M&A Mega-Deals Suggest Metals Bull Run

For junior mining companies, cash-strapped at the best of times, one excellent way of achieving growth and raising liquidity can be through arranging mergers or acquisitions between themselves. An M&A deal between two juniors can help both companies raise cash, spread their risk, and increase investor value. Likewise mid-cap enterprises with cash to burn may choose to acquire juniors in order to diversify their assets, restructure their debt, or increase production levels, while eagle eyed private equity firms are always scouring the horizon for opportunities to make speedy ROIs. Regardless of the nature of the deal, a healthy M&A market is a sign that confidence is returning to the sector.

On a global scale M&A activity in the mining sector remained fairly stable in 2015, with total deal value dropping slightly from US$44.6 billion in 2014 to US$40 billion the following year according to accountancy firm EY. With international stock markets performing as unpredictably they did in 2015, it should perhaps come as no surprise that the majority of M&A activity was focused around gold. As investors sought a safe haven for their cash, the yellow metal accounted for US $13.9 billion in M&A deals across the globe in 2015, a 64 percent increase on 2014.

The most notable of these deals, the US$1.5 billion deal to merge Alamos Gold with Aurico gold, will have significant long-term ramifications for the Mexican market. The merger of equals deal added Aurico Gold’s El Chanate mine, which produced more than 79,000 ounces of gold in 2015, to Alamos’ flagship Mulatos mine. Both projects are located in Sonora and will be complemented by Alamos’ advanced development stage project at Esperanza, Morelos. One year on from the merger, which was the second biggest M&A in the global mining sector behind Wandle Holdings’ takeover of Polyus Gold International, the Alamos Gold stock price has risen more than 8 percent on the New York Stock Exchange.

Another deal to affect the Mexican market was First Majestic Silver’s acquisition of SilverCrest in October 2015. The purchase gave First Majestic Silver its sixth producing mine in Mexico with the Santa Elena mine in Sonora. It is projected to increase total production for the company by up to 5 million oz/y of silver equivalent ounces and further cement First Majestic’s role as one of the leading foreign players in the Mexican mining sector. Between completion of the deal on October 1, 2015 to August 2, 2016, First Majestic Silver’s share price had risen from CA$4.13 to CA$24.1 on the Toronto Stock Exchange, a rise of 483 percent.

Most recently, Riverside Resources provided the option to acquire a 70 percent stake in its Sonora Glor gold concession to Centerra Gold. As part of the deal, Centerra Gold will be required to provide US$3.5 million in exploration funding over the next four years. In late July 2016, Yamana Gold announced its intention to sell 100 percent of the Mercedes mine to Premier Gold Mines through a share purchase agreement. The total value of the transaction was negotiated at US$140 million, with US$122.5 million in cash, US$6 million in Premier Gold Mines shares, and US$3 million in shares warrants. Perhaps most notably, Goldcorp announced intentions to sell its Los Filos property in Guerrero due to poor economies of scale, according to the company’s CEO David Garofalo.

Despite these deals, there is still a sense that more could be done on the M&A side in the Mexican mining sector. Many observers lament the conservatism of the market, urging players to take a more proactive, less risk-averse approach to counter the effects of the downturn. However should gold and silver prices sustain their steady rally throughout the second half of 2016, confidence will return to the markets and M&As will as always provide an excellent opportunity for companies of all sizes to capitalize on the new found bullish sentiment.