M&A Market Flourishes

In Mexico, 220 transactions were sealed across industries in 2017 and mining was also at the top of the heap. Of the estimated US$21 billion that was accumulated in these activities, the sector accounted for 20 percent followed by real estate with 17 percent. Enrique Rodríguez del Bosque, Founding Partner at RB Abogados, says an active M&A market is a sign of a healthy mining industry. “It is important to ensure a healthy and continuous flow of transactions in mining because this helps push the discovery of high-value assets and to replenish portfolios.”
The law firm represents Primero Mining, which closed the acquisition of the year by selling its shares to First Majestic Silver for US$320 million. Its key asset was its flagship San Dimas project. “San Dimas is the largest gold-silver mine in the state of Durango and is one of the most important in the entire country,” says Keith Neumeyer President and CEO of First Majestic Silver. “It is a mine we have had our eyes on for over a decade and, when it became available due to Primero’s financial status, we were able to evaluate the asset.” The acquisition is expected to eventually help the company double its silver production.
JUNIOR PROJECTS, RIPE FOR THE PICKING
While large operators learned their lessons from the downturn and are being awarded with higher purchasing power thanks to their discipline, junior companies continue to struggle financially. This makes way for the closing of deals that are relatively cheap and quick, a context that companies like McEwen used to stay one step ahead of the pack. “Our approach is opportunistic,” says Rob McEwen, Chief Owner of McEwen Mining. “We like to buy assets that are unloved by the market. While a distressed asset purchase will guarantee more work, the low purchase price limits the impact of a downside price and offers a good upside potential.”
In line with its strategy the company recently acquired the Black Fox complex in Canada that was also owned by Primero Mining, purchased in 2014 for US$300 million. “Then it invested US$120 million, increasing its total investment to US$560 million,” explains McEwen. “We bought it for US$35 million, which was equivalent to paying US$0.06 for every US$1 it invested. It came with over 1 million ounces in resources.”
After the acquisition of the Black Fox Complex and before First Majestic Silver acquired the company, Argonaut Gold also dipped into Primero Mining’s portfolio by acquiring Cerro del Gallo mine in Guanajuato for US$15 million in November 2017. Cerro del Gallo was part of a series of projects that had been suspended in 2014 and 2015 due to the drop in precious metal prices. Primero Mining succumbed to opening the company to the market after several years of financial struggle caused by a decision taken by SAT to change an advanced tax agreement.
PROJECT REJUVENATION
The downturn may have forced companies to post projects for sale but the process revives the mining ecosystem as new owners inject new life into previously stagnant mines. One example is Campo Morado that was acquired by Telson Resources from Nyrstar in June 2017 for US$20 million. After a detailed evaluation of the mine, the company was able to identify many areas of opportunities within the project that had been overlooked. “The previous owner focused on zinc and processing a mix of mineral concentrates from various deposits that required more equipment, personnel and costs as each body has unique geological characteristics,” says José Antonio Berlanga, CEO and Director of Telson Mining Corporation. “We decided to instead mine and process mineral from a single deposit and to only exploit areas with profitable grades of gold, silver, lead and copper to reduce costs. We do this even if the deposit has lower levels of zinc as it could hold profitable minerals that were ignored by previous owners.” After acquiring the project, the company was able to start production in less than four months thanks to its revaluation of the project and expertise in the industry.
First Majestic also hopes to breathe new air into San Dimas by diversifying its portfolio. “When Primero owned the San Dimas mine, the stream agreement in place meant the majority of the silver went to Silver Wheaton (now Wheaton Precious Metals), while Primero focused on gold production,” says Neumeyer. “Now that the asset has been sold and the stream agreement has been renegotiated, we have incorporated both gold and silver streams into the agreement.”
As the market recovers and major players turn their eyes to the unloved assets left behind by those that were unable to withstand the bear cycle, Mexico’s M&A market continues to have a strong outlook for the years to come. “Deals in the industry are starting to pick up again. Companies are looking to expand their portfolios and merge with other players to keep shareholders happy,” says Rodríguez del Bosque. “We believe this upcycle will be even more dynamic than the last one. It also helps that companies are getting used to the current administration and the changes that were implemented over the last couple of years.”