Optimization Driving Today's Mining Industry

According to statistics released by EY, M&As within the global mining context are becoming increasingly prevalent with over US$40 billion of deals completed in 2015. In an environment of low prices, companies are trying to keep costs low while also increasing production, meaning that acquisition of an existing mining asset is often an attractive option, says Mauricio Candiani, President & CEO of Candiani Mining Investment Bank. Candiani is interested in brokering M&A deals in Mexico and South America and has capitalized on the market downturn and recent increase in activity. “It is a noted fact that in 2014 the M&A market was desolate, while research suggested that 2015 offered a comeback,” he explains. “For 2016, we see a larger number of mergers between small and midtier producers. The main drivers are effort to gain enough size, cash flow, and a well-established balance between productive assets and assets that are in a development or early exploration stage.”

He believes the mining industry will continue to wipe out junior players but that this will be the catalyst for a survival of the fittest mentality, with the potential for modest exploration of flagship projects exclusively. “Conversely in Mexico, the major conglomerates have unexpectedly weathered this hostile environment," he comments. "Regardless of the low level of their stock price, all have reduced operational costs significantly and kept their balance sheets in strong shape. Some have made use of acquisition opportunities, while mid-tier production companies have struggled enough and they have either stopped operations or gained a new kind of momentum with smaller margins.” For the moment at least, he believes that early stage exploration is dead and a series of conditions must be met in order to have these projects reexamined. “Whenever prices rebound and capital markets gain some momentum to enable them to expose themselves more to high-risk investments, we will see new money flowing into exploration teams capable of discovering or re-size new deposits,” he states. “This will only start happening when the existing inventory of mid to advanced projects runs out.” It is important to divide real acquisitions and strategic mergers, according to Candiani. “Some companies are invested in gaining full control of a company and are ready to pay in full for that control, and that is what we consider to be a real acquisition,” he explains. “A strategic merger is where we see two companies that are struggling and arrange a merger that is presented as an acquisition. This is due to one of the players being bigger than the other or having a stronger balance sheet." He believes the quadrupling of the value of operations in Latin America from US$2.8 billion in 2013 to US$11.9 billion in 2014 may come as a surprise to some but these large acquisitions paid in stock. “These are logical transactions to follow since companies are tight on cash,” he declares. “The M&A activity in the last two years has been driven by the fact that small and mid-size companies have interesting projects in their pipeline but do not have enough capital to carry them out.”