Hope springs eternal for miners as the market picks up for some, but not all, metals. Lawyers in the sector, however, suggest we're far from a full recovery
IN A STEREOTYPE THAT goes back to the original Gold Rush, it is generally said that business people in the mining sector are optimists; they have to be, given the risks they take on. Recent years have surely tested that optimism, and yet in 2016 and now in first quarter 2017, there are hopeful signs, even murmurings of a resurgence in the market. We asked Canadian lawyers who serve mining company clients to weigh in as to whether this was real or “make-it-so” thinking.
John Turner of Fasken Martineau LLP noted: “Last year, particularly the first half, was dominated by equity financings in the precious metals sector. The second half was more about M&A and that is continuing and picking up pace in 2017. There was definitely an increase in interest from China, and the election of [US] President Donald Trump seemed to improve the outlook for base metals and uranium in particular.”
“However,” cautioned Turner, “there are issues around value. With mining companies having worked hard to improve their balance sheets over the past few years, shareholders have little appetite to see companies repeat the value destructive acquisitions we saw during the super cycle.”
Jay Kellerman, Toronto managing partner of Stikeman Elliott LLP, categorized the recent deals in the mining market: “Given the significant resurgence in commodity prices since 2015, there has been increased interest in the mining sector.” He pointed to “increased corporate finance work as companies are able to actually raise money; the beginnings of an IPO market; ongoing M&A activity; and a number of privatizations.”
Fred Pletcher of Borden Ladner Gervais LLP said, “The good news on the legal front is that there were more equity financing windows during 2016 than in the previous couple of years, particularly for precious metals producers.”
For example, in anticipation of President Trump’s ultimate approval, Northern Dynasty completed a financing in early 2017, with a view to developing its Pebble gold project in Alaska. It had been under Environmental Protection Agency review because of its proximity to sockeye salmon fisheries. Its stock continued to climb as of late January, once President Trump’s “blessing” came through.
Not every project is obtaining financing these days, however; investors are much more discriminating than they used to be. George Dubé of McMillan LLP told Lexpert, when it comes to investing in mining entities, “investors on the street are much more adamant. They are investing in production companies, pre-production companies, provided they have good management teams.” This may sound axiomatic, but mining investors have been looser with purse strings in the past, willing to take risks across the board, hedging the bets across the sector. Now, says Dubé, “what distinguishes companies is the people.” Quentin Markin, co-head of Stikeman Elliott LLP’s Global Mining Group, concurred: investors are looking for strategic and resilient leaders for challenging times.
Superior Gold Inc. became the second initial public offering of 2017 in Canada. According to a National Post report, it marketed “its offering of regular common shares this week” after having “formed last July and acquired the Plutonic gold operations from Australia’s Northern Star Resources last October, [and] has more modest ambitions: it is seeking between $13.5 million and $14.5 million from the sale of shares that are expected to be priced at $1. In addition, it plans to list the shares on the TSX Venture Exchange.”
As previously reported in Lexpert, in June 2016, Nevsun Resources Ltd. completed its acquisition of Reservoir Minerals Inc., a TSX-V listed company, for approximately US$440 million. The acquisition was completed pursuant to a statutory plan of arrangement in which all of the issued and outstanding common shares of Reservoir were exchanged on the basis of two common shares of Nevsun and $2 in cash per share. Additionally, on April 24, 2016, the companies entered into a funding transaction comprised of a private placement for 19.99 per cent of Reservoir’s outstanding common shares and a loan transaction. Pursuant to the private placement, Nevsun subscribed for 12,174,928 common shares of Reservoir at a price of $9.40 per share, for a total subscription price of $114,444,323 (US$90,296,571). Pursuant to the loan transaction, Nevsun provided an unsecured cash loan of US$44,703,429 to Reservoir. The combined funding transaction provided US$135,000,000 in financing to enable a wholly owned subsidiary of Reservoir to exercise its right of first offer (ROFO) to acquire 100 per cent of the interest of Freeport-McMoran in the upper zone, and increase Reservoir’s interest in the lower zone, of its joint venture in the Timok copper-gold project in Serbia.
Reservoir was represented on the ROFO, consideration of financing alternatives and consummation of the takeover by Nevsun by Blake, Cassels & Graydon LLP. Nevsun was represented by Stikeman Elliott LLP.
Apart from these deals, Kellerman noted “there have also been a number of privatizations in the sector and we have been very busy with those the past year, including Africo, Alloycorp and Migao. There are companies that once went public, have a controlling shareholder in commodities where there has not been a resurgence in price and these are being privatized.”
In other words, much depends on price, in any of these four categories. Pletcher of BLG follows the commodity prices carefully, which is no small feat. He comes away from all of that with a most vivid word of caution: “I wouldn’t call it a resurgence yet, rather the patient has come off life support and left the hospital under her own power, albeit with the aid of a cane.”
