NGEX positive mention from Bloomberg
By Liezel Hill - Oct 15, 2013 3:27 PM CT
Mining acquisitions valued at less than $1 billion have slumped to an eight-year low as the industry’s largest players rein in spending after a drop in .
The slump threatens hundreds of exploration and development companies that don’t have revenue, more than half of which are based in Canada. Being bought by a larger miner is proving increasingly elusive as companies such as Toronto-based Barrick Gold Corp. (ABX), the biggest gold producer, avoid acquisitions and new projects in favor of improving existing operations.
“Buyers are being very cautious on where they deploy capital,” said Matthew Hind, the Toronto-based head of Canadian metals and mining for Credit Suisse Group AG. “Players are in the process of re-evaluating their balance sheets and pipelines.”
There were 76 takeovers of companies in the third quarter, with a combined valuation of $1.73 billion, according to data compiled by Bloomberg. That’s the lowest volume since the fourth quarter of 2004, the data show.
Copper and zinc have dropped this year amid concerns that a Chinese economic slowdown, and gold has declined 24 percent, heading for its first annual decline in 13 years. Ltd. and Rio Tinto Group, the two biggest mining companies, have cut billions of dollars of spending while Barrick sold three mines in October and said it may sell others to cut costs.
‘Few Buyers’
“There are a lot of sellers and very few buyers,” Clive Johnson, the chief executive officer of B2Gold Corp., a Vancouver-based gold producer that’s considering acquisitions, said in an interview.
“The general mood is anti-M&A in the gold space for the most part, particularly at the senior level,” Barrick CEO Jamie Sokalsky said May 21 at a conference in Toronto. While potential targets have low valuations, often “they’re projects that you might have to spend a billion or two billion to build.”
Andy Lloyd, a spokesman for Barrick, declined to comment on potential acquisitions.
There are about 972 mining companies based in Canada that reported no revenue in the past 12 months, according to data compiled by Bloomberg. The largest, Detour Gold Corp. (DGC), started production at its Detour Lake gold mine in Ontario in August and has a market value of C$1.03 billion ($988.8 million).
Prepare Sale
While Toronto-based Detour and some others have been able to raise funds and start production, for many more the capital and operational expertise required to develop a mine means selling is the best strategy.
Lumina Copper Corp. (LCC) is one junior looking for a suitor. The Vancouver-based company put itself up for sale last year. It would probably have announced a deal already if it weren’t for the change in industry sentiment and an increase in political risk associated with Argentina, where Lumina operates, CEO David Strang said.
Bigger miners are “making sure that they move back to a greater profitability on their operating mines, and are less inclined to look at greenfield-project acquisitions,” Strang said in an Oct. 3 phone interview.
Strang said his team’s objectives are clear: they don’t build mines, instead they prepare projects for sale. His previous job was CEO of Global Copper Corp., which was acquired in 2008 by Teck Resources Ltd. for C$406 million. Strang also has held executive roles at Northern Peru Copper Corp. and Regalito Copper Corp., both juniors that were acquired.
‘Our Job’
Lumina is prepared to “sit and wait” for the right deal, he said.
“Our job is to remain patient and focused and to be ready that when the market does return -- and it will return -- that we’re ready and the project’s ready to be shown for sale,” Strang said.
Lumina’s Taca Taca copper project in Argentina is large with relatively high ore grades and has access to infrastructure, all of which mean the junior is more likely than most to find a buyer, said Adam Low, a Toronto-based analyst at Raymond James Financial Inc.
“In all likelihood it’s only going to be the cream of the crop that will get considered seriously in the current environment,” Low said. “The other juniors might have to wait until the next cycle.”
Funding Options
A sale can bring riches to founders and early shareholders. Billionaire mining investor Robert Friedland established his fortune when he was co-chairman of Diamond Field Resources Inc., a Canadian junior that discovered the Voisey’s Bay nickel deposit in Labrador. Inco Ltd. paid C$4.3 billion for the project in 1996.
Without revenue, it may be difficult for some juniors to survive for long. Mining-industry stock sales, one of the few funding options available as companies try to cover operating costs, are poised for a fourth consecutive annual decline, according to data compiled by Bloomberg.
Mining mergers and acquisitions may get a boost from cash-starved companies looking to combine to survive. The decline in the gold price may drive some companies that produce and explore for the metal to consolidate, J. Paul Rollinson, CEO of Toronto-based Kinross Gold Corp. (K), said Oct. 9 by phone.
Most juniors will probably just keep moving their projects forward while keeping their options open, said NGEx Resources Inc. (NGQ) CEO Wojtek Wodzicki.
‘Adding Value’
NGEx, which has projects in Chile, Argentina and Canada, is another junior that may attract interest despite the tough environment, Raymond James’s Low said. While Vancouver-based NGEx isn’t actively looking for a buyer, it won’t rule anything out, Wodzicki said in an Oct. 8 phone interview.
“We’re adding value to the projects and just sort of pushing ahead with them,” he said.
Credit Suisse’s Hind said that while there will always be interest in high-quality projects, there are also marginal ones that can’t be restructured to fit the current price environment.
“Many projects won’t be able to re-invent themselves and will ultimately disappear,” Hind said.