10
New Gold’s
contrarian
strategy
Randall Oliphant,
Executive Chairman and
Director, New Gold Inc.
14
Smart money mining
rock bottom valuations
Gareth Turner, Head of
Mining & Metals Private Equity,
Apollo Global Management
Deals in
the dumps
Global Mining Deals
Mid-Year Report
September 2013
www.pwc.com/ca/miningdeals
Authors:
Researcher:
Amy Hogan
+1 416 941 8221
[email protected]
Madison Pearlstein
Stephen Mullowney
+1 416 687 8511
[email protected]
John Nyholt
+1 416 815 5086
[email protected]
* A special thanks to writer/editor, Brenda Bouw
B Global Mining Deals
Contents
Executive summary2
H1 2013 deal analysis
4
Analysis and commentary
7
Top 10 Global Mining Deals in 2013
8
Russian oligarchs “switch it up” at Polyus Gold9
FEATURE: New Gold’s contrarian strategy
New Gold: Randall Oliphant
10
Deal outlook for H2 2013
12
FEATURE: Smart money mining rock bottom valuations
Apollo Global Management: Gareth Turner
14
Mining Excellence at PwC
16
PwC 1
Executive summary
Downturn tests miners
John Gravelle, PwC Global Mining Leader
Despite a recent prolonged stretch of growth, the mining industry
is fundamentally a cyclical business. It is especially during the
downturns that companies are forced to remember this reality,
and adjust to the risks.
So far in 2013, there have been a number of reminders – from
falling commodity and equity prices to multi-billion-dollar write
downs across the sector. Neither gold’s reputation as a haven nor
China’s steady hunger for commodities have been able to hold
back the bears, as the global economy continues to try to find a
solid footing.
“There’s been a confidence crisis with big mining companies
because they haven’t been able to deliver the levels of profitability
shareholders have grown used to in recent years, even after the
global finance crisis,” says John Gravelle, PwC’s global Mining
leader. “The substantial write offs we’ve seen from many of the
big producers around the world have caused investors to leave
the market and move on to other things.”
The current volatility in the mining sector has had a noticeable
impact on merger and acquisition (M&A) activity in 2013. While
some companies have taken advantage of lower prices to pick up
assets, the number of deals across the global mining sector fell by
31% in the first half of 2013 compared to the same time last year,
which was already considered to be a slow time for deal activity.
While majors continue to invest in their operations, projects have
been deferred and capital spending has been curbed.
The real challenge in the current M&A market is finding buyers.
Juniors are not seeing the same level of takeovers they’ve come to
expect at a certain stage in their growth, while majors are mostly
looking to divest assets, not pick up more. Meantime, mid-tier
consolidation interest has waned due to tight financing conditions
and fewer buyers overall.
What we have seen so far in 2013 is somewhat of an anomaly in
the industry, skewing results for what is shaping up to be a
sluggish year in mining M&A.
Equities across the sector have fallen by between about 20% and
30% so far this year, which has also impacted the size of deals.
Deal value fell 70% to US$22.9 billion between January and June
2013 versus the same period last year, which was a period
highlighted by Glencore International plc’s US$54-billion
purchase of Xstrata plc (GlenX), the largest-ever takeover in the
sector. Even without the blockbuster GlenX agreement, deal
values were down 21% for the first half of 2013 as compared with
a year earlier. Gold and copper continued to be the most active for
buyers and sellers in the first half of 2013. That trend is expected
to continue as depressed prices create opportunities for companies
that can afford to buy, and may force others to sell.
2 Global Mining Deals
One shift so far in 2013, as compared to
previous years, is in the geography
behind some of the top deals, and who’s
making them. Unlike in previous years,
when deals were dominated by players
in countries such as Australia and
Canada, top M&A activity so far this
year is coming from former Soviet Union
states, namely Russia and Kazakhstan.
Russia accounted for about a quarter of
deal value by geography in the first half
of 2013, followed by Kazakhstan. The
United States rounded out the top three.
That’s a new lineup compared to last
year when Canada, the United Kingdom,
Switzerland (thanks to GlenX) and
China dominated the top spots for deal
activity by geography. Deals by Russian
and Kazakhstan oligarchs led M&A
activity for the first half of 2013. Two
Russian billionaires are behind the top
deal, which was for a stake in Polyus
Gold International Ltd., the country’s
largest gold miner, while Kazakhstan
billionaires were behind the second and
third-largest transactions for the
January-to-June period.
Meanwhile, the mining industry’s major
public companies are taking different
positions on the M&A field. Many have
switched from buyers to sellers as they try
to reduce debt, raise capital and improve
both balance sheets and shareholder
returns. Rio Tinto plc has its “for sale” sign
up on a number of assets to help pay down
about US$19 billion in net debt. In June,
Rio sold its Michigan-based Eagle nickel
and copper project to Lundin Mining Corp.
for US$325 million. In July, it announced
the sale of its 80% stake in the Northparkes
copper mine in Australia to a Chinese
buyer. But selling hasn’t been easy. Rio
cancelled the proposed sale of both its
diamonds business as well Pacific
Aluminium after being unable to find
buyers or investors willing to pay the
required price. However, Rio continues to
pursue a buyer for its 59% interest in Iron
Ore Company of Canada, according to
media reports.
its stake in the Ekati diamond mine in
Canada’s Northwest Territories, as well as
its Pinto Valley copper mine in Arizona.
