Global merger and acquisition activity in the mining sector fell 31% in the first half of 2013, according to PwC, and the third quarter looked equally sluggish. But towards the end of the year there were signs that the beleaguered junior sector was beginning to consolidate in the interests of survival.
Among other smaller deals, Primero Mining agreed to buy Brigus Gold to create a mid-tier gold producer based in the Americas. The all stock transaction, valued at about $200 mn, combines Brigus’s Black Fox gold mine in Ontario and Goldfields project in Saskatchewan with Primero’s operations in Mexico to produce about 250,000 oz. gold per year.
Likewise, Mercator Minerals agreed to be swallowed by Russia’s Intergeo MMC to create a growing copper miner that will combine the Mineral Park mine in Arizona and the El Pilar project in Mexico with Intergeo’s Ak-Sug copper project in Siberia. The deal signals an end to Intergeo’s attempts to launch an IPO on the TSX in an unreceptive market.
And long-time neighbours Asanko Gold and PMI Gold plan to merge in an all-share deal valued at $183 mn to create a mid-tier gold company operating in Ghana with the potential to produce 400,000 oz. annually.
“There is more activity on the smaller scale, but it will take a little longer for the monster assets to get digested by the market,” says Allan Fordyce, managing director of investment banking for BNP Paribas.
Small companies acquire major assets
Most of the senior producers have lost interest in acquiring assets because they are under pressure from shareholders to clean up balance sheets and boost profitability. Gold producers in particular are looking inward after an annual decline in the S&P/TSX global gold index of 48% that far exceeded the 28% drop in gold prices.
“The only company in a really good position to buy is Teck, because it has a solid balance sheet and cash flow,” says Fordyce. On the contrary, many of Teck’s peers are selling non-core assets to smaller companies with access to capital and lower overheads.
In April, for instance, BHP Copper Inc., a subsidiary of BHP Billiton, sold the Pinto Valley copper mine in Arizona to Capstone Mining for US$650 mn. The transaction, financed by two $200 mn loans from Scotiabank, gives Capstone its third mine as it strives to become an intermediate copper producer.
Similarly, Rio Tinto Nickel, a subsidiary of Rio Tinto plc, sold the high grade Eagle mine in northern Michigan to Lundin Mining for US$325 mn. The deal, also financed by bank loans, gives Lundin an underground nickel-copper mine in a low risk jurisdiction to add to its base metal operations in Portugal, Sweden and Spain.
Sherritt International, meanwhile, sold its portfolio of coal and potash royalties to Newfoundland-based Altius Minerals Corp. for $481 mn and a suite of coal mines in Alberta and Saskatchewan to Colorado-based Westmoreland Coal for $465 mn.
And Newmont Mining is selling the Midas gold mine and mill in Nevada to Klondex Mines for US$83 mn. The acquisition, financed by a combination a $35 mn package from royalty company Franco-Nevada, a $35 mn private placement of subscription receipts and a $25 mn private placement of secured notes, will complement Klondex’s nearby Fire Creek project.
“These deals are indicative of just how much pressure the large majors are under to improve their balance sheets and profitability by walking away from or monetizing non-core assets,” says Mark Zastre national leader of Grant Thorton’s mining sector. “We’ll see more of these acquisitions by smaller companies, possibly financed in non-traditional ways.”
Junior financings plummet, TSX salvaged by Barrick
Financings for juniors on the Toronto Venture Exchange (TSX-V) fell to just over one billion dollars for the year to November 30, an 80% decline from the same period in 2011, when financings reached $5.5 bn, and less than half of what was raised for the first 11 months of 2012.
“Over the past year or two, investors have become more risk averse and as a result they have moved into other sectors,” says Orlee Wertheim, head of mining business development for the TMX Group. “Fewer financings are being done by early stage exploration companies, which make up a large part of the mining companies on the TSX-V, and the financings that do happen are smaller in terms of dollar amount. Companies don’t want to dilute their shareholders any more than they have to.”
One prerequisite for substantial financing on the TSX-V this year was access to a project that generates, or is about to generate, cash flow. The largest financings were completed by SantaCruz Silver Mining ($40.4 mn), owner of one producing mine (Rosario) and two advanced-stage projects in Mexico; Corsa Coal ($31 mn), a Toronto-based company with operations in the U.S. Appalachian coal belt; and Atico Mining ($19.4 mn), which recently purchased the El Roble copper-gold mine in Colombia.
There were only six mining IPOs on the TSX-V in the first 11 months of 2013, compared with 38 at the same time in 2012. Of those new listings, five were companies with projects in Canada while one (Aurania Resources) had a gold project in Switzerland.
“The companies that are getting financed typically have projects in more stable jurisdictions,” says Wertheim. “We’re seeing a trend towards financings for projects in Canada, the United States and other jurisdictions where there is a good rule of law and companies have some certainty of title, taxes and royalties.”
Financings on the senior exchange, the TSX, were more stable, falling 23% from the $6.9 bn raised during the same period last year. However, a single US$3 bn bought deal financing completed by Barrick Gold late in the year skewed the numbers.
Barrick’s massive financing, though scorned by shareholders, was enough to vault mining back into first place for equity capital raised by sectors within the TMX Group, ahead of real estate ($5.2 bn), oil and gas ($4.6 bn) and financial services ($4.4 bn). Other major raises included secondary offerings by Platinum Group Metals ($180 mn), Detour Gold ($176 mn), Allied Nevada Gold ($154 mn), and Guyana Goldfields ($100 mn).
