeye watering, record shattering levels. They were not alone.There were many more, including Murchison Metalslong-running pursuit of Australian iron ore group Midwestand a contest between four different entities for the bigTampakan copper and gold deposits in the Philippines.While the anticipated BHP Billiton and Xstrata super-consolidation plays did not take place, the largest 2008

deal was a key side-move in the fate of the super-consolidation gameplay.

In February 2008, Aluminum Corporation of China(Chinalco) announced that it had partnered with Alcoa tobuy Rio Tinto shares in the market. The dawn raid movegave the two companies a 9% stake in Rio Tinto andadded a fascinating twist to an absorbing battle as BHPBilliton circled Rio Tinto in an ultimately unsuccessfulventure.

It was as much a year of the deals thatmight have been as it was of those thatwere. BHP Billitons pursuit of Rio Tintowas the one that grabbed the mostheadlines, but just as transforming wouldhave been Vales early 2008 rumoured

US$90bn pitch for Xstrata. If it hadhappened, it would have created theworlds biggest mining company. Later in2008, Xstrata returned to the negotiatingtable with a US$5bn move for Lonmin,the worlds third largest platinum miner,but the bid was dropped as marketconditions rapidly deteriorated.

Deal makers

No. Value of Date Buyers Sellers Sector Primarytransaction announced continent(US$m)

Source: PricewaterhouseCoopers, Mining Deals 2008 Annual Review, based on published transactions from theDealogic M&A Global database, December 2008

Figure 5: Top Ten mining deals 2008

14,316

12,651

10,000

4,665

3,904

3,730

3,690

3,120

3,103

2,798

01 Feb 08

29 Jul 08

05 Aug 08

31 Mar 08

18 Jan 08

03 Jun 08

03 Mar 08

17 Oct 08

17 Jan 08

03 Jul 08

Aluminum Corp of China; Alcoa Inc

Teck Cominco Ltd

Interros Holding OAO

Existing Shareholders

PT Bakrie & Brothers Tbk

CVC Capital Partners Ltd

Oxiana Ltd

Itochu Corp (16%); Nippon Steel Corp;POSCO Co Ltd; Kobe Steel Ltd;JFE Steel Corp; Nisshin Steel Co Ltd;Sumitomo Metal Industries Ltd

Anglo American plc

Undisclosed Buyer

Rio Tinto plc (12%)

Fording Canadian Coal Trust(60% non-operating interest in theElk Valley Coal Partnership)

Norilsk Nickel OAO (16.7%)

Anglo Ferrous Brazil SA

PT Bumi Resources Tbk (35%)

Evonik Industries AG (25.1%)

Zinifex Ltd

Nacional Minerios SA NAMISA (40%)

IronX Mineracao SA (63.3%)

Norilsk Nickel OAO (6%)

Europe

North America

FSU

South America

Asia Pacific

Europe

Australasia

South America

South America

FSU

1

2

3

4

5

6

7

8

9

10

Diversified

Other

Base

Ferrous

Other

Other

Diversified

Ferrous

Ferrous

Diversified


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08 Deal makers

Chinalcos move reflected the growing importance ofChinese and Asian buyers of mining assets, a trend thatwas to accelerate later in the year as distress became adriver of deal-making (see Asia Pacific section on page 14).The deal was a major factor in the big increase in the totalvalue of deals involving Chinese buyers which rose fourfold,from US$6.7bn in 2007 to US$25.5bn in 2008. In anothertop ten deal, Japanese general trading company ItochuCorporation and a group that included Japanese and South

Korean steelmakers bought a 40% stake in Brazilian ironore mining firm, Nacional Minerios SA (NAMISA), forUS$3.1bn.

With super-consolidation off the table, many of the dealsthat did take place delivered consolidation below the toptier. Vancouver-based zinc and copper miner TeckComincos US$12.7bn purchase of Fording Canadian CoalTrust followed a 20% stake it already owned in Fording.When the deal was announced in July 2008, the rising priceof coal had spurred a worldwide consolidation trend withproducers of coal used to make steel or to fuel powerproduction seeking to scale up in order to become more

competitive and cash in on rising prices. The Fording salewas also triggered by the Trusts response to a Canadiangovernment decision to start taxing income trusts. Later inthe year, the debt that came with this deal became amillstone around Teck Comincos neck.

