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Mining M&A activity has defied the doubters and returned to prominence in 2014, with several big deals being struck and more in the pipeline.
After an extremely slow 2013, the expectations for mergers and acquisitions activity were muted going into this year. Metal prices remained low, junior and intermediate companies did not want to sell while their stock prices were depressed, and many seniors were still trying to recover from bad acquisitions in the last cycle. They were effectively in the investor “penalty box.”
Regardless, the takeovers have come. There have been 41 Canadian mining deals so far this year worth a total of $7.1-billion, according to Financial Post Data. By comparison, there were just $9.3-billion of deals in all of 2013.
Most notably, there has been an impressive number of large and medium-sized takeovers, including those of Osisko Mining Corp. ($3.7-billion), Augusta Resource Corp. ($555-million), Lumina Copper Corp. ($470-million), and Sulliden Gold Corp. Ltd. ($300-million). And of course, Barrick Gold Corp. and Newmont Mining Corp. were negotiating a potential US$13-billion tie-up until talks collapsed in April.
The pace and size of deals is still far below peak years like 2010, when there were 191 transactions worth almost $40-billion. But the action is very encouraging in a sector that needs more consolidation.
Kevin Thomson, a partner at Davies Ward Phillips & Vineberg LLP who works on many mining deals, said the hostile bid for Osisko back in January was the catalyst that got people looking at M&A again. He said his phone started ringing off the hook shortly after that.
“The swashbuckling days of 2006 and 2007, when you could sell anything to anybody, are not there anymore,” he said. “But the demand for quality assets is absolutely still there.”
An uptick in the gold price improved market sentiment and helped propel more deals in that space. But the activity across the sector has caught many insiders off-guard.
Egizio Bianchini, co-head of the mining group at BMO Capital Markets, called the action a “pleasant surprise.”
“There was one point in the nadir of sentiment where it would have been hard for most anybody [to do deals],” he said. “There were a handful of companies that could have done something without investors seriously questioning their sanity.”
That has changed. Mr. Bianchini said larger companies are being spurred to act, sometimes by investors and sometimes because their flat or declining production profiles force them to look at deals. He said there are more companies with a “license” from investors to make acquisitions than there were six months ago.
There is also a large valuation gap in the market between producers and development companies that producers can exploit to do accretive acquisitions. At the same time, developers need capital and the cost of raising it is prohibitive for many of them. That pushes them into the hands of eager buyers.
For the rest of this article, click here: http://business.financialpost.com/2014/07/30/mining-deals-defy-the-doubters/