It used to be that the mining and energy sectors were stable and predictable and, in many ways, quite separate. That kind of stability included dealmaking and M&A activity.
“Things sailed along and didn’t change very often – maybe just some minor changes, like adding renewable energy to the mix,” says Greg McNab of Dentons Canada LLP.
Fast forward 20 years or so, and there has been a considerable intermingling of mining and energy in many ways, says McNab, Canada co-chair of Dentons’ mining group, “especially if you consider the advent of critical minerals, which are mined but are key to the push towards decarbonization and reduced reliance on fossil fuels.”
Greg McNab
Says McNab: “Everything accelerated – from a gradual transition to a full-on push to revolutionize everything, on both the mining side and the energy side.”
McNab, whose practice is about 70 percent mining and 30 percent energy, adds that both sectors are a “pretty volatile place to be trying to put long-term money to work now, especially because these are long-term, capital-intensive projects.”
This means that for mergers and acquisitions in both sectors, the economic models used for dealmaking are “less certain,” and the patterns of financing and costing out projects are changing, he says. “All the elements that go into the valuation and M&A process are more unpredictable.”
Traditional energy sources here for the next while
McNab also says that on the energy side, traditional oil and gas companies went from having a declining demand model to the realization among investors that such energy is still going to be around for a whim and that the energy transition will not be as quick as many hope for.
“Now, all of a sudden, they’ve got a new life, and so M&A valuations for those companies have increased significantly.”
As for his mining clients, many are now looking at renewable energy projects as targets for stability and many other reasons, he says. “So, the lines are more blurred.”
Deal activity over a broad spectrum in mining
John Wilkin, an M&A lawyer at Blakes Cassel & Graydon LLP who focuses mainly on mining, says he sees “a lot of activity in the market” and expects it to stay robust for a while. He adds that the deal flow we’re seeing now is not focused on one or two commodities but a relatively broad representation of the sector – precious metals, gold, and rare earth metals.
He notes that previous dealmaking has opened the door for other transactions. For example, US gold mining giant Newmont completed the acquisition of Australia’s Newcrest Mining in November 2023 and then announced plans to sell six non-core assets. These include its Éléonore mine in Quebec, the Musselwhite and Porcupine mines in Ontario, the Coffee project in the Yukon Territory, and its 70 percent stake in the Havieron joint venture with Greatland Gold in Western Australia.
John Wilkin
So, as global players build their portfolios, he says, they also decide to divest non-essential assets. That opens the field for others to come in and make their own deals. These aren’t “bad” assets; perhaps they just don’t fit into the larger plan.
As for gaps in valuations – the difference in what buyers are willing to pay and what sellers are willing to accept – Wilkin says how wide it is depends on the commodity. The Newmont-Newcrest deal was completed at a 30 percent premium, he says. But Glencore’s $6.9 billion recent acquisition of 77 percent of Teck’s coking coal assets, for an implied value of $9 billion for 100 percent, was considered by some analysts to be less than the $11 billion they thought the coal assets were worth.
Another example is the critical mineral lithium, which is used in batteries for electric vehicles. Wilkin says lithium assets were valued highly a couple of years ago, when prices surged between 2020 and 2022, but have since dropped substantially, making deals more challenging. Part of this is due to larger-than-needed inventory and the changing makeup of the critical minerals in batteries.
Larger companies have more options than midcaps or juniors
Robert Mason of Mason Law says dealmaking “has been great” in some areas of mining, like gold, over the past several months. He recently led Marathon Gold Corporation through its sale to Calibre Mining, which closed in January, saying it is a key transaction in the overall development of new Canadian gold mines. Its Marathon gold project is based in Newfoundland.
Higher gold prices have fuelled activity in the gold equity space, such as selling a stake in a company or particular project, with more than 30 or 40 equity deals over the past several months. However, Mason notes that these deals were all for assets in production, near production, or very senior.
Robert Mason
For these companies, “things have been great,” he notes, “but if you are a junior exploration company, you’re still struggling.” For the latter, alternative financing, such as royalty or streaming deals, has been one way for these smaller companies to bridge the gap.
In its simplest form, a royalty company provides the mine operator with an upfront payment and, in return, receives a percentage of revenue generated from production at the mine. A streaming deal is similar, but instead of a percentage of revenue, the company has the right to buy a percentage of production, or future production, at an agreed-upon, discounted price.
Says Mason: “There are a lot of companies looking to buy royalties or streams, either short or long term, and the issuers need that money because they don’t have many other means of getting it.”
Mason adds that there is still much M&A opportunity in mining, even as consolidation has meant fewer new mining companies are likely coming onstream. “The old dealmaking stories are not being replaced by new stories at the same rate.” Still, he adds, mining has probably been one of the more successful stories on the Toronto Stock Exchange this year.
New regulations on foreign investment could cool deals
Fred Pletcher, a partner in the Vancouver office of Borden Ladner Gervais LLP and the national leader of its Canadian mining group, says that recent policy directives from the federal government will make it harder for foreign firms to acquire domestic mining companies, imposing measures meant to protect top takeover targets from larger global rivals and secure national security interests.
Takeovers of Canadian mining companies by foreign entities will be approved only “in the most exceptional of circumstances,” according to guidelines from Industry Minister Francois-Philippe Champagne in July.
Fred Pletcher
“That certainly has put a chill on the market,” says Pletcher, noting this crackdown could constrict access to capital for companies that rely on foreign investment to fund exploration and mining projects.
This also comes as the world’s largest mining firms are hunting for metals, including copper, that will help the global transition from fossil fuels. For example, Glencore wanted to acquire all of Teck for $23 billion last year but later opted for just the coal assets. That acquisition was approved in July even as the government set the new criteria for mining deals.