Ownership share switches in Russian miner Norilsk Nickellay behind two of the deals in the top ten table (seeRussian Federation section on page 16). The remaining topten deals were in the US$3bn-US$5bn range. A complexdeal structure lay behind Anglo Americans purchase ofiron ore assets belonging to Brazils Mineracao e Metalicos(MMX) with the move featuring in two of the top tentransactions. Existing MMX shareholders agreed a partialsplit up as well as the main move by Anglo American (see

South America section on page 18).

Private equity made a rare top ten mining dealsappearance with CVCs US$3.7bn purchase of a 25.1%stake in German chemicals, energy and property groupEvonik. The stake was sold by RAG-Stiftung, a foundationset up to take over the liabilities of the coal industry in theGerman states of North-Rhine Westphalia and Saarland.

Rank Company Number Total valueof deals (US$m)

Source: PricewaterhouseCoopers, Mining Deals 2008 Annual Review, based on published transactions from theDealogic M&A Global database, December 2008

Figure 6: The five most active bidders, 2008

Pinetree Capital Ltd

ArcelorMittel SA

Companhia Vale do Rio Doce Vale

Zijin Mining Group Co Ltd

SeverStal OAO

5.7

2,534.5

522.0

195.9

1,058.7

1

2

3

4

5

11

10

7

7

6


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09

Mining deal dialogue:

Deal Origination the first step is often themost important one

Identifying the right acquisition targets is key toany successful corporate developmentprogramme but this goes much further thanresearching lists of companies active in aparticular sector or geography. As well as therelative quality of the asset and the ability for a

transaction to be consummated, it is importantto assess the strategic rationale for making theacquisition. This is even more so for miningwhere a strategic long-term view, tempered witha real-time understanding of current marketconditions, is critical for any investmentdecision.

Developing robust criteria for target selection isan important first step and provides a frameworkagainst which to screen acquisition candidates.Next a deep understanding of the operationsand also the motivations of all key stakeholders

(shareholders, management, employees,governments/regulators and customers) willallow the target population to be further refined.

Once a target has been identified, the firstapproach is all important. A series of importantquestions needs to be answered. Whois the key decision maker? What relationshipscan be brought to bear to present the approachin the best light? Does the target operate in acountry where the culture dictates a differentstrategic approach?

PricewaterhouseCoopers is extremely well

placed to assist in deal origination. Our globalnetwork of mining industry experts, togetherwith our global network of corporate financespecialists, help our clients develop acquisitioncriteria and assess the strategic impact ofmaking specific acquisitions.

With a global partner and staff base of over1,500 mining professionals dedicated to themining sector and unparalleled researchcapabilities, we can spread the netwide to find the right targets for your businessand advise you on the most effective way to

make the first approach. Our corporate financepractice provides lead advisory services fromidea generation to deal negotiation, executionand completion around the world.

In Australia, there was the seventh largest global deal themerger of Oxiana with Zinifex to create OZ Minerals, theworlds second largest zinc producer. The deal wascompleted in June 2008 and the combined value wasUS$10bn. However, by December 2008, shares in the newcompany had been suspended as it ran into debtrefinancing problems which led to a February 2009 bailout by China Minmetals of only US$2bn.

The most active bidders table (see Figure 6) is led byCanadian investment fund Pinetree Capital with a largenumber of deals for shares in Canadian mining companiesbut a relatively small US$5.7 million total value. In contrast,steel-maker ArcelorMittel was involved in a similar numberof deals but with a total value of US$2.5bn as it sought tosecure raw materials supply around the world.


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10 Deal places

Figure 7a:All mining deals by region, 2005-2008*

The largest share of resources targeted by2008 mining deals continued to be in NorthAmerica and, in particular, Canada. The regionaccounted for a total deal value of US$32.8bnin 2008, although this was down sharply fromUS$77.1bn in 2007. The previous years totalincluded Rio Tintos US$43bn purchase of

Alcan. As a result, North Americas share ofassets targeted in deals fell from 49% to 21%of all deals (see Figure 7b). North Americandeal numbers also fell as did those in Europeand Australasia.

