A truck winds its way out of the Canadian First Quantum Minerals Ltd. Frontier mine in Fungurume, in southern Democratic Republic of Congo, on May 25, 2010.KATRINA MANSON/Reuters
A handful of Canadian mid-tier miners spent the past few decades bringing major copper and nickel projects into production. They aren’t getting long to enjoy the fruits of their labours.
Merger and acquisition activity is picking up in mining, as cash-rich global companies snap up smaller producers of metals that are essential to an electrified economy. Analysts predict targets in the next round of acquisitions will include domestic companies that have producing mines around the world, including Champion Iron Ltd. CIA-T, Copper Mountain Mining Corp. CMMC-T, First Quantum Minerals Ltd. FM-T, Hudbay Minerals Inc. HBM-T and Ivanhoe Mines Ltd. IVN-T
Judging by the latest round of deal-making, the tone of the takeovers is likely to be hostile.
Mining companies have two paths to growth: they can either develop their own properties or buy someone else’s. In an industry study this month, a team of four analysts at Scotiabank concluded major international miners own very few quality development projects. But they do have strong balance sheets, courtesy of the recent strength in commodity markets. That’s a starting point for a boom in M&A activity.
The frenzy is being fuelled by investors willing to pay a premium for mining stocks that offer exposure to metals used in high-growth sectors, such as electric-vehicle manufacturing.
“The world’s largest diversified miners are under significant shareholder pressure to re-balance their asset portfolios towards greener metals,” such as copper, nickel, cobalt and lithium, the Scotiabank study says, adding that these companies are likely to divest from polluting commodities, including coal and oil, as they work to overhaul their holdings.
Takeovers got even more attractive over the past six months, as Canadian mid-tier mining stocks sold off as part of a broad-based decline in markets – a reaction to inflation and recession fears. Scotiabank’s analysts say large global mining companies are now shopping for bargains in Canada and elsewhere, because the share prices of many domestic copper and nickel producers are disconnected from their intrinsic value.
That disconnect explains why future deals may start out hostile – or “unsolicited,” as potential buyers prefer to say. So far this year, global miners have run into resistance when they have pitched chief executives and boards on handing over control of mines that took years to build, and that are now producing some of the world’s most sought-after resources.
In March, mining giant Rio Tinto PLC made an unsolicited offer for Montreal-based Turquoise Hill Resources Ltd., then had to improve it twice to win approval from the smaller company’s board. Rio Tinto’s bid still hasn’t won over one of the copper producer’s largest shareholders. In August, Australia’s OZ Minerals rebuffed a bid of $8.3-billion Australian dollars (about $7.4-billion) from BHP Group, the world’s biggest miner.
Boards at domestic mining companies are likely to be reluctant to do deals, except at premium prices, according to Scotiabank’s analysts.
If buyers take a run at domestic copper producer First Quantum, which has a $17-billion market capitalization, or Ivanhoe Mines, an $11-billion company, geopolitics will add all sorts of complexity to the bidding. China-based entities own significant stakes in both of those Vancouver-based companies, and neither miner has significant operations in Canada.
Jiangxi Copper holds an 18.3-per-cent stake in First Quantum, while China Citic and Zijin Mining own 26 and 14 per cent, respectively, of Ivanhoe. It is easy to imagine a scenario where the federal government would be asked to approve acquisitions of Canadian miners by China-based companies.
The last mining M&A boom saw Canadian companies with deep historic roots – Alcan, Inco and Falconbridge – acquired ahead of a projected commodity supercycle. That cycle never materialized, and buyers’ remorse was commonplace.
A new generation of domestic miners now faces takeovers, based in part on a projected bull market for environmentally friendly commodities. At the right price, Canadian companies will get sold. Will this trend be the buyers’ friend?
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