Nora Pincus, a partner at the international law firm Dorsey & Whitney, forecaststhat the significant volume of mergers and acquisitions (M&A) activity in the metals and mining space in 2019 will continue into 2020. The Northern Miner reached Pincus in Salt Lake City, Utah.
The Northern Miner: Do you think the market consolidation or M&A activity in the metals and mining industry that started in 2017 — and continued through 2018 and 2019 — is likely to continue this year, at the same pace? According to the latest research from Bank of America Securities, the total transaction value in global gold M&A last year was US$20.2 billion — a nine-year high.
Nora Pincus: Yes, I do think that market consolidation in the precious metals space is likely to continue through 2020. I don’t think it will be as big in terms of the dollar value, no, but I anticipate that there will be higher volumes and smaller dollar figures. Much of the low-hanging fruit or obvious targets for consolidation have occurred over the last 18 months — the Barricks and the Newmonts of the world — but we are likely to see more M&A in the mid-cap to small-cap areas, and potentially more investments in the mid-caps from the majors — either at the company or asset level.
TNM: Do you have any forecasts on which companies might acquire companies or assets, and which ones might be acquired?
NP: I’m hesitant to make any specific predictions, but think that there are a number of potential targets with projects in Nevada and Alaska that may look very attractive at today’s gold prices.
TNM: What really drives the consolidation beyond the difficulty in finding significant new deposits in friendly mining jurisdictions?
NP: The increase in M&A activity globally has been driven by an anticipated rise in gold prices, which we have seen happen in the last six months, but there has been a view that commodity prices would continue to rise over the last 18 months and that started happening in mid- and late-2019. So when commodity prices increase, majors obviously become more bullish. There’s just more capital to invest in acquiring new assets. I also think that a lot of miners have recognized the economies of scale that come with significant mergers or consolidation of assets through joint ventures, which really do produce a pretty tangible impact on their bottom line, so there’s a lot of value that can be captured through synergistic mergers and consolidations.
TNM: Is it the easiest thing to do rather than pursue organic growth?
NP: That is a good point. But it’s not necessarily that it is harder to find good assets. The majors over the last 10 years have really cut back on their own exploration and increased their reliance on juniors to do exploration work, and have made investments in juniors and mid-caps once a deposit or resource has been found. That trend is likely to continue with the juniors and mid-caps really doing the exploration work and turning to the majors to fund mine build-outs due to the significant capex needed to bring a greenfield project into development. We’re seeing a lot less reliance on the capital markets or on traditional debt financings used to finance mine building by juniors and the mid-tiers. The majors are funding project development with cash. We have also seen in the last couple of years an increasing reliance on more exotic financing structures like streaming deals and royalty transactions to fund the capex of major projects — certainly at the mid-cap level, but also to some degree even some of the majors are starting to do those types of transactions.
TNM: You have said that one of the impacts of the M&A we have seen has been a decrease in the number of mid-cap miners. You have argued that the industry is increasingly becoming split between the majors and the juniors. Can you comment on this trend and what it means for the industry?
NP: I anticipate that we will continue to see the share of mid-caps and juniors decrease as more majors focus on precious metals assets and projects. That has to do with some contraction in the capital markets, as well. We’re likely to see the mid-caps continue to lose market share, and that’s going to be driven by two things: 1) Contractions in the capital market participants interested investing in junior exploration companies in the mining space. We have seen a lot of interest in mining and metals shrink as investors have looked at investing in other industries like cannabis, for example, which in the last two years has taken up a lot of those dollars instead of junior mining companies. 2) The realities of bringing a gold mine on line and how much cash is required means that it’s very hard to finance mine development either through traditional debt or from the capital markets. So that is driving more of the majors to pick up assets held by mid-caps at a rate that is competitive, at least based on current gold prices.
At the same time, because the mid-caps are having more trouble securing investment dollars or getting debt financing, they are turning to majors, either to do joint ventures with because majors have the cash to invest or they are divesting assets to the majors who will build and develop them. The majors aren’t as reliant on capital markets in the same way, as they typically fund acquisitions through cash or share deals. We’ll see a slow squeeze on the mid-caps.
What we’ll see in the future is that juniors will continue to be active on the exploration side, but we’ll see fewer of them making the leap from junior exploration to mid-cap miner, largely because the juniors will sell their projects to the majors or joint venture with them.
The majors certainly have more ready access to public debt, which many majors are reliant on, and that is certainly cheaper money than through a traditional credit facility with a standard bank.
TNM: There has been an increase in the number of foreign mining companies acquiring assets in the United States. Can you give me some of the best examples of this and comment on whether this is going to continue?
NP: The trend of non-U.S. based companies coming to the U.S to look for an acquisition is likely to continue. In some ways, it’s a perfect storm for investment in precious metal assets in the U.S., given the rise in the gold price and the continued global uncertainty we’re seeing as the dollar potentially falls, so I think commodity prices are likely to remain high for the foreseeable future. The U.S. is looking like a very good and safe place to put your investment dollars. I’m talking about the security situation in countries like Mexico, Brazil and even Chile, where we have seen unrest in the last couple of months. When you combine a relatively safe jurisdiction in the U.S. with a lot of world-class assets and a fairly predictable path to permitting major mines, all of that makes the U.S. a fairly attractive place to put money.
TNM: Yes, and the current administration seems to be making permitting easier in some cases.
NP: That’s true in terms of the review of the National Environment Policy Act (NEPA), with the current administration focused on trying to tighten up permitting time lines, which has allowed several mines to get through the NEPA process faster than they would have before the overhaul. The real impact of those regulatory reforms remains to be seen, but many miners are bullish about the Trump administration’s policies on streamlining permitting.
TNM: What do you see happening in the base metals space? Companies like South32 are investing in the Hermosa project in Arizona and Polymet’s proposed Northmet project in Minnesota.
NP: Base metals certainly have suffered over the last couple of years, but investment in base metal projects seems to be continuing as has exploration activity, so that is likely to continue. You have a number of large and often non-U.S. based miners that are funding pretty extensive capex into major project development in the base metal space, so that’s likely to continue. Whether we’re going to see a lot more greenfields development of base metal assets in the U.S. that are not already underway, however, I’m less certain of.