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.