Retired mining machines set up as a tourist stop along Highway 63 north of Fort McMurray, Alta., are shown on April 25.AMBER BRACKEN/The Canadian Press
Kenneth Kaczkowski is a mergers-and-acquisitions (M&A) professional based in Munich, Germany. He has worked on global transactions in excess of $20-billion.
Marc Levy has founded and sold several resource sector companies, with more than $950-million of public company exits; notably he sold Norsemont Mining to Hudbay Minerals Inc. for $520-million in 2011.
Commodity markets have been heating up over the past 12 months, prompting major mining companies to consider turning on their M&A engines. The market has seen some mega-deal announcements including BHP’s unsuccessful offer to take over Anglo-American, Newmont taking over Newcrest and Glencore acquiring Teck’s coal assets, which just gained approval from the Canadian government.
But the tail winds of the Glencore takeover of Teck’s TECK-A-T coal assets have left a bitter taste in the market, owing to the Canadian government’s applying new rules limiting foreign takeovers of mining companies. This is simply unwarranted government intervention, as their actions are not benefiting the market nor resulting in a net benefit to the economy. In fact, this act of governmental overreach is making it much more challenging for the Canadian market.
The Canadian government has a history of meddling in mining M&A. In 2010, prime minister Stephen Harper blocked BHP’s proposed takeover of Potash Corp. of Saskatchewan Inc. More recently, the government blocked a $130-million investment by an affiliate of Zijin Mining Group into Solaris Resources Inc., despite Solaris being headquartered in Vancouver with assets in South America. These actions send mixed messages; on one hand, they claim to protect domestic industry and natural resources, while on the other, they meddle in foreign jurisdictions and scare off investors.
Canada used to be the premier location for mining companies to go public. Over the past two years, capital markets have been extremely tough, especially for junior and mid-tier mining companies, which have struggled to raise capital and faced downward pressure on their share prices and valuations. In the past six months, as markets and commodities began to heat up, optimism started to show its face. However, recent Canadian governmental decisions might change that.
Canadian miners, namely those with portfolios of foreign assets, will start to question the benefits of being headquartered and publicly listed in Canada. The Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V), once rich with investors looking for the next hot mining stock, have lost their allure. Recent changes to charity flow-through funding rules have further strained the mining sector, pushing away domestic investors. Companies are left having to venture overseas to try to court potential investors. This shift positions the Australian Securities Exchange (ASX) in a prime position to capitalize on companies considering listing elsewhere.
Government intervention has always been a hot topic of discussion. While support can lead to economic and industry growth, restrictions can stifle industries and harm the economy. Increased scrutiny from Western governments raises the question of whether this increases the risk premium for investment in these jurisdictions – the additional return an investor needs to compensate for the uncertainty. This is proving to be true as share prices of Canadian majors moved lower after the government’s decision on the Solaris investment.
Does the Canadian government want to imply that the likes of Lundin Mining, Ivanhoe mining, First Quantum Minerals, B2Gold and Capstone Copper, all of which are headquartered in Canada but operate mines in other jurisdictions, are off the table for a potential acquisition? If that ends up being the case, the market is sure in for an awakening call.
M&A has historically been a strategy to advance the mining industry, providing tremendous benefit to the Canadian economy along the way. For the past 100 years as exploration companies de-risk assets, and majors deploy capital into new projects, M&A has been at the cornerstone of the industry. If M&A and foreign investment is taken out of the equation, the industry will have to look to fill that gap. One solution is to relocate to a friendlier jurisdiction and also list on a different exchange, whether that be the ASX, New York Stock Exchange (NYSE) or London Stock Exchange (LSE) only time will tell, but it’s a scary thought as once they leave they will never come back.
As the commodity market heats up and the industry looks to grow, government co-operation and support are essential, not unnecessary restrictions and hurdles. Countries aiming to grow their mining industries must attract capital and get projects running, rather than deterring or punishing investors and companies. The market awaits to see if the Canadian government will step in and block any more potential transactions. If so, countries willing to support business will be waiting with open arms to welcome Canadian mining companies.