Indeed, North American 2008 mining asset deal value fellbelow 2005s level of US$36.2bn. However, this was offsetby big rises elsewhere, not the least being intense activityfor South American, principally Brazilian, assets.At US$22.8bn, total 2008 deal value in South America wasmore than 16 times the US$1.4bn total of 2005. Similarincreases were seen elsewhere, notably Asia Pacific, theRussian Federation and nearby central Asian statesincluding Kazakhstan. These regions also recorded year-

on-year increases in deal value taking total volume higherthan in 2007. There was also a big year-on-year increase indeal value in Europe, accounted for by the inclusion ofChinalco and Alcoas US$14.3bn stake building in Rio Tintoin that territory and CVCs US$3.7bn Evonik purchase fromGerman coal foundation RAG-Stiftung.

*The geographical split of the deals refers to the location of the purchased asset(s). Where this is not clearly identified or relates to multiple geographical regions,the deal region is stated based on the location of the target company.

Europe 2005 2006 2007 2008 % change

Value of deals (US$bn) 2.2 3.8 3.0 22.4 653%

Number of deals 66 73 70 49 -29%

North America 2005 2006 2007 2008 % change

Value of deals (US$bn) 33.8 83.5 77.1 32.8 -57%

Number of deals 225 312 695 596 -14%

South America 2005 2006 2007 2008 % change


Number of deals 53 115 174 180 3%

Russia Federationand CIS 2005 2006 2007 2008 % change


Number of deals 50 100 57 77 35%


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Europe 15%

Australasia 11%

Figure 7b:All transactions by continent by value of transactions, 2007-2008*


2007 (total US$158.9bn) North America 21%

Asia Pacific (excluding Australasia) 15%

Russian Federation and CIS 16%

Africa 6%

Middle East 0%

South America 15%

2008 (total US$153.4bn)

Europe 2%

Australasia 12%

North America 49%

Asia Pacific (excluding Australasia) 10%

Russian Federation and CIS 13%

Africa 8%

Middle East 0%

South America 5%


Asia Pacific(excluding Australasia) 2005 2006 2007 2008 % change


Number of deals 96 129 245 267 9%

Australasia 2005 2006 2007 2008 % change


Number of deals 207 237 391 360 -8%

Africa 2005 2006 2007 2008 % change



Middle East 2005 2006 2007 2008 % change




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12 Deal places: North America

Canadian companies or assets accounted for 82% oftotal of North American target deal value. The vast majority ofvolume was generated by buyers from within the region withonly US$3.2bn coming from purchasers from outside ofNorth America. There were no big foreign purchases to rivaldeals such as the 2007 US$5.4bn purchase of LionOre byRussias Norilsk Nickel or the 2006 purchases of Inco andFalconbridge, Canadas largest nickel producers, by BrazilsCVRD (now Vale) and Xstrata respectively. The largest foreign

purchase was for US$875 million by Russias biggeststeelmaker, SeverStal OAO, for PBS Coals. The commoditysector collapse led to PBS Coals accepting a US$300 millionreduction in the takeover price in order to get the deal done.

The largest North American deal was Teck ComincosUS$12.7bn purchase of Fording Canadian Coal Trust (seepage 8). The deal was announced in July 2008 just ahead ofthe downturn in the commodities market and was partlyfinanced by a subsequent US$2.3bn deal with an unnamedCanadian chartered bank purchasing an 18.56% share ofFording. Despite this, the last few months of 2008 saw TeckComincos shares slide to less than a tenth of their

pre-Fording purchase value and the company was soonlooking for buyers for its gold projects and other non-coreassets as part of a forced debt reduction drive. The TeckCominco developments highlight the contrast between theperiod before and after the collapse in commodity andequity prices.

The value of deals for assets orcompanies primarily located in North

America fell to US$32.8bn fromUS$77.1bn in 2007 (see Figure 8), in theabsence of deals such as Rio Tintos2007 US$43bn purchase of Alcan.

However, deal-making by North Americanmining companies continued at a highlevel. The value of deals where North

American companies were bidderstotalled US$33.6bn compared withUS$33.9bn in 2007.