Capstone Mining Corp. bought Pinto
Valley for US$650-million, and
acknowledged it was a rare opportunity.
“The majors don’t sell assets very often,”
Capstone CEO Darren Pylot told The
Financial Post. “I’ve been CEO of Capstone
for over 10 years, and I’ve seen more assets
for sale in this six-month period than I had
in the [prior] 10-year period.”
GlenX is also looking to sell its Las
Bambas copper project in Peru, as a
condition of approval for its merger
imposed by China’s Ministry of
Commerce. GlenX said it has received
numerous expressions of interest, “from a
diverse group of international mining
companies and potential investors”.
These transactions and pending sales
follow a surge in acquisitions over the past
several years. Times have changed.
Thanks to rising production and operating
costs and slumping values for
commodities amid slower global economic
growth, many of the world’s major mining
companies have taken significant write
downs over the past couple of quarters.
Some of these write downs have been due
to premium prices paid for deals between
2007 and 2012. Gold miners alone have
taken write downs totaling about
US$25 billion in the second and third
quarters of 2013. It should be noted that
many of these write downs have been
reported mainly by companies in North,
South and Central America as well as
Europe, as opposed to Asia. “You may not
see as many of the write downs relating to
companies in a country such as China,”
says Ken Su, lead Mining partner at PwC
China. “Many assets are held by stateowned or private companies which do not
need to disclose such information.”
These write downs have contributed to
the current confidence crisis in the
mining industry. As companies work
through the impacts of rising costs and
volatile markets, deal activity is expected
to remain muted for the remainder of
2013. Expect to see more sales of noncore assets from the major mining
companies, and more interest from sellers
including state-owned enterprises (SOEs)
and potentially private equity, which is
showing an increasing interest in the
sector given today’s lower valuations.
Companies will also continue to get
creative in how they fund the transactions
through joint ventures and royalty and
streaming agreements, for example, given
the continued uncertainty in equity and
debt markets.
Due to the cautious climate in the
mining sector right now, it’s hard to see
the return of mega deals like GlenX in
2012, or even large hostile bids such as
such as BHP’s unsuccessful play for
Potash Corp. of Saskatchewan Inc. in
2010. Mining investors aren’t looking for
companies to take big risks. Right now,
they’re looking for signs of a discernable
turnaround in performance.
Other miners selling off assets include BHP
Billiton Ltd., which unloaded its 15%
interest in the Jimblebar iron ore mine in
Australia in the first half of 2013. The
world’s largest mining company also sold
PwC 3
H1 2013 deal analysis
Big losses lead to M&A reluctance
The billions of dollars in write
Deal volume and value: 1H 2013
downs across the mining sector,
light on deal making
alongside market uncertainty and There were 649 deals in the first six
months of 2013, which is down 31% from
volatile commodity prices, led to
a slowdown in M&A activity from the same period last year, when there were
a total of 940 transactions. Both are
January to June 2013. While 2012 considerably lower than the 1,371
was considered a slow year for
transactions in the first six months of 2011,
which was one of the busiest half years for
mining M&A, following a very
M&A activity in the mining sector’s history.
busy 2011, this year is proving to
Total deal volume from January to June
be even tougher for deal making.
2013 was US$22.9 billion, down 70% from
Investors are finding it difficult
a year earlier when the US$54 billion
to attract enough financing to
GlenX deal is factored in. Without GlenX,
fund growth and are nervous
the average deal value was still 21% lower
about overpaying for assets. At the at $26 billion in the first half of 2013 as
same time, sellers are reluctant to compared with the same time last year.
approve transactions when their
valuations are at multi-year lows.
600
80,000
70,000
500
Volume
400
50,000
300
40,000
30,000
200
20,000
100
10,000
0
0
Q1 2012
4 Global Mining Deals
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Value (US$mm)
60,000
The three largest deals for the first half of
2013 involved the sale of portions of
companies and not complete takeovers.
They include: the US$3.62 billion two
Russian oligarchs paid for the 37.8% stake
in Polyus Gold; the US$4.6 billion paid by
three founding shareholders of Eurasian
Natural Resources Corp. for a 26% share;
and the $1.65 billion paid by National
Welfare Fund Samruk-Kazyna for a 29%
stake in Kazzinc from Verny Capital.
When all transactions for the half-year
period are tallied, the average value is
US$52.2 million. That is only slightly
higher than the average value of
US$47 million for the same period in
2012, excluding GlenX, which largely
skews any comparisons.
While both deal value and volume were
down significantly in the first half of 2013
compared with the same period in 2012,
the stratification of deal sizes in
percentage terms was largely unchanged.
