The Waiting Game

Hostile? Hell, no. Grateful is more like it. Mining companies definitely do not have the confidence that commodity prices have bottomed out and are starting to turn up, leaving most sitting on their wallets, says John Sabine, counsel at Bennett Jones LLP in Toronto.
“There’s more activity with people waiting on the sidelines for distressed assets than there is on deals,” says Sabine, an experienced mining lawyer. “There’s too much fear and loathing out there right now, too much concern about where these commodity prices are going.
“The global economy is not stable, it’s just not, and that’s discouraging people from making major investments.”
When commodity prices are high, says Sabine, companies can go a little bit nuts and make investments, which, “if you look at it through a hard cold economic lens, don’t make sense unless you have sustained commodities prices.
“I’ve been doing this for a lot of years. We do not have sustained commodity prices, we have a roller coaster. Sometimes at the very top, the apogee, you can have US$4.30 copper. Then it’s US$2, or sometimes less. It rolls up and down, up and down.
“Look at the dead man walking on the Toronto Stock Exchange at the moment, particularly the venture [exchange], because you can’t raise money for exploration projects. You just can’t. It’s just impossible.”
That has left the majority of junior explorers – the lifeblood of any country’s mining ecosystem – unable to either sell their latest find or go to markets or their bankers to finance the next one.
Some lawyers who work in the area are concerned about what the majors will feed on once commodity prices stabilize and the cycle ticks up again.
“A lot of people I talk to, senior mining people who’ve been in the business for decades, are really worried about things like the lack of investment in exploration,” says Marion Shaw, who heads the corporate finance and securities group at Bull, Housser & Tupper LLP in Vancouver. “They say: ‘What’s going to happen? We don’t live in a post-mineral society. We need to explore, we need to develop mines.’
“There’s this tremendous focus on cutting costs and productivity and profitability. Shareholders don’t seem to have the appetite to have companies reinvesting in exploration — meanwhile a lot of these little exploration companies are just dying on the vine.”
A couple of years ago, she says, the large corporate-commercial firms thought there would be plenty of transactional work to do with the majors picking off assets, says Shaw, “but mostly they’re not.”
Instead, increasingly, the big companies are waiting for the smaller companies to get into a distress situation – insolvency or receivership – before making a move.
“People didn’t used to like to do it that way because they thought it was complicated but actually the restructuring statutes, at least in Canada or the US, can actually de-risk it a bit. If you can buy it out of a court proceeding, courts in restructuring have the power to make pretty much any order they want.”
Shaw, who frequently advises mining companies, calls the state of relative deal paralysis “deeply worrisome on a going-forward basis, because we’re also seeing things like intellectual capital leaving the industry.
“The old guys are retiring, new people aren’t coming in because it’s not a good career move right now, and companies aren’t investing in management training. We’re going to come to a point where the old guys are gone and nobody knows how to do this work well.”
Shaw says there are lots of sellers and lots of buyers out there with money, “but they’re keeping it in their jeans.
“There’s a real uncertainty whether this is the bottom of a cycle or a whole new world. A lot of people in the mining industry think it’s a sea change and not just yet another cycle — and that things will be done differently in the future.”

