October 14, 2014
By Peter Koven
The past couple of weeks provided a jolt that the Canadian mining industry's bankers and lawyers have awaited for a long time. But is it...
TORONTO • The past couple of weeks provided a jolt that the Canadian mining industry's bankers and lawyers have awaited for a long time.
But is it sustainable? Insiders are far from convinced.
Since the start of October, there have been two sizeable private equity mining deals announced, plus a US$1.8-billion asset sale and related financing that got a better reception from the market than almost anyone imagined.
While mining M&A has moved along at a decent pace this year, these transactions stood out from the pack.
Private equity, for one, has been the talk of the mining business for months. There have been predictions that a wave of private equity investment is set to pour into the cash-needy sector and give it a lift, but those deals simply have not materialized the way the industry expected.
Two transactions this month gave Canadian miners some renewed hope: Magris Resources Inc.'s private equity-backed $500-million acquisition of the Niobec mine in Quebec, and a $73-million takeover of Chaparral Gold Corp. involving private equity firm Waterton Global Resource Management LP.
Outside of private equity, the big announcement was Lundin Mining Corp.'s US$1.8-billion purchase of Freeport-Mcmoran Inc's 80% stake in the Candelaria mining complex in Chile. To get the deal done, Lundin arranged a complex US$2.2-billion financing package. That includes a US$600-million bought deal, the single biggest mining equity financing of the year. It got a terrific reception from shareholders despite rough market conditions, as Lundin shares traded well above the $5.10 offer price after the stock was sold early last week.
"The good news is there seems to be quite a bit of support for the right stories," said John Turner, head of the global mining group at Fasken Martineau LLP.
"There are other [deals] bubbling under the surface at the moment. I think you'll see some in the next few weeks as long as the market doesn't deteriorate further."
Others are less optimistic. Investment bankers said the market reaction to the Lundin deal is a great sign, but they noted that chairman Lukas Lundin might be one of the only people in the sector who could get that kind of shareholder support. They also doubted many companies have the courage and conviction to do the sort of transformative deal that Lundin just announced.
There have been plenty of quality assets up for sale in the industry over the last couple of years, but few companies appear willing to pay a premium to get them.
The skepticism also remains over private equity, where billions of dollars have been raised for mining investments and very little has been spent. Waterton alone raised more than US$1-billion for a precious metals fund earlier this year. And Magris chief executive Aaron Regent (who formerly headed Barrick Gold Corp.) said his Niobec deal is just the "first of many."
It makes sense for private equity to be interested in mining, as valuations are cheap compared to almost anything else. But experts said that private equity players continue to have misgivings about this sector, both because of commodity volatility and a lack of mining expertise in their shops. They doubt the Niobec and Chaparral deals are the sign of a big trend, though more deals are likely.
"Even with falling commodity prices and falling valuations, I'm not certain it's going to help traditional private equity funds get comfortable allocating capital in the mining sector," Waterton partner Cheryl Brandon said.
Waterton has been the exception rather than the rule, as it has done 29 transactions since launching in 2009. The firm has a team of technical people from the mining sector, and is happy to hold onto assets for seven years or more, which is a long time horizon compared to most private equity firms.
"We'll be extremely active given we've identified which projects we like, which management teams we want to invest along side of and now it's a matter of executing," Ms. Brandon said.