TGR: Overly optimistic feasibility studies and PEAs. Are you suggesting that recoveries won't be as high as expected? That capital numbers are generally too low? Mine life will be shorter? All of the above?
MF: All of the above and more, particularly in the case of PEAs. The stated returns in some of these reports are far too optimistic.
TGR: EY estimates that mining-focused private equity funds may have as much as $10B ready to deploy in the mining sector. What is private equity seeking?
MF: Most of the private equity firms want big assets. They are not interested in small exploration plays or tiny companies. They want assets that are in production or near production, perhaps offloaded by majors looking to trim debt; other targets could be companies with big development projects with juicy returns. Pretium Resources Inc. is one example. In April, Boston-based Liberty Metals & Mining Holdings bought roughly 5.78 million (5.78M) Pretium common shares at CA$6.92 apiece and received a seat on the board. Private equity wants to be involved in the decision-making.
TGR: Typically, how large are these private equity deals?
MF: Private equity generally wants to have a big chunk of a company, typically 10–20%, maybe more in some cases. It's about having a say in what these companies do.
TGR: Why not outright takeovers?
MF: A huge amount of private equity has not been deployed into the resource business. I don't think private equity is particularly comfortable with it. Most private equity managers don't have the expertise to actually run a mine. They generally prefer a big stake, but not actually run the company.
TGR: Are institutional bidders going to start bidding up these stocks or does the market rise owing to greater M&A speculation and activity? Which comes first?
MF: The institutions are going to be more actively involved in the space but they want to see more cost cutting, better earnings and cash flow, and generally good fundamentals in the gold sector. Institutions shunned the sector because there was tremendous cost inflation. Now it's going the other way. If the gold price goes up, M&A activity will gain steam.
TGR: If M&A gains steam, who would be the likely aggressors? Is it the large-cap producers? The midtiers? Small cash-flowing juniors?
MF: The majors are still in the game for good quality assets. We saw that with Yamana Gold Inc. and Agnico-Eagle Mines Ltd. taking over Osisko Mining. There are other assets out there with reasonable quality and some of the majors may well pick them up.