BC Business
First Quantum's Kansanshi mine in ZambiaFirst Quantum's Kansanshi mine in Zambia
First Quantum’s Kansanshi mine in ZambiaFirst Quantum’s Kansanshi mine in Zambia
B.C. was a major player in global mining deals in 2012, according to a report by PricewaterhouseCoopers LLP that is expected to be made public later this month. According to the report, three of the ten biggest acquisitions announced or closed in the year saw Vancouver-based mining giants on the buy side.
The biggest of the three is First Quantum Minerals Ltd.’s hostile bid to take over Inmet Mining Corp. of Toronto. The deal, worth US$6.7 billion, was announced in 2012 but has yet to close, with First Quantum’s latest offer to shareholders slated to expire next Monday, March 11.
The other two deals involving B.C. companies last year saw Pan American Silver Corp. acquire Minefinders Corp. Ltd., another B.C. company, for $1.3 billion. B2Gold Corp. acquired CGA Mining Ltd. of Australia for $1.2 billion. Both those acquisitions have closed.
Take away Glencore International PLC’s $54-billion bid to acquire Xstrata PLC, both Swiss companies, and First Quantum’s attempt to acquire Inmet was the biggest announced acquisition in the world last year.
Overall, it was a slow year for M&A activity in the global mining sector, with the volume of deals down 30 per cent from the previous year, and at the lowest level since 2005. PWC attributes the slowdown to falling equity prices and rising costs for construction and raw materials, which squeezed profit margins for senior miners, in some cases leading to significant writedowns of assets.
As for the year ahead for B.C. miners, “It’s definitely going to be an interesting year,” says Philip Heywood, leader of the transaction services group in PWC’s Vancouver office, who specializes in mining deals. “The majors, Teck, Goldcorp and others, will continue to see a little bit of hunkering down and a little bit of austerity.” Shareholders in these companies are largely institutional investors, Heywood explains, who are looking for the majors to prove they can get costs under control and improve profitability before undertaking any significant new projects.
As for the junior sector, many sat on the sidelines last year as financing dried up, and there will likely be a shakeout in the coming year. The companies that survive will be those that either have ample cash on the balance sheet, or a promising project in or nearing development.
“There are a lot of juniors that are very strapped for cash, including those in B.C., and you can’t sit on the sidelines forever,” says Heywood. “Where we are now is that the juniors realize that they are going to need to do something.”
With equity markets remaining tight and majors reluctant to take on new projects, juniors have been pursuing a number of alternatives. Many have formed partnerships, typically involving a company with cash joining forces with a company that has a strong development project.
Heywood points to the example of South American Silver Corp., which has $29.5 million in cash, and lost its main asset when its Malku Khota silver project was nationalized by the Bolivian government last year. (The expropriation remains under contention, with South American Silver disputing it in Bolivian courts.) “The company now has cash but its main project is no longer there. I would expect companies like them to be on the hunt for juniors where they can deploy that cash into a project that needs to be advanced,” says Heywood.
Streaming is becoming an increasingly popular means of advancing projects, where one company offers another cash in exchange for a portion of a mine’s future output. Heywood offers Silver Wheaton Corp. as an example; the Vancouver company recently announced two big deals with Vale, promising the Brazilian company $1.9 billion in financing in exchange for 24 per cent of the gold production from Vale’s Salobo mine in Brazil and 70 per cent of gold production from certain of Vale’s properties in Sudbury, Ontario.
As for the coming year, Heywood predicts a good year for companies at both the senior and junior ends of the sector, but with one big “if”: “If we see continued demand for commodities and sustained strong commodity prices, it will be beneficial for juniors because equity markets will begin to relax a little, and seniors will be able to sell their story to shareholders a little better.”
Heywood cautions that’s a big “if,” though: “If that commodity demand isn’t there or starts to drop off then we’ll continue to see the challenging times that we’ve had. That’s worrisome, particularly for the junior end of the market.”