The struggle for control of Osisko
Après Osisko, le deluge? Tossing aside my specialty metals hat, I have been tempted to put on my investment banker hat by the free-for-all that is the struggle for control of Osisko (OSK.to). The deal brings back fond memories of the good old days on the mining markets with companies throwing money indiscriminately in an attempt to get control of a scarce asset. And yet there are differences from the good old days and its useful to highlight here what they might be… and what the pressures will be in the M&A market over the coming year for those predators prowling around, the potential prey and how investors should position themselves…
If there is one big lesson out of all this, it’s that the long lean years of feeble financing have thinned down the field of potential targets. While it seemed like 2010 and 2011 were somewhat like the period pre-2008 and gold was exceptionally healthy price-wise it was really just a case that stories that had been stopped in their tracks with the 2008 were only able to restock their treasuries during a rather window before the shutters came down again and financing was choked off. This meant that the projects and mines we have now available for acquisition are not projects from 2010/11 but ones from 2008 and before. The brief recovery in markets then did not provide any fresh meat.
Much has been made of Goldcorp’s (GG) choice of Osisko as a target, with the general conclusion being that predators’ first choice is going to be mines in “good” jurisdictions. This may be an illusion though because “good” jurisdictions also happen to be expensive jurisdictions for operating costs, particularly labour, and (relatively) low cash costs are paramount these days. It is no surprise that so many household names threw themselves into the fray of the Osisko mosh-pit and indulged in M&A crowd-surfing because the choice of Osisko lookalikes is so thin. What other companies are there positioned in the same place in terms of production and valuation? The answer is “almost none”.
The Osisko carve-up at this stage looks like a feast of starving cannibals. Like the jungle it’s a case of eat or be eaten. Both Yamana (AUY) and Agnico Eagle (AEM) must be hoping that they are not next on the menu as the ranks of Canadian mid-tier producers have become seriously thin in recent years. We should avoid the temptation of claiming, as some others have, that Osisko is the start of a trend because such a trend would need similar deals to happen. Frankly, there are few other “good jurisdiction” early-stage producers up for grabs. This means that the target range for the likes of a spurned Goldcorp is going to have to widen out to less good jurisdictions and less advanced projects. The big players, like Goldcorp, are now going to have to pay the price for sitting on their hands over the last two years and not snapping up some of the distressed players that were lying around on the mining battlefield.
If the next “theme” is going to be bulking up amongst lookalike companies then we might see West African miners acquiring West African advanced explorers (or other miners in those parts) such as Semafo (SMF.to) or Asanko (KGN.to). Some of the Mexican gold (and silver) stories might also combine. Maybe the joint collaboration between Yamana and Agnico Eagle might even lead to wedding bells between those two. Eldorado (EGO) and Alacer (ASR.to) could hitch together.
The consolation prize for Goldcorp could be to make a move on Chesapeake Gold (CKG.v – which holds the sizeable Metates deposit) and its President, Randy Reifel is also a director of Goldcorp. Mexico ranks as a “fair” jurisdiction these days even if not at the levels of Quebec or Ontario. At least Goldcorp feels comfortable in Mexico.
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Another welcome development would be to see some of the smaller Canadian gold producers bunch up into more viable and cohesive units. That, in the long run, lays the foundations for ever bigger deals. The best example of how this can play out is New Gold (NGD.to) which started out as a merger of three smaller miners and has gradually bulked up doing progressively bigger add-ons.
It’s not just gold companies that should be combining forces. We still feel that an alliance between HudBay (HBM.to) and Thompson Creek (TC) would make a lot of sense. Lundin (LUN.to) would not be hurt by adding some up and coming lead/zinc projects to its portfolio (not that there are a lot to conjure with due to underinvestment). We might also see some companies venturing back into the waters of nickel now that that metal has shed its pariah status. Royal Nickel would be an obvious candidate to be snapped up before its market cap runs away.
Spooking around in the background also is the new predatory vehicle of Mick Davis (late of Xstrata) which is all cashed up and on the prowl for properties to rebuild his empire. The recent decision of BHP Billiton to spin out its “less desirable” projects as a separate listed entity, probably signals that the fire sale of second tier projects by major like BHP and RTZ is now at its end. This implies Davis will have to hunt amongst base metal juniors to get what he wants. It would take a very large spending spree to build a diversified mining group out of the odds and sods lying around unloved in the TSX and ASX. The interesting thing is whether this vehicle will pursue whole companies or just try and acquire projects. In either case more cash will be pushed out into the markets which will make its name back into other stocks lower down the foodchain. Vacuuming up some of the bigger base metals projects that have been sitting around awaiting financing will also enhance the pipeline of buildable projects.
In a reverse trend though, it might be a propitious moment for the Brazilian iron-ore giant, Vale (VALE), to set free the Inco business, which is quite clearly something the Brazilians have little empathy for, by demerging it back onto the TSX.
To come full circle though, it is not clear to us that there will be much or any M&A activity in the special metals space. Almonty (AII.v) has shown itself to have potential as an acquirer but most of the other players seem to be content as “one-mine” players. This is not a situation that is conducive to building long-term strength in the specialty metals arena. It is also worth repeating that we see combinations in the Rare Earth space as pretty unlikely in the foreseeable future.
The Osisko deal in recent weeks has revived use of the term “feeding frenzy”. In fact it had certain aspects of cannibalism about it, to continue the culinary theme. However, it has certain unique aspects because there are just aren’t a lot of Osisko lookalikes lying around after so many years of underinvestment in bringing new projects to production. The period 2010-2011 was just a false dawn. Most of the money raised in that period was just frittered away and very few new projects advanced from where they were in 2008. The stop-start nature of the mining finance market has not been conducive to creating fresh meat for the carnivores of the gold mining space (and even less so in the base metals and specialty mining areas). Bidding wars will become more common… mergers of equals will be the response to provide some sort of defensive posture… and the target areas will widen out to “less good” jurisdictions and less advanced (and less sizeable) mines than that of Osisko. Even for those investors not positioned in the “victim” stocks the trickledown effect of higher valuations, reratings of juniors, and investors from stories that are taken out redeploying funds will give a fillip to the whole universe of listed miners.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>