Figure 8: North America mining deals by sector 2005-2008

2005 2006 2007 2008

By value (US$bn) By value (US$bn) By value (US$bn) By value (US$bn) % share

Base metals 16.8 65.8 44.4 1.6 5%

Diversified 0.9 0.9 17.7 3.3 10%

Ferrous 0.3 0.0 0.0 0.5 2%

Precious metals 14.2 15.2 8.6 8.2 25%

Other 1.6 1.7 6.4 19.3 59%

Total US$33.8bn US$83.5bn US$77.1bn US$32.8bn 100%


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13

Eighty-four per cent of North American mining deal value wasin the other (covering resources including coal and uranium)and precious metals sectors (see Figure 8). An increase in thevalue of coal mining deals boosted activity in this sector. Inaddition to the Teck Cominco deals, another large coal movesaw Canadian mining and energy company SherrittInternational complete a US$915 million buyout of coal minerRoyal Utilities Income Fund, adding to its existing share andgiving it full ownership.

Heading the precious metals deal list was Barrick GoldsUS$1.7bn purchase from Rio Tinto of the remaining 40% itdid not already own of the Cortez gold project in Nevada. Ina second US$1bn plus deal, Goldcorp completed a friendlyUS$1.4bn acquisition of its Red Lake neighbour Gold Eagle.Goldcorp is Canadas second largest gold producer and thedeal came as it reported an unexpected second-quarter loss,cut its production outlook for the year and boosted its 2008cost estimates. The two gold deals were both examples ofmoves by large gold producers to boost their pipelines.


Total tax contribution a more completetax analysis

Mining companies, their investors, governmentsand other stakeholders are coming to realisethat a proper analysis of a mining companys taxobligations extends far beyond its income taxes.Property taxes, royalties and other non-incometaxes typically exceed a mining companys

income tax burden. A potential acquirer wouldsee perhaps only half the picture if itonly focused on a target companys income taxexpense as shown on the P&L statement.

The typical focus on a mining companys incometaxes only is understandable; income taxes arethe only tax separately stated in any companysfinancial statements. Reporting those nonincometax obligations in the financial statements isimpractical, as many rates and agreements arenegotiated or otherwise confidential.

While a knowledgeable mining executive orinvestor knows there are significantnon-income taxes levied on the industry,historically almost no one focused on the extentof those obligations, even tax directors. Propertytaxes, royalties, VAT and most other non-incometaxes are often calculated and paid by personnelat the mines. Payroll taxes are typicallycalculated and paid by a central payrolldepartment. Income taxes are usuallycalculated, paid and actively planned by aheadquarters tax function that often has noresponsibility for the non-income taxes andrelated activities at the mines.

PricewaterhouseCoopers Total Tax Contribution(TTC) study shows that mining companiesusually pay more total income and non-incometaxes than companies in other industries. Thistotal tax data can be invaluable when a miningcompany is analysing a potential mine, when anacquirer is evaluating a target, or when agovernment is contemplating legislation thatmight lead a mining company to considerswitching investment to another country. PwCsTTC group and databank can help a potentialacquirer evaluate a companys TTC (if the right

information is available) and enable a betterinformed decision to be made.


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14 Deal places:Asia Pacific(excluding Australasia)

In 2008, the other US$1bn plus moves by Asia Pacificbidders for companies outside their region were:

the US$3.1bn purchase of Brazilian iron ore mining firm,Nacional Minerios by a group of Japanese and SouthKorean steelmakers (see page 8);

the US$1.3bn acquisition by Japans MarubeniCorporation of a 30% stake in Minera Esperanza andMinera El Tesoro located in Chile from UK-based copper

miner Antofagasta;

Xinwen Mining Group of Chinas in-progress US$1.3bnpurchase of coal exploration permits fromAustralias Linc Energy.

The vast majority of activity for the US$22.8bn of assetslocated within the region was mainly in the coal miningsector and, to a lesser extent, the base metals sector (seeFigure 9). The highest value deal was a US$3.9bn purchaseof a 35% stake in Indonesian coal mining firm PT BumiResources by Bakrie & Brothers, the holding company ofIndonesias powerful Bakrie family. However, in the last fewmonths of 2008 following a share price plunge, the Bakries

were seeking to sell their stake for US$1.3bn in order torepay debts that had been guaranteed as part of the originalpurchase. Attempts to strike a deal with a private equity ledconsortium fell through.

