The Prospectors and Developers Association of Canada wrapped up their annual conference in Toronto last week, and Bay Street appears to be abuzz with optimism that mining M&A is finally going to make a comeback. This is welcome news, as 2013 marked the lowest levels of M&A activity the mining sector has seen in years: $12 billion worth of deals were concluded in 2013; $6 billion less than 2012 saw and well off the mark of 2007, which saw $103 billion worth of deals completed.
So, how exactly is 2014 shaping up? Alisha Hiyate, in her recent article in Mining Markets, and Rachelle Younglai, in her recent article in the Globe and Mail, have offered some interesting insight and predictions for the year ahead.
Rumours have been circulating since Q4 in 2013 that after the dust settled from a tumultuous 2012 and 2013, sooner or later, certain companies may be in a position to sell, and sooner or later, certain companies would be ready to buy. Many predict that we've now reached that point, and the result will be the advent of a buyers-market. This means we can anticipate a lot more acquisition activity as we move forward in 2014. Expect the targets to be smaller companies with viable properties in need of a capital injection to optimize their operations and achieve their business plan. Expect the buyers to be companies that were able to regroup in 2013 and have spent the early part of 2014 building up their balance sheets.
However, even with a rise in acquisition activity, shareholders of mining companies should not necessarily hold their breath waiting for a big payout from an acquisition. Not all target mining companies and their shareholders are guaranteed to receive the hefty premiums from potential buyers that would have previously been the status quo. While modest premiums are likely still attainable, more companies are likely to see hostile or compelled bids reaching the table, which may further serve to limit any premiums.
The number of hostile bids are expected to go up in 2014. Low valuations of mining companies, which could serve to end most deal discussions long before they are even presented to shareholders, may lead to an increased number of hostile rather than friendly bids. Acquiring companies can use the hostile bids to ensure their proposals are considered, and in turn, involve the market in determining the value of any potential deal.
2014 may also see a growing number of "compelled" transactions. Large investors with significant holdings that want to reduce their exposure to the risks of mining may pressure a company's management into striking a deal with an acquiring company. When that acquisition transaction takes place, such investors would be presented with a clear exist strategy and could therefore significantly reduce, or divest completely, their holdings in the target mining company.
Finally, 2014 may see an increased amount of "distressed" M&A in the mining sector. Many mining companies took to alternative financing strategies to make it through 2012/2013. This included engaging in high-yield debt, convertible debt, and royalty and streaming deals. Some of these financing strategies, when combined with low commodity prices, may have left companies in increasingly vulnerable positions. Their vulnerability is further compounded by many of the debt-like covenants of the alternative financing agreements. Such covenants are increasingly likely to be breached as project costs rise and commodity prices drop. Companies in breach could wind up in the hands of creditors and in turn the subject of a restructuring. Similarly, companies who entered streaming or royalty deals may look to sell off certain properties. The result in both cases will present opportunities for potential buyers to step in.
The bottom line: M&A in the mining sector will likely make a comeback in 2014. However, while things are arguably improving from last year, we should not hold out and expect the deal space to return to the way it was in its 2007 hay-day. Instead, we should watch out for acquisitions that favour the buyer and deals that take place out of necessity: in the form of hostile, compelled and distressed M&A transactions.
Norton Rose Fulbright Canada LLP
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