Canada: Mining M&A: Opportunities and trends

The Canadian resource sector has recovered nicely from the worldwide decline in commodity prices, public company valuations and M&A activity that was experienced earlier in the year. As economies and financial markets around the world begin to stabilize, we see excellent opportunities and advantages for investors in the Canadian resource sector. In this regard, the following factors are significant.

Domestic and international supply of natural resources

With an abundance of base metals (in particular iron, copper, zinc and nickel), precious metals (in particular gold, silver and platinum), uranium, diamonds, coal, oil and gas, controlled by Canadian companies, both domestically and internationally, there is an enormous source of supply for the global economy. The Canadian entities exploiting such natural resources have a voracious appetite for capital and are open to takeover, investment or joint ventures.

Global leader in mining finance

Canada is a global leader in the mining industry and Toronto is the world's most active centre for mining equity finance - almost 60% of the world's public mining companies have Toronto listings. Toronto-listed mining companies are currently involved in nearly 10,000 projects worldwide, approximately half of which are outside Canada. Over the past five years, issuers listed on the Toronto stock exchanges (the TSX and the TSX Venture Exchange) together have led all international stock exchanges in mining equity financings, with over 10,000 transactions, being over 80% of the volume of all mining equity financings in the world (the next markets were ASX at 9% and LSE-AIM at 8.5%; US markets combined were 0.35%). These TSX-TSXV equity financings saw mining and exploration companies raise US$136.9 billion, being 33% of the value of all world mining equity financing during the five-year period (LSE-AIM accounted for 20%; ASX accounted for 11% and US markets combined were under 9%).

Recent M&A trends in the Canadian mining sector

Foreign Acquisitions/Joint Ventures

We anticipate an increase in acquisitions and joint ventures by and involving foreign investors, including specifically sovereign wealth funds. In response to the seemingly inexhaustible demand of expanding economies for metals and other natural resources, there is a need to secure sources of supply and potential influence in commodity price negotiations. This trend is being fuelled in part by lower commodity prices.

Reduction of debt

Many Canadian companies, including mining companies, are carrying high-debt loads. We anticipate that highly leveraged Canadian resource companies will continue to sell off non-core assets to reduce debt.

Strategic acquisitions

Cash-rich and high valued senior Canadian resource companies will capitalize on lower company valuations to pursue strategic acquisitions of junior and middle-tier Canadian resource companies.

Recent trends in mine financing

Equity financing

Notwithstanding the state of the global economy generally, there seems to have been a continued strong appetite for equity at Canadian resource companies. In 2009, the TSX and TSX Venture Exchange together saw mining issuers complete 1,962 equity financing transactions to raise C$22.2billion. In comparison LSE/AIM had 166 equity financings raising C$22.3 billion and the ASX had 186 equity financings raising C$13.5 billion.

Debt financing

Canadian banks, while very-well capitalized, remain very cautious lenders. For senior companies and strong middle-tier companies, senior debt financing may be available but terms are tougher - higher upfront fees; strict requirements for feasibility studies and due diligence; tighter credit parameters; preference for operations in stable jurisdictions; less willingness to negotiate positive and negative covenants (particularly financial covenants); requirements for offtake agreements; and strict hedging requirements (lenders do not like exposure to commodity price fluctuations).

As a consequence, many companies turn to non-traditional bank debt to finance their activities, including instruments such as convertible debentures, or given the appetite for equity, additional equity.

Royalty agreements

This source of financing, in which mining companies sell a percentage of future revenues in exchange for current financing, will become more common. We understand that under recently-negotiated royalty agreements in Canada, net smelter royalties are typically 2% of proceeds net of smelting and refinancing charges plus 10%-15% of net profit after all expenses are deducted.

Joint ventures and strategic partnership

Joint ventures and strategic alliances will become much more common as a source of funding for junior exploration and development companies in Canada. This type of structure with a Canadian "partner" has the added advantage for investors of providing risk-sharing, local knowledge of the legal and regulatory landscape, as well as contacts for a wide variety of purposes, including political, financial, professional, customers and suppliers.

Joint ventures in the Canadian mining industry typically utilize an unincorporated joint venture structure. In such a joint venture, one "partner" typically retains title over the joint venture assets, subject to holding a proportionate undivided beneficial interest in the joint venture assets for itself and a proportionate undivided beneficial interest in the joint venture assets in trust for the other joint venture partners. Control and operatorship are governed by the terms of a negotiated joint venture agreement.

Another less typical joint venture structure involves the use of a limited partnership model whereby the general partner of the limited partnership typically controls all of the joint venture assets. For contractual purposes, the limited partnership would be the contracting party to any commercial or other agreements, but it would be the general partner that would execute such documents in its capacity as the general partner of the limited partnership. Control over the general partner itself is exerted by the joint venture partners in accordance with their respective ownership interest in the general partner.

Conclusion

With an abundance of natural resources controlled by Canadian companies, both domestically and internationally, and the world's most active centre in the resource sector for resource finance, Canada has always presented excellent opportunities for investors. Specifically, this is an ideal time to take advantage of opportunities in the current economic climate and recently increased thresholds for review of foreign investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions