To find out about the latest trends in mining M&As we spoke to lawyer Oliver Wright from deal legal advisers White & Case, who shed light on the future of the sector and the importance of blockchain technology.
Jack Unwin (JU): What are the current trends in M&A’s in your areas of expertise?
Oliver Wright (OW): One major trend in M&A’s is gold sector consolidation. In 2018 and the first half of 2019 we have seen some very significant transactions in the gold sector.
The reason for consolidation is because in the period 2012 to 2016 the large gold companies slashed their exploration budgets, so exploration and junior mining companies struggled to raise capital compared to how they had done in the past
More recently companies have been coming under pressure to demonstrate growth and the quickest and most cost-effective way of doing this has been for the majors to consolidate and look to M&A for growth. This has driven significant transactions in 2018-19 and I think we will continue to see more M&A activity as a result of those transactions.
There is also an objective for companies to undertake a sale of non-core assets. This begs the obvious question of who is going to buy these assets, which depends to some extent on the location of the assets. Assets that are in Africa, Latin America in politically sensitive jurisdictions seem to be likely targets for Chinese companies.
JU: Are private equity (PE) interests making inroads in the mining industry?
OW: I think PE companies have played a more significant role recently that they have done historically.
If you go back a decade it was very unlikely that you would see PE participating in the mining sector due to the long-term nature of the investment not suiting PE.
There are a growing number of special PE groups that are playing a significant role in the mining sector as they bring value based on their ability to be flexible in terms of the transactions they are doing, and often being able to take several positions in the capital structure of the companies and projects they invest in.
JU: Who are the key mining companies worldwide involved in M&A activity?
OW: Here I can talk about a couple of categories of companies and what they are doing.
I previously mentioned Chinese companies as potential buyers of non-core assets, what we’re also seeing is them having a willingness to take on the political risk of investing in minerals like cobalt in politically risky areas such as the Democratic Republic of Congo (DRC). Western companies don’t have the same appetite and are not as comfortable in these jurisdictions.
These Chinese companies have very sophisticated mining technology that is highly regarded by Western companies and they are playing a very significant role in the global mining landscape now.
Another category to mention is junior miners who are often responsible for exploration activity in the early stages.
Typically these have been funded by equity raised on stock exchanges in the UK, Canada or Australia and are focused on smaller markets. Just as the major mining companies have slashes slashed exploration budgets recently, these exploration companies have found it difficult to raise equity recently as that high-risk capital seems to have been diverted elsewhere.
JU: How much impact have environmental concerns had on M&A activity?
OW: You can argue that the mining sector is actually hundreds of sectors, with each commodity having its own unique issues.
Some certainly face these environmental concerns more than others. The one that stands out is thermal coal and I think a lot of major equity investors, pension funds and sovereign funds have stated that they are exiting companies that are invested in thermal coal, so I think has already had an impact on valuation.
But it is important to differentiate between coal and copper for example. There is a strong argument that you need access to a lot of new minerals like copper to power batteries and help change the energy mix in the world and produce renewable technologies.
The other big environmental issue beyond the climate change debate has been the number of highly publicised tailing dam incidents, which has really shaken the mining sector as a whole.
I don’t profess to be an expert on the direct impact of the incidents but there are a number of clear ways that those incidents can affect the industry; whether it’s the loss of life, the need to stop operations and to clean up the environment.
We are seeing reviews being undertaken by governments and industry bodies like the International Council on Mining and Metals to develop a global standard for tailing dam designs to ensure their safety for the future.
Another thing that is going on in the industry is the better adoption of technology. The mining sector has the perception of being a backward industry which simply digs stuff out of the ground. It doesn’t spark thoughts of being a high-tech sector but I think the industry has woken up on the need to adopt technology, not only to improve efficiency but to improve safety and environmental standards. This has had a positive impact on companies reputations for being environmentally aware.
JU: How much of an impact will blockchain have on mining M&A’s?
OW: We see technology being significant to mining going forward. Blockchain will be important to the mining sector to be able to trace the origin of commodities and also be able to improve the efficiency of the trading chain.
An example of this would be diamond trading. Anybody looking to buy a diamond is likely to be concerned about the origin of the diamond and understanding that there has not been any human rights abuses in extracting it. Blockchain provides a robust way to trace the origins of minerals.
We’ve supported MineHub in this area and we hope to see this becoming par for the course in the way that companies will do business with each other.
JU: What do you expect to see happen in the future of mining M&A’S?
OW: I was reading some data yesterday that suggested that exploration activity remains stagnant, there has been a bit of pick up in exploration but it has not been sustained so as a result I think we will see continued consolidation in the sector.
The ongoing trade wars between China and the US will inevitably have an impact on global growth generally and may well impact mining, the need for minerals depends on the amount of growth going on in places like China. The number of new cars on the road will obviously drive demand and if anything puts that growth at risk then we may see a change in the cycle.
One other area to touch on in the long term is M&A activity on the back chapter 11’s and the insolvency processes in the coal sector in particular. There is a lot of equity moving away from investing in coal but the reality is that coal still represents a very significant portion of the world’s energy mix is not going to disappear overnight.
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