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All the money sloshing around in the financial system has to be poured into something.
Historic low interest rates and an ongoing abundance of cheap cash have already led to a new bubble in internet stocks: when a social network with $12m in annual profits are valued at $9bn it quickly becomes clear that there are too many investors with cash burning holes in their pockets.
No wonder then that financiers with longer memories — the last internet bubble burst less than a decade ago — and who are less inclined to invest in virtual profits are now steering all that nearly-free cash in the direction of miners and metals.
The latest study of mergers and acquisitions in the resource sector show that two of the four biggest deals of 2011 were financial companies taking over natural resource companies, not strategic investments by other miners: The $1.95bn bid by a Japanese investor group for Brazil’s Companhia Brasileira de Mineração e Metalurgia (CBMM) and US investment holding company Renco Group’s $1.19bn takeover of steel producer Severstal.
And the trend is only set to continue.
Lower down the scales – deals worth $50m or more – financial investors are also finding ways in. In 2009 only 3.6% of transaction involved investment houses and corporate takeover artists. By the first quarter of 2011 that figure had jumped to 16.1%. At the same time the median value of these deals ballooned by more than two thirds to no less than $500m.
However, before you think someone from Goldman Sachs or Deutsche Bank plans to come knocking on the door of the junior rare earth explorer in Outer Mongolia you just bought for pennies a share, consider this caveat from the authors of the report:
“PwC expects financial investors to remain engaged in metals deals, but notes that their focus is likely to stay on downstream targets, with upstream assets remaining primarily the domain of strategic acquirers. The reasons for this, according to PwC, include the inherent volatility, political risks, and potentially longer holding periods required for upstream acquisitions.”
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To download the complete report from PwC called Forging Ahead click here