There were 5 deals valued at more than
US$1 billion in the first half of 2013, as
compared with 8 in the same period in
2012 and 11 in 2011. Three deals in the
first half of 2013 were valued between
US$500 million and US$1 billion, which
compares to 2 in 2012 and 12 in 2011. As
in previous years, most deals were valued
below US$500 million. Between January
and June 2013 there were 24 deals
between US$100 million and US$500
million, compared with 36 in 2012 and
42 in 2011. The number of smaller deals
valued at less than US$100 million
dropped to 341 for the first half of 2012,
down from 394 in 2012 and down further
from 591 in 2011.
Deals by commodity: Gold and
copper most attractive for M&A
Lower commodity prices appeared to be
the catalyst behind what few deals were
done in the first half of 2013, as the
companies able to acquire assets
looked carefully for mines at today’s
discount prices.
Producers were particularly interested in
buying and selling gold and copper in the
first half of 2013, which was similar to
what took place during the same period
in 2012. In both periods, gold and copper
accounted for nearly half of the
transactions in the sector by both value
and volume. “Acquisition targets are
shifting,” says Ken Su, lead Mining
partner at PwC China. “Where iron ore
and coal were the focus before, gold and
copper are the hot commodities now.”
For the first half of 2013, gold was the
leader by value, representing 32% of
transactions from January to June. That
compares with 26% for the first half of
2012. Copper accounted for 11% of deals
by value, down from 23% a year earlier.
These comparisons exclude the GlenX
deal, which falls into the diversified
metal ores category. Diversified metals,
which include such commodities as
nickel and zinc, represented about 25%
of M&A by value for the first half of
2013, compared to 6% in 2012,
excluding GlenX.
By volume of M&A transactions for
the first half of 2013, gold was again at
the top with 33% representation, versus
29% for the same period a year earlier.
Copper came in at 14%, which was the
same as the first half of 2012. Diversified
metals accounted for about 22% of deals
by volume, versus 8% last year,
excluding GlenX.
Alongside the Polyus deal, another
notable gold transaction in the first half
of the year was Hecla Mining Co.’s
US$775-million takeover of Aurizon
Mines Ltd., beating out hostile bidder
Alamos Gold Inc. There was also New
Gold Inc.’s takeover of exploration
company Rainy River Resources Ltd., in
a deal valued at about US$310 million.
After dominating deal activity in 2011,
transactions in the coal and iron ore
space continued to fall by the wayside in
2013. That followed a similarly slow
Diversified
metal ores 25
Others 27
Others 30
2012 for these companies that produce
steel-making ingredients. A drop in the
prices of coal and iron ore is to blame for
the waning interest. That said, it has
opened doors for some buyers. The
largest coal deal in the first part of 2013
was India’s Jindal Steel & Power Ltd.’s
US$553-million offer for Gujarat NRE
Coking Coal Ltd. as part of its plan to
increase production.
While not a standout on the list of top
mining transactions, uranium was also
in play in the first half of 2013. Russia’s
state uranium firm ARMZ Uranium
Holding Co. (JSC Atomredmetzoloto)
made a bid to take Canada’s Uranium
One Inc. private in a US$1.3 billion deal.
The deal comes as uranium prices
struggle to recover from the 2011
earthquake and tsunami in Japan, which
created distrust for nuclear power and in
turn a drop in prices and valuations of
companies that produce it.
Gold 33
Platinum ores 4
Gold 32
Copper 11
Diversified
metal ores 22
Copper 14
PwC 5
Deals by geography: Russia flexes
its M&A muscle, Kazakhstan steps
further into spotlight
The former Soviet Union isn’t usually top
of mind when it comes to deal making in
the mining sector. However, Russia and
Kazakhstan surprisingly took the top two
spots for most active M&A value by
geography in the first half of 2013.
Canada and China, which took the top
spots last year (excluding GlenX), took a
few steps back in the rankings.
Kazakhstan accounted for 27% of the
deals from January to June 2013, followed
by Russia at 23% and the United States at
10%, with Canada and China representing
6% and 5% respectively. For the first half
of 2012, Canada was the busiest place for
M&A with 16% of transactions (not
including the GlenX deal), followed by the
United Kingdom at 14% China with 13%,
Chile at 11% and the United States at 8%.
Australia 2
Canada 6
Other 26
China 5
Kazakhstan 27
United States 10
Russia 23
6 Global Mining Deals
Russia’s top ranking was due largely to
the decision by Mikhail Prokhorov, one
of Russia’s wealthiest oligarchs, to sell
his entire 37.8% stake in Polyus to two
billionaire bidders from the same
country. Kazakhstan had the second and
third-largest deals, and ranked second
highest on the list thanks to the
US$4.6 billion buyout of Eurasian
Natural Resources Corp. by the three
founders of the company. Another top
deal out of Kazakhstan was state-owned
National Welfare Fund Samruk-Kazyna’s
US$1.65 billion bid for a 29% stake in
Kazzinc from Verny Capital. SamrukKazyna, Kazakhstan’s sovereign wealth
fund, bought into the zinc producer to
add to its mining holdings in the
country. Analysts told Reuters at the
time the deal was struck in February
2013 that it was a strategic investment
and a smaller stake wouldn’t have been
of interest to the Kazak government.