The other US$1bn plus deals for Asia Pacific assets were adivestment of zinc mining assets to Shanghai-listed zincand germanium manufacturer Yunnan Chihong in aUS$1.5bn deal that still remained pending at the end of2008, and a US$1.4bn purchase by Hong Kong-listedFushan International Energy Group of various Chinesecoking coal assets.

Asia Pacific deal volume surged in 2008.The total value of deals for assets andcompanies primarily located in Asia Pacificrose 39%, from US$16.4bn in 2007 toUS$22.8bn in 2008 (see Figure 9). Thelevel of deal-making where Asia Pacific

companies were bidders rose even further,buoyed by an increased level ofdeal-making by Chinese companies forassets outside the region. Chinese biddersaccounted for US$25.5bn out ofUS$48.3bn Asia Pacific total bidder valuein 2008. In turn, the US$48.3bn total wasmore than triple the US$15.6bn level of

Asia Pacific bidder activity reached in2007. US$26.8bn of 2008 Asia Pacificbidder activity was for targets outside theregion, of which US$17.5bn was byChinese companies.

Chinalcos US$14.3bn February 2008 investment in RioTinto headed the list of outbound 2008 deals by Chinesecompanies. Twelve months later, Chinalco is set toincrease its stake in Rio Tinto further with the February2009 announcement of a US$19.5bn cash injection inresponse to Rios need to reduce debt. If completed, thelatest move will double Chinalcos stake in Rio Tinto from9% to 18% and be the largest investment ever by a

Chinese entity in a foreign company.


Figure 9:Asia Pacific (excluding Australasia) mining deals by sector 2005-2008

2005 2006 2007 2008


Base metals 0.0 0.9 1.4 2.6 12%

Diversified 0.2 0.8 4.3 1.0 5%

Ferrous 0.1 0.1 1.1 0.8 4%

Precious metals 0.6 0.2 1.3 2.2 10%

Other 1.4 1.6 8.2 16.1 71%



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Figure 10:Australasia mining deals by sector 2005-2008

2005 2006 2007 2008


Base metals 0.5 0.5 4.9 0.2 1%

Diversified 8.7 3.1 4.5 5.0 29%

Ferrous 0.6 0.8 2.5 2.2 13%


Other 0.8 2.0 5.0 8.1 47%


Australasia

Foreign investments in Australian companies and assetsmust pass the Foreign Investment Review Boards (FIRB)national interest test. For much of the 2006 and 2007boom years this was a significant obstacle for Chineseinvestors. However, towards the end of 2008 and into 2009,the board has given the green light to a series ofinvestments by Chinese companies in response to thedifficulties faced by a number of cash-strapped Australianmining companies.

The place where the change of mind is most evident is inmany mining company boardrooms. Iron ore producerMount Gibson, for example, had resisted overtures fromChinas Shougang Concord. Its resistance had beenreinforced by an Australian takeover panel ruling in April2008. By the end of the year, however, the company wasturning to Shougang and another Chinese group, APAC, ina rescue package that will give the two Chinese companiesa substantial stake in Mount Gibson.

Other Australian mining companies that have opened up toChinese investors in late 2008 and early 2009 include zinc

miner Perilya and iron ore explorer Centrex Metals throughdeals with Shenzen Zhongjin and Wuhan Iron and Steelrespectively. FIRB approvals, and in particular the appetitefor Chinese investment in Australia, will be seriously testedin 2009 by the recently announced Chinalco/Rio Tintoand China Minmetals/OZ Minerals deals.

Deal volume for Australasian miningresources fell 11%, from a total deal valueof US$19.2bn in 2007 to US$17.1bn in2008. However, total deal value where

Australasian entities were buyers rose12%, from US$9.1bn to US$10.2bn, as

Australian companies continued to step uptheir quest for mining assets worldwide.

