A Renewed Appetite in Mexico for M&A DealsMon, 10/22/2018 - 16:12
Q: Why is it important to maintain a healthy market for M&A deals in the Mexican mining industry?
A: It is important to ensure a healthy and continuous flow of transactions in mining because this helps to push the discovery of high-value assets and to replenish portfolios. For example, a junior exploration company may take a property that is only worth a few hundred thousand dollars and turn it into a US$4 million asset after completing drilling and feasibility studies. Afterward the player may decide to sell the asset to another company that then continues to drill in another part of the property. The concession will continue to rise in value from one hand to another until an important ore body is discovered. The project can end up being worth US$50 million and will commonly end up in the hands of a major operator to start production when it reaches this point as they are the ones that have the capital to continue developing the mine. For this reason, it is important to promote exploration, which helps increase the likelihood of the next big discovery. Probably one out of 100 exploration projects will reach this level but the process has a strong economic impact in the country, providing employment and capital to thousands of people in Mexico.
Unfortunately, it can be quite expensive to maintain a mining concession in good condition as a variety of permits need be obtained and negotiations must be concluded. Medium-sized players have a significant role as they help fund and continue the exploration started by smaller companies with limited budgets, which in turn helps large operators maintain world-class assets in their portfolios. The industry depends on constant transactions and acquisitions. Our law firm has experience working with lawyers around the world and we specialize in M&A and project finance.
Q: What key trends do you foresee when it comes to M&A deals in the country’s mining sector?
A: The global economy is volatile and the direction in which it is heading is not clear. In times of instability, investors rely on commodities as there will always be demand for minerals. This is what truly differentiates mining from other industries: it is the only sector that can guarantee consumption upon production. Thanks to the current financial climate and the rise in prices, M&A 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. Many transactions will occur as players have to dedicate themselves to either being an exploration company or an operator. It is too expensive to fund both, with the exception of large companies like Pan American Silver. Australian and Asian companies that left during the mining slump are starting to take interest in Mexico again. 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.
Q: Considering RB Abogado’s participation in the acquisition of Primero Mining, what are the main advantages of this deal?
A: We are representing Primero Mining in this deal and while the company will cease to exist and therefore no longer be our client, we are happy to see our client join First Majestic Silver. The company has the advantage of primarily focusing on Mexico, which means that it greatly reduces costs as other international companies have to invest in lawyers and management in each country in which they operate. Our firm additionally helped Primero Mining acquire San Dimas from Goldcorp, one of the oldest mines in Mexico with room for growth and sell Cerro del Gallo to Argonaut Gold in December 2017.
RB Abogados also represents Pan American Silver, which closed a JV with Kootenay Silver in 2016 that has had great results. The JV was not a traditional move for the company as it normally chooses to work with more developed projects. Through due diligence, it decided to take a risk and the projects are performing well.