The Mother of Invention
With only a tentative recovery in mining, junior explorers are resorting to creative structures like streaming in order to stay in business. Majors, meanwhile, seem content to play the waiting game.
THE BEST COMPANIES KNOW that adapting is the key to turbulent economic times, a principle that’s as true for the mining industry — majors, mid-tier and juniors — as it is for anyone else.
Classic strategy has the major concerns buying out the junior exploration outfits when they’ve reached a certain stage of exploration and development. While this strategy remains overarching, today’s economic environment has instilled a mentality of caution in the buyers.
Still, it’s important to understand the market in context. “The majors have thresholds for takeovers, and the truth is, for example, that gold mining projects with the minimum 10 million ounces don’t come along very often,” says Brian Abraham in Dentons Canada LLP’s Vancouver office.
But even when the threshold is met, “caution” is the underlying buzzword. “The last two to four years has seen the majors take a much more disciplined approach, and while they obviously continue to understand the need for acquisitions, I’m not seeing an ‘any deal at any cost’ mentality,” said Linda Misetich Dann in Bennett Jones LLP’s Toronto office.
Majors have also been willing to do minority investment with explorers and then work with the explorers to develop assets, as evidenced by Newmont Mining Corp.’s May 2017 US$109-million purchase of a 19.9-per-cent interest in Continental Gold Inc. by way of supporting the Buriticá and three other gold exploration assets in Colombia. “Explorers are trying to sell a little later, so we’re not just seeing straight take-outs,” says Michael Boehm in Fasken Martineau DuMoulin LLP’s Ottawa office. “The explorer ends up getting more value, and the major gets a hard look at the asset.”
More particularly, majors are taking a closer look at locales in which they already have mines. “We’re seeing more majors adopting the philosophy that the best place to look for a new mine is near an old mine,” Abraham says. “That’s especially true in eastern Canada.”
The majors, of course, also have an ongoing concern about replacing reserves. “Majors who don’t have robust projects in their own pipeline are concerned about access to new projects by way of moving the needle on production in the next generation,” says Mark Bennett in Cassels Brock & Blackwell LLP’s Toronto office.
In that vein, Eldorado Gold Corp. recently announced its purchase of Integra Gold Corp., essentially a single-asset company holding the Lamaque project near Val D’Or, Québec. The transaction, like Goldcorp’s continuing focus on Chile, can be seen as a continuation of a trend to diversification to low-risk jurisdictions.
“It’s a classic case of a senior company taking over a one-asset, late-stage enterprise in what will be a key project for Eldorado going forward,” Bennett says. “The key is finding the right-sized project, which is why we’re not seeing as many of the billion-dollar-plus deals.”
It’s not that deals in the billions are entirely dead, as evidenced by Lundin Mining Corp.’s sale of its 30-per-cent minority interest in the African copper miner Tenke Fungurume for US$1.14 billion in cash in November 2016. “There’s still a lot of buying out of Asia, where they have the financial resources,” Bennett says.
But even the majors are hedging their bets by entering into joint ventures. In May 2015, Barrick Gold Corp. announced a long-term strategic partnership with Chinese mining company Zijin Mining Group Ltd. The relationship kicked off with Zijin acquiring 50 per cent of Barrick’s interest in the Porgera joint venture gold mine in Papua New Guinea. “The whole idea behind the transaction was to spread out risks and costs,” said Boehm, who acted for Zijin.
More recently, in May 2017, Barrick announced another long-term strategic partnership, this time with Shandong Gold Mining Co. The partners’ first deal was Shandong’s acquisition of 50 per cent of Barrick’s Veladero mine in Argentina for US$960 million. Two months earlier, Barrick joined with Goldcorp Inc. to form a partnership in Chile’s gold belt in a complex transaction involving four miners.
Ivanhoe Mines followed the joint venture trend in 2015 by engaging Zijin in a co-development agreement under which Zijin acquired 49.5 per cent of Ivanhoe’s interest in the Kamoa-Kakula copper discovery in the Democratic Republic of Congo for US$412 million.
Abraham predicts that the majors will increasingly turn their attention to co-operation in the name of risk reduction, cost savings and other efficiencies in other ways. “We’re likely to see more joint ventures between the majors, and not just on mines but also infrastructure like port facilities,” he says.
