TORONTO (miningweekly.com) – Low commodity prices are having a big impact on merger and acquisition (M&A) activity, owing to playing such a critical role in determining deal values, professional services firm KPMG partner Jamie Samograd, who focuses on mining in the deal advisory practice, tells Mining Weekly Online.

“[Commodity prices are] critical in determining the deal price, or the seller and buyers’ view of what the deposit’s value in the future might be, as well as what the value of the reserve in the ground might be. For these reasons, one is increasingly seeing deferred payment of consideration in some of the deals,” he said in a recent interview.

Samograd explained that a couple of years ago, deals were not happening because the spread between what the seller wanted and what buyers were willing to pay was great. However, that spread had narrowed. “Sellers are for some reason either more desperate, or with about five years of declining commodity prices under our belts, the outlook is that prices will stay low for longer,” he noted.

According to him, the market was progressively coming to the view that this was the new reality – prices were not going to turn as quickly as previously thought. For this reason, sellers wanted to build in some optionality in sales contracts as they wanted to benefit from the possibility that prices might rise again. “Buyers are not willing to pay that premium upfront.”

A prime example of this was when Lundin Mining bought Freeport-McMoRan’s 80% stake in the Candelaria/Ojos del Salado copper mining operations and supporting infrastructure, in Chile, in 2014, for about $1.8-billion. Lundin had agreed to pay a contingent of up to $200-million, calculated as 5% of net copper revenues in any year over the next five years should the average realised copper price exceed $4/lb.

NEW LOWS

KPMG’s latest ‘Mining M&A quarterly newsletter’ showed that M&A activity in the fourth quarter of 2015 had slowed to its lowest levels recorded since KPMG began publishing the newsletter in 2012.

The new lows touched both deal value and deal volume. According to KPMG, of the 11 significant deals announced worldwide in the period, eight exceeded $100-million. The total global deal value amounted to $3.2-billion, 70.5% below the previous quarter.

KPMG stated that Canadian activity mirrored the global economic deceleration, while China’s economic uncertainty and the worldwide commodities rout were weighing heavily on the mining industry. Copper, gold and the S&P/TSX Global Mining Index ended the quarter in negative territory, while the S&P/TSX Global Gold Index bucked the trend, ticking up 7.9%.

For 2015, the global mining M&A deal value reached $25.7-billion, down 5.8% from the $27.3-billion recorded in 2014. A total of 59 global transactions were recorded in the year, down 41.6% from the 101 deals transacted in 2014.

In the weak M&A environment, gold captured four of the top ten global deals, accounting for 51% of total deal value in the fourth quarter. The four gold transactions included the largest deal of the quarter, while the other three were all-Canadian affairs, KPMG reported.

The largest transaction of the quarter was Hong Kong-based G-Resources’ sale of its Martabe gold mine, in Indonesia, for $775-million, plus a further $130-million deferred payment if gold prices averaged $1 500/oz over a continuous 12-month period before January 2019. Australian private equity firm EMR Capital, together with Farallon Capital and two Indonesian investors led the transaction.

In a deal of similar size, Barrick Gold continued its strategy of selling off noncore assets by divesting properties in Nevada. Barrick agreed to sell the Bald Mountain mine and a 50% stake in the Round Mountain mine to Kinross Gold for $610-million. Upon closing of the transaction, Kinross would own 100% of the Round Mountain mine.

In a related transaction, Barrick also agreed to sell 70% of the Spring Valley project and the Ruby Hill mine to Waterton Global Resource Management for $110-million.

KPMG reported that a single iron-ore transaction represented the quarter’s second-largest deal and captured 21% of deal value in the three-month period. Companhia Siderúrgica Nacional had acquired a 4% stake for $680-million in Congonhas Minérios from an Asian consortium that included Kobe Steel, Posco, China Steel, Nisshin Steel, Itochu, and JFE Steel. Companhia Siderurgica Nacional now held an 87.52% stake in Congonhas Minérios, while the Asian consortium retained 12.48%.

Coal was able to account for 10% of deal value in the quarter with a single all-American transaction. West Virginia-based Seneca Coal Resources bought the remaining coal business of Cliffs Natural Resources for $268-million, which included the Pinnacle mine, in West Virginia, and Oak Grove mine, in Alabama. Seneca could also pay Cliffs an earn out of up to $50-million, depending on the terms of a revenue sharing plan that extended through to 2020.

KPMG also noted four other metals and minerals M&A deals in the fourth quarter, with smaller solo transactions. In the largest of these, South Africa’s Sibanye Gold acquired Aquarius Platinum, also of South Africa, for $294-million. Aquarius’s main operating asset was the Kroondal joint venture with Anglo Platinum. Sibanye was the largest miner of gold bullion in South Africa, and was expanding its diversification into platinum after already bidding for some Anglo American Platinum assets in September.