Regardless of the merits of consolidation in an overpopulated mining space, merger and acquisition activity has been muted so far this year, especially in North America. Why, when valuations are so low and good projects can be acquired for a song, aren’t companies lining up for the bargains?
According to SNL Mineral Economics, deal value jumped 66% to almost $12 bn in the first quarter of 2014 compared to the previous quarter. But one deal accounted for half that value: China Minmetals purchase of Peru’s Las Bambas copper project from Glencore for $5.85 bn.
More telling is the number of announced deals, which slipped to 62 in the first quarter compared with 76 in the December 2013 quarter. Even then, several transactions have failed to materialize because either the companies can’t agree on what constitutes a fair price and/or shareholders are demanding that buyers exercise discipline after several years of writedowns on expensive acquisitions. Austerity has replaced growth.
Junior management reluctant to budge
It’s estimated that half of the roughly 1,600 companies listed on the TSX and TSX-V have less than three months worth of cash in the treasury. Naturally, industry followers have been predicting heavy consolidation among this group as a result.
But that hasn’t happened, partly because executives are reluctant to give up their titles and paycheques and partly because merging can be exorbitant for companies just trying to survive. So instead of joining forces to create stronger companies, most juniors are hunkering down, waiting for a revival of investor interest that may or may not arrive in time to save them.
Debate over fair price
Larger companies are having a hard time completing deals too. Prominent among the thwarted hostile takeovers was Goldcorp’s offer of $3.6 bn for Osisko Mining and its Malartic gold mine in Quebec. Goldcorp withdrew the offer in April after Agnico Eagle Mines and Yamana Gold teamed up with a better, friendly offer of $3.9 bn for the gold producer.
In terms of acquisition activity, Agnico stands out as an exception in the industry, quietly investing in several small companies or projects while assets are relatively cheap and competition low.
In the copper space, Augusta Resources responded to a lowball bid by HudBay Minerals by seeking suitors willing to pay more for its main asset, the Rosemont project in Arizona. But none have come to the altar yet, likely because there is still some uncertainty about when Augusta will receive permits for construction. HudBay has extended its hostile offer, which values Augusta at about $443 mn, by two months to mid-July.
And a $13 bn deal to merge gold giants Barrick Gold and Newmont Mining failed spectacularly when egos overruled prudence. Even though the two companies, which have neighbouring assets in Nevada, agreed they could find US$1 bn in annual savings if they joined forces, negotiations collapsed amid public sparring from both sides of the table.
China muscling in
China may be filling the void left by tentative Western companies. According to Bloomberg, Chinese buyers accounted for 38% of the mining deals during the first four months of 2014, compared to 15% in the same period in 2013, when dealmaking dropped to a 4-year low.
Bloomberg says the increase is partly the result of new rules in China that allow most foreign investments valued at less than US$1 bn to proceed without government approval and partly because mining assets, especially in the copper, iron ore and coal spaces, are so undervalued.
The World Bank expects China to overtake the United States as the world’s largest economy by the end of this year. If Western mining companies continue to shy away from deals, China could soon dominate the global mining scene too.
Time to act?
It may be time for producers to ratchet up the risk taking in order to ensure long term growth, a strategy that Agnico Eagle continues to employ as it strives to produce at least 1.2 mn ounces by 2015. There are lots of good companies out there (e.g. Pretium Resources, True Gold Mining), especially in the gold space where operational discipline has been particularly strict. But does anyone have the guts to buy them?
