The flurry of M&A transactions last year brought a much-awaited consolidation of the global gold sector. It also brought significant changes to the Canadian mining landscape: Newmont’s (NYSE: NEM) takeover of Goldcorp wiped a major Canadian firm off the board, and Barrick Gold (TSX: ABX; NYSE: GOLD), while still Canadian, has shifted its focus away from the country, with few executives remaining in its Toronto headquarters and only one Canadian mine.
Those headline-making deals have prompted concerns that Canada’s influence in the global gold mining sector is waning. Franco-Nevada (TSX: FNV; NYSE: FNV) chairman Pierre Lassonde said in an interview with BNN Bloomberg in January 2019 that Barrick’s smaller footprint in Canada was the same kind of diminishment of the country’s mining sector that Barrick founder Peter Munk had decried. “The head office of a company is where the CEO and the CFO sit, and they have to sit in one room and that’s where the direction comes from,” Lassonde said. “It’s not going to be a de facto Canadian company, period.”
Barrick CEO Mark Bristow dismissed the criticism at the time as “hysteria” and pointed out that several departments will still be based in Toronto. But last year’s deal activity also saw international companies taking over or taking stakes in Canadian companies and assets, meaningfully changing the Canadian mining landscape. Australia’s St Barbara purchased Atlantic Gold, Titan Minerals acquired Core Gold and Zijin Mining bought up Continental Gold a little more than a year after it acquired fellow Canadian miner Nevsun Resources. Australian giant Newcrest Mining also took a stake in Imperial Metals’ (TSX: III) Red Chris copper-gold mine, and the newly consolidated Newmont sold off its Red Lake mining complex in Northern Ontario to Australia’s Evolution Mining.
There may be merit to concerns that Canada’s influence is on the decline — but it’s also a natural part of gold miners’ use of M&A to achieve scale and relevance to investors, said Jay Kellerman, a partner at Stikeman Elliott and head of the firm’s mining group in Toronto. Based on data on Toronto Stock Exchange-listed companies, there are now only 41 mining companies on the index with a market capitalization of more than $1 billion, according to Kellerman. Smaller companies will need a plan to reach that valuation or risk being left behind, he said.
“The mining sector globally is a very, very small industry, and the Canadian piece of that itself is very, very small … If companies need to be bigger [to reach investors], from an absolute-number-of-companies perspective [the industry] will be smaller,” Kellerman said. “It will evolve, it’s never going to be what it was and probably will reduce in size.”
He noted that a smaller industry could have a knock-on effect on the services that support it, such as lawyers, accountants, investment bankers and mining technology providers.
Lassonde, in the BNN interview, had a similar perspective. Lawyers and investment bankers are “gonna have a bit of a tougher life for the next few years until we can replace [Barrick] with someone else,” he said.
However, Michael Amm, a partner at Torys LLP who co-leads the firm’s mining and metals group in Toronto, said the worries are overblown. Canada has seen major mining companies gobbled up before, he noted, with Falconbridge’s takeover by Xstrata (later taken over by Glencore (LSE: GLEN), Vale’s (NYSE: VALE) takeover of Inco and a Rio Tinto (NYSE: RIO; LSE: RIO) and Mitsubishi-led consortium’s purchase of the Iron Ore Company of Canada. While giants like Barrick may play a reduced role here, he said, others will emerge in their wake. “This has been a theme that’s been talked a lot about over the last 15 or more years of Canada losing significant companies. … Goldcorp has gone but look at the growth of companies like Agnico and Kinross,” he said.
As well, Amm added, the Toronto Stock Exchange still remains a well-understood and popular way for mining companies from Canada and abroad to access equity capital.
Amm and Michael Pickersgill, Torys’ other mining and metals group co-head, believe that the next group of majors could emerge from consolidation in the mid-tier space.
“While M&A activity can reduce the number of large players in Canada, especially when the acquirers are foreign companies, M&A activity involving domestic players can also be a catalyst to create larger, stronger and more dynamic Canadian companies,” Pickersgill said. “This is especially the case in the mid-cap space where combinations between players can create new potential future champions in the sector with bigger clout to develop projects and make further acquisitions. Kirkland Lake Gold’s (TSX: KGI; US-OTC: KG) recent acquisition of Detour Gold is a good example of the creation of a new larger cap Canadian gold company that has the potential to develop into a leading player in the sector.”
Kerry Smith, vice-president, senior mining analyst and director at Haywood Securities, said he expects to see the next majors come from established mining titans such as Equinox Gold (TSX: EQX) founder and chairman Ross Beaty and Lundin Gold (TSX: LUG) chairman Lukas Lundin.
“Those kinds of people with those skillsets are going to get more funding in the market, they’re going to get more investor interest,” Smith said, noting that Lundin Gold has a much higher valuation than is typical of a single-asset miner, and Equinox’s stock has continually climbed since it listed in 2017. “I think people are prepared to back those kinds of people because they’re winners.”
Small and mid-tier miners also have an opportunity to benefit from mega-consolidations as companies like Barrick and Newmont prepare to sell off excess assets post-merger, said Kellerman. Mid-tier producer Teranga Gold (TSX: TGZ) was one beneficiary in December, when it purchased the Massawa project in Senegal from Barrick.
“What are now non-core assets in each of those companies probably take up a significant amount of management time and … those assets would be better off if they were sold for fair value and deleted from the portfolio, so management can focus on higher-valued, more important assets,” Kellerman said. “And yet those assets in the hands of a smaller company might be very important, strategic and become core assets.”
It may prove necessary for smaller companies to seize those opportunities as investors, seeking to de-risk their portfolios, grow tired of single-asset companies.
“It’s one thing to be a single-asset exploration company as you de-risk the asset and take it through to production,” Kellerman said. “But at a certain point in time that company will find itself in the hands of another company or it needs to buy something else to survive.”
In a Canaccord Genuity research note in December, several single-asset Canadian miners are seen as takeover targets this year — including Pretium Resources (TSX: PVG; NYSE: PVG), TMAC Resources (TSX: TMR), Premier Gold Mines (TSX: PG; US-OTC: PIRGF), Wesdome Gold Mines (TSX: WDOP), Sabina Gold and Silver (TSX: SBB) and Great Bear Resources (TSXV: GBR).
“Single-asset companies are not in good graces right now with capital markets generally,” said Smith. ”You have one hiccup, and you can’t cover it up. You can’t hide it.”
However, Kellerman said he doubts that the mid-tier space will be the originator of Canada’s new majors. “I think there’s too many social issues and I don’t think there’s enough courage,” he said. “Last time I looked, when two companies merge there’s only one CEO. There’s not enough courage to … create a major and put these two or three companies together.”
It’s partly an issue of executive compensation, Smith suggested. With executives receiving generous cash compensation and, often, very little in stock, there’s less incentive to say yes to a merger or acquisition that may put them out of a job — even if it would be value accretive to shareholders. “If [CEOs] own more stock, they’d be more receptive to doing things that increase the stock price even if they lose their jobs.”
— Kelsey Rolfe is a freelance journalist based in Toronto. She has written about the mining sector for more than five years and was previously a section editor at CIM Magazine in Montreal.