MINING FINANCE / INVESTMENT
Mining M&A bargain hunter action beginning to take off
Mining's ‘haves' and ‘have nots' are beginning to get together as predators with cash sense market has bottomed and big bargains to be picked up.
Posted: Tuesday , 16 Dec 2008
TORONTO (Reuters) -
Two recent mining M&A deals suggest that acquisition-hungry players are starting to come off the sidelines looking for smaller competitors made vulnerable by volatile metals prices and tight credit markets.
But unlike the M&A boom earlier in the decade, which was fueled by high prices and a thirst for size, any new wave of takeovers is expected to match "haves" with "have-nots" as miners with strong balance sheets take advantage of cash-hungry companies hawking their assets at rock-bottom prices.
"We had a round of M&A activity when the going was good," said John Ing, president of Toronto investment dealer Maison Placements.
"Now with prices where they are, there's no question it's quite attractive for the stronger balance sheets to pick up some smaller balance sheets,"
Cash-rich HudBay Minerals (HBM.TO) sparked the recent activity with an all-share bid for rival Lundin Mining (LUN.TO). Once an M&A-hungry high-flier, Lundin has suffered from weak zinc prices that have made much of its operation uneconomical.
HudBay clinched Lundin's agreement to the takeover by doing a C$136 million private placement financing that allowed it to give Lundin an immediate cash injection ahead of the C$600 million takeover's close in February.
Iamgold (IMG.TO), meanwhile, agreed to buy small player Orezone (OZN.TO) for about $140 million last week. The deal will give Iamgold the 3 million-ounce Essakane gold deposit in West Africa, which Orezone could not afford to develop on its own.
The shares of both target companies had dropped more than 80 percent this year, a not-uncommon decline in the current market as tight credit and weak metals demand have prompted investors to favor miners with positive cash flows and money in the bank, and shun the rest.
All told, stocks measured by the Toronto Stock Exchange's S&P/TSX global mining index are down 40 percent so far this year, with smaller players bearing the brunt of the decline.
In the most recent reporting period, many larger miners said they were keeping an eye on smaller miners' valuations, looking to add assets. But analysts said deals would be slow in coming until buyers concluded that stock prices had calmed to the point of being useful as a valuation tool.
ENTRY POINT REACHED?
The Iamgold deal -- which has been welcomed by investors, as opposed to the deeply unpopular Lundin takeover -- has been seen as a sign that that point has been reached.
"It's the first one made at these depressed levels. It's kind of the first out of the gate that got things going again," said Paolo Lostritto of Wellington West Capital Markets.
Mining stocks, meanwhile, have been relatively stable since late October, and the Iamgold bid has given a boost to shares of several junior gold players seen as potential targets.
Shares of NovaGold, which warned last month it would need additional funding to meet financial obligations, jumped 52 percent immediately after Iamgold announced its bid, and has tripled in less than a week.
The company owns half of the Donlin Creek project in Alaska, which has the potential to produce a million ounces a year, and is seen as a potential target for Donlin Creek joint venture partner Barrick Gold (ABX.TO).
Guyana Goldfields (GUY.TO) surged 55 percent following the deal, while Detour Gold (DGC.TO), which is developing the Detour lake project in northeastern Ontario, rose 18 percent.
Also boosted by M&A talk is Corriente Resources (CTQ.TO), a Canadian copper explorer active in Ecuador. Corriente stock jumped 12 percent on Tuesday after it said it was in exclusive talks to sell itself to a third party.
Expectations of deals have also been fueled by signs the strength of industry's senior segment is improving, as larger miners such as Agnico-Eagle (AEM.TO) and Yamana Gold (YRI.TO) have successfully issued equity to shore up balance sheets.
"I hear separately that M&A lawyers are extremely busy now," said George Topping, a mining analyst Blackmont Capital.
"I think the ball is starting to roll."
($1=$1.21 Canadian) (Additional reporting by Susan Taylor in Ottawa; editing by Peter Galloway)
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