Michael Fowler, senior mining analyst with Toronto-based Loewen, Ondaatje & McCutcheon, predicts when gold breaks out, mining M&A will take off. He expects the major producers to lead the next rush of M&A. The majors want development-stage companies with high-grade, near-term production assets, and Fowler suggests some targets in this interview with The Gold Report.
Fowler has worked in the investment industry since 1987 as a base and precious metals mining analyst for numerous high-profile firms. His coverage list included the major North American gold mining companies, but is now focused on small- to mid-sized companies. Previously, Fowler worked as a geophysicist involved in mineral exploration for 10 years. He was involved in the discovery of the high-grade Cigar Lake uranium mine in Northern Saskatchewan in the early 1980s. Fowler holds a Master of Business Administration from Cranfield University, UK; a Master of Science in mineral exploration from Leicester University, UK; and a Bachelor of Science in geology with geophysics from Liverpool University, UK. He is a member of the Institution of Materials in the UK and a member of the Canadian Institute of Mining and Metallurgy.
Source: Brian Sylvester of The Gold Report
The Gold Report: A report titled “M&A and Capital Raising in Mining and Metals, 1H 2014″ from Ernest and Young (EY) says that mining and metals deal values in H1/2014 are “down 69% year-on-year, to $16.7 billion ($16.7B), from $53.8B, with deal volumes down 34% over the same period.” Why aren’t more mergers and acquisitions (M&A) happening in the precious metals space?
Michael Fowler: The first reason is that there are some big egos in the mining sector and some mining companies would prefer to go it alone or at least be in charge. But if both companies want to be in charge, someone is going to lose out. Ego is a big factor.
“Pretium Resources Inc. will be looked at strongly by some larger companies.“
Job entrenchment is a second reason. CEOs, for example, want to keep their jobs versus being kicked to the curb.
Third is asset quality. Miners looking at other companies believe that their own assets are of superior quality and those of targeted companies are poor. Generally, asset quality is not high.
Number four is transaction costs. It costs a lot of money to make a transaction, especially for small companies with limited cash.
TGR: Obviously, there were more transactions last year and the quality of assets couldn’t have changed a lot since. How do you define poor quality?
MF: We define that by the return to the prospective acquirer. As companies look at some of these assets, they see decreasing mining grade or reserve grade. That means cash margins will be less than what they would have been, say, 10 years ago. Grade plays a large role in determining the economics of putting a deposit into production and making a profit. I should note, too, that recently I have seen too many overly optimistic feasibility studies and scoping studies or what they now call preliminary economic assessments (PEA). Generally, asset quality isn’t that high.
TGR: Overly optimistic feasibility studies and PEAs. Are you suggesting that recoveries won’t be as high as expected? That capital numbers are generally too low? Mine life will be shorter? All of the above?
MF: All of the above and more, particularly in the case of PEAs. The stated returns in some of these reports are far too optimistic.
TGR: EY estimates that mining-focused private equity funds may have as much as $10B ready to deploy in the mining sector. What is private equity seeking?
MF: Most of the private equity firms want big assets. They are not interested in small exploration plays or tiny companies. They want assets that are in production or near production, perhaps offloaded by majors looking to trim debt; other targets could be companies with big development projects with juicy returns. Pretium Resources Inc. (PVG:TSX; PVG:NYSE) is one example. In April, Boston-based Liberty Metals & Mining Holdings bought roughly 5.78 million (5.78M) Pretium common shares at CA$6.92 apiece and received a seat on the board. Private equity wants to be involved in the decision-making.
TGR: Typically, how large are these private equity deals?
MF: Private equity generally wants to have a big chunk of a company, typically 10–20%, maybe more in some cases. It’s about having a say in what these companies do.
TGR: Why not outright takeovers? Continue reading