2018 was a difficult year for Canadian mining companies. The aggregate valuation of TSX-listed miners declined by 12.7%, while equity capital raised by these companies declined by 36% from the previous year's total. In this environment, new financings and deals have been scarce, but there is reason to believe that this trend might change in 2019, according to a recent publication by PwC.
A number of factors support the general prediction of increased M&A activity among TSX-listed mining companies. These factors include:
- Increasing commodities prices. Spot prices for based and precious metals decreased across the board in 2018. However, according to PwC, "prices for several base metals, including copper, zinc and nickel, have shown significant gains in the first few months of 2019."
- Stronger balance sheets. Among the top 25 TSX-listed mining companies by market capitalization, cash flows from operations improved in 2018. Many of the companies opted to spend this cash on dividends, share buybacks, and paying down debt. The group's debt-to-equity ratio decreased by almost 5% over 2018.
- The re-emergence of the mega-deal. 2018 and 2019 have seen a number of deals that are noteworthy not just for their size, but for their implications to the mining landscape. Among these deals were the merger of Potash Corp. of Saskatchewan Inc. and Agrium Inc., the purchase of Randgold Resources Inc. by Barrick Gold Corp., the purchase of Goldcorp Inc. by Newmont Mining Corp., and Lundin Mining Corp.'s acquisition of Yamana Gold Inc.
PwC's prediction regarding mega-deals could have a cascading effect. Newly consolidated senior companies will quickly move to discard non-core assets, which will be attractive acquisition prospects for mid-sized miners who may in turn seek to consolidate or form joint ventures in an effort to remain competitive. With miners sitting on strong balance sheets and commodity prices bolstering management confidence, there appears to be ample kindling to fuel the "mania" over mergers in the mining space. PwC concludes by noting that although this renewed excitement presents significant opportunity, "overall growth outlook is uncertain" and the industry still faces key challenges including exploration and development and cost control. In this context, identifying the right opportunity and unlocking its value through execution and innovation is more important than ever.
The author would like to thank Eric Vice, articling student, for his contribution to the article.
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