Analysis and commentary
While 2013 has been an exceptionally slow
year so far in M&A, deals are getting done.
Of course, they look a lot different than
some of the mega transactions from the
recent past. What is more, traditional
takeovers of entire companies are taking a
back seat to joint ventures, spinoffs and the
purchase of company stakes by sovereign
wealth funds. There are also more private
equity funds expressing interest in mining
assets in recent months.
Private equity is taking a particularly
hard look at mining assets. According to
various media reports, funds are looking
for long-life, low-cost projects and want
to pick them up at lower prices, which
today’s market offers. The difference
between private equity and mining
companies is they have more money to
spend, and in some cases without the
same level of public scrutiny by
shareholders. As miners line up to sell off
operations to reduce debt and raise
capital, funds are circling assets around
the globe to see if now is the time to jump
in. High-profile private equity firms such
as Blackstone Group LP, Apollo Global
Management Inc., The Carlyle Group LP
and Kohlberg Kravis Roberts & Co. have
all been cited as potential bidders for a
range of assets put on the market
recently. The interest highlights how
attractive mining investments are today
to those who have money to spend.
Buyers will continue to team up to pick
up assets being sold off by miners,
including the three taking over Barrick’s
energy assets that were put on the block
this spring. Venturion Oil, Whitecap
Resources and Canadian Natural
Resources are together paying $455
million for the Alberta oil business as
Barrick sheds non-core assets. Other
joint-effort examples include the various
parties that came together to carry out
the Polyus Gold and ENRC deals in the
first six months of the year.
Royalty and streaming agreements haven’t
proven as popular so far in 2013 as they
were in 2012, but companies continue to
look at the arrangement as a way to
finance future growth. Alternative
financing will continue to be a trend in the
mining sector in the near future as
companies work through the downturn in
the cycle and prepare for the next phase,
which they hope will be an upward swing.
PwC 7
Top 10 Global Mining Deals in 2013
(by value, $US million, historical rate)
Announced
date
Target/issuer
Target/issuer
headquarters
Total gross
transaction
Target
value ($USmm) resource type Acquirer
Acquirer
headquarters
Transaction
status
Target stock
premium – one
Month prior (%)
02-22-2013
Polyus Gold
United Kingdom
International Limited
3,616
Gold
Zelimkhan Mutsoev
and Gavril Yushvaev
Russia
Closed
3.79
05-17-2013
Eurasian Natural
Resources Corp Plc
United Kingdom
4,600
Diversified
Metal Ores
Samruk-Kazyna National
Welfare Fund JSC;
Alexander Machkevitch;
Alijan Ibragimov;
Patokh Chodiev;
The State Property and
Privatisation Committee
of the Ministry of Finance
of the Republic of
Kazakhstan
Kazakhstan
Announced
5.89
02-07-2013
Kazzinc Ltd.
Switzerland
1,650
Copper Ores
Samruk-Kazyna National
Welfare Fund JSC
Kazakhstan
Closed
–
06-21-2013
BHP Iron Ore
(Jimblebar) Pty Ltd.
Australia
1,500
Iron Ores
ITOCHU Corporation
and Mitsui & Co. Ltd.
Japan
Announced
–
01-14-2013
Uranium One Inc.
Canada
1,351
Uranium Ores ARMZ Uranium
Holding Co.
Russia
Announced
–
01-11-2013
Zimbabwe Platinum
Mines (Private)
Limited
South Africa
971
Platinum Ores National Indigenisation
and Economic
Empowerment Fund
Zimbabwe
Announced
–
03-04-2013
Aurizon Mines Ltd.
Canada
775
Gold
Hecla Mining Co.
United States
Closed
01-31-2013
Gujarat NRE Coking
Coal Limited
India
553
Diversified
Metals and
Mining
Jindal Steel & Power Ltd.
India
Announced
–
06-28-2013
Canyon Fuel
Company, LLC
United States
435
Bowie Resources
Bituminous
Partners, LLC
Coal And
Lignite Mining
United States
Announced
–
05-29-2013
Goldbell Holdings
Limited
British Virgin Islands
412
Gold
Macau
Announced
–
8 Global Mining Deals
Newtree Group
Holdings Limited
2.87
Russian oligarchs “switch it up”
at Polyus Gold
The largest mining deal in the first half of 2013 was the sale of Mikhail
Prokhorov’s 37.8% stake in Polyus Gold International Ltd. for $3.6 billion to
fellow Russian billionaires, Zelimkhan Mutsoyev and Gavril Yushvaev.
Polyus Gold is the largest gold producer in Russia and one of the top 10 gold
miners globally in terms of production, with more than 83 million ounces of
proven and probable reserves. Its principal operations are located in eastern
Russia, with 5 operating mines and several advanced development projects.
