Mining sector ripe for increased M&A activity: report

TORONTO and MONTREAL—Canada’s mining sector will see a new era in mergers and acquisitions (M&A) as a near perfect alignment of factors takes place, according to a study released by advisory firm Grant Thornton LLP.

Following last year’s tepid M&A performance in which deal volumes failed to breach the $90-billion mark, Grant Thornton’s report, Gathering Momentum, suggests a fertile environment will lead to a doubling in the value of M&A in the mining sector compared to 2013.

The resurgence of M&A is predicted to come from four main factors identified through feedback from 250 senior mining executives:

• One in 10 junior mining exploration companies are likely to enter administration, and a quarter of major mining companies anticipate challenges with financial covenants, resulting in significant numbers of distressed assets and low valuations
• Excellent environment for matchmaking, with a third of executives at mining companies looking to make an acquisition (35 per cent of junior mining exploration companies and 32 per cent of major companies)
• Approximately the same amount of firms are showing an appetite for selling (36 per cent of junior mining exploration companies and 27 per cent of larger companies)
• Lower commodity prices will be a driver for M&A, pushing companies to band together to generate scale and lower productions costs

“The mining sector is ripe for a resurgence in M&A activity. We’ve started to see elements of this emerge already,” says Jeremy Jagt, national mining leader at Grant Thornton Canada. “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.”

Jagt added that the return of private equity interest have now raised around $8 billion in capital and are looking for opportunities in mining.

“If these appetites persist I think that the value of transactions for 2014 will be double that of the previous year,” said Jagt.

The situation in Quebec is relatively similar to other regions globally.

“There are almost as many mining companies that want to sell or buy assets (44 per cent vs. 48 per cent), 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,” said Anand Beejan, partner and mining sector leader at Raymond Chabot Grant Thornton.

According to Grant Thornton, the financial downturn has been especially difficult for junior mining exploration companies with hundreds of companies still facing financial conditions that threaten their existence.

More than half of junior mining exploration companies interviewed needed to raise additional funds in the next 12 months and a third stated that as a result they were considering a corporate transaction or merger. It is likely that valuations will be low given the financial situation these companies find themselves in.

Despite recent gloom, however, industry executives and suppliers expect the sector to bounce back. They express optimism for the future, viewing recent turmoil as a correction—a painful but necessary overhaul that will lead to a more robust future.

Get a copy of the report here.