Ernst & Young's annual review of M&A and financing in the mining sector forecasts that mining megadeals will continue to slow, while niche deals will increase.

In their report, which was made public Sunday, Ernst & Young also predicted a renewed focus on the mining sector by specialist funds.

We believe that two events will signal a change in sentiment , Ernst & Young's global mining and metals country leaders advised.  Firstly, inventories will reduce sharply as higher cost mines are shut or suspended and the current deferral of capital expenditure starts to have an impact. Supply is a casualty of bottoming commodities prices, rising production cuts and suspended exploration plans.

Secondly, the details of the infrastructure stimulus packages are merging, they noted. When the exact nature of the planned infrastructure is known, analysts will be able to more reliably determine the nature of the metals demand. On average, infrastructure represents between 30% and 40% of the stimulus packages. This may create a new supply-demand imbalance with metal prices increasingly sharply and, accordingly, deal prices following.

The total number of recorded mining transactions in 2008 increased 2% to 919, while the total value of deals fell 40% from $211 billion in 2007 to $127 billion. E&Y's analysis also revealed many proposed or contemplated deals that were delayed, damaged or destroyed by the effects of the credit crunch and the associated collapse in metal prices. The highest-profile casualty was BHP Billiton's proposed takeover of Rio Tinto.

The number and value of megadeals dropped significantly to 27 transaction valued at more than $s1 billion with a combined value of $79.3 billion, compared to 36 transactions with a total value of $166.6 billion in 2007. Russian companies carried out the most megadeals by volume while Chinese companies dominated deals measured by value.

However, E&Y found North America was the hub of mining activity last year with Canadian deals accounting for 20% or $25.2 billion of global transactions. The majority of Canada's deals were domestic with 25% made by gold companies.

E&Y expects there will be a significant increase in consolidation [in Canada], as junior explorers join to pool scarce cash reserves, and as companies look at ways to survive the lows in commodity prices and the difficulties in accessing capital.

Meanwhile, the UK mining and metals sector is likely to continue to see extreme volatility in share prices, leading to a prolonged pause is corporate activity. ...The outlook for 2009 is likely to be a continuation of severe production cutbacks until supply is restricted enough to sustain the growth of inventories.

With the Chinese Government reportedly advising major Chinese mining and metals companies to be cautious, E&Y forecasts the level of transactions are likely to slow.

Nevertheless, E&Y's analysis suggests, A strong renminbi is making foreign mining and metals assets even cheaper from a Chinese perspective.

The global mining and metals team forecast an increase of mining and metals transactions in Australia this year. Australia remains a low-risk environment where it is cheaper to acquire new production than develop it. We will likely see countries like China, Japan and Korea taking advantage of large government funding to support their investments.

According to research provided by LAFIS Consulting, Brazilian mining and steel companies will reduce production in 2009 in line with lower planned production in the global steel and iron sectors. This will significantly impact some more marginal producers and may force assets sales, E&Y advised. Timely capital-raising by Vale...puts it in a good position to make low-cost strategic acquisitions.

The decrease in copper and industrial commodities prices is expected to have a significant impact on the Chilean mining and metals sector this year, resulting in lower revenues for miners in the year head. However, the outlook remains positive for the sector as a whole, with these losses partially offset by the expected decreases in energy prices and depreciation of the Chilean peso.

E&Y predicts that 2009 will be a challenging year for Russian companies.

In South Africa the total value of mining and metals transactions dropped substantially by 86% to a total value of $810 million last year.  South Africa's outlook for 2009 remains uncertain. There will need to be a greater degree of predictability and certainty before sellers re-enter the market, E&Y suggested.

In the rest of Africa, there were 18 M&A deals last year, valued at $1.4 billion.

IPOs experienced a significant slowdown in volume last year. Extreme volatility in equity markets, and astonishingly low valuations for mining companies towards the end of the ear, effectively cut off equity finance, the country leaders said. Worst hit in the sector were the ‘juniors': the exploration and early stage development companies.

While 280 mining and metals IPOs raised a total of $21.4 billion in 2007, the transactions were almost halved in 2008 as just 117 mining and metals IPOs raised $12.4 billion. Interestingly, however, the number and value of loans to the mining and metals sector actually grew substantially last year as the number of loans increased from 83 in 2007 to 268 in 2008, with the value increasing from $110.7 billion to $171.7 billion.

Australia dominated the loan market with rising raising totaling over $56.4 billion last year with $55 billion raised by BHP Billiton. The next largest 2008 loan was taken out by Canada miner Teck for $9.8 billion to fund the cash portion of its acquisition of all of Fording Canadian Coal Trust.

Cross-border activity

In 2008, cross-border activity spread to nearly 60 different countries. In Russia, the U.S., Canada, Brazil and Indonesia, parts of the mining and metals sectors underwent considerable consolidation in 2008. The largest deal of this kind was conducted by UC Rusal when it acquired 25% of Norilsk Nickel for $13 billion.

In the U.S., Appalachian coal saw the most consolidation in 2008; in Canada, it was the gold sector. Brazilian consolidation was dominated by major mining and metals houses such as Anglo American and ArcelorMittal. In Indonesia, foreign miners effectively handed back mining assets to domestic companies, promoted by a change in mining regulation. Canada had the most domestic mining and metals acquisitions, followed by Australia and the U.S.

A number of mining companies acquired non-mining assets in power generation, oil, gas and water. E&Y forecasts that water supplies are likely to be a major factor in future infrastructure acquisitions. Water scarcity, population growth, urbanization and climate change are all putting stress on water supplies. While many mining and metals companies are expecting new technologies to improve water efficiency, acquisitions may also offer a solution.