Mr. Prokhorov, through his holding company Onexim Group, indicated in
September 2012 that he was considering the sale of all or part of his stake in
Polyus Gold. Speculation on his rationale for exiting at this time included
growing concerns over mine delays, and also possibly connected to his
unsuccessful run for the presidency of Russia earlier in2012.
Regardless of the motivation, the sale of his interest still leaves 40.2% of the
ownership of Polyus Gold with yet another Russian billionaire oligarch,
Suleiman Kerimov. Interestingly, one of the new shareholders in Polyus Gold,
Mr. Mutsoyev, is a partner with Mr. Kerimov in potash giant, Uralkali. The
remaining 22% of the company are publicly held, through its listing on the
London Stock Exchange.
At the time of the deal, analysts expected the move to lead to higher dividends.
“In the past there were two key shareholders who had differing views on
strategy. Now the strategy will be driven by Mr. Kerimov alone, so Polyus
can start paying higher dividends,” said UBS metals and mining analyst
Alexei Morozov.
This view was echoed by Barry Ehrlich, metals and mining senior analyst of
Moscow-based Alfa Bank who said: “The transaction was likely to be heavily
leveraged so the new shareholders’ priority now is to boost cash flow and
dividends to reduce that leverage.”
These comments were obviously made before the price of gold fell by more than
$300 per ounce in the first two weeks of April, with further declines thereafter.
That will likely make increasing dividends in the short term quite challenging.
PwC 9
New Gold’s contrarian strategy
Randall Oliphant
Executive Chairman and Director
New Gold Inc.
10 Global Mining Deals
If it were not for the billions of dollars in
write-downs being announced by miners
around the world lately, the M&A bender
of 2011 would seem like a distant memory.
“Mining companies acquired too much in
2011,” says Randall Oliphant, Executive
Chairman and Director of New Gold Inc.
“There was an acquisition binge —
valuations were high, gold prices were at
peak levels and everybody went out
seeking more growth with the thought,
bigger is better.”
It has been quiet ever since. Deal activity in
the sector has fallen 31% in the first half of
2013, after falling 30% in all of 2012.
Companies today are more cautious, and
have less money to spend.
New Gold is one of the exceptions. Its
$310 million acquisition of Rainy River
Resources Ltd. surprised the market given
many of its industry peers are busy
divesting assets.
Randall believes New Gold’s timing is
right, while the rest of the industry is off.
“Our industry is doing things at the
wrong time,” he says. “It is buying assets
when they are expensive and now that
things are less expensive our peers are
trying to divest.”
While he is frustrated by the impact such
decisions are having on the industry’s
credibility with investors, New Gold is
looking at this period of lower prices and
valuations as an opportunity for the
company to find future growth.
That said, given the company’s
reputation as having one of the best
growth profiles in the industry, Randall
says New Gold does not feel pressured to
make any hasty purchases.
“If we see something compelling we are
ready to move, but if we don’t acquire
anything for five years we are perfectly
comfortable with that too,” he says.
While austerity is the industry buzzword,
as miners reduce capital expenditures, cut
dividends and hold off on acquisitions,
Randall believes the situation will become
more acute in 2014.
“I think we could see more hostile or
forced deals as shareholders look for
greater returns,” Randall says.
Over the past year, investors have fled the
mining sector and while companies are
making changes to their business strategy,
a rebirth of investment interest isn’t
expected any time soon. Randall believes
two things need to happen before investors
regain interest in gold mining stocks: gold
price needs to rise and the industry needs
to rebuild its credibility by delivering on
promises of greater shareholder returns.
In the meantime, New Gold is going to
carry on with its contrary strategy.
He also expects additional pressure will
be placed on boards and management
teams if they don’t take action to improve
their performance, despite volatile
market conditions.
“We know what generates strong returns
long-term,” says Randall, pointing to New
Gold’s status as an intermediate company
with below average cost of production, low
political risk and strong production upside.
“Shareholders aren’t as patient and are
calling for change,” says Randall.
“That is exactly what we are aiming at,”
says Randall.
PwC 11
Deal outlook for H2 2013
The renewed austerity in the mining sector
has led to more measured M&A activity.
Companies are being held back by a lack of
debt and equity financing and lower
margins as a result of a drop in commodity
prices. There’s also a fear of overpaying for
certain assets—a mistake history shows
was made by many of the big miners in the
recent past.
assets at today’s lower prices. An example
is New Gold’s $310 million purchase of
Rainy River Resources in late May. “I think
we did, as an industry, way too many
acquisitions in 2011 when things were
expensive, and we’re not doing nearly
enough now when things are inexpensive,”
New Gold executive chairman Randall
Oliphant told the Financial Post.
To regain investor confidence, the industry
must begin to show that it can deliver
increased profits and cash flow in the
coming quarters. To get there, some miners
will continue selling non-core assets to
help reduce debt and raise capital.
Companies with cash are expected to
capitalize on today’s low valuations and try
to purchase assets at discount prices. Given
tight financing conditions, buyers will also
continue to seek creative ways to strike
deals. As this alternative investment trend
continues, expect to see more private
money coming into the market, as well as
joint ventures, royalty and streaming
agreements and Asian-based SOEs.