Predictions that hundreds of companies would lose their listings this year as they ran out of cash did not come true. There were 67 delistings of mining companies on the TSX and TSX-V in first 11 months of the year. Of those, 35 were the result of M&A, 20 were at the request of the companies themselves and only 12 were removed because they did not meet listing requirements, according to Wertheim.
But the overall market capitalization of the sector has fallen dramatically, from $481 bn in late 2011 to $225 bn, as investors sold off mining equities in the wake of falling commodity prices, underperforming projects, missed deadlines and moves towards resource nationalization in several jurisdictions where North American companies operate.
The S&P/TSX Venture composite index, the bellwether of the junior sector, hovered just above 900 towards year end, off 24% over 12 months. The index reached a peak of 2440 in March 2011 and has been in steady decline ever since.
CNSX aims to take advantage of carnage
A smaller but less expensive exchange may attract some of the juniors. The Toronto-based CNSX has only a tenth of the listings of the TSX-V, but recent injections of capital may give the tiny bourse the traction it needs to compete seriously for mining listings.
Over the past year, both Dundee Corp.’s Ned Goodman and Caldwell Financial founder Thomas Caldwell have purchased significant stakes in the CNSX and are actively promoting the exchange as home for mining companies who want cheaper listing and filing fees and less red tape.
“I have been impressed for some time with CNSX’s approach to helping entrepreneurs access the public capital markets in Canada,” said Goodman at the time of the investment. “The CNSX model reduces the time and expense companies face in going public, and in maintaining a listing, along with a high level of continuous disclosure.”
Private equity: will it fill some of the void?
Meanwhile, mining bargains are proving too attractive to resist for the traditionally conservative private equity sector. At mid-year, Toronto-based Brookfield Capital Partners provided a $130 mn loan to North American Palladium (NAP) for the expansion of NAP’s Lac des Iles mine in Ontario, while Calgary-based Matco gave Yellowhead Mining an $8 mn convertible loan to continue work on the Harper Creek copper-gold-silver project in south-central British Columbia.
Larger U.S. equity firms, including Apollo Global Management, Blackstone Group and Caralyle Group continue to circle the sector, though none have announced a deal on the scale of TPG Capital’s $500 mn investment in X2 Resources, a new company run by former Xstrata CEO that is planning to build itself into a mid-tier diversified producer.
Closer to the riskier end of the spectrum, Toronto-based Minvest Partners is considering advanced exploration projects that can purchased cheaply, upgraded over a few years, then sold to producers.
Companies such as metals trader RK mine finance, part of the Red Kite Group, are also offering a range of financing to junior and mid-cap mining companies. For example, Asanko Gold secured $150 mn from RK for its Esaase gold project through a combination of debt and off-take financing.
But there has been more talk than action with respect to private equity investments in the mining sector. Although some firms have recruited ex-CEOs for their expertise, their overall ability to professionally vet projects remains limited.
“I’m still sceptical,” says Zastre. “Private equity has traditionally been more involved in oil and gas than mining because mining is so cyclical and it’s much harder to predict when cash flow will be realized.”
Major development projects, major headaches
One of the more disturbing trends to emerge in 2013 was the failure by the industry to deliver new projects. “Several major deposits have come to a halt because of geopolitical risk, cost escalations for labour, steel and energy and the infrastructure requirements for remote projects,” says Miranda Werstiuk, vice president of IBK Capital.
The biggest disappointment was Pascua Lama, the massive gold mine on the border of Chile and Argentina that Barrick Gold has spent US$5.4 bn to develop. Barrick shelved the project indefinitely in October, citing lower gold prices as well as legal and regulatory obstacles imposed by the Chilean government. Other suspensions include:
Goldcorp’s $3.9 bn El Morro gold-copper mine, now dormant while the Chilean government considers an appeal by indigenous communities that say they were not properly consulted about the project.
Kinross Gold’s Fruta del Norte gold project, purchased for US$1 bn in 2008 but abandoned this year after Kinross failed to reach an agreement with the Ecuadorean government on the terms of a windfall tax.
Colossus Minerals’ technically complex Serra Pelada gold project in Brazil, put on care and maintenance after a last ditch financing attempt with Arias Resources Capital Management failed. Colossus, once a junior market darling that soared to $8 per share in 2011, opened 2014 trading at seven cents.
Cliffs Natural Resources $3 bn Black Thor chromite project in northern Canada, suspended indefinitely because of uncertain timelines and the risks associated with developing infrastructure.
Outlook
There doesn’t appear to be any relief forthcoming as 2014 unfolds and new supplies of copper, nickel and gold start entering the market. “I think it’s going to get worse before it gets better. There will be more companies that walk away from projects, delist or get acquired,” says Zastre. “We won’t be through the worst of it until we have a gold price that everyone is comfortable with.”
But the inability of several companies to make money at current precious metal prices suggests a bottom may not be too far off for the gold producers. Fordyce argues that at total sustaining costs of $1000 per oz. or more, gold does not have much room to drop without a major cut in production “We’re probably close to bottom and its not going to get much worse” he says.
For the base metal sector, Fordyce is optimistic in the longer term because the economies of both the United States and parts of Europe are finally beginning to brighten. He says tapering of the bond buying program in the US – a signal that the feds are less worried about economic prospects - could have a positive impact on base metal prices.
As for M&A, he says 2014 is going to be a lot more active than 2013. “I think you are going to see much more consolidation on the junior level,” he says.
