Mining industry rides M&A wave to new opportunities

07 November 2019 3 min. read
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Consulting firm PwC Canada examined the top 25 miners by market capitalization on the TSX in its annual Canadian Mine series, and found that the “megadeal” was back in a big way in 2018.

Megadeals returned as large companies decided to take advantage of improved balance sheets to optimize their portfolios, the PwC report found. The two huge deals were the previously announced combination of Potash Corp. of Saskatchewan Inc. with Agrium Inc. to create Nutrien, as well as Barrick Gold’s acquisition of Randgold.

The beginning of 2019, meanwhile, saw Barrick Gold form a joint venture with Newmont with the two companies’ assets in Nevada. April 2019 saw Lundin Mining Corp. announce a $1 billion acquisition of a Brazilian copper and gold mine from Yamana Gold Inc.

Most of the heightened level of deal activity occurred in the gold sector, with the large deals likely to lead to another series of transactions, as the merged firms sell off non-core assets which will be picked up by intermediate players or formed into joint ventures.

The report noted that competition for investment dollars in the mining industry has intensified as investors shift money to less risky royalty and streaming companies and ETFs holding physical inventories of commodities. Meanwhile, a significant amount of risk capital has shifted to the cannabis sector.

TSX mining sector market capitalization

“While recent mergers were a sign of a wave of consolidation that will help companies better compete for capital, we can expect even more M&A activity in the near future. That creates a cascading effect of further deals as companies sell off non-core assets, which brings new opportunities for management teams to build the next big Canadian mining company," Dean Braunsteiner, national mining leader, PwC Canada, said.

The PwC report noted that mining stocks largely moved in step with the TSX market in 2018, with aggregate valuation of miners on the TSX declining by 12.7% compared to the 10.8% decline of market capitalization on the index.

Miners began to rebound with the broader market in early 2019, recovering 2018 losses by the first quarter. The mining sector remained the third largest in TSX total value (10%), after industrial products and services (12%) and financial services (29%).

The decreasing price of commodities dampened performance in 2018, with zinc tumbling 25%, copper 17%, and nickel 6%, while cobalt and lithium dropped by double digits as well. Copper, zinc, and nickel prices made strong gains in the first quarter of 2019, however.

Several firms were insulated from the weaker prices of base metals by their high exposure to gold, with bullion prices ending 2018 down only 2%.

Spot price trend

Gold remained the dominant commodity among the top 25 firms by market capitalization, with 21 having exposure to the precious metal. Kirkland Lake Gold and OceanaGold were the strongest performers in terms of valuation, with market capitalizations surging by 87.3% and 55%, respectively.

While M&A is one way the industry is responding to market pressures, digital transformation is another avenue, according to the PwC report.

In January 2019, a number of miners – including Wheaton Precious Metals and Kutcho Copper – announced a collaboration to develop a mining supply chain solution built on IBM’s blockchain platform.

True change, according to PwC, entails holistic change across management systems and functions – with many currently operating in siloed fashion. Advanced data on absenteeism or worker shortages, for example, could be shared between the HR department and affected production and maintenance groups to better address and solve issues.

Culture, people, and business processes will also have to be adequately addressed in order to transform the organization in a sustainable way.

The report also recommends agile methodology for miners who have long used traditional project management approaches with separate and extended stages of concept, design, testing, and implementation. Digital investments could be better integrated through “short bursts of activity by cross-functional teams that deliver incremental value regularly,” the report notes.