The big deals were centred on Australian assets withOxiana and Zinifexs merger to create OZ Minerals and itssubsequent tumble taking the spotlight (see page 9).The second largest, and the only other US$1bn plus deal,saw energy company New Hope selling its New Saraji coalproject to BHP Billiton and Japans Mitsubishi Corporationfor US$2.4bn.

The year 2008 saw the continued emergence of Chinese

investors in Australian mining resources. Chinesesteelmaker Sinosteel gained control of MidwestCorporation. It had faced competition for Midwest fromMurchison Metals but emerged victorious in July 2008.The Sinosteel move and the involvement of Chinalco inmining giant Rio Tinto is the most high profilemanifestation of a trend that is being echoed through theranks of more junior mining companies in Australia.


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16 Deal places: Russian Federation andCommonwealth of Independent States

The largest foreign purchase was the US$1.5bn purchase ofUK-based nickel and gold producer Oriel Resources byRussian miner and steel maker, Mechel OAO, followed bySeverStals US$875 million deal for Canadas PBS Coals (seeNorth America section on page 12). In Russia, a privatisationof the Verkhnekamskoye potassium-magnesium salts depositin the Ural region raised US$2.3bn in a sale to four Russianfertiliser manufacturing and mining companies. US$10bn ofthe US$20bn Russian deal total stemmed from the move to

purchase a 16.66% stake in Norilsk Nickel by InterrosHolding, owned by Vladimir Potanin, already a majorshareholder in Norilsk Nickel. The deal, which remainspending, is the latest stakebuilding move in the companywhich has also seen acquisitions by Oleg Deripaska whoseBasic Element company controls aluminium producer Rusal.However, speculation about a merger between Norilsk Nickeland Rusal has not, thus far, been borne out.

The total value of deals involving assetsor companies primarily located in theregion rose 21%, from US$20.9bn in 2007to US$25.2bn in 2008 (see Figure 11).However, the step change in internationalexpansion that had characterised activity

by Russian companies in 2007 did notfollow through as strongly in 2008. Miningacquisitions by Russian companiesdropped back to US$20bn in 2008 fromUS$26bn the previous year. Much of thetotal was domestic activity with no foreignacquisitions to rival the 2007 US$5.4bnpurchase of Canadas LionOre byNorilsk Nickel.


Figure 11: Russian Federation and CIS mining deals by sector 2005-2008

2005 2006 2007 2008


Base metals 0.17 7.07 0.0 13.1 52%

Diversified 0.85 2.98 15.8 4.4 18%

Ferrous 2.30 1.25 0.0 0.2 1%

Precious metals 1.43 3.79 1.0 4.0 16%

Other 0.88 1.55 4.0 3.5 14%



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17

The major regional activity outside Russia was in Kazakhstanwhere target mining values totalled US$3.8bn in 2008, upfrom US$1.4bn in 2007. A major focus in that country is thegovernments ambition to develop a national championmining company that can develop worldwide scale. A holdingcompany has been created to facilitate this process althoughit remains unclear whether this will be a vehicle for anattempt to combine the two largest players London-listedKazakhmys and Eurasian Natural Resources Corporation

(ENRC) or whether the holding company will seek tointegrate deposits and smaller companies that are not ownedby the two main players.

Deals for Kazakh companies and assets leapt from US$1.4bnin 2007 to US$3.8bn in 2008, largely due to the acquisition ofa US$2.3bn 7.66% stake in ENRC by Kazakhmys in returnfor the Kazakh government building a 15% minority share inKazakhmys. In a separate deal, Kazakhmys made a US$784million open market purchase of a 2.66% stake in ENRC withthe aim of gaining sufficient minority control to prevent anyacquisition by its rival.


Targets are cheap now why bother with duediligence?

The slump in the global economy and the majorfinancing issues facing many mining companies areleading to cheaper valuations and more specialsituations. In turn, this is spurring deal activity. Withincreased deal activity, shortened deal timetables astarget companys bleed cash, and the rapid

emergence of major players in key developingeconomies with less history in the international miningM&A arena, effective and efficient due diligence willbecome even more critical for achieving strategicgoals and executing successful deals.

