We often highlight articles that would be interesting and relevant to the Firmex community. We thought you might find the following PwC research report insightful, analysing the top mining deals of 2012 and the deal outlook for 2013.
Down But Not Out
It was far from the most active year for mining mergers and acquisitions (M&A), but 2012 had its share of exciting transactions and trends.
The obvious deal-of-the-year was the $54-billion blockbuster merger between Switzerland-based Glencore International and UK-based Xstrata, to form the world’s fourth-largest diversified miner. There was some controversy around the deal in terms of offer price and retention bonuses, but as it works its way through final regulatory approvals, “Glenstrata” is expected to go down in history as one of the largest mining marriages in history.
Commodity Prices Rebound
There was some concern when the deal was announced in February 2012 that it might have cursed commodity prices, which took a dive in the first half of the year. However, as 2012 wound down, prices of gold, silver, copper, zinc and other metals rebounded. Market volatility is expected to continue, but miners are confident that demand from resource-hungry nations such as China will continue to feed demand for years to come.
Precious Metals Shine
While “Glenstrata” dominated news headlines, 2012 was not a one-hit wonder for M&A activity. Copper was the most sought-after metal when measured by deal value in 2012, and evident in First Quantum Minerals Ltd.’s $6.7 billion hostile bid for Inmet Mining Corp. That said, copper couldn’t outpace gold in terms M&A deal volume. While 2012 didn’t yield any blockbuster gold deals, the mining community did witness plenty of interest in the gold space. The two largest gold deals in 2012 included Pan American Silver Corp.’s $1.4-billion purchase of Minefinders Corp. Ltd. and B2Gold Corp.’s $1.2-billion purchase of CGA Mining Ltd.
Escalating Costs Bring Both Write-Downs and Opportunities
M&A activity across the sector was driven by a drop in equities prices as a result of general market jitters, as well as the rising costs for construction, labour and raw materials that have squeezed profit margins, in some cases causing billion dollar write-downs and project delays.
On the flip side, for some major miners with money to spend, the lower valuations created buying opportunities. Consider U.S. silver producer Coeur d’Alene Mines Corp.’s decision in early 2013 to buy Vancouver’s Orko Silver Corp. For $350-million, breaking up a deal Orko had made previously with First Majestic Silver Corp. At the time the deal was announced, CEO Mitchell Krebs noted that lower valuations and tight finance markets made it an attractive time to make a move.
Companies with financial constraints have been forced to get creative when it comes to raising money to fund acquisitions or advance projects. We anticipate the need for creativity to continue well into 2013. Equity investors are still content to sit on the sidelines until a marked improvements in the markets appears. Expect miners to continue to consider the bond market to finance their projects, joint-ventures and royalty and streaming agreements.
What we don’t expect to see in 2013 are mega-mergers. With a rash of write-downs in 2012 related to significant acquisitions completed in prior years, shareholders are wary, not willing to stomach the risks associated with mega-mergers. Many of the CEOs associated with the announced write-downs have been replaced by CEOs peddling a new mandate, bottom-line growth.
Asset rationalization will be a key theme amongst senior miners in 2013. Many senior mining companies such as Barrick, BHP Biliton, Anglo-America and Rio Tinto have disclosed they are in the market to sell, not buy. As seniors look to divest non-key assets, intermediates with strong cash positions and a track record of successfully bringing projects on-line will be opportunist, looking for strategic “tuck-in” acquisitions.
In addition, seniors and intermediates looking to de-risk projects will pursue joint venture partners. We expect Chinese investors to display interest in these joint venture opportunities as they look into increase their global holdings in the resource sector. Joint-venture arrangements offer Chinese investors many advantages to that of a straight-up takeover, including the much desired transfer of skills and knowledge.
Junior Miners Join Forces
As for juniors, the road will remain bumpy. In the absence of available equity, in 2012 we began to see junior mining companies team up with one-another in an attempt to move their projects forward. Looking to pair the strength of one company with the strength of the other, junior mining CEOs are able to create a stronger, more resilient mining company, better positioned to ride out the equity down-turn.
Overall, those participating in the deal market will remain cautions not to overpay for assets or make investments that appear too risky to shareholders. While 2012 was already a disciplined year for M&A activity, miners will be equally as cautions in 2013.