Mining M&A: Where are the Deals Getting Done?

By Sprott US Media

Junior miners have been a quiet bunch for the last three years, quiet enough to make many investors, large miners and financial institutions forget about the space. But taking mining as a whole, it appears the market activity has shifted, rather than having simply “gone away.”

The junior mining space has always been characterized by a wide risk to reward ratio, and investors had to hedge their bets, hoping that the gains of one winner would be excessive enough to offset the losses or mediocre performance of five other companies. For many years, this was a winning strategy. Hungry, larger mining houses are poor explorers whose money and energy was better spent building mines rather than searching for new deposits. A happy and symbiotic relationship emerged with the junior miners, to whom major and mid tier miners alike looked to furnish a viable product pipeline as they naturally deplete their own resources through extraction.

In the race for increased share prices, major mining houses were willing to spend their cash and stock to acquire juniors’ and mid-tiers’ assets, whether those assets were in production or not, and to pay handsomely, as competition for these deals was fierce.

But in the last four years, this relationship seems to have broken, or at the very least, shifted, as majors’ appetites for assets have changed.

Majors used to want size: the larger the asset, the better. The majors required a well-stocked pipeline to assure many years of uninterrupted production. Profitability was certainly important, but mass was key. After decades of rising commodities prices, the financial success of each deposit became dependent on further price increases. Perhaps the mine did not exhibit exceedingly strong margins today, but with a seemingly unabated rise of gold, copper, silver, platinum and iron prices, surely the margins would improve tomorrow.

Cue a few years of price declines, and the M&A model for major miners has been undoubtedly broken.

And yet, merger and acquisition activity has not stopped.

In 2015, there were at least 10 “mega” deals completed valued at over $1 billion each. These 10 deals alone accounted for $25.3 billion in total value.

In the 2015 Trends and 2016 Outlook report by Ernst and Young, they quote some fascinating historical volume trends for the mining industry.

What we see here is a drop in overall volume over the last five years, but not necessarily a drop
in deal value. In 2014, 544 deals were done, representing $44.6 billion in overall value (or an average deal size of $82.0 million). In 2015, 358 deals were done, representing $40 billion in value (excluding the South 32 spin off) and an average deal size of $111.7 million. That’s a huge 36% increase in average deal size.

This pattern persists for junior and mid tier participants. The median deal value for 2015 was $7.2 million, compared with just $3.2 million in 2014.

So how do we explain this drop in volume, but rise in average deal price?

Majors are selling, buying, or merging to achieve healthier balance sheets as they attempt to refinance their debt and refocus their core operations. While they used to want size, now they want profitability and certainty.

Of the deals completed in 2015, 67% by value targeted assets in developed countries, and gold assets were the most targeted by both volume of deals and value of deals.

Finally, the majority of the deals completed in 2015 were for assets which were either in production, or had very near-term visibility into production.

This last point tosses most juniors by the wayside, regardless of the quality of their assets.

When the market was more competitive, investors searching for value were diligent in assessing the individual characteristics of each deposit or exploration story. The grade, size, and cost to extract the product was studied carefully, and one sparkling drill hole was enough to excite a wide range of potential buyers.

Conversely, today the major miners are concerned with rebalancing, whittling away at their non-core assets, and picking up those with strong cash flow profiles. Capital expenditures have been slashed, loss-making operations have been mothballed, and the name of the game is margin improvement. The mid-tiers are responding by merging with their equals to assume a stronger market position, and hopefully a stronger balance sheet. Mining M&A has not gone away, but it has moved up market, for now.

Works Cited: "Mergers, Acquisitions and Capital Raisings in Mining and Metals." Ernst & Young Mining and Metals Group (2016): n. pag. Web. 4 Mar. 2016.

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