TORONTO (miningweekly.com) – Navigating the mergers and acquisitions (M&A) market can be tricky at best, but with increased pressure to conclude deals in the tight economic environment, there are several pitfalls buyers and sellers should heed to maximise deal values.

Professional services firm EY in October released the findings of its Capital Confidence Barometer, which found that 62% of respondents intended to actively pursue an acquisition in the next 12 months, despite the valuation gap, and an adverse political and economic climate, remaining key obstacles to M&A strategy.

“If you can’t grow it, it has to be mined,” noted EY Greater Toronto Area metals and mining leader Blake Langill at the firm’s first Mining Day Conference held last week. Themed ‘Visions of the future of mining,’ Langill’s comment underscored the critical role mining played in the modern economy and, conversely perhaps, to what extent the downturn in the global economy had wreaked havoc on the mining industry.

TESTING TIMES
Iamgold executive VP and CFO Carol Banducci informed the audience that completing M&A transactions in the current environment were complicated by the bruised and battered metals market.

“We see a lot of price volatility, which brings the challenge of bringing potential buyers and sellers in alignment in this extremely uncertain economic climate,” she stated.

Banducci elaborated that it created more risk, leading both producers and buyers to be extremely focused on risk and capital discipline.

Bond and equity financing were difficult to secure in the current climate, with companies now turning to alternative financing sources. While many companies were focused on the operations model to drive costs down, others were focused on selling noncore assets to deleverage and strengthen balance sheets.

“Managing finite assets brings a focus on long-term management strategies and an acute focus on returns on capital. The key is to find those assets that could withstand these vulnerabilities,” she stressed.

Kinross Gold executive VP and CFO Tony Giardini agreed with Banducci’s summation, asking the illustrative question: “How does one make an oil acquisition when oil is trading at $30/bl?”

“Volatility in prices is a major challenge, while financing options are very limited. There is much less risk appetite now.”

He noted that even the precious metals streaming firms that had been a source of alternative financing to project developers, seemingly had a diminished ability to raise equity finance this year. “It would be interesting to see if they are willing to load debt on the balance sheet,” he supposed.

Capital market headwinds and weary investors presented a unique conundrum for miners who wanted to grow their businesses but at the same time protect their balance sheets.

Banducci noted that, in this environment, it was not always easy to sell even a very good noncore asset, pointing to Iamgold’s sale of the Niobec niobium mine, in Quebec, early in 2015.

“Niobium is used in small quantities in the steelmaking process. The challenge was that it is not a well known commodity, and we had to educate the market. Due to price fluctuations, it was a tough negotiation to find a fair value for the asset,” she stated. “It made sense to take the capital from the asset and use it in our core gold business.”

POTENTIAL PITFALLS
Giardini advised that, in the rush to get rid of noncore assets, some companies compiled their data rooms in great haste, which often resulted in lower-quality, incomplete data sets for investors to work with and raised question marks instead, which provided bidders with ammunition to steer value negotiations southward.

He had seen a lot of ‘blue-sky’ potential, or implied advanced future project options, such as for underground expansion, attached to sketchy data.

“If the seller wants to maximise value, make data of high quality available. Credibility is critical. It’s essentially ‘self diligence’ before opening the data room, to lift value,” Giardini said.

Banducci stated that, with about $780-million in cash available for acquisitions, as at the end of the third quarter, many groups were approaching Iamgold with potential deals. Giardini said that Kinross sat on about $1-billion in cash as at the end of the third quarter, attracting many a knock on the door.

“We want to get in as early as possible, to be able to allocate the right resources. We have our finance team integrated in the vetting process. The hardest thing is to say no, when it is easy to say yes,” Giardini said.

TEAM EFFORT
In assessing potential deals, Giardini pointed out that miners were dealing with technical challenges as well, often conducting due diligence in very tight timeframes.

“There’s a lot of pressure on the technical teams tasked to advise on the upside potential of projects, and there is frequently a lot of pressure from the board, making it tough to tell the sometimes not-so-good truth about projects,” he said, noting that difficult decisions were often made throughout the organisation, from the board level, all the way down to the technical team.

Banducci stressed that it took a team to make a good decision. “One always needs a second pair of eyes to identify risks.”

This incorporated the entire team, with engineering, human resources and senior management working together in a collaborative effort to find the best outcome.

Despite this, it was very rare that there was consensus throughout the organisation about a particular decision, she noted, which illustrated the rigorous process the company went through to vet assets.

Banducci said that, through Iamgold’s efforts to run a leaner organisation, it had cut 40% of management, which had enabled it to better engage the technical team.

While fewer people doing more things in the organisation was a challenge, it did not detract from the company’s established process through which it engaged M&A activities, which was designed to enable the right people to do their jobs. This allowed for a lot of filtering to take place before the company became serious about an asset.