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Mining M&A Market Purring Back to Life in 2015

John Gravelle - PwC
Global Mining Leader and Canadian Mining Leader

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Wed, 10/21/2015 - 15:27

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After the mining M&A market underwent a desolate year in 2014, analysts are excited for 2015 as it promises a different reality. Majors and juniors alike seem to be either looking to buy or ready to sell, creating a natural M&A market. In the last months of 2014, a few choice deals began to indicate that changes were nigh for 2015. A number of these deals concerned Mexico directly, especially when Coeur Mining acquired Paramount Gold & Silver, Scorpio Mining merged with U.S. Silver & Gold, and Timmins Gold acquired Goldgroup Mining’s Caballo Blanco project in Veracruz.

With a high number of firms making encouraging noises about considering acquisitions, the first quarter of 2015 could provide some welcoming news for a mining industry in need of a boost. Research by Grant Thornton suggests that this perfect storm could lead to the value of M&As throughout in 2015 reaching double the level seen in 2013. The Gathering Momentum report was compiled by consulting with over 250 senior mining executives from all around the world and turned up some interesting findings. For example, with around 10% of junior companies facing the imminent risk of bankruptcy and 25% of majors looking like they will struggle with current financial constraints, it seems like distressed assets and low valuations will be in plentiful supply. This means companies that were able to weather the 2013-2014 storm and now find themselves with cash on hand will find some wise purchases to make. Against the figures of companies that will struggle, Grant Thornton finds that 35% of junior mining exploration firms and 32% of majors are now on the hunt for acquisitions. These numbers are close to those more interested in selling, to the tune of 36% of juniors and 27% of majors. Traces of this situation began to appear in 2014 when Agnico Eagle and Yamana Gold bought Osisko Mining for US$3.49 billion, after a failed hostile takeover bid by Goldcorp. These findings are largely backed up by Ernst & Young’s (EY) Capital Confidence Barometer, which found 46% of companies were looking to close an acquisition in 12 months to come. This rate will be welcome to forecasters, as it stands at almost double the rate seen in mid-2014. EY has also spoken out on the potential presented by private capital funds that are flush with cash to spend in a mining industry that once again presents good opportunities. In August 2014, EY estimated that these private funds had US$10-20 billion to inject into metals and mining transactions.

However, the aforementioned desire to sell may not greatly benefit juniors that are in dire financial straits. Grant Thornton seizes on the fact that the financial crisis has battered juniors, with many admitting that even as signs of a recovery emerge, funds are proving hard to come by. The analysis firm states that 59% of juniors it interviewed have to raise funds in the next year and around 33% accepted this might have to come in the form of a merger. But given their condition, the valuations reached in such deals might not be impressive. Such low valuations would certainly spur enthusiasm among buyers but companies being approached for a merger will have to assess their longterm goals against a sub-par injection of funds.

PwC is also keen to point out that those companies looking at JVs must carefully consider both the risks and opportunities in play. JVs can be safer than an all-out acquisition, but heighten the risk of negotiations collapsing due to the quarrels between the two boards, or lead to significant delays in project planning and execution. “When a 50/50 JV is formed, there is usually a lot of discussion on who retains the ultimate veto on major decisions such as mine plans, CAPEX spend, and capital calls,” says Stephen Mullowney, PwC Canada’s Mining Deals Leader. “As there is usually a dilution mechanism, this can lead to potential problems down road if one party is not able to make capital calls.” PwC recommends that such challenges can be reduced by mining operators teaming up in a JV with partners whose core business is not mining, such as sovereign wealth funds. This is where the long-term aims of a mining company looking to stay in control can merge with the investment goals of the private funds mentioned in EY’s research. These funds will usually not look to claim a controlling stake in a project and will remain focused on ROI, trusting a mining operator to run the project in a profitable manner. “While JVs may not have the same ‘star power’ as an outright takeover or a mega-deal, they provide some flexibility and can be an effective alternative for miners in an increasingly challenging climate,” stated John Gravelle, PwC’s Global Mining Leader and Canadian Mining Leader, back in March 2014.

It seems certain that the mining M&A market will provide a challenging environment to navigate for companies looking to buy, sell, or find the right partner. However, after two years of a virtual M&A standstill, any activity is welcome.

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