Mining M&A – Eat or Be Eaten
Recently we mused upon the motivations behind predators in the mining space at the current time and about some of the limitations they face. In this commentary we toy with some names and which way they might jump…
Glencore – we might as well start off with the 800-lb gorilla and state (again) that despite its rattling of its cage in RTZ’s direction, we do not feel it has a snowflake’s chance in hell of taking over RTZ OR anything else of substance. The Xstrata deal was only permitted by regulators at the price of substantial divestments (Las Bambas going to MMG and the unwinding of the relationship with Nyrstar) and we are sure the Chinese do not want to have Glencore too dominant and thus would resist vigorously. We interpret its takeover talk as machismo gone wild. In any case the copper plunge has much depleted its currency.
MMG – Can the Las Bambas acquisition be the end-game for MMG? Somehow we doubt it. The problem here is that the Peruvian mega-project sucks in cash like a black hole leaving little spare lying about for humbler adventures. With the rundown in Zinc production (via closure of the Century mine) while copper production will soar with the Las Bambas start-up, the company will swing wildly from one exciting metal to a humdrum one. Taking over Talvivaara or Nyrstar or even Lundin could make sense.
Trafigura – the major trader, Trafigura, which ranks second only to Glencore in the metals space. This company has made some strategic investments and bought some mines outright (Coricancha in Peru) however, we senses that they are champing at the bit to “do a Glencore”. In this we suspect they are more likely to follow the Glencore Mark 1 Model with a satellite entity (such as Xstrata) rather than create something like an internal entity (as Glencore is post-takeover of Xstrata). The existing mining interests could be folded into a public vehicle that would then have a symbiotic relationship with the trader much as Xstrata used to do with Glencore. It recently acquired stake in Nyrstar could provide the vehicle to achieve these goals. Acquisition of only a minor stake has allowed it to already precipitate a management spill.
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X2 – the glacial pace of Mick Davis’s acquisition plans for his post-Xstrata reincarnation has many frustrated who hoped he would be an indiscriminate shopper in the mining bazaar. That was never likely to happen anyway. Though the sheer absence of meaningful deals means he is under some pressure to show his investors some action, particularly as it is now that the most convincing bargains are lying around like shells on the beach. The budget here is in the low billions but it is also unlikely it will be splurged on one deal. The Nickel West business that BHP-Billiton put up for sale (and now has put on the backshelf) might have been a start. Amongst the financially stricken, Talvivaara is sitting there awaiting an acquirer while Mercator’s Mineral Park or Thompson Creek could also be bite-sized targets. It could also be really counter-cyclical and make a bet on iron ore in the form of the recently bankrupted Northlands.
We (and many others) had great hopes that X2 wading into the market would be a catalyst for change and movement. The slow pace has led some to wonder whether Davis has lost his mojo. In searching for the perfect deal to pull back the curtain on, the entity seems to have come down with chronic performance anxiety. At this point with so many bargains lying around he should just swallow a blue pill and get on with it.
First Quantum – the issue here is whether this company has fully digested its last feast, the takeover of Inmet which we had hailed as the potential creation of a new Canadian major. This structure still lacks the heft to really move into the top league. If Barrick spins out its copper activities then they would make an interesting target for a merger with First Quantum.
HudBay – this company has turned out to be a sleeping giant. Coming out of the 2008 crash cashed to the gills, and narrowly escaping a Lundin merger offer, proved to be the making of the company. The old management bit the dust and a new (old) major was the result. Its acquisition of Norsemont brought the capex heavy Constantia mine in Peru onto the radar while projects like Lalor in Manitoba started to hit their stride. It recently won the bid for Augusta Resources, with its planned operations in Arizona. We are somewhat surprised that the interest in Arizona did not manifest itself in the company making a run at Mercator Minerals, or at least the assets of this stricken company. The most bite-sized target for the company is probably VMS Ventures which owns 30% of the copper-producing Reed Mine in Manitoba, with HudBay owning the rest.
Lundin – this company is one of the second tier players that is most desperately in need of a transaction. It has been left at the altar twice since 2008 with the mergers with HudBay and Inmet both coming to grief. Merging with Nyrstar would make a lot of sense. This would make Lundin into a totally vertically integrated player in the lead and Zinc space and bring on board a fistful of mines that it could probably run better than Nystar has. With its big exposure to Tenke Fungurume and the recent purchase of Freeport’s Candelaria Mine in Chile the group has swung towards a large copper bias. Excepting Nyrstar we cannot see how (with few zinc projects coming alon) that it can make anoy other acquisition besides Nyrstar that makes a difference.
