Mining remains a bright spot in M&A gloom

Mergers and acquisitions have taken a hit because of coronavirus but one bright spot is mining where there has been a flurry of deals, many of them involving smaller gold producers.

Unlike many others, the industry has been comparatively unscathed by the pandemic. Most big mines have continued to operate without interruption and China, the world’s biggest consumer of raw materials, has continued to suck in their products.

This has given executives pause to think strategically about how to position their companies for a world after the pandemic.

According to data from Refinitiv, there have been 292 deals worth a total of $11.8bn in the metals and mining industry since March 23, when Canada’s Endeavour Mining announced plans to combine with Semafo in a $690m deal to create the largest gold miner in west Africa.

Over the past month Anil Agarwal, the Indian metals tycoon, launched a $2bn-plus bid to take control of natural resources group Vedanta, and Colorado-based Alacer Gold announced plans to merge with Canadian rival SSR Mining in a $1.7bn deal.

In addition, state-owned Chinese miner Shandong Gold swooped in to acquire TMAC Resources, and Canada’s Gran Colombia Gold set out plans to buy Guyana Goldfields in an all-stock deal. 

“There are definitely opportunities for M&A and consolidation,” Mark Bristow, chief executive of Barrick Gold, the world’s second-largest gold producer, told the Financial Times.

“There are a lot of deals that are going to come out of necessity. I have no doubt about that. And there will be opportunities for us. We are certainly quite busy on that front . . . tracking the potential opportunities we have identified in the past.” 

Spiro Youakim, head of the natural resources team at Lazard, said: “In mining and basic industries, top-line growth is limited other than through higher commodity prices. One way to potentially create growth and earnings momentum in this environment is through well thought out and judiciously priced acquisitions.”

Consolidation has been one of the key trends in the gold mining industry since Barrick announced plans to buy Randgold Resources for $6bn in September 2018. 

Analysts say there is an abundance of gold companies that lack the scale to appear on the radar of big generalist investors.

When Endeavour announced its deal with Semafo in March, its chief executive Sébastien de Montessus said the combined company would have the “trading liquidity, free float and size, characteristics that investors are seeking in today’s market environment”. 

Mr Youakim said the same logic applied to other parts of the mining industry, including industrial metals such as copper.

“The fundamental drivers of M&A have not gone away, but there is a flight to safety. In a very uncertain economic environment, investors in this industry tend to prefer large companies with more resilience, more operational and financial wherewithal, more operational flexibility and a reasonably controlled but greater number of assets,” he said.

Investor preference for big companies was in evidence earlier this year when Australia’s Newcrest Mining raised $655m from shareholders to fund a deal in Ecuador. Petropavlovsk, the Russian gold miner, has examined a potential merger with rival UGC to create a 1.1m-ounces-a-year producer.

Richard Horrocks-Taylor, who runs the metals and mining team at Standard Chartered Bank, picked out gold and battery materials — such as copper, nickel, lithium, cobalt — as attractive hunting grounds. 

Gold has been buoyed by the flight to safety, he said. Battery materials are experiencing “some weakness” because of the economic outlook but investors remain optimistic about the sector’s prospects, he said.

He added that the recent flurry of deal activity had shown that it was possible to execute deals in spite of the logistical problems caused by the pandemic, using virtual management presentations, online data rooms and detailed technical discussions by video conference. 

 “We are having to come up with some more creative and innovative approaches to due diligence. Some of the things we are helping clients with is using drone technology and Go-Pros to create credible alternatives to [site visits].”

However, investors expecting mega deals involving the big diversified mining groups are likely to be disappointed. 

While Anglo-Australian miner Rio Tinto has a “watching brief” on M&A, its chief executive Jean-Sébastien Jacques said it was difficult to make decisions while “fundamentals are shifting”.

“Right now, the market is finding it difficult to value companies and the Covid-19 recovery pathway is not clear. Rio Tinto will only transact if an opportunity creates value,” he said.

Moreover, the most likely targets for the sector’s big groups — major independent copper producers such as Freeport-McMoRan and First Quantum Minerals — are not in distress and would demand a massive premium from any suitor before they would recommend a deal.

“You’ve just got to ask the question, why would our shareholders consider selling now,” said Richard Adkerson, Freeport chief executive.