The pace of Chinese demand for
resources is also expected to continue to
drive M&A. While China seems to have
shifted its focus more towards consumer
spending, the world’s largest consumer of
metals is still hungry. Even though
economic growth has fallen from years in
the double-digits, growth between 7%
and 8% is still significant and comes from
a much bigger economic base now than in
the past. This steady growth will continue
to serve as the backbone of demand for a
wide range of resources such as copper,
coal and iron ore. There’s also strong
growth coming from such emerging
nations as India and Brazil, which gives
mining companies reason to continue
developing their longer-term plans.
“Despite what we’re seeing with equity
prices today, the demand story is still
there, particularly from countries such as
China, India and Brazil,” said John
Gravelle, PwC’s global mining leader.
“We just need to get over this confidence
crisis to be able to move forward.
Investors need to see signs of a
turnaround before they can get
comfortable with the industry again.”
Junior mining companies will continue to
be challenged to raise money. That is
expected to result in more takeovers of
smaller companies later this year and into
2014. A sale to a larger player may be the
only way for many juniors to generate
some shareholder value, or even avoid
financial collapse. While many large and
medium-sized mining companies have
vowed to stay out of the M&A game for a
while to satisfy frustrated shareholders,
some may see a rare opportunity to buy
12 Global Mining Deals
In the meantime, it’s up to mining
companies to demonstrate that they can
adjust to the cyclical nature of the
industry. That includes responding
appropriately to rising costs and volatile
commodity prices by cutting costs,
delaying projects and selling off assets
where necessary. Many will also need to
seek alternative sources of financing. Debt
was popular last year, and joint ventures,
but those aren’t as readily available today.
Miners will need to look at selling noncore assets and hold off on any big
acquisitions. Instead, they will need to
focus on the projects they have and
operate them with a strong focus on the
bottom line.
This industry realignment is expected to
propel M&A in the near term. Given how
financially strapped many mining
companies are right now, more M&A
activity is anticipated to come from private
players, including sovereign wealth funds.
That includes potentially increased interest
in assets purchased from resource-hungry
nations such as China and India, or
perhaps even Russia and Kazakhstan. As
the recent past has shown, China may be
slower to act in the M&A field, but its
interest has not waned. In May, an
Australian unit of China’s Zijin Mining
Group Corp. said it was considering
bidding for three gold mines in Australia
put on the block by Barrick. During the
same month, Qixing Group Company Ltd.’s
Shenzhen-listed subsidiary Shandong
Qixing Iron Co. agreed to a conditional
$140 million deal to acquire the assets of
Australia-listed Stonewall Resources Ltd.
Miner MMG, majority owned by China
Minmetals Corp. confirmed recently it’s
also on the hunt for acquisitions. “We can
get the funding but we have to be able to
demonstrate that what we are looking at to
buy has good economic returns,” MMG
CEO Andrew Michelmore told investors in
a conference call in July 2013. “We don’t
want to blow that by doing something silly
just for the sake of doing an acquisition.”
Added Michelmore, “We are seen as one of
those that are contrarian: we have been
focusing on costs but we are actually out
there looking for an opportunity to buy …
We are like a duck on water, serene on top,
peddling away madly underneath, looking
for that opportunity.”
Copper and gold are expected to remain
the top commodities on the block in the
months ahead and coal is also expected to
regain interest given lower prices. Potash is
another sector that could see an increase in
M&A activity now that one of the two
largest cartels is being dismantled,
following Russian potash miner Uralkali’s
decision to walk away from its marketing
partnership with Belarusian Potash Corp.
That is expected to increase competition in
the sector, and in turn lower prices.
Uralkali CEO Vladislav Baumgertner told
The Wall Street Journal in August that his
company’s move could lead to a round of
consolidation in the potash sector. He also
told the Vedomosti newspaper that
consolidation “would be a logical step
when the price falls to a level of marginal
producers.”
For the rest of 2013 and into 2014, M&A in
the mining industry is expected to remain
lethargic. However, deals will come
together for companies that have enough
cash to seize the opportunity and as their
peers unload assets that are no longer
considered a fit in the renewed costcutting environment. One thing is certain;
the deals that do get done over the next
several months will help to shape the
future of the mining industry and to
determine its key players.
PwC 13
Smart money mining
rock bottom valuations
Gareth Turner
Head of Mining & Metals
Private Equity
Apollo Global Management
“More of the same, a very difficult
environment” was Gareth Turner’s
response when asked what he thought the
mining deals market would look like in
2014. But the Senior Partner and Head of
Mining and Metals Private Equity at Apollo
Global Management added two major
predictions: one, miners can expect the
separation between the winners and the
losers to become more distinct and two,
private equity will make a notable entry
into the sector.
“A wall of capital needs is building”,
explains Gareth. “There are a lot of
companies lining up to push projects
ahead and you can only delay those
decisions for so long.” With public markets
essentially closed to mining companies,
and few signs of windows opening in the
next year or two, miners have been forced
to pursue alternative forms of financing to
push their company’s vision forward.