NewGold – this company is always a daring mover but with a slow and steady accumulation of bite-sized targets rather than biting off more than it can chew. Rainy River was the most recent bargain buy, though the company followed that up by mopping up shares in Bayfield Ventures that owned adjoining exploration territory. Newgold always surprises with its buys so we cannot begin to imagine what it might grasp at next.
Magris – This group appeared from the shadows a few months back when it announced it was paying IAMgold some $500 million in cash to get its hands on Niobec, the only Niobium miner outside Brazil. Magris is not necessarily mistaken in making its first major move upon a specialty metal mine rather than the old Bay Street object of desire, a precious metals mine.
The Magris-led group includes Singapore’s Temasek Holdings and CEF Holdings Ltd, a Hong Kong-based investment company owned by Canadian Imperial Bank of Commerce and billionaire Li Ka-shing’s Cheung Kong Holdings Ltd. Aaron Regent set up Magris Resources after he was ousted as chief executive of Barrick Gold in 2012. He was one of a cluster of industry figures who raised private funds to invest in mining, reasoning that public companies would sell unwanted assets at attractive prices during an industry slump.
With Niobec being the only deal so far, it’s tough to try and work out which way this group will jump next. Clearly cashflow is a major interest though. We suspect its deals for now will need to be sub-$1bn in size and in light of Barrick’s travails with mine-builds in recent times, we doubt Regent will be gung-ho piling into projects over producers. Thus Magris is a wild card in the M&A space.
Goldcorp – this gold major is suffering from a severe ego-bruising having been beaten out by two mid-size companies in the battle for Osisko. It’s like a T-Rex being seen off by two velociraptors. In a sign that Goldcorp is regaining its mojo, it announced this week that it has agreed to buy Probe Mines in an all-stock deal that values the metals exploration company at $526mn, in a bid to win control of the Borden Gold project in northern Ontario. The obvious next candidate, as we have written several times in recent months, is Chesapeake Gold where it already has a toehold. Goldcorp does NOT need a producing asset at this time. This means it can get away with purchases of advanced explorers then work their projects up to production and then slot the extra gold-flow in when its own peak is reached several years out from now.
OZ Minerals – This company has a large mature asset in Prominent Hill and a potential massive new project in Carapateena but the latter is going to be years in the making. It has a couple of very puny JVs outside Australia that scarcely move the dial. The company has the resources to potentially splurge on a copper project (or gold/copper) in the more than billion dollar range, but it would need to be in production or very near. Which limits the field quite significantly.
Sherritt – this company is both predator and prey. Having recently ditched its coal division, it is now very substantially weighted back towards nickel and cobalt. It was mooted as a potential buyer of BHP-Billiton’s Nickel West division, which would have brought in into the Australian market. That would NOT have brought more cobalt, which we are more bullish about than nickel. The NICO project of Fortune Minerals in the NWT (and Saskatchewan) looks to have many synergies with Sherritt’s refining activities in the Plains States and its mainly gold/copper/cobalt. Not too much further afield there is Polymet in Minnesota, still soldiering on as the Last of the Mohicans now that Duluth has fallen to Antofagasta. However, the US is no-go territory for Sherritt with the Helms-Burton “problem” it has.
Teck – this company suffered bulimia in the last decade with a binge on assets before the 2008 that then resulted in a very violent and wrenching disgorgement post-crash. The acquisition of Fording of the eve of the debacle meant it was the asset that caused the problem and yet the one it could not let go of. It ended up being, like Sherritt, being overly exposed to coal.
Antofagasta – this company is probably out of the marriage market for the short-term with its major international effort being the takeover of Duluth. Antofagasta never probably imagined they could get Duluth for such a snip and unfortunately neither did Duluth (or its shareholders).
Norilsk – this player from the past is not a player this time around as the general weight of sanctions against Russia will see groups like this retreating rather than advancing. Evidence of this is the sale of some of its producing nickel assets in Australia and Botswana in recent months.
Anything and everything beneath a certain size is potential prey …..but then again why pay an exploration junior when you can take their asset away via a rock-bottom earn-in deal?
Talvivaara – the stricken Finnish miner is the most obvious candidate to be taken out in the short term. Any resolution of the problems here would be helpful for Nyrstar. In fact if Nyrstar was in better condition we would see it as the party most likely to step in here..
Sherritt – as a target Sherritt does have somewhat of a force-field in the form of its “relations” with the US government over the matter of Cuba.
