Takeaways:
- There have been 59 mergers and acquisitions announced globally in the metals and mining space so far this year through June 5, according to GlobalData, up from 57 deals announced during the same period last year.
- “The industry is ripe for consolidation, at least from the shareholder perspective,” one source said.
- Despite an inclination for mining consolidation, Covid-19 has created challenges for dealmaking in the space, including share price deterioration, hindrances to due diligence and delays for court and regulatory approval, a second source said.
Continued deal-making in the mining sector amid Covid-19 could encourage activist investors to push for more consolidation in the space, said industry advisors and activists, though they warned that the current climate will still pose challenges to public campaigns.
There have been 59 mergers and acquisitions announced globally in the metals and mining space so far this year through June 5, according to GlobalData, up from 57 deals announced during the same period last year. Major recent deals include Endeavour Mining’s $690.7 million
combination with Semafo in March and SSR Mining’s $1.7 billion
merger of equals with Alacer Gold in May. More recently, on June 12, Zijin Mining announced it will
acquire Guyana Goldfields for $238 million.
Shareholders are impatient for change in the sector and will likely encourage some companies to push for a sale, agreed three M&A and shareholder activism lawyers with expertise in the mining sector.
“The industry is ripe for consolidation, at least from the shareholder perspective,” said Bradley Freelan, a partner at law firm Fasken. He noted that shareholders have been pushing for deals in the space for years. The sector attracts a lot of nontraditional activists, said Ian Robertson, president of proxy solicitor Kingsdale Advisors, noting that former CEOs and founders as well as long-term shareholders facing a poor performance and deteriorating share price often launch campaigns.
The mining sector has fared better during Covid-19 compared with other industries. The S&P/TSX Global Mining Index has gained 3.4% so far this year, compared with a 3.6% loss for the S&P 500 Index. Most of the world’s leading mining companies are based in Canada, Australia and South Africa, though the U.S. also houses some market leaders such as Newmont Corp, Southern Copper and Freeport-McMoRan.
There is a recognition in the industry that consolidation is necessary for companies to continue competing, Robertson said. This is largely because mines are depleting resources, forcing the larger companies with balance sheet flexibility to acquire more assets in order to maintain production levels, said Matthew Zabloski, founder of Delbrook Capital Advisors, which
launched a proxy contest at Canadian firm Rapier Gold in 2017. Later that year, the company
agreed to be acquired by Canada’s GFG Resources.
“There are too many subpar companies and junior companies with little to no access to capital,” agreed David Neuhauser, founder of Livermore Partners, which publicly
backed activist Paulson & Co. in its
quest for change at another Canadian company, Detour Gold, in 2018. “Given the lack of value companies have achieved for shareholders ... the weak will need to merge or be sold to achieve the required results,” Neuhauser said.
Delbrook, Livermore and Paulson are members of the Shareholders’ Gold Council, which launched in 2018 to represent the interests of shareholders in the gold industry. Less than a year after Paulson won its campaign at Detour, the company agreed to
sell itself to Kirkland Lake Gold in November 2019 for $3 billion.
J.R. Laffin, a partner at law firm Stikeman Elliott, noted that the majority of the announced deals this year were in the works before Covid-19 hit in mid-March. The resurgence in gold prices could also have influenced the deals, Zabloski said. Gold prices are up nearly 30% year over year, creating “huge optimism in that sector,” agreed Patricia Olasker, a partner at law firm Davies. Gold is currently valued at around $1,725 per ounce, an increase of approximately 14% since the start of the year.
Likely Targets
M&A targets in the mining sector are often single-asset companies that prepare only one mine, said Robertson and Zabloski. These include Canadian companies Guyana Goldfields and Torex Gold Resources, which have market caps of $222 million and $1.1 billion, respectively. These single-asset companies often partake in no- or low-premium mergers of equals to capitalize on geographic or commodity synergies, or are acquired by larger players in the space, Zabloski said. Major large acquirers include Colorado-based Newmont, which has a $44.7 billion market cap, and U.S.-listed, Canadian firms Barrick Gold and Agnico Eagle Mines, which have respective market caps of $42.7 billion and $14 billion.
Olasker and Laffin said smaller companies are even more vulnerable now because they are likely to be disproportionately hit by Covid-19. Guyana Goldfields has seen its share price tumble 56% over the past five years, and Torex has lost nearly 12% of its value so far this year. However, Laffin noted that the vulnerability of these companies will depend on what metals or minerals they mine as well as whether they are in the development or production phase. Gold companies are currently less vulnerable to downturns from Covid-19 because the commodity has seen a resurgence in value, which often happens amid economic hardships, Freelan said. Other metals that have not fared as well, such as copper, might provide more opportunities for activists to push for change, he added.
Companies susceptible to activism also include corporations that have a pattern of “value destructive acquisitions,” said Olasker. Activists will often push these companies to conduct asset sales or spinoffs, Robertson said. U.S.-listed Canadian company Teck Resources, which has a $5.4 billion market cap, is currently facing dissent from Tribeca Investment Partners and Impala Asset Management, which called for the ouster of CEO Don Lindsay and criticized its “underperforming” investments in coal and oilsands, including its 2008 acquisition of Fording Canadian Coal Trust and investment in the Frontier Project.
The sector is particularly scrutinized for its executive compensation, Olasker and Zabloski said, and some activists are pushing for cost reductions and capital returns, Laffin said. Other activist concerns include governance practices regarding director tenure, independence and diversity, as well as lack of “skin in the game,” Robertson said. Pentwater Capital Management
launched a proxy contest for one seat at Turquoise Hill Resources, claiming the company has been mismanaged because of a lack of independence from majority owner Rio Tinto.
Neuhauser said a sale is often the end-goal for Livermore after operations are strengthened and the business is streamlined. Shareholders can generate the greatest returns when management agrees to “build it, grow it and sell it,” he said.
Challenges Amid Covid-19
Despite an inclination for mining consolidation, Covid-19 has created challenges for dealmaking in the space, including share price deterioration, hindrances to due diligence and delays for court and regulatory approval, Robertson said. Moreover, most players that would typically be open to consolidation are “getting their own house in order” and have put M&A on the “back burner” during the pandemic, Laffin said.
Nonetheless, more M&A deals are still expected to emerge from the crisis, with the stronger companies acquiring the weaker ones, Olasker said. She noted that there have recently been several rounds of “robust” financing, indicating that executives are likely “building war chests” to use for acquisitions of less-financed companies. U.S.-listed South African company Harmony Gold Mining, which has a market cap of $1.7 billion, received shareholder
approval for a $200 million equity raise on June 11.
However, Freelan noted that with strong gold prices, smaller gold companies are able to receive financing quicker and may have “less impetus” to seek a buyer.
Meanwhile, shareholders may be challenged to push for change amid the current backdrop of Covid-19, the sources said.
There is increased reticence to take an “aggressive public stance” for fear of upsetting other shareholders, Robertson said. In addition, shareholders are likely to “give management a pass” if the company is struggling strictly because of Covid-19, Freelan said, noting that shareholders might think now is an inopportune time for a “costly proxy contest.” Neuhauser agreed, saying activists need “an extraordinary plan in this environment” if they are to succeed with a campaign.
Activists must build a strong track record that proves they tried to work behind the scenes with management before going public as a last resort, Robertson said.
--Elana Duré