Fitch Says M&A Mining Risk Rising For Diversified Miners

Debt ratings agency Fitch Ratings said Wednesday that the risk to credit ratings from mergers and acquisitions activity in the mining sector is rising.

"Fitch considers the risk to ratings from M&A activity is rising, although the likelihood of large transactions varies substantially across individual issuers," the credit ratings agency said after canvassing investors during a series of seminars in Europe.

Investors cited two key concerns in the mining sector: M&A risk and cost inflation.

Anglo-Australian mining titan BHP Billiton Ltd (BHP) has the strongest financial capacity in the sector; "large scale M&A is a clear option" for BHP, Fitch said.

Fitch expects that BHP's most likely targets would be Australian natural gas producer Woodside Petroleum Ltd (WPL.AU) and U.S. oil producer Anadarko Petroleum Corp. (APC).

"In Fitch's opinion, a potential link with these companies would be plausible as they would enhance BHPB's scale and operational profile in the highly profitable oil and gas sector," Fitch said.

A BHP spokesman declined to comment on BHP's interest in the two companies.

Fitch expects Anglo-Australian miner Rio Tinto PLC (RIO) to pursue a more conservative M&A strategy, in line with its previous guidance that it would make small to medium size acquisitions in the mid-single billion dollar scale.

The mining giant recently took control of Riversdale Ltd (RIV.AU) after a bid valuing the Mozambique-focused coal miner's equity at nearly $4 billion.

Anglo American PLC (AAL.LN) may also increase its appetite for M&A, Fitch said, although it's less certain because the company has been primarily focused on organic growth, Fitch added.

Rising costs are also a concern, Fitch said, but less so than in the period prior to the financial crisis that caused commodity prices and demand to slump in 2008-09.

Fitch said many companies supplying tires, diggers and other equipment to the mining industry increased their production capacity during the last mining boom (prior to the crisis) and as such "the extreme time delays experienced in 2007 are unlikely to be repeated in coming periods to the same degree."

-By Alex MacDonald, Dow Jones Newswires; [phone]; [e-mail]