Thursday, April 23, 2015

There’s Reason to Look Out for Increased Mining M&A’s, explains Randy Reichert

In 2011, The Globe and Mail published an article that prepared investors for a different kind of “gold frenzy”.  The form of this “frenzy” was namely a dramatic increase in merger and acquisitions in the mining space coming into the latter half of 2011 and into 2012.

In 2011, gold was enjoying a strong bull market, with gold prices peaking in August 2011 at a record price of above $1,900 an ounce.

Skip ahead to 2015 and gold producers and gold bugs are now clamoring for anything above the psychological price point of $1,200 an ounce. Can you imagine their delight if gold returned to $1,800 or $1,900?

But, that’s beside the point.  In 2011, gold prices were high, the precious metals sector was strong and The Globe and Mail article was prescient in predicting that acquisitions would be particularly prominent that year. 

No doubt because of strong metal prices, 2011 saw a dramatic uptick in mergers and acquisitions in the resource space.

In fact, there were so many m&a’s in 2011, that at the end of the year, called 2011 the “Year of the Deal”.  Some statistics warrant attention.  In 2011, Ernst & Young reported that 779 deals worth roughly $132 billion in total value were completed from January to October 2011. 

2011 was the "Year of the Deal" in the resources
industry.  Will 2015 be the same?

Compare that number to 2014, which as Ernst and Young pointed out was the fourth consecutive of decreasing mergers and acquisitions, with 2014 coming in at $44.6 billion in total m&a activity value.

So, where does this leave us today? 

Here’s what we know.

Prices of precious metals still remain low, having frustratingly hovered at the $1,200 price point for several months now.

Private equity remains at arm’s length from the mining space (as some media outlets claim, private equity can’t run away fast enough from the mining industry).

There still remains a great deal of uncertainty as to where commodity prices are heading for the rest of the year.

But still, despite all the uncertainty in the sector, despite the low prices, many analysts and mining executives are preparing themselves for a resurgence of mergers and acquisitions in 2015.    

In 2011 and 2012 and during other periods of m&a resurgence, high commodity prices and easy access to private equity were the engines that inspired acquisition activity. 

But, today’s mining environment is a different animal.  In turn, there are different reasons why insiders are expecting more acquisitions this year.

In a recent MiningFeeds cover, Andrew Pollard, a mining executive recruiter, highlighted a point that’s been less covered than others – namely, that major miners, and in some cases juniors, are not only beginning to suffer from a lack of reserves, they are also facing a shortage of talent.  In the article, Pollard elaborates that a 2014 Marketing Resource Group survey showed that 39% of mining executives plan to retire from full-time employment over the next four years.

That’s an incredibly sizable loss, and Pollard and others believe that one way miners will be replenishing their ranks is through increased merger and acquisition activity.

Of course, the elephant in the room is the diminishing reserves at many major mining companies.  It’s been mentioned a number of times over the past several months, but it bares repeating – miners, particularly gold producers, are at their lowest reserves in years.  There are two ways that miners can replenish their reserves – either by finding and building up new mines (something which is clearly capital and investment intensive, not to mention risky), or acquiring juniors that have quality product and strong financials.

Merging and acquiring a junior is what many analysts predict major miners will do over the next year or two.

But, in order to attract attention, in order to attract some sort of merger or acquisition opportunity, junior miners need to have their financials in order, mining consultant Randy Reichert points out.

“Acquiring or merging with another miner carries with it risk.  Clearly, majors want to limit their risk as much as possible.” 

Randy Reichert continues, “That’s why majors are on the lookout for companies that show high-quality product, that ideally have their mine feasibility completed, that, even better, are fully permitted and that are not carrying a load of debt or a high CAPEX ...  These are the companies that will be first in line when it comes to being acquired.”

When it comes to M&As this year, Randy Reichert
sees juniors that have little debt and quality product
as prime takeover targets.
Besides diminishing reserves, there are other economic bullets that are pointing toward increased mining acquisition activity this year.  Having sat on the sidelines for several years, many majors have an excess of cash on their books that would be perfect for scooping up a junior.  Given the low commodity prices, acquiring a junior at a discount rate would be seen as a perfect opportunity for a major mining company.

Randy Reichert adds, “At this moment, the resource market seems to be primed for some resurgence.  I think those junior mining companies that prepare themselves for a new bull market over the next several years will do very well.”

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