Michael Fowler, senior mining analyst with Toronto-based Loewen, Ondaatje & McCutcheon, predicts when gold breaks out, mining M&A will take off. He expects the major producers to lead the next rush of M&As. The majors want development-stage companies with high-grade, near-term production assets and Fowler suggests some targets in this interview with The Gold Report.
The Gold Report: A report titled "M&A and Capital Raising in Mining and Metals, 1H 2014" from Ernest and Young (EY) says that mining and metals deal values in H1/2014 are "down 69% year-on-year, to $16.7 billion ($16.7B), from $53.8B, with deal volumes down 34% over the same period." Why aren't more mergers and acquisitions (M&A) happening in the precious metals space?
Michael Fowler: The first reason is that there are some big egos in the mining sector and some mining companies would prefer to go it alone or at least be in charge. But if both companies want to be in charge, someone is going to lose out. Ego is a big factor.
Job entrenchment is a second reason. CEOs, for example, want to keep their jobs versus being kicked to the curb.
Third is asset quality. Miners looking at other companies believe that their own assets are of superior quality and those of targeted companies are poor. Generally, asset quality is not high.
Number four is transaction costs. It costs a lot of money to make a transaction, especially for small companies with limited cash.
TGR: Obviously, there were more transactions last year and the quality of assets couldn't have changed a lot since. How do you define poor quality?
MF: We define that by the return to the prospective acquirer. As companies look at some of these assets, they see decreasing mining grade or reserve grade. That means cash margins will be less than what they would have been, say, 10 years ago. Grade plays a large role in determining the economics of putting a deposit into production and making a profit. I should note, too, that recently I have seen too many overly optimistic feasibility studies and scoping studies or what they now call preliminary economic assessments (PEA). Generally, asset quality isn't that high.