May 2007

Increases in mergers and acquisitions within the mining industry

By H. E. Robinson

Canada has an excited minerals industry market because everyone is consolidating. The high price of commodities has led to an upward movement in share prices. Most large mining companies have to grow, and this growth cannot rest on exploration alone. Instead, there is a need for these companies to perform in the market to demonstrate their growth. Shareholders look to the management. One way for an organization to experience growth is through mergers and acquisitions.

Toronto has a sophisticated and highly developed marketplace for companies. Over 50 per cent of mining companies are listed in the city.

“We have a very thriving equity market in Canada for mining company stocks,” explained John Sabine, a partner at Fraser Milner Casgrain, with over 30 years of experience in mining and complex business transactions. “It is the most attractive place to raise equity money.”

Mergers and acquisitions have increased in recent years. In the past, it was more difficult to affect some of these mergers. Target opportunities are now based in companies that operate globally. The increased value of the commodities that are being extracted from the ground means there is a heightened appreciation, which you can use as currency to acquire from smaller producers.

“There is a built-in expectation that mid-tiered producers in mining will be acquired by larger companies,” said Sabine. “[A company] can use stock to buy a smaller company to enhance growth prospects, as well as enhancing the return for shareholders. Current commodity prices have made it very lucrative for companies to do acquisitions.”

Many of these companies estimate that commodity prices will be higher in the future than present values. In a recent transaction involving nickel, for example, acquisition of the nickel company was done at a price that was lower than prices today. So companies are taking the risk that the commodity prices are going to increase.

In addition, some companies are merging because the reserve life of the minerals they are actively extracting is short term. In order to improve their reserve life, they acquire companies that have greater reserves. This improves a company’s own operating capabilities - using the value of company stock where shareholders have been investing in order to pick up companies that have a lag in their sector. These companies might have good properties, but they just have not been producing the shareholder returns that were expected.

The resource extraction industry has a lot of challenges. Some mining companies are based in parts of the world that make it very difficult to operate, so they need a large amount of capital to develop. Many expectations are raised with new projects but it becomes difficult to go out and acquire the basic equipment you need to build and operate a mine.

People who are knowledgeable about the industry are also in high demand. The mining industry has changed in the past couple of decades. A lot of people did not train to become geologists or engineers, or they did not specialize in skilled trades and the mining industry.

Sabine noted, “Another reason for people to do acquisitions is to pick up a workforce that knows how to develop, build, and run mines.”

A challenge facing mining companies is governmental rules and regulations that prevent the mining industry from development in particular countries. Places like China and India are growing very rapidly. Their demands for commodity products are high, particularly in the metals industry. A growing middle class in those jurisdictions is purchasing refrigerators, stoves, automobiles, and other things that have metal content. The industry struggles to keep up with the ever-increasing need.

“What people [in the industry] are looking for is long-life reserves in reasonably politically secure regions of the world,” Sabine said.

A lot of mergers and acquisitions have been happening in the minerals industry. In the past four to five years, most of the major mergers have required a great deal of input from legal teams or firms working with companies across international borders. Canada is in a unique position as a principal player in mineral exploration investment for many of the large mining companies whose operations are global.

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