For now, many junior explorers are just trying to keep the lights on until commodity prices return to their former glory. Major producers are shedding non-core assets, but many are also discreetly prowling for fire-sale deals on promising properties.
Stymied by the lack of consensus on valuations, you’d think the air would be ripe with the scent of hostile take-over bids. Wrong.
“There’s a reluctance for people to go hostile period because it’s a higher-risk scenario,” says Gordon Chambers, a Cassels Brock & Blackwell LLP partner in Vancouver who often advises miners. “What happens if a white knight comes in and you lose? You lose some credibility, it may be a bit embarrassing.
“Besides, hostiles only make sense if you believe values have come to a landing point — why should I buy today if it may be cheaper tomorrow? Unless you’ve got confidence it’s hit bottom and started to turn, so I know what the values are, why should I commit my time and resources to making an acquisition of any kind?”
It’s not as though deals have completely dried up, says Jeremy Fraiberg, Co-chair of the mergers and acquisitions group in the Toronto office of Osler, Hoskin & Harcourt LLP. They’re just not the massive headline-grabbers of old.
The only 2015‒2016 deals involving Canadian companies that surpassed the billion-dollar mark were Tahoe Resources Inc. and its US$1-billion purchase of Rio Alto Mining Ltd. and Barrick Gold Corp.’s $1-billion sale of its 50 per cent interest in Zaldivar. Everything else has been in the millions.
In Canada and elsewhere, large international players like Barrick, BHP Billiton, Rio Tinto and Anglo American are making their balance sheets more attractive to shareholders through peripheral asset sales. That has both deal volumes and deal sizes fairly low, says Fraiberg, former Co-chair of the firm’s Mining Group.
“For two or three years we’ve been saying we just need to get some stability so that people will understand what relative values are, then the deals will come. Well, we’re still saying that.”
Fraiberg says the market won’t see hostiles again “until people believe values have come to a landing point. Why should I buy today if I think it’s going to be cheaper tomorrow — and it doesn’t matter if it’s a friendly or hostile acquisition.
“I’d like to think we’ve hit bottom but where’s the evidence? Where’s the deal flow? It’s a confidence game. There are buying opportunities but people are reluctant because in many cases they don’t know what’s going to happen to the prices, and they’re trying to reduce debt and limit their capital expenditures, making them reluctant to take those risks.”
Globally, the only deal that even came close to the eye-popping numbers of a few years ago was Solvay S.A. Inc.’s 2015 US$6.4-billion purchase of Cytec Industries Inc.
 Fraiberg says some reasonably sized deals have been done recently. He points to China Molybdenum Co. Ltd.’s agreement to acquire a 56 per cent stake in Tenke Fungurume Mining S.A. from Arizona-based Freeport‐McMoRan Inc. for US$2.7-billion.
China Moly, as it’s known, also agreed to acquire Brazil’s niobium and phosphates businesses from Anglo American plc in April for US$1.5 billion.
Both of these are deals on which Osler acted for the Chinese producer (although neither of them had a Canadian component) due to a pre-existing relationship they had with management. “Many Canadian firms get involved with foreign deals because of our mining expertise,” says Fraiberg.

Among the small and mid-sized deals getting done, many are only getting pushed across the finish line with the help of “deferred consideration.”
Anglo American, for example, sold three South African mines to Sibanye for US$330 million. There was an upfront payment of cash or shares totalling about $100 million, plus a deferred consideration calculated as roughly 35 per cent of the free cash flow generated from the mine operations over a defined period (with a minimum guarantee of roughly $US200 million).
Anglo American also sold two Chilean copper mines to Audley Capital Advisors LLP for US$300 million. The deal includes conditional future payments, which could boost the eventual price tag by US$200 million.
“I’m pointing these out because we might be seeing more of these,” says Richard Steinberg, International Chair of the Securities and Mergers & Acquisitions Group at Fasken Martineau DuMoulin LLP in Toronto. “This may be a way to bridge the value gap between the buyer and seller on a number of uncertainties that exist — commodity prices, the life of mines, etc.”
Steinberg also points to discussion about increased mergers of equals, which are non-cash deals that provide scale and diversification.
He was part of the team that helped Alamos Gold Inc. and AuRico Gold Inc. combine their companies to create a new, intermediate gold producer with a transaction equity value of about US$1.5 billion.
He’s not holding his breath for a raft of similar arrangements. “They’re difficult to negotiate, it’s difficult to find partners of relatively equal size,” Steinberg says. “Even if you find that, it might not provide the diversification you might be looking for because they may be operating in the same geographic location or space.
“And with mergers of equals, it’s never 100 per cent equal so there’s always one company that’s slightly larger or more valuable, so they’re slightly more complex to negotiate and settle.”
When it comes to Canada, Chambers of Cassels Brock says that many of the junior explorers that are potentially for sale are too small to get the majors out of bed in the morning.
“$10 million, $20 million, $30 million is just way too small for them to bother with,” he says. “It’s just a reality of the Canadian market. We may be huge in mining but these days we have relatively few champions on a global scale. Go back a few years and everyone was moaning about the hollowing out of corporate Canada, particularly in the resource sector. So many of our champions have disappeared.
“We’ve been left with relatively few world-scale large-cap mining companies — but an awful lot of mining and resource expertise and experience.”