Competing with the likes of Asian
investors and streaming companies,
private equity has decided to throw its hat
into the mining ring which is a natural
14 Global Mining Deals
evolution from private equity’s experience
investing in other resource opportunities
like oil and gas which has been very active
for well over 10 years. “China and India’s
desire to purchase quality long-term
assets have made them a very strong
competitor,” says Gareth. However, he
believes private equity offers miners
distinct advantages over more popular
forms of alternative financing.
“While miners may receive slightly
higher prices from a foreign investor in
some limited cases, execution risk
associated with these deals can be much
higher,” he says. Deals with foreign
investors are notorious for their
complexity and the length of time
required to close. Transacting with a
foreign buyer is not a sprint, but instead a
marathon that requires patience and
persistence. In comparison, Apollo
believes it is able to close a deal in three
to four months, noting any elongation to
the process tends to be a factor of the
design of the process itself or a mining
company’s internal approval procedures.
“There are not too many places you
can go to raise several hundred million
dollars of capital in relatively short
order,” Gareth shares, when explaining
what makes private equity unique.
As for royalty and streaming deals, Gareth
does not deny that they too are strong
contenders. In the past year, the industry
has seen significant deals completed by
two major players in this space: Silver
Wheaton and Franco Nevada. Silver
Wheaton signed a US$1.9 billion deal
with Vale and Franco Nevada closed a
US$1 billion deal with Inmet. Gareth
says streaming companies have operated
largely unchallenged heretofore, but
hints things may be about to change.
“Streaming agreements subordinate
cash-flow to the equity holders”, says
Gareth. “Equity holders take all the risk in
a streaming deal, as typically these deals
exist through the life of the mine and cash
flow comes off the top – it appears to be a
very high price to pay and unless a
company literally has no other options it
seems like a very sub-optimized capital
structure solution”. In comparison, private
equity is generally long-dated capital,
looking to keep its investment for up to 5
to 10 years. Unconstrained by the form of
their investment, private equity investors
can also be more creative and flexible in
the way they structure deals.
Apollo’s investment model is to focus on
cash-flow producing assets, but also to
blend in project development
opportunities to round out their
portfolio to a roughly 75/25 split. “The
risk is higher in development projects
but so is the potential return, so on a
risk-adjusted basis we are prepared to
invest in selected projects that satisfy
certain basic criteria” says Gareth. They
are also interested in completing
so-called PIPE (Private Investment in
Public Equity) deals, allowing their
counterpart to raise significant equity
capital to complete a transformational
balance sheet restructuring or M&A
transactions. There is a bias towards
assets in politically stable regions, which
also have high-quality geological bases
and strong management teams. Apollo’s
investment sweet spot tends to be in the
$150-to-$500 million range, but has
recently closed deals in the energy space
upwards of $1 billion. Gareth says they
are not interested in investing much less
than $50 million in a single transaction.
“We are commodity agnostic, opportunity
driven investors,” says Gareth. Apollo is
actively combing the market for viable
investment opportunities and has been a
leading bidder in many recent divestment
processes according to various media
reports. The relative deal-making silence to
date among private equity in the mining
sector is said to be because valuations are
still not low enough for them to jump in.
However, Gareth disagrees. “You cannot
believe everything you read in the media.
In fact, valuations are not the only factor
that has held back private equity investing
in the mining sector to date. Another key
barrier has been the lack of understanding
and comfort level mining executives have
about the pros and cons to private equity
investment. When considering financing
options, mining executives and boards
need to better understand the value of
working with private equity and how the
industry operates.
“We believe we can be the most cost
effective source of capital and miners need
to understand we can add a lot of value in
addition to just our capital,” says Gareth.
One value add is Apollo’s institutional
brand, which can help miners attract very
good terms for debt capital and another is
the firm’s network of advisors and
international institutional investors. Apollo
also takes an active role at the board level,
and often offers additional guidance and
support through its presence on a project
advisory committee.
“We will sit alongside the management
team, providing advice and support as
the company moves from production to
ramping to re-financing,” says Gareth.
“We are not operators, we leave that to
management, but we have tremendous
experience in what has worked well and
what has not worked so well in other
situations”.
Whatever the preference of mining
executives, they may have to start
dropping off “nice-to-haves” from their
wish list for new capital in-place of “must
haves” as they look to try to progress their
strategic ambitions and keep their
valuations from retreating further.
PwC 15
Mining Excellence at PwC
Delivering local solutions to global challenges
The mining sector is facing a range of competing trends and a rapidly changing global
business environment. Against the backdrop of commodity price fluctuations, miners
need to balance shareholder dividend expectations whilst maintaining an investment
pipeline in the midst of increasing operating costs. Safety, environmental and community
principles also continue to shape the industry as miners look to achieve their licence to
operate and deliver on corporate responsibilities.
Mining Excellence at PwC has been designed to mobilise and leverage PwC’s collective global
knowledge and connections to deliver an exceptional and tailored client experience, helping
our clients navigate the complex industry landscape and meet their growth aspirations. Our
team of specialists is exclusively focused on the sector and brings an industry-based approach
to deliver value for you and your organisation.