Pletcher notes that geopolitical factors such as protectionism can substantially impact dealmaking, especially with assets that are seen as necessary to national security. “There would be a more robust M&A market for many companies and projects, such as copper, were it not for these policies coming out of Ottawa.”
Pletcher says that geopolitical risk is also a factor in Canadian companies with assets in certain countries. For example, he says, some jurisdictions in Latin America have experienced a “noticeable shift to the left,” which has made them less agreeable to mining projects and more supportive of expropriating or nationalizing projects they do support. Not only does that increase the risk of making acquisitions in these jurisdictions but it may also make Canadian companies with such assets riskier to buy.
Energy transition a driving force behind M&A
Rob Blackstein, co-chair of BLG’s electricity markets group in Toronto, says that while energy-related M&A moved at a “torrid pace” during the pandemic, it slowed down due to the rise in interest rates, which constrained capital in a sector sensitive to interest rates.
“With interests more stable now, even edging a bit lower, we’re seeing a general uptick in the sector across the board,” Blackstein says, with the energy transition, electrification, and decarbonization a driving force bound to propel the market.
Rob Blackstein
As for valuations, Blackstein says the expectation gap between buyers and sellers varies from project to project and even jurisdiction to jurisdiction and often depends on the regulatory environment.
One definite factor driving M&A activity and valuations is “expectations on the future direction of government policy and any uncertainty around that.”
Another exciting development in dealmaking in energy is the increased presence of Indigenous communities in projects, especially as they access capital to take stakes in projects. “The involvement of Indigenous communities has grown exponentially in energy projects and will continue to grow.”
Blackstein says Indigenous involvement in projects can be vital in ensuring that a project will be built, given the importance of getting approval for the construction of infrastructure that could potentially cross Indigenous territories.
Similarly, ESG concerns drive activity in the energy space, as investors realize that “a renewable project ticks a lot of boxes, and many capital providers see the value of getting into decarbonization and electrification projects.”
Finally, Blackstein points out how much the energy sector fits into the broader framework of what is happening in other sectors, such as transportation, infrastructure, and the auto industry. “These sectors of the economy are trying to lower their carbon footprint, placing pressure on the energy system. The bottom line is the need to grow energy capacity.”
Cautiously optimistic as interest rates stabilize
Sarah Gingrich, co-leader of the capital markets and mergers and acquisitions group at Fasken Martineau DuMoulin LLP, says she, too, has noticed a pickup in activity in recent months, perhaps in part due to more interest rate stability. This makes her cautiously optimistic, though she thinks the market is “looking for confirmation or resolution” of election results in Canada and the United States to clarify how dealmaking might be impacted.
She says strategic acquisitions are still happening, “where it makes sense for these companies to merge or for a larger company to acquire a smaller one. Clean energy investments are another area that is attracting a lot of interest.”
Sarah Gingrich
However, Gingrich notes that more due diligence is being put into transactions to mitigate higher borrowing costs and reduce the risk of getting the valuation wrong.
Gingrich adds that inbound investment in the energy sector is up this year, a signal of investor confidence despite some government regulations that may suppress activity. At the same time, Canada’s support of projects with an ESG angle has also proved to be attractive.
“The commitment to ESG, including renewable energy commitments, provides attractive, inbound investment opportunities,” she says. “But you must still understand the target assets and the performance metrics.”
She points out that part of being an M&A lawyer in the energy space is understanding the regulatory framework, how government investment works, and what is coming down the pipeline.
“As such, we watch things such as the Competition Act and foreign investment rules, and how that affects risk for our clients, and then take steps to mitigate any risk.”
Different levels of activity for different sectors
Gingrich’s colleague at Fasken, Brian Graves, a partner in the M&A group, says the mining sector has exhibited traits similar to those in the energy space. “Activity levels started picking up in Q2, and we expect that to continue or at least hold steady through the rest of this year.”
Among the driving factors are more stable interest rates and the results of many elections held worldwide this year, which at least provided some geopolitical clarity. There is also “always the appetite for market participants to do deals after a slow period.”
Brian Graves
However, like many M&A lawyers, Graves says the level of dealmaking excitement depends on “which mining sector you’re talking about.”
The precious metal sector, for example, is reflecting higher prices for silver and gold and the desire of large players to achieve even greater scale. On the other hand, Graves says, the rush in the lithium market has abated as users of this battery mineral focus on securing sources of supply rather than getting involved directly in the mining sector.
Graves says that M&A in the base metal sector is more focused on achieving success on particular assets. He notes the recent deal between UK-based BHP and Lundin Mining to jointly acquire Filo, which owns 100 percent of the Filo del Sol copper project in Chile.
The two companies also agreed to a joint venture to develop FDS and Lundin’s Josemaria project in Argentina. This project is in an emerging copper district with world-class potential and demand as a battery metal. BHP’s total cash payment for the transaction is US$2.1 billion.
Graves says such joint ventures can be a good way to develop assets in a unique area, with each side taking on risk.
At the smaller end of the mining sector, junior miners and mid-caps still have the higher interest rate environment to deal with, perhaps unlike cash-rich, larger players, so borrowing can be a challenge. “Other sources of capital are available, but they come with conditions, whether they are streams or royalties.”
As for an M&A lawyer’s role in dealmaking, Graves says, “We’re trained to think about risk, but we also need to think about the practicalities of getting deals done.
“These deals aren’t lawyer-driven; they’re party-driven. Our job is to ensure that we work through all the elements of a potential transaction, from due diligence to negotiations to completion of the deal and managing the risks along the way.”