Pletcher explained, “Commodity prices are certainly not as bleak today as they were in January of 2016 — which seemed to mark the nadir of the bear cycle. But, I don’t think any commodities analysts are calling this the return of a secular bull market. Yes, precious metals performed well through the first half of 2016, but the rally faltered in the third quarter and the downtrend (surprisingly) accelerated after the US election result.” This is where a rise in precious metals prices may mean something quite different than a rise in commodity prices.
Precious metals, gold especially, are often the investment of choice for those who are hedging their bets against the dollar economy. Base metals, by contrast, are the choice for those who are betting on it in practical terms, in this case, especially the infrastructure promises of the US President, Donald Trump. They believe spending will go up. By the way, Trump’s competitor in that race, former US Secretary of State Hillary Clinton also promised Infrastructure spending — arguably at a higher level than President Trump did.
Did the market in 2016 invest in base metals figuring that, either way, there would be positive returns due to infrastructure spending in the US? It’s a popular narrative among Canadian mining lawyers. Yet how does President Trump’s “America First” policy persuade against that narrative? It would seem that even if the current president puts America first, it can’t be the only country involved in vast infrastructure construction. As Dubé explained, “there isn’t enough copper, for example, located in the US.” Moreover, such projects take years to ramp up. As he added, “on base metal price increases at the end of 2016, it seems that most of the analysts I spoke to feel that the main cause was linked to speculation on increased infrastructure spending by the US rather than a reflection of a sudden imbalance between supply and demand.”
The global nature of mining — be it on the financing side or the mining side — makes fluctuating prices almost impossible for anyone to predict. Who can say what is the sine qua non of any one increase or decrease in the market?
To hear Pletcher tell it, “Copper mean-dered at $2.00-2.30/lb. prices for the first nine months of , before a late rally in the last quarter lifted prices by nearly 30%. Zinc, coal and nickel also certainly performed surprisingly well, particularly in the last half of the year — leading to Teck Resources being the best performer on the TSX.” The US is not the only player that drives the market. Far from it.
Pletcher continued to explain the good performance of base metals as “in part due to supply disruptions stoked by speculation concentrated on the Chinese market.” Who knows where it will go from here? Pletcher: “All of these commodities have since come off their highs. While there are some analysts who are calling for zinc, nickel and gold to continue to gain ground in 2017, most expect copper, aluminum, coal and iron ore prices to slide back from currently inflated levels due to oversupply. As for potash and uranium, things were not good in 2016 and do not look good in the short term either — evidenced by mine closures and production curtailment.
“But mining M&A was still off in 2016, as many of the major and mid-tier producers were concentrating on strengthening their balance sheets and consolidating their geographic footprints. I would expect the M&A market for 2017 to continue to be focussed on strategic divestitures and incremental acquisitions that complement existing projects.”
If this sounds like rather conservative strategizing for optimistic mining executives and investors, mind Pletcher’s words: “Issuers are not out by paying huge premiums for costly development projects in politically risky countries — their boards still painfully remember the operational beatings and writedowns they took for the last wave of such acquisitions.”
As Sander Grieve of Bennett Jones LLP pointed out, questions remain, including about the return of growth to China, and the extent to which the US governmentally led infrastructure projects will drive up base metals consumption. Until those are answered with some clarity, investors will be cautious.
Precious metals, gold particularly, are even harder to nail down. If investing in gold is a hedge against the money economy, could instability within a major player in the global economy be good for gold but not base metals?
And yet another factor props up caution in the sector: mining often raises sensitive — and costly — political issues. Last November, The New York Times reported that Prime Minister Justin Trudeau had a different corporate social responsibility agenda than the previous PM, Stephen Harper, including with respect to Canadian mining companies abroad. During his 2015 campaign, at least, Prime Minister Trudeau suggested that he would take a stricter tack with Canadian mining companies. In April 2016, according to the New York Times, “Mr. Trudeau received a letter from more than 180 nongovernmental organizations in Latin America and elsewhere requesting that he regulate the behavior of Canadian mining companies abroad.”
The Prime Minister hasn’t released a plan of response yet, but CSR is something mining companies and their lawyers bear in mind. “At present there is no overarching Canadian law that directly regulates overseas operations of Canadian-registered mining companies,” Andrew Kalamut of McCarthy Tétrault LLP noted in a recent article. “Instead, there is a legislative ‘patchwork’ that governs these companies’ compliance with various (international) standards. … The Canadian Government has a complicated task ahead that requires it to balance its stated priorities of strengthening its CSR approach, while at the same time ensuring that it is not placing Canadian businesses with overseas interests at a commercial disadvantage,” Kalamut added. This sounds like another variable in an already complicated equation.
To Pletcher go the last words on whether or not there has been a marked resurgence in the mining sector: “So, a better market? Certainly. A resurgence? That might be a too strong a characterization. Maybe in 2018.” Hope springs eternal.