North American metals and mining companies likely to see continued consolidation in light of liquidity issues, industry sources say18 June 2009

Consolidation in the metals and mining sector is likely to continue as companies still face liquidity issues, industry sources said.

There has already been a wave of consolidation, said John Lee, principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. Liquidity will continue to drive consolidation as exploration companies cope with trying to fund projects while unable to tap the capital markets, he said.

Mining majors are more likely to look for smaller, immediately accretive buys than the traditional “mega-mergers,” Lee said. Companies with low-grade deposits such as Greystar Resources and Andina Minerals may attract interest. Those with big deposits such as Banro Corporation, located in the Democratic Republic of the Congo, and Gabriel Resources, in Romania, are attractive, but involve higher risk, he added.

Aurizon Mines and Wesdome Gold Mines are also potential targets that could draw interest from majors, an industry analyst said, describing the environment as “eat or be eaten” for juniors.

Such M&A activity likely will see the largest spike when gold prices rise to USD 1,000-1,500 per ounce around September, Lee said. Gold prices opened around USD 935 per ounce today.

Large bidders such as Kinross Gold Corporation and Newmont Mining Corporation are raising money and could be buyers, but Lee added that it could be years before they make another “mega-deal.”

Meanwhile, mergers of equals are likely to be the next phase of consolidation, Lee said. He pointed to Central Sun Mining’s acquisition of B2Gold for USD 58m in February 2008, IAMGOLD’s November 2008 acquisition of Orezone Resources for USD 137m and Red Back Mining’s acquisition of Moto Goldmines for USD 471m in early June of 2009 as the start of this trend.

Mining juniors hit hard on the Toronto Stock Exchange should “band together” in mergers of equals to underpin their share prices, suggested Ross Henderson, a Sydney-based managing director at American Appraisal, a valuation consulting company. Lee pointed out that there are over 3,000 junior mining companies in Toronto, 70% with market caps under USD 15m, down from USD 100m-USD 200m a year ago.

Precious metals will see the most M&A activity, as similar-sized companies combine to combat the sluggish capital markets, mainly in the USD 200m and lower range, a mining strategist agreed.

The summer will bring a “flood” of transactions, as government hand outs reach completion and landmark events such as the bankruptcy of GM bring reality to sellers, said Alexander Lopatnikov, a Moscow-based managing director at American Appraisal. Many will feel the need to do something after “what they thought would help didn’t.”

Those juniors that are near production have hope of financing, Lopatnikov said. However, those that are at further stages are going to have a much harder time.

The metals and mining sector could also see players from China and Russia looking to enter new markets.

In the wake of Chinalco’s bid for Rio Tinto in Australia, Chinese companies will continue to look for buys abroad, but will likely face more governmental opposition, the strategist said. China is going after the junior sector, but due to regulatory hurdles with the Canadian government, are instead creating joint ventures, taking equity stakes, and signing offtake agreements, rather than taking over companies outright, Lee added. Specifically, he said the Jinchuan Group was looking for deals in the USD 100-200m range.

Therefore, Chinese bidders may be more likely to ink deals in developing countries in Africa, Latin America and Asia rather than North America, Lee said.

Those making large buys in mining are almost entirely large government-backed companies looking to secure a supply of resources, Lopatnikov said. Large buys for financial reasons are unlikely to occur until financing is easier to secure. It is probably too early for other large companies to feel that the dry spell is over, he added.

Some Russian companies are looking to buy juniors listed on Canadian exchanges, but with precious metals assets entirely located in Russia or Kazakhstan, Lopatnikov said. There are 15-20 companies that could fit the bill, he added.

by Page Robinson and Bryce Covert

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