“Working in the sector for over 20 years, I have seen and
worked across the mining sector in both good times and
bad. It’s fantastic to see our clients and PwC teams working
together to respond to the everchanging business dynamics
miners face today.”
John Gravelle, PwC Global Mining Leader
16 Global Mining Deals
Mining Excellence at PwC provides our clients:
leading
edge
knowledge and insight
With significant investment in the research
behind our mining publications and a
comprehensive industry learning and
development program, our professionals
can share both industry and technical
insight with our clients, such as:
• A library of industry publications designed
to help challenge “conventional” thinking
and delve into topical industry issues. This
includes:
– global thought leadership publications
including Mine and Mining Deals
– flagship territory publications focused on
regional and industry-specific issues
www.pwc.com
Executing a
successful listing
Markets for miners
www.pwc.com
connections to our vast
network of mining experts
and global client portfolio
the delivery of an
experience that meets our
clients’ definition of ‘value’
We have the widest network of industry
experts who work out of strategic mining
hubs across the globe to help better
connect you to vital mining markets.
With mining experts working around
the globe, our award winning teams
are helping clients deliver on specific
projects and organisational growth
aspirations. We offer advisory, tax and
audit services to global corporations
and locally listed companies.
Our connections provide:
• seamless client service delivered with
collaborative cross-border account
management
• maximised deal potential through a wellconnected global community of mining
leaders
• a well-connected and mobile workforce to
ensure effective service delivery in even the
most remote mining locations.
Mine
The growing disconnect
A PwC IPO Centre
publication − helping
mining companies assess
their choices
February 2012
Review of global
trends in the mining
industry—2012
• a suite of niche mining consulting capabilities
focused on optimising value across mining
operations and effectively managing risk
to help our clients grow their business and
deliver shareholder value
• a comprehensive client feedback program
to ensure we are always improving and
delivering on individual client needs.
Ken Su Beijing
John Gravelle Toronto
• An extensive industry development program
for our people and clients. This features our
annual university-style courses:
–– Hard Hat: The Mining Experience
(Australia)
–– Americas School of Mines
(North America)
–– London School of Mines
(United Kingdom)
–– Asia School of Mines (India, 2013) An
extensive industry development program
for our people and clients. This features our
annual university-style courses:
–– Hard Hat: The Mining Experience
(Australia)
–– Americas School of Mines
(North America)
–– London School of Mines
(United Kingdom)
–– Asia School of Mines (India, 2013)
Mining Excellence at PwC
complements this with:
John Campbell
Kiev
Kameswara Rao
Hyderabad
Jason Burkitt London
Steve Ralbovsky Phoenix
Ronaldo
Valino
Rio de
Janeiro
Sacha Winzenreid Jakarta
Hein Boegman Johannesburg
Jock O’Callaghan Melbourne
At the coalface
Hard Hat:
The Mining Experience
PwC 17
Contacts
John Gravelle
Canada
Global Mining Leader
T: +1 416 869 8727
E: [email protected]
Carlos Miguel Chaparro
Colombia
Partner
T: +57 (1) 634 05 55 ext 216
E: carlos. [email protected]
Ken Su
China
Partner
T: +86 (10) 6533 7290
E: [email protected]
Jose Almodovar
Mexico
Partner
T: +52 (55) 5263 6000 ext 7082
E: [email protected]
Fernando Gaveglio
Peru
Partner
T: +51 (1) 211 6500 ext 7046
E: [email protected]
Ronaldo Matos Valino
Brazil
Partner
T: +55 (21) 3232 6015
E: [email protected]
Colin Becker
Chile
Partner
T: +56 (2) 940 0016
E: [email protected]
Michael Goenawan
Indonesia
Partner, Deals
T: +62 21 5289 0340
E: [email protected]
Simon Venables
South Africa
Partner, Deals
T: +27 11 797 5660
E: [email protected]
Mark Binney
UK
Partner, Deals
T.+44 (0)20 7804 0855
E: [email protected]
John Nyholt
Canada
Partner, Deals
T: +1 416 815 5086
E: [email protected]
Leonardo Viglione
Argentina
Partner
T: +54 (11) 48504690
E: [email protected]
Hein Boegman
South Africa
Partner
T: +27 11 797 4335
E: [email protected]
Jock O’Callaghan
Australia
EU&M Industry Leader
T: +61 (3) 8603 6137
E: [email protected]
Sacha Winzenried
Indonesia
Partner
T: +62 21 5289 0968
E: [email protected]
Jason Burkitt
UK
Partner
T: +44 (20) 7213 2515
E: [email protected]
Steve Ralbovsky
U.S.A.
Partner
T: +1 (602) 364 8193
E: [email protected]
John Campbell
Ukraine
Partner
T: +380 (44) 490 6777
E: [email protected]
Kameswara Rao
India
Partner
T: +91 40 6624 6688
E: [email protected]
© 2013 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network.
Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 3637-01 0913
18 Global Mining Deals