There’s a delicious tension building in the mining industry.
At the world’s biggest resource companies, including Barrick Gold Corp., chief executives are determined to avoid the mistakes of the past – namely, overpaying on acquisitions. After watching their stock prices take a beating over megadeals done a decade ago, and seeing many of their predecessors tossed out the door, this generation of CEOs is showing an understandable reluctance to pay up for takeovers.
The mood is completely different at midcap miners, such as Teck Resources Ltd. and First Quantum Minerals Ltd., and at smaller exploration companies. Their leaders anticipate a once-in-a-generation opportunity to boost profits from producing critical minerals such as copper. Demand is expected to soar, on the back of an increasingly electrified economy, while supply is in decline, as older mines close and new projects take decades to develop.
With the future bright, boards want to see any potential buyer pay a significant premium. Last week’s report that First Quantum nixed takeover talks with Barrick, and Teck’s refusal to engage with suitor Glencore PLC, reflect this reality.
The buyers want to bulk up, without blowing up their balance sheets. Sellers, on the other hand, are only willing to walk down the aisle after getting massive engagement rings. Their boards can just say no to perceived low-ball offers, confident the commodity cycle is going to keep boosting their stock prices.
At Barrick, CEO Mark Bristow won the top job in 2019 as part of no-premium, US$6-billion merger with Rangold Resources, which he ran. What worked with investors four years ago is unlikely to fly today. While there are no details on Barrick’s overture to First Quantum – neither company is commenting on reported negotiations – analyst Orest Wowkodaw at Bank of Nova Scotia said “a potential zero-premium combination with Barrick makes little sense for First Quantum shareholders.”
What would it cost to acquire a midtier producer such as First Quantum? Keep in mind the Vancouver-based company just settled a long-running tax dispute in Panama, the site of its largest mine. Mr. Wowkodaw predicted any bidder would need to offer at least a 30-per-cent premium – making this a $30-billion-plus takeover.
If the board showed it is open to a deal, Mr. Wowkodaw said First Quantum would draw interest from at least two other global copper players, Freeport-McMoRan Inc. and Rio Tinto Group, and could fetch 60 per cent more than its current share price.
So how does the current tension between mining’s buyers and sellers work itself out? The big dogs may start looking for smaller meals, by targeting junior companies that own undeveloped properties.
“We are likely to see further consolidation although it can be hard to add value buying production at a full and fair price,” RBC Capital Markets analyst Sam Crittenden said in a recent report on the outlook for copper. “The focus may shift to exploration stage companies, where M&A activity has been less active in recent years.” Potential takeover targets include Filo Mining Corp. – already partly owned by BHP Group – Solaris Resources Inc., Marimaca Copper Corp. and Arizona Sonoran Copper Co., according to Mr. Crittenden.
The problem with buying projects that are years from production is they fail to move the dial for major mining companies. Investors aren’t willing to pay now for cash flow and profits that will take up to a decade to materialize.
Most major mining companies boast strong balance sheets, and they all need to keep adding new reserves as existing mines age. If the price of copper continues to rise – as most analysts predict it will – the urge to do megadeals will become irresistible. There are a handful of companies with the scale that global players desire: Along with First Quantum and Teck, the list would include Hudbay Minerals Inc., Ivanhoe Mines Ltd. and Lundin Mining Corp.
History tells us a few of these miners will be acquired at a premium, and some of the buyers will regret the price they pay.
Andrew Willis