Solid fundamentals, strong balance sheets and an appetite for growth is expected to drive M&A in the global mining and metals sector in 2012, says Ernst & Young’s Global Mining & Metals Transaction Leader, Lee Downham.

Commenting on the release of Ernst & Young’s annual global mining and metals sector transaction report, Recognizing value in volatility, Downham says that although mining and metals companies are dealing with uncertainty they are positioned to seize opportunities.

“The global uncertainty and volatility is likely to continue through 2012, but mining and metals companies have an appetite for growth and are increasingly unwilling to stall their growth plans, so it’s likely there will be a return to deal-making in 2012. Those who can work with volatility will be the dealmakers in 2012 and there may well be real buying opportunities.” says Downham.

The Ernst & Young report shows that total global deal value in 2011 was up 43% to US$162.4 billion (compared to US$113.7 billion in 2010). Mega-deals of US$1 billion or more accounting for two thirds of total deal value, primarily driven by strategic domestic consolidation where operational synergies were identified.

However, while deal value was up, global deal volume in 2011 was down 10% to 1,008 (compared to 1,123 deals in 2010). The report noted that limited capital availability reduced the capacity of smaller players to do deals.

In deal value terms, M&A in 2011 was dominated by developed mining countries, notably the US, Canada and Australia, with consolidation in coal and gold the dominant commodities. However, a trend back to emerging and frontier mining regions, particularly parts of Africa, South America and Asia, via off-take agreements or minority interest stakes in ASX or TSX listed companies is anticipated.

“We expect the number of deals in those emerging and frontier countries that have high quality resources and friendly foreign investment rules to ramp up this year as risk appetites increase,” said Downham. “This shift is primarily due to the diminishing availability of quality mineral deposits in developed mining countries at a reasonable price.”

Downham says equity markets remain very sensitive to macroeconomic news and for many companies, market values do not appear to correlate “with the value under the ground”. Overall, commodity prices were stable in 2011 driving an improvement in earnings and cash positions for many mining companies. Now, companies are faced with the challenging but favorable decision of how best to utilize their capital – the dilemma of to buy or build is at question.

According to Royal Bank of Scotland (RBS) senior mining analyst Warren Edney, the most significant trend last year was that most mining companies came through the global financial crisis with very robust balance sheets. “With those robust balance sheets, they can spend a lot of money. It’s going on everywhere,” said Edney.

Mining companies’ capital expenditure surged to a record $US140 billion around the world in 2011, up from $US100 billion in 2010 and less than $US40 billion in 2003, according to RBS.

A report released at the end of 2011 by financial services firm PricewaterhouseCoopers (PwC) also predicts the market tumult could create a series of mergers and acquisitions, particularly in the gold mining sector. Almost 30 percent of PwC survey respondents around the world said they expected to spend cash on acquisitions.

“With the volatility we are seeing in the market, not least of which includes the recent downturn in the gold price, those companies sitting on deep pools of cash and have an appetite for acquisition are in the box seat,” said PwC mining commentator Tim Goldsmith. “They are ready and able to swoop on smaller explorers who are more vulnerable to market fluctuations and who can have difficulty raising capital.”