Limited access to equity financing, a drop in metals prices, and general malaise about the economy has made it a difficult few years for junior mining companies. The result is reduced merger and acquisition activity in the sector in Canada.
While there is still new money outside Canada for select deals, Toronto has “gone into shell shock” according to Jim Kofman, vice chairman of Cormack Securities Inc.
“It’s been a tough time in the resource industry,” said Kofman, speaking as part of a panel on Global Capital Markets and M&A Trends: Financing Alternatives For Mining Companies in a Difficult Market Environment hosted by Baker & McKenzie.
“Things are changing but it is a tough, tough market out there. Market sentiment is incredibly negative when you focus on the resource sector. Yet if you’re in the United States and looking at the S&P, it is flirting with all-time highs.”
M&A activity is particularly important in the mining sector because the business model is based on small companies selling to mid-size companies and the big selling to the bigger — in mining it’s core to the model.
“M&A is declining and we think it’s going to be tough in 2013,” said Kofman.
Mining needs access to cash to grow and with limited access to equity financing for organic growth companies have had to turn to alternatives. “There’s some [equity financing] out there but it’s incredibly selective,” said Kofman, adding while there are more private equity firms interested in resources there are more lookers than buyers.
Mining companies are also looking at high-yield debt and streaming arrangements where companies pre-sell their forward production for more immediate payment.
“From our platform with clients in the main mining jurisdictions in the world some of our overseas clients see the current situation as an opportunity for them to acquire assets at attractive prices or secure sources of production,” said Baker & McKenzie partner Howard Burshtein in an interview. “Other clients see projects out there and have less of an investment focus and more a project focus, and that’s different too.”
Kofman said there will continue to be “modest activity” in mining on the M&A front until there is some long-term clarity on the outlook in Europe and China. However, he said “the food chain” in the mining world is currently “broken.”
“The whole essence of mining is that the smaller companies were sold to the bigger companies and the big ones like Barrick and others were also buyers but the top of the food chain is not in buying mode right now and it’s having an impact right down the ladder,” said Kofman. “The biggest reason for that is that acquisitive growth hasn’t delivered value to shareholders to date and some of the biggest acquisitions have been incredibly destructive. So companies at the top of the food chain are incredibly cautious.”
The big deals such as the ones seen in 2006/2007 with the sale of Alcan to Rio Tinto for $40 billion and the purchase of Inco by Vale for $20 billion may well be in the past, not to be seen again for a long time.
“Yes we had the [CNOOC] Nexen deal but I don’t think we’re going to see the years of the big deal in Canada or, quite frankly, globally the way we have in the resources sector for a long, long time,” said Kofman.
Compare those numbers with figures cited by Osler Hoskin & Harcourt LLP last week that stated there were 76 announced deals in 2012 with a total value of about $4.9 billion — down considerably from 101 deals with a total value of $26.8 billion in the previous year.
At the same time, Burshtein said Toronto is still a leading source for equity capital raised in the industry. About $10 billion was raised through the Toronto Stock Exchange last year for mining companies, significantly higher than any other stock exchange.
“A few years ago capital was more accessible. Not everyone who was able to access the markets before can do so now. It’s a really difficult market and particularly challenging for junior companies and those in the exploration side,” said Burshtein.
He said cash-starved junior mining companies find it a challenge to maintain certain mining claims when they can’t spend a certain amount as required on exploration over a period of time. While they may be sitting on good properties, they run the risk of losing them if they aren’t able to fund exploration in a way that’s going to satisfy the terms of their licences or claims.
Those with access to capital will find there’s not much competition from buyers. Last week, U.S.-based silver mining producer Hecla Mining Co. out-bid a Canadian gold producer for Vancouver-based Aurizon Mines Ltd., to gain control of a Quebec gold mine. The bid came a month after Aurizon rejected a hostile offer from Canadian-based Alamos Gold, which shows there are companies that will act opportunistically (Hecla has been looking to diversify into gold). While Hecla offered $796 million to Alamos’s $780 million, Kofman pointed out “it’s not that competitive.”