Mining sector to herald M&A boom time as planets align – Grant Thornton

Mining sector to herald M&A boom time as planets align – Grant Thornton
7th November 2014       By: Henry Lazenby
TORONTO (miningweekly.com) – A new report from international firm Grant Thornton has found that the mining sector will experience a new era in mergers and acquisitions (M&A) as a near perfect alignment of factors was taking place.
Following a slow period for transactions, in which last year’s deal volumes failed to breach the $90-billion mark, Grant Thornton’s research and analysis suggested that a fertile environment would lead to a doubling in the value of M&A in the mining sector compared with 2013.
Grant Thornton’s new report ‘Gathering Momentum’ attributed the resurgence of M&A to the confluence of four main factors, identified through feedback from more than 250 senior mining executives across the globe.
The first was that given the fact that one-in-ten junior mining exploration companies were likely to enter administration and a quarter of major mining companies anticipated challenges with financial covenants, the market could expect significant quantities of distressed assets and low valuations.
There was also a ripe environment for matchmaking, with one-third of executives at mining companies stating that they were likely to make an acquisition (35% junior mining exploration companies and 32% major companies) and about the same amount showing an appetite for selling – believing that their company would either be sold or undergo a partial sale (36% junior mining exploration companies and 27% major companies/other).
Further, the report identified lower commodity prices as a driver for M&A; pushing companies to band together to generate, scale and lower production costs to remain competitive.
Grant Thornton Canada’s national mining leader, Jeremy Jagt, said he had started to see elements of this M&A boom time emerge already, citing diversified miner BHP Billiton’s announcement that it would spin off assets as an example.
“Executives at mining companies are telling us that they are in the market to make acquisitions and a near equal proportion say they will sell their mining company, or parts of it, this year. So there is plenty of opportunity for doing deals, especially for those looking to seize opportunities with distressed sellers ahead of any improvement in the metals market, he said.
Jagt was also observing the return of private equity interest to the market, which was adding to this demand. “Funds have now raised large volumes of capital – around $8-billion – and they are looking for investment opportunities in mining. If these appetites persist I think the value of transactions for 2014 will be double that of the previous year,” he argued.
Raymond Chabot Grant Thornton partner and mining sector leader Anand Beejan echoed Jagt’s comments, saying that the situation in Quebec was relatively similar to that in the other regions surveyed around the world.
“There are almost as many mining companies that want to sell or buy assets – 44% versus 48% – and this partly explains the sense of optimism, despite weak global demand. The best example of this situation in Quebec is the acquisition of Osisko by Yamana and Agnico Eagle in April 2014,” he noted.
According to Grant Thornton, the financial downturn had been especially difficult for junior mining exploration companies, with hundreds of companies still facing financial hardship that threatened their existence.
Fifty-nine per cent of the junior explorers interviewed stated that they needed to raise additional funds in the next 12 months and one-third stated that, as a result, they were considering a corporate transaction or merger. It was likely that valuations would be low, given the financial situation these companies found themselves in.
“Financing is still untenable for junior mining exploration companies. We’re seeing more and more that mining exploration is not a priority in venture capital plans. Moreover, the decrease in exploration assistance offered by the tax credit for resources announced in the initial budget, [which was] tabled by the Minister of Finance of Quebec Carlos Leitão, sent a negative message to the industry,” Beejan commented.
“We understand the Quebec government’s need to make choices to return to a balanced budget; however, this decision seems contradictory considering the government’s desire to revive the Plan Nord, a plan that is one of the rare options under its control to attract investments,” he pointed out.
Despite the recent gloom, however, industry executives and suppliers expected the sector to bounce back. They expressed optimism for the future, viewing recent turmoil as a correction – a painful but necessary overhaul that would lead to a more robust future.
“Arguably the conditions that will drive M&A activity wouldn’t have come about without the correction of the past four years. But, just like a planetary alignment, these conditions won’t last forever. Buyers and sellers will need to take consideration of issues, such as valuations, and be prepared to execute strategies decisively,” Jagt expressed.

About prosperitysaskatchewan

Consultant on Saskatchewan's natural resources.

Posted on November 10, 2014, in miscellaneous. Bookmark the permalink. Leave a comment.

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