Grant Thornton LLP (Grant Thornton) recently released its 2014 Global Mining Report, Gathering Momentum: The Resurgence of M&A (the Report). The Report, which tracks the results of Grant Thornton’s Global Mining Survey (the Survey), is optimistic about M&A activity in the mining sector as the industry is set to heat up as 2014 ends and 2015 begins.
Over one third of the mining executives surveyed in the Report said they expected to need a near-term cash injection in order to stay afloat. Grant Thornton reports, however, that funds are unlikely to come rushing in to struggling mining ventures as investors remain cautious and risk-averse while commodity prices continue to slide. Faced with limited access to capital, Grant Thornton predicts that such mining industry players will look to better capitalized mining companies and seek to sell (the whole or a part of) their company. To that end, the Report also states that over one third of the mining executives interviewed indicated they had an interest in acquiring a mining company (or a part thereof) in the near future. It would therefore appear that the mining industry is warming up to the idea of increased M&A activity: there is a growing pool of companies ready to sell and an equal number of companies looking for the perfect target to acquire.
How will M&A activity play out?
The Report has heralded this time to be “the onset of a buyers-market”. However, Grant Thornton are quick to caution that this may not lead to a surge of fast-paced, hostile M&A activity where buyers scramble to find the best deals. Instead, the Report says we should expect to see a slower, more calculated process of acquisitions. In the present marketplace, potential buyers are looking at their targets in great detail: buyers are looking at the target’s strategies, management, planning initiatives and cost control measures. When evaluating a potential target, buyers are looking for clear paths for cost reduction, ways to enhance revenue, investments in technology and effective management control. In short, buyers are going to examine much more than a target’s mineral deposits when it comes to selecting a target to take the plunge with. It follows that a much more rigorous due diligence review will take place, as buyers need to carefully study the potential target prior to committing to any kind of deal.
Considerations for buyers
As potential buyers in the mining industry begin the acquisition process, Grant Thornton outlined some key considerations:
- Does the deal fit the current profile for the buyer’s commodity portfolio? Buyers should consider whether management already has technical experience relevant to the target’s main commodity, and whether additional knowledge and skills are required. Buyers should also consider where the commodity is located and whether management already has the expertise and in-country experience to operate in that region.
- What is the rate of return? After examining existing feasibility studies, buyers need to know when and how much the acquired assets can be expected to produce.
- What kind of infrastructure does the target have (or have access to)? Buyers should consider the costs associated with accessing the mine site and the costs are associated with transporting the minerals to a customer.
- How does the target’s jurisdiction regulate mining activities? Buyers should consider the federal, regional and local laws as they relate to not only mineral extraction but also labour standards and sustainability (to name a few), and be aware of any proposals for new regulations.
- Are there socio-political forces that could impact the target’s jurisdiction? Buyers should consider how the current social or potential climate could affect mine value (for example, in regard to resource nationalism, corruption or unrest).
- How does the target’s current management team fit in with the acquisition plan?Buyers should consider how qualified or experienced management is at the target’s property/on the target’s board, and how they will fit into the buyer’s overall strategy.
- Will the acquisition create value for shareholders? Buyers should consider opportunities to realize on potential synergies, such as by improving returns through the combination of adjacent properties or by sharing milling operations, which will ultimately create value for shareholders.
- Who are the target’s key suppliers? Buyers should consider how efficient and cost-effective the target’s supply base is, and whether the acquisition presents opportunities for cost-saving synergies.
- What is the target’s capital structure? Buyers should pay attention to how the target’s shareholder base is structured, and consider whether there are any blocking stakes that could present problems for a successful takeover.
The bottom line
As deal opportunities present themself to players in the mining industry, buyers need to take a disciplined approach to M&A. It will be crucial for buyers to carefully evaluate projects and focus their efforts on strategically appropriate transactions. In doing so, the mining industry should expect to see a greater number of successful deals take place as we move into 2015.