More mining mergers ahead despite high prices

By Caroline Humer

NEW YORK (Reuters) - Despite historically high commodity prices, mining executives said expectations for declining production will push even more deals in the metals and mining sector this year.

While high prices make valuing deals more difficult as some companies expect higher prices still and others worry about the sustainability of current levels, it does not stop them from moving forward, executives said, speaking at the Reuters Global Mining and Steel Summit in New York.

That is borne out in the numbers. So far this year, the value of announced deals in the global mining, metal and steel sectors has increased to $133.7 billion from $39.7 billion at this time last year, according to market research firm Dealogic.

Gold and silver hit quarter-century highs in May on strong investment demand, while platinum and copper reached record highs last month. Inflation fears and uncertainty over global growth have knocked those prices down, but the metals are still trading at historically high levels.

Other commodities, such as aluminum and steel, are also at relatively high levels due to a strong increase in demand, largely from China's industrial growth. Iron ore prices, for instance, have risen 19 percent this year on top of a 71 percent gain last year.

But deals continue, for example, in the gold market, which has been consolidating despite its price rise to a 26-year high of $730 a troy ounce last month. That has helped companies increase earnings, driven stock prices up, and put more cash in mining companies' pockets that could be used for acquisitions.

"It's not like suddenly we're out of the market because gold is above $600," Newmont Mining Corp. (NEM.N: Quote, Profile, Research, Stock Buzz) Chief Executive Wayne Murdy said. "We continue to be actively looking in the market for things that are complementary to our business."

Newmont, the world's second-largest gold mining company, is not, however, looking to a large, company-defining deal. "I don't really see that right now," Murdy said.

Gold companies have the same concerns as most other miners -- replacing reserves. That means that they need to find new natural resources, either adjacent to existing mined areas or in new areas altogether.

That is difficult at the moment, because there are not enough new mines coming into production, the top executive at No. 1 gold producer Barrick Gold Corp. (ABX.TO: Quote, Profile, Research, Stock Buzz) said earlier this week, also at the summit.

"If anything there's a shortage of assets in the industry. These assets are that much more dear at higher metal prices," Barrick CEO Greg Wilkins said.

Scarcity of assets is an issue not just for gold, but copper and other metals, and drives consolidation, executives said.

"The fact that companies are having such a hard time to find projects to invest in from their exploration and development activities ... that's a force that naturally leads to consolidation," said CEO Richard Adkerson of Freeport-McMoRan Copper & Gold (FCX.N: Quote, Profile, Research, Stock Buzz).

CONSOLIDATION IN STEEL

The largest announced deal so far this year in the metals and mining universe is the $32 billion hostile offer from Mittal Steel Co. NV (MT.N: Quote, Profile, Research, Stock Buzz) for Arcelor CELR.PA in January. That deal became more complicated recently with Arcelor's announced plans to link-up with Russia's Severstal to try to fend off the bid.  Continued...