Thompson Creek – The market slump has been brutal for Thompson Creek with Moly hardly ever staging a decent rally since 2011. The attempt to diversify in buying Mount Milligan did little to ameliorate the pain despite its significant rebalancing of the company from Moly to Copper/Gold. Recent weeks have brought the announcement of a stoppage of work at Endako due to high costs (rather than low Moly prices). The company now resembles a turtle on its back waving its legs in the air unable to get traction or right itself.. This will either prove fatal or an overwhelmingly temptation for a predator. Names that are interesting to conjure with here are X2, Magris or Trafigura.
Nyrstar – Trafigura has worked itself out a pretty nifty relationship with Nyrstar, but the problem is that Nyrstar might not be similarly so thrilled with the way it is playing out. Market reports indicate that Trafigura started in September to build a stake which now amounts to at least 15%, making it the company’s largest shareholder. Of course a merger between the two would make the most sense, as it would be synergistic and create a stronger competitor for Glencore, which dominates the Zinc trading space. However those with longer memories will recall that competition authorities forced Glencore to divest its stake in Nyrstar and unravel some trading relationships with Nyrstar when it took over Xstrata in the process becoming even more dominant in the metals Nyrstar smelts. Thus one could see that maybe pressure would be put on Trafigura in a proper merger with Nyrstar to reduce its strong position also.
Nyrstar though should be of attraction to others, despite Trafigura’s headstart. X2 would be a good candidate as it could then move on Talvivaara as well. Revenge would also be sweet as it would make X2 one of Glencore’s major competitors. Teck are veterans at the smelting game and thus it would also be a good fit geographically and otherwise with their Trail smelter. And as we mentioned before, it would be a good fit with Lundin which must already be sending some of its European zinc output to Nyrstar’s facilities.
Chesapeake Gold – This is another target that has the name of the predator written all over it, with Goldcorp already having a share foothold (of over 9%) and a director in common. Compared to any of the other potential buys out there, Chesapeake represents the best way of Goldcorp plugging a production decline in its mid-term outlook. Other majors have more pressing production declines and thus need to outbid Goldcorp to plug those gaps. Goldcorp on the other hand has the time to develop Metates to fill a future need IF it moves in the next year to eighteen months.
The rationales can we put forward for Goldcorp going after Chesapeake are:
- Cheap, cheap, cheap
- Familiarity with the story
- Confidence in the CEO
- Mexico being familiar territory
- Substantial size of gold resource
- Extensive mine-life
Yamana – We see the Osisko “white clown” rescue as having weakened Yamana. The spin-off of the Brazilian assets into a structure called Brio Gold, makes Yamana less of a gold company and thus potentially of more interest to any number of copper players that would like to have their hands on the Alumbrera property and the shamefully underdeveloped Agua Rica polymetallic deposit in Argentina that is near Alumbrera. The sheer incompetence of Yamana’s management should be enough to set off Blue Light Special signs flashing around it. A takeover of Yamana could put Osisko back in play or force Agnico to undertake a proper merger with Osisko to save its own skin. X2 could gang up with Goldcorp to bring about such an outcome.
Veris Gold – the old Yukon Nevada had been sliding towards the abyss for a while. Despite management that the word “omnishambles” was invented for, the prime asset of the Jerritt Canyon mine and mill remains almost unique and a key playing piece in Nevada power games being one of only three approved refractory roasters in the state. The gormlessness of the crew in the executive suite meant that the company spent a long time unprofitably tolling ore for Newmont, making itself poorer and more dependent in the process.
Mercator Minerals – the failure of this company’s announced merger with the Russian group, InterGeo had an ultimately fatal effect tipping it into bankruptcy. It is not clear to us what happens next but the Mineral Park property is a long term producer and should be of interest to someone wanting to secure one of the few producing copper mines in the US. The company also owns two properties in Mexico, including the Creston molybdenum project, which we covered several times back in its guise as the main asset of Creston Moly. It is not clear to us who has a first charge over the assets not that it is in legal limbo.
Miscellaneous – if one cannot imagine being less attractive than Mercator or Veris, then spare a thought for Centerra and Centamin. Both of these have embedded problems that should potentially scare away any predators in a way that makes dealing with companies in the bankruptcy courts look like easy pickings.
The bid this week by Goldcorp for Probe and Coeur D’Alene’s move on Paramount Gold & Silver a few weeks back show that transactions can still come out and (pleasantly) mug the unsuspecting holder of a seemingly becalmed advanced explorer. Neither of these seemed to us to be synergistic in the very short term. As we stated before we would like to see some combinations that make new players in the mid-tier and top tier of the market. Takeovers of juniors, even for stock, are not the kind of transformative deal that would help get this market on the mend.
We suspect though the dust will need to settle on the base metals reversal since the start of this year before the deals we would like to see will again become feasible.
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>