Mining consolidation anticipated

(Financial Post;  November 02, 2008) 

Mid-tier miner Yamana Gold's Brasileiro mine in Brazil.

Since mining industry share prices began their historic collapse several weeks

ago, investors have wondered when the inevitable consolidation will begin.

According to law firm Fasken Martineau, it is only a matter of time before it

gets underway. However, this round of consolidation will look nothing like the

last one, and it will not be led by the large companies like Xstrata PLC that

dominated the last cycle.

In a presentation to mining industry insiders late last week, Fasken partner

Greg Ho Yuen advanced the theory that the intermediate companies will be the

ones that kickstart a new wave of acquisitions rather than the senior companies.

The reason is that the sudden fall in commodity prices is forcing the majors to

take time to re-evaluate all of the multi-billion-dollar mine developments they

were planning. The more nimble intermediate producers will be able to take

advantage of the weak markets faster to buy up distressed juniors.

"Because intermediates are smaller and more focused on a few projects,

their period of self-evaluation will have either been completed or can be

completed very quickly," Mr. Ho Yuen said in an interview.

to the midway point of 2008, the mining industry was enjoying a boom and the

takeovers were coming fast and furious. The value of mining mergers topped

US$199-billion in the first five months of the year alone as the majors battled

over prized assets. But then everything ground to a halt because of falling

commodity prices and frozen credit markets. 

In this new market, many junior companies are desperate for capital and need to

find partners or outright buyers. Analyst Michael Gray of Genuity Capital

Markets even predicted that 50% to 75% of the world's junior miners could

cease to exist 12 months from now in a "massive Darwinian culling."

With so many companies ripe for the picking, Fasken said that the next round of

takeovers will be financially driven rather than strategically driven. 

Major shareholders, sovereign wealth funds, company management, or even private

equity could privatize junior miners that have no reason to be public anymore.

This would represent a huge shift from the more traditional mergers of the last

few years.

During that time, a mining company could put itself in play and usually

generate a heated auction. Things have changed so much today that Mr. Ho Yuen

believes targets will try and put new provisions into deals to keep buyers from

walking away.

One possibility he suggested is the use of "collars" that can

stabilize the value of stock-based takeovers when markets are extremely

volatile. They were popular during the tech bubble when shares of firms like

Nortel Networks Corp. would rise faster than the companies they were buying and

they would end up overpaying. 

In today's mining universe, a buyer put in that position would either walk

away or force a renegotiation. The collar could keep that from happening, as

could efforts to delay price negotiations during the takeover process for as

long as possible.

"What you're almost seeing now is target [companies] are expecting to

get re-traded or are much more aware of the fact that they could get re-traded.

And consequently the upfront price is not taken as seriously in the

negotiations," Mr. Ho Yuen said. 

One major mining deal has already been revalued after it was announced, as

Russian steel giant OAO Severstal slashed its friendly bid for PBS Coals Ltd. by

$382-million last month.