Although deal activity continued in the gold space last week,
many miners will likely remain on the sidelines when it comes to
mergers and acquisitions until at least 2014, say analysts.
Late last week, Canadian-based gold producer
that it is acquiring
Esperanza Resources Corp.
(CVE:EPZ) in a deal worth $69.4 million. Alamos' bid to acquire
(NYSEMKT:AZK) fell through earlier this year, with
) instead buying Aurizon for $796 million.
In other recent M&A news, intermediate gold miner
(NYSEMKT: NGD) announced a $310 million bid to take over
Rainy River Resources
(CVE:RR) in June.
says that in general, mining M&A activity in Canada shrank back
toward mid-2012 levels in the first quarter, gold accounted for 64%
of deal value in Q1, up from only 35% in Q4. There were 14 gold
transactions announced in the quarter, representing an aggregate of
$3.4 billion in deal value.
Globally, gold transactions also accounted for 47% of deal value in
Q1, compared with only 20% in Q4 2012, with three of the top four
gold transactions involving a Canadian company.
But in spite of recent activity, signs point to miners remaining
cautious at least through the end of this year. In its April to
Global Capital Confidence Barometer
outlook for the mining and metals industry, Ernst & Young said
that only 24% of miners expected to pursue acquisitions in the
following 12 months, with 91% expecting to see smaller bolt-on
deals below $500 million.
"Mining and metals respondents are less focused on pursuing M&A
opportunities compared with six months ago. This is unsurprising
given the recent level of write-offs announced during the first
quarter of 2013, which have stunned the industry and has taken
large scale M&A off the table for now," says the report.
In its Pipeline Activity Index for May and June released this week,
SNL Metals Economics Group also explains that although M&A
activity is one area it expects to eventually improve, many
potential buyers remain on the sidelines as "shareholders are not
in the mood to tolerate unnecessary spending."
Indeed, while the lure of discounted assets may eventually become
too temping for some companies to pass up -- particularly for the
miners that have not been recently burned by writedowns -- Justin
DesRochers, senior industry analyst with SNL Metals Economics
Group, says he doesn't expect this to happen quite yet.
"I suspect that most miners will be unwilling to take on much risk
at least until 2014, so their M&A increasing in the short term
is unlikely. Shareholders are currently just not willing to
tolerate any unnecessary spending, especially given all the recent
writedowns caused by large deals in the recent past. And a major
miner buying up a junior without a revenue generating mine would be
considered unnecessary spending at this point, no matter how
promising the project or how low the junior's share price is," he
Meanwhile, in the intermediate space, the biggest challenge for
those companies seeking acquisitions is the recent instability in
the gold price, says DesRochers.
"Many of these companies have strong balance sheets, and they are
not committed to multi-billion development projects. So these
shareholders are much more welcoming to growth by acquisitions.
However, the recent slide in gold price definitely adds a layer of
uncertainly to these plans. But I do expect this to be the sector
the most active in M&A activity in the near term," he adds.