Due diligence can often identify earnings or assetquality weaknesses of the target. This could includedeclining production efficiency, cost increases, labourpool redundancies, capitalised assets with no futureeconomic value, and significant off-balance sheetliabilities such as third party claims, employee pensionobligations, asset retirement obligations, orenvironment-related exposures. In turn, these could

indicate that the targets financial position is not asstrong as originally presented or that the targetshistorical performance may not be sustainable.

It is also common to identify significant regulatory andtaxation-related deal risks, such as pre-emptive rightstriggered by a change of control, failure to secure allnecessary approvals for exploration/production,aggressive tax planning structures in the targetsorganisation, ambiguity regarding the targetssatisfaction of all criteria necessary to enjoy local taxincentives, failure of the target to make all appropriatefilings in each tax jurisdiction, or the potential loss ofsignificant future tax deduction assets as a result ofproceeding with the contemplated transaction.

Each target has its own unique challengesand issues. Some will have only just emergedwhile many others might still be lying hidden beneaththe surface. In this context, it is very important towork with experienced advisors with the ability toorganise your diligence process and work with yourdeal team in a cross-functional manner to manage allkey deal risks, from the initial assessment phasethrough to assisting you with gaining leverage duringnegotiations.

PricewaterhouseCoopers unmatched network oftransactions specialists is best placed to assist the

worlds mining companies with all their importantdeals. Our mining industry-focused deal experts usetheir extensive experience with domestic andcross-border mining deals to conduct the mosteffective due diligence as rapidly as possible whileworking closely with the client deal team and otherdeal advisors.

Kazakhstan


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18 Deal places:Africa and South America

US$17.7bn of South American deal value centred on Brazil,headed by Anglo Americans US$4.7bn purchase of iron oreprojects from Mineracao e Metalicos (MMX). It gained a100% interest in the Minas-Rio iron ore project and a 70%interest in the Amapa project. In a complex deal structure,the controlling shareholders of MMX and Anglo Americansigned a share purchase and sale agreement by which AngloAmerican acquired a 63.47% stake of IronX Mineracao SA, anewly formed company owning 51% of the share capital of

MMX-Rio Mineracao and 70% of MMX Amapa Mineracao.

South American deal value was further boosted by two otherUS$1bn plus deals in 2008. In a US$1.9bn deal, Braziliansteel producer USIMINAS bought Brazilian iron ore miningcompany Mineracao J Mendes. Finally, Canadian-basedmining gold company Kinross purchased Toronto-listedAurelian Resources in a friendly US$1bn deal that addsAurelians Fruta del Norte gold discovery in Ecuador toKinross mining interests in the United States, Brazil, Russiaand Chile.

In the rest of the world, the biggestnumber of deals and total deal valuecontinued to come in South America and

Africa. There were year-on-yearincreases in deal numbers for assets inboth continents up by 39% from 94 to

131 in Africa and 3% from 174 to 180 inSouth America. But while African dealvalue reduced from US$13.5bn in 2007to US$9.6bn in 2008, South Americantotal deal value rose dramatically fromUS$8.7bn to US$22.8bn.


Figure 12: South America mining deals by sector 2005-2008

2005 2006 2007 2008


Base metals 0.3 1.0 2.1 0.9 4%

Diversified 0.2 0.5 1.4 2.4 11%

Ferrous 0.2 2.6 2.1 16.9 74%


Other 0.0 2.2 1.4 0.6 3%



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19

The African deal-making spotlight in 2008 was centred onattempts to combine Impala Platinum and Northam Platinumin a US$2.6bn deal that would have created a worldchampion in the sector. Negotiations continued throughmuch of 2008 only to finally flounder in January 2009 due tothe global economic climate and continuing volatility incommodity and equity prices. It is included in our totalsbecause it remained pending at the end of 2008. Itsfailure to complete, however, reduces the headline deal

value for Africa still further.

A big African deal that did take place was UK-ownedCentral African Mining & Exploration Companys (CAMEC)purchase of the remaining 50% stake in Democratic Republicof Congo-based cobalt and copper mining holding companyDRC Resources Holdings from Israeli holding companyPrairie International Ltd. The acquisition was one of a handfulof deals for assets in the DPR in an African deal listdominated by South African targets. Six of the top ten butonly 29 of the total 131 African deals involved bidders fromwithin Africa itself the remainder comprising predominantlyAustralian, American, European and Asian buyers.


