Chinese state-owned gold companies are going after some of the most troubled gold companies in Canada, betting that their deep pockets, cheaper access to capital and long time horizons will pay off.
In the past few months, Zijin Mining Group Co. Ltd. proposed a $323-million acquisition of Guyana Goldfields Inc., and Shandong Gold Mining Co. Ltd. offered to buy TMAC Resources Inc. for $207.4-million.
Both Toronto-based companies are among the most beaten-down assets in the Canadian gold sector, with Guyana long grappling with grade problems at its Aurora mine and TMAC struggling for years with an underperforming mill at its Doris mine in the Arctic.
“It has been a pattern,” Barry Allan, analyst with Laurentian Bank Securities Inc., said of the Chinese targeting the problem children of the Canadian gold mining sector. “Certainly the Chinese like deep value.”
The Chinese companies can afford to take their time betting on companies such as TMAC and Guyana Goldfields. Their time horizons are much longer than both publicly traded Western miners, whose investors typically demand quick turnarounds on acquisitions, and even private equity buyers who can afford to wait about six years for a return.
With access to the vast coffers of the state, Chinese buyers have ready access to cash for both the acquisition itself and the hundreds of millions of dollars in additional capital that are often needed to fix companies such as Guyana and TMAC.
“Buying the asset is just a ticket to the dance. There’s still a lot more money to be thrown in,” said Jon Case, precious metals portfolio manager with Sentry Inc. “Not a lot of companies have that firepower.”
While the ore at TMAC’s underground Doris mine in Nunavut is high grade, the company’s mill has been problematic. Since Doris went into production in 2017, output has been consistently lower than expected and costs significantly higher than predicted, in large part because of the company’s decision to use an unconventional modular mill.
Close to $700-million is needed to rightsize TMAC, including the construction of a brand new conventional mill.
Guyana Goldfields, too, needs a big capital infusion. Last year, the company stunned investors by reducing its gold reserves by 40 per cent after an earlier geological model overestimated the amount of gold in the ground at its Aurora mine in northwestern Guyana. The cost to transition from the current open-pit operation to a higher grade underground mine is about $140-million.
Rick Rule, chief executive officer of Sprott U.S. Holdings Inc., said the Chinese hold a major trump card when heavy capital expenditures are needed because their input costs are much lower than Western miners. That encompasses everything from raw materials, such as steel that they can source domestically, to cheaper labour costs and savings on using their own engineering firms.
Chinese state-owned firms can also raise money for mine construction on much better terms than junior Canadian miners. Mr. Rule said they can borrow at interest rates as low as 5 per cent, compared to as much as the 15 per cent TMAC might be subject to.
If Shandong were to borrow the $680-million needed to fix TMAC, for example, its interest costs would be $34-million a year. TMAC, by comparison, would have to pay up to $102-million a year. Over three years, Shandong could save $204-million in financing costs alone.
“The Chinese have a durable advantage in terms of both capital cost and cost of capital,” Mr. Rule said.
Before the TMAC and Guyana acquisitions can close, they must pass a security screening by the Canadian government. In April, Ottawa announced it would subject acquisitions by foreign state-owned firms to “enhanced scrutiny” in light of the COVID-19 pandemic.
If the government suspects either transaction could be a threat to national security, the deals could undergo a more thorough review under Section 25.3 of the Investment Canada Act.
Canada has rejected large takeover deals on security grounds in the past, including the proposed $1.5-billion acquisition of construction company Aecon Group by China’s CCCC International Holding Ltd. in 2018.
This year, Ottawa has already given the nod to one large acquisition in the gold sector by a foreign buyer.
Last month, the federal government approved London-based Endeavour Mining Corp.‘s $1-billion takeover of Montreal-based gold company Semafo Inc. Since Semafo’s gold operations are located in West Africa, ostensibly the takeover presented little risk to Canadian national security.
Guyana Goldfields’ operations are also abroad – meaning on the surface, the acquisition by Zijin would not appear to be problematic.
TMAC’s operations by contrast are located not only within Canada, but also in a sensitive location from a national security viewpoint. The Doris mine is situated near tidewater in the Northwest Passage, a highly strategic shipping route connecting the Atlantic Ocean to the Pacific.
China doesn’t own any territory in the Arctic but has referred to itself in the past as a “near Arctic” state.
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