The days of mining companies being offered fat premiums by potential buyers are but a distant dream to shareholders.
While modest premiums are still attainable, this year miners may be more likely to see hostile or compelled bids that limit those premiums.
Already, the mining sector has seen three hostile takeover bids in 2014: Goldcorp’s (TSX: G; NYSE: GG) bid for Osisko Mining (TSX: OSK), HudBay Minerals’ (TSX: HBM; NYSE: HBM) bid for Augusta Resources (TSX: AZC; NYSE-MKT: AZC), and Waterton Global Resource Management’s bid for Chaparral Gold (TSX: CHL).
John Gravelle, PwC’s global mining leader, says we may well see more hostile bids as the year progresses, driven by ultra-low valuations.
“The valuations are too good to be true and (the acquirers) are not expecting there to be these extended bidding wars where the premiums end up being really high.”
Geordie Mark, senior gold mining analyst at Haywood Securities, says M&A is a tough and time-consuming process, with most discussions ending before a deal can be struck and presented to shareholders.
“Ultimately, going hostile at least brings it to the table and it’s out there — it presents a discussion that can be tabled and the market will be able to participate in making call on the relative value of the proposal.”
With its bid for Osisko, for example, Goldcorp is declaring the price it’s willing to pay for the company and the market is now engaged in making a value call on the potential deal.
“I guess what we’re seeing is that where Osisko’s valuation is relative to the original offer, the market’s expecting something a little higher,” Mark says.
Another related category of M&A that we might see is “compelled” transactions, says Gravelle.
“There’s still some investors that are looking for exit strategies or looking to reduce their exposure to mining and they can only get out if there’s a transaction,” he says. These large shareholders may be pressuring management teams to do a deal.
“It’s almost like a hostile because the company’s probably selling before it thinks it should, but it has to do what shareholders want and the shareholders are telling them let’s take the price that’s on the table and take the cash.”
In the last couple of years, stock prices were so bad that many companies did everything they could to avoid issuing equity. To raise funds, they used a range of alternative financing options, including high-yield debt, convertible debt, and royalties and streaming deals.
Some of these financings have made companies vulnerable at low gold prices, Gravelle says.
“There’s a lot of conditions in that funding that have debt-like covenants,” he explains. “When gold was down below US$1,200, a lot of companies, especially those with higher costs, were not having their projects looking terribly viable. Their balance sheets had a lot of high-priced debt on it, and they were pretty close to breaching some covenants.”
While this is less of a problem now that gold is up over US$1,300 per oz., companies that do find themselves violating conditions of these deals may end up in the hands of creditors and the subject of a restructuring. Streaming companies may also reconsider some of their previous investments and look to sell them, creating opportunities for new buyers to step in.
Other trends we may see this year are: more deals with private equity firms (see Waterton Global’s recent bid for Chapparal Gold); mergers of equals among juniors for the sake of survival; and the re-emergence of Chinese buyers.