M&A-shy mining majors eye junior partnerships to grow reserves

M&A-shy mining majors eye junior partnerships to grow reserves

3:50pm EST

By Julie Gordon

VANCOUVER (Reuters) – At a time when major miners have turned gun-shy on acquisitions after a rash of value-busting deals, two big players made it clear last week that they are still keen to partner with junior firms on high-quality, early-stage projects.

Under pressure from investors to retreat from large, capital-intensive projects, companies like Canada’s Teck Resources Ltd (TCKb.TO: QuoteProfileResearchStock Buzz) and Poland’s KGHM Polska Miedź SA KGH.WA are looking to tiny exploration companies to secure future output.

Junior miners are likely to be receptive. Once able to tap retail investors when commodity prices were climbing, many juniors now find themselves locked out of capital markets and struggling to fund exploration programs or even just keep the lights on.

“We have billions of dollars in cash, ready to deploy, and are looking for opportunities,” said Teck’s chief executive Don Lindsay at an industry conference in Vancouver last week. “We are open for business and we want to partner.”

Lindsay’s comments echoed those made by the chief executive of KGHM International, KGHM’s global mining arm, just hours before, who also urged juniors to bring him their best projects.

“We believe that now is the time to build a portfolio of partnerships with junior exploration and development companies,” said Derek White, speaking at the same conference. “The benefits of these kinds of partnerships is that both parties build the business and both can create a synergistic relationship.”

These smaller deals are a more attractive option than the mega-deals that in recent years gave buyers access to producing assets, but also resulted in huge writedowns when metal prices soured and projects failed to live up to expectations.

Barrick Gold Corp (ABX.TO: QuoteProfileResearchStock Buzz), which bought Equinox Minerals for C$7.3 billion ($6.6 billion) in 2011, later booked a $3.8 billion charge on the value of the deal’s flagship asset, and Kinross Gold Corp (K.TO: QuoteProfileResearchStock Buzz) has written down some $5.7 billion related to its C$7.1 billion takeover of Red Back Mining in 2010.

NEWFOUND ENTHUSIASM

To be sure, big miners funding projects for juniors in order to earn stakes in promising early-stage ventures is nothing new. But there is a fresh enthusiasm for such partnerships as top producers look for more economical ways to grow their project pipelines.

The bullish statements also build on the positive momentum of Goldcorp Inc’s (G.TO: QuoteProfileResearch,Stock Buzz) C$2.6 billion ($2.35 billion) hostile bid for Osisko Mining Corp (OSK.TO: QuoteProfileResearch,Stock Buzz), which signaled an uptick in deal activity in the mining sector.

The sector has sagged in recent years, as falling metal prices and underperforming assets led to massive writedowns, prompting top miners to swear off big budget deals, shelve new developments and focus on cutting costs.

In an effort to be more disciplined, producers slashed exploration budgets and shunned mega takeovers.

But that process limited their own prospects for new growth, leaving many in a sticky situation.

“As an operating mining company, we know our reserves are depleting every day,” said KGHM’s White. “We know we need to replace those reserves, otherwise we will go out of business.”

COUPLING UP

For some, small partnership deals are the ideal solution. Rather than spending hundreds of millions on full exploration programs, miners can spend a few million to gain a toe-hold in a promising property. For the juniors, an established partner adds prestige to a project and guarantees years of funding.

It is a model that has worked well for mid-sized producers like HudBay Minerals Inc (HBM.TO: QuoteProfile,ResearchStock Buzz) and Agnico Eagle Mines Ltd (AEM.TO: QuoteProfileResearchStock Buzz), who have had considerable success partnering with juniors on early-stage projects and using those investments as a farm system for future development.

Now, the majors are seeing the opportunity in cash-strapped juniors. In 2013, mining firms on the TSX Venture exchange raised a combined C$1.28 billion in equity capital, down sharply from C$2.79 billion in 2012 and C$5.89 billion in 2011, according to TMX Group data.

And while many juniors were hesitant to tie themselves to one partner in the past, seeing it as a potential hindrance to future deals, with cash flows running low, they are now faced with the choice of either selling out at a rock-bottom price or finding a partner to keep the project alive.

“A lot of those small juniors, particularly if they have something valuable, are realizing … I’m going to have to go to the seniors, and I’m going to have to have partnerships,” said Francis McGuire, chief executive of Major Drilling Group International (MDI.TO: QuoteProfileResearchStock Buzz), which provides drilling services for the mining industry. “I think you’re going to see more of that.”

The trick is to not give away too much, too soon, but rather to retain a big enough stake to create value for shareholders if future exploration is fruitful, said Ralph Rushton, a director at Radius Gold Inc (RDU.V: Quote,ProfileResearchStock Buzz), which is developing the Holly-Banderas project in Guatemala and doesn’t have a senior partner.

“Junior companies are wary of being seen by the investment community to have given away the family jewels too early,” said Rushton. “On the other hand, (they) are starved for cash.”

($1 = 1.1082 Canadian dollars)

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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