Mining mergers and acquisitions 'back on radar' for Rio Tinto

The value of completed mining deals fell in 2014 to US$51.3 billion ($68 billion), the lowest annual total in 10 years, according to data compiled by Bloomberg. Photo / Thinkstock

With the mining sector seen nearing the bottom of the cycle, Rio Tinto Group signalled to analysts it's ready to resume mergers and acquisitions.

The company is prepared to look for a deal if it can secure the right asset at the correct valuation and win investor backing, Morgan Stanley said after an analysts' meeting last week with Chief Financial Officer Chris Lynch.

An acquisition would be Rio's first since 2012, according to data compiled by Bloomberg. As asset valuations get pushed lower, larger producers may be changing their attitude toward deals, according to Argo Investments.

"If they can buy tier-one assets at valuations that are closer to the bottom of the cycle, then that's not a stupid thing to do," said Jason Beddow, chief executive officer of Argo Investments, which manages about A$5 billion ($5.2 billion) in Australia and holds Rio shares.

The value of completed mining deals fell in 2014 to US$51.3 billion ($68 billion), the lowest annual total in 10 years, according to data compiled by Bloomberg.

As recently as February, Rio's chief executive officer Sam Walsh said the company had "no near-term plans" for major acquisitions. A deal for Freeport-McMoRan or Anglo American is "not on our radar", he told investors.

Since Walsh's comments in February, tumbling oil prices saw Royal Dutch Shell bid US$70 billion for BG Group Pacific Investment Management last month said commodity prices are trading close to the bottom.

Teck Resources, the second-largest exporter of metallurgical coal, expects growing competition for mining deals with the sector "closer to the bottom of the cycle than the top," chief executive Don Lindsay said on an April 22 earnings call.

Mine valuations have fallen as much as 70 per cent, according to gold producer Evolution Mining.

Still, with lower prices forecast for many key commodities in oversupply and slowing demand in China, the biggest metals buyer, asset sales or demergers are more likely than acquisitions, according to Goldman Sachs Group.

After Rio has moved to reduce its project budget to the lowest since 2010, cut spending and complete a US$2 billion share buyback, investors may accept acquisitions, according to Argo's Beddow. "They may need to consider that this could be a better use of capital than just buying back shares."

- Bloomberg