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M&A deals to continue in H2 as companies take advantage of perceived low prices

M&A deals to continue in H2 as companies take advantage of perceived low prices

Photo by Reuters

9th August 2014

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – The market can expect continued unsolicited merger-and-acquisition (M&A) activity during the second half of the year, driven by companies trying to take advantage of what they perceive to be lower target valuations and prices, Fasken Martineau partner and global mining group leader John Turner told Mining Weekly Online.

The market seemed to be bouncing off the bottom, he said, despite prices having settled back a bit. Despite analysts being reluctant to call the exact timing in which positive movement in share and commodity prices will be seen, there was a growing sentiment that it was getting closer to that time.

Turner told Mining Weekly Online in an interview that much of the M&A activity of the first half of the year was precipitated by companies being beaten down so badly by the continued lackluster global economy, that larger firms with the financial abilities were acting to close deals that had been talked about on and off for years.

“Some of the deals were hostile because of the discrepancies between what the targets saw as fair versus the acquirer’s deemed value. It is a little like back in the global financial crisis where companies had been beat up badly and somebody came along and offered a big premium but [they] still weren’t able to close a deal,” he noted.

Turner cited that a prime example was base metals producer First Quantum Minerals, which was buying Lumina Copper for about C$470-million in a cash and scrip deal that would give the company control of the world-class Taca Taca copper/gold/molybdenum project, in Argentina. It’s something the company had talked about for years, before being able to get a deal done. I think people are becoming more realistic about value in the current environment,” he explained.

Turner headed the Fasken team that had so far this year advised on more than a dozen deals – including M&A, public offerings and capital markets transactions, worth about $2.5-billion. Among the firm’s representations so far this year were Iamgold’s base shelf prospectus allowing it to make offerings of up to $1-billion, First Quantum’s $438-million acquisition of Lumina Copper, Compass Minerals’ $88.5-million acquisition of Wolf Trax, Eldorado Gold’s $33.35-million acquisition of Glory Resources and Investec Bank’s provision of a $32.7-million debt term facility to Keaton Mining.

Turner noted that in any market there was always a value for good projects. However, in recent months several junior and intermediate companies short on cash and not readily able to raise new cash, had taken a hard look at what their key projects were and had been willing to sell what they considered to be noncore projects at reasonable prices.

At the senior level, while there are a lot of projects on the block, there was no big rush to get rid of them, owing to their owners having certain requirements for value, resulting in the market not having seen a lot of movement yet at the higher end, barring a few exceptions.

Turner was optimistic that there would be more gold deals in the second half of the year.

“People have a variety of views on where the gold price is going. It seems for the moment to have stabilised at around $1 300/oz. If it stays at this level, or rises a bit, most companies would be in good shape, but if it continues to fall a bit more, there will be more trouble, causing some more distress deals to be done. I think that companies producing, if the price holds, may be strategically looking for some development projects, taking advantage of the lower prices in the market to acquire some new properties,” he said.

Turner also pointed out that the major cull of junior companies predicted by many analysts had taken place to some degree, noting that these companies were run by people very experienced in surviving a downturn.

“It’s amazing to see, when they apply their minds to it, how long they can last with a relatively small amount of cash. In most cases, we’ve seen companies acting prudently by cutting staff, expenses and exploration work, trying to ride it out. But if it goes on for much longer, we may see some more companies failing,” he added.

WINDOW OF OPPORTUNITY

In the aftermath of the Great Recession, Turner said equity financing for the mining industry had not improved much in recent years, except for a few “windows of opportunity”, which were supported in part by rallies in the particular commodity prices.

These days, he said, more companies were looking at convertible debt deals, because their share price had been beaten up so badly, they did not want to raise capital through issuing equity until at least some price recovery had taken place.

A favourable window would entail a combination of factors, such as an improvement in the price of whatever commodity the company was involved in and overall sentiment in the resources market

“We’ve seen a few times this year [people taking advantage] where things seemed to be heating up to raise money, but [these times] were of limited duration. There is some optimism that in the fall the window will open again and there will be some financing done, but right now there is not a lot [being done to raise] pure equity.

“The good news is that in the deals that [have been concluded], some experienced investors put down some money for the first time in years. I hope we will see some more windows where convertible debt or equity can be raised by a number of companies, including even some of the junior companies,” Turner enthused.

He said for him, the jury was still out on whether private equity would indeed play an increasing role to finance projects, as several commentators had been expecting. “Clients have looked at situations and taken advantage of what was considered a low point in the market, but the reality is they still have difficulty getting their heads around the volatility in the sector and the potential for commodity prices to go down again.

“We are not out of the woods yet; however, it certainly feels a lot better than a year ago. I don’t think anybody is jumping up and down yet, but there are signs that things are starting to turn and we know that when things turn, they often turn very quickly,” Turner said.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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