The upshot is that majors are less and less inclined to take over early stage juniors, leaving the field for the mid-tiers. “The mid-tiers are particularly interested where the junior has a feasibility study or something else beyond a preliminary study,” Abraham says. “But it’s also true that mid-tiers may be making fewer acquisitions and instead developing their own two- to five-million-ounce deposits, and as they do so, they’ll start to put up packages of these interests for sale.”
One classic example is the take-over by Kirkland Lake Gold, a Canadian miner, of Newmarket Gold, an Australian producer, in November 2016. The combined company, which produced more than 500,000 ounces of gold in 2016, operates seven mines and five mills, and has a market capitalization in excess of US$2.4 billion. “The transaction looks more like a merger than a takeover because it involved mid-tier companies of approximately the same size,” Bennett says. “Both companies wanted economies of scale and a growth platform that could achieve that goal, and to do that they needed more than the one significant asset they each had.”
As the majors and the mid-tiers shift strategies, then, junior miners and their lawyers are increasingly forced to rely on alternative and creative strategies, like joint ventures, royalties, streams, working interests and mineral banks, to stay in business. “For the juniors, it’s all about belt-tightening by choice or necessity, and about making sure they have the right story out there so that the place they’re at from a process and development perspective makes sense to the street,” Misetich Dann says.
What the juniors are selling, however, is also changing, as evidenced by the emergence of what amounts to alternative methods of financing, including royalties, streams, working interests and mineral banks. “We’re seeing more junior companies involved in royalty deals than we did in the past,” Misetich Dann says. “There’s definitely a lucrative market out there for both streamers and royalty companies.”
As explained on the Franco-Nevada Corp. website, royalties are economic interests in the future production from a mining property. They have distinct advantages for the majors: because they are not subject to cash calls to fund exploration or other costs, they are lower-risk than operating interests; they provide exposure to the upside of commodity price, reserve and production increases; they can create an interest in new discoveries made on a property; and they do not involve operations or development management, thereby avoiding considerable overhead.
Streams, according to Franco-Nevada, are metal purchase agreements that provide the right to purchase metals produced from mines at a pre-set price in return for an upfront deposit. “Streams are particularly well suited to co-product production providing significant value for by-product precious metal production,” Franco-Nevada states. “Streams are not royalties because they are not an interest in land and there is an ongoing cash payment required to purchase the physical metal.”
Majors or mid-tiers with “working interests” have an ownership position in a property and are therefore liable for cash calls. Naturally, working interests expose their holders to more risks than royalties or streams.
More recently, mineral banks have become popular. Mineral bankers accumulate early-stage gold assets from distressed companies whose assets are undervalued. They also search out deep-pocketed development partners with a view to selling the assets while retaining a residual royalty or a minority interest.
By way of example, First Mining Finance Corp., a Vancouver-based public company founded by Keith Neumeyer, who established First Majestic Silver Corp. and co-created First Quantum Minerals Ltd., is a mineral bank focused, according to its website, on “acquiring, enhancing and monetizing high-quality mineral assets.” The company currently boasts 25 projects with a gold resource base of 12 million ounces.
“First Mining will add value to its assets through drilling, metallurgical studies, infrastructure improvement and economic studies,” the website states. “When market conditions are optimal, the company will monetize its portfolio through agreements with third parties to further advance the projects through development and production while First Mining retains residual interests in the projects (e.g., joint ventures, royalties and/or streaming structures).”
These methods have all contributed to a change in takeover timing as many of the juniors forgo the traditional exit strategy of an early buyout in favour of bringing a project along before selling it. “It’s in this space that you see private money coming into play converting projects into public companies as a precursor to a takeover,” Abraham says.
According to Bennett, the evolution of takeover strategy is the response to the realization that the industry was overleveraged relative to commodity prices. “What everyone is trying to achieve is to add something to the project so as to minimize the role of leverage in M&A deals,” he says.
It’s also true that significant shareholders are less inclined to walk away from distressed juniors. “They’re not as willing to forgo their initial investment, and that’s one way in which some juniors have stayed afloat and obtained further financing,” Misetich Dann says. So while things may have changed, much is happening.