Figure 13:Africa mining deals by sector 2005-2008

2005 2006 2007 2008


Base metals 0.1 0.3 2.1 1.0 11%

Diversified 0.3 0.3 0.5 0.3 3%

Ferrous 0.0 0.0 0.4 0.4 5%


Other 8.2 0.5 3.7 2.7 28%



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20 Looking ahead

Continuing financial market uncertainty,economic slowdown and actual recessionin many countries look set to provide thebackground to mining deal-making for theimmediate future at least. In theforeground, depressed and, in some

cases, collapsed share prices and aninability to access debt markets arecausing immense distress for some miningcompanies. In contrast, others haverelatively healthy balance sheets.

Such a climate suggests a subdued short-term dealoutlook compared to recent years although theconstraints and contrasts in the market will create theirown impetus for deal momentum. Entities with balancesheet strength will regard the current environment as abuying opportunity although many may be content tobide their time for the right conditions to emerge. On thefinancial front, Asian banks are not as constrained as

their western counterparts and are still willing to lend.

The current environment presents a unique investmentopportunity for acquirers from China to get in ahead ofcompetitors and gain access to targets which might bedenied to them in more normal circumstances.Chinalcos increased stake in Rio Tinto is the most highprofile example and all eyes will be on shareholderreaction and, in particular, the Australian governmentsregulatory response to Rio Tintos strategy.

Activity by private equity players, who traditionally havebeen relatively absent from the sector, may increase.

Such players, as well as sovereign wealth and otherinvestment vehicles, will be looking for opportunities tobuy in at the bottom of the cycle. As with any deal-making in heavily cyclical sectors, timing is everythingand, just as mining companies have discovered whohave bought close to the top of the market, much willhinge on the financing and economic background.

Access to equity and debt has dried up for manysmall-to mid-cap mining companies. Those withportfolios that are at the development stage or that arenot sufficiently revenue generating will have to sell

assets to survive. The spate of impairmentannouncements and write-downs will intensify and,across all tiers of the industry, we are likely to seeconsiderable sector reshaping as stronger companiesseize opportunities to acquire assets at low prices.


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Contact us 21

AustraliaTim GoldsmithGlobal Mining & Asia-Pac LeaderTelephone: +61 3 8603 2016Email: [email protected]

CanadaPaul MurphyTelephone: +1 416 941 8242Email: [email protected]

ChinaKen SuTelephone: +86 10 6533 7290Email: [email protected]

KazakhstanAlper AkdenizTelephone: +7 727 298 0562Email: [email protected]

Ahmed SharkhTelephone: +7 727 298 0448Email: [email protected]

India

Kameswara RaoTelephone: +91 40 6624 6688Email: [email protected]

Latin AmericaAnthony DawesTelephone: +56 2 940 0064Email: [email protected]

Global Mining Deals Team

Russia and Central & Eastern EuropeJohn C. CampbellTelephone: +7 495 967 6279Email: [email protected]

South AfricaHugh CameronTelephone: +27 11 797 4292Email: [email protected]

United KingdomJason BurkittTelephone: +44 20 7213 2515Email: [email protected]

Ricardo Morales

Telephone: +44 207 804 9588Email: [email protected]

United StatesSteve RalbovskyTelephone: +1 602 364 8193Email: [email protected]

Further information

Olesya HatopGlobal Energy, Utilities & Mining MarketingTelephone: +49 201 438 1431Email: [email protected]


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Acknowledgments

We would like to acknowledge the assistance of Rio Tinto for providing images used in this report.Front cover, pages 1, 2 and 3 Rio Tinto

This report cover is printed on FSC Profisilk 250gsm.The text pages are printed on FSC Profisilk 150gsm.

For copies of the report, order online at:www.pwc.com/mining

PricewaterhouseCoopers (www.pwc.com) provides industry-focusedassurance, tax and advisory services to build public trust and enhancevalue for its clients and their stakeholders. More than 155,000 people in153 countries across our network share their thinking, experience andsolutions to develop fresh perspectives and practical advice.

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