In a jungle without predators, Canadian miners are shortchanging investors--Ecclestone

Management of Canadian companies "are shortchanging themselves and their investors by allowing the pygmies of the marketplace to rebuff their overtures with impunity," Hallgarten's Christopher Ecclestone suggests.

Author: Dorothy Kosich
Posted: Monday , 29 Jun 2009

RENO, NV -

While the mining M&A scene has shown some signs of life, analyst Christopher Ecclestone of Hallgarten & Company asserts "really transformative deals have been few and far between."

"Shareholders both large and small are being short-changed by managements" who adhere to the philosophy that hostile bids "are the last refuge of the scoundrel", he suggested in a recently published analysis.

"Is it any wonder that Canada has lost its layer of mid-sized diversified mining groups (with the exception of Teck)?" Ecclestone asked. "Organic growth is stymied by having to pay top dollar to sitting managements at companies holding assets that would be better managed in more competent hands."

In his analysis, Ecclestone also claimed, "The brokerage community in Toronto has a vested interest in maintaining the status quo as being ‘friends with everyone' means that the constant drip feed of private placing with 6% fees is far more lucrative than to actually do some M&A work."

"The movers and shakers in the Canadian mining community have shrunk to a collection of toothless old men sitting in the village square," he alleged. "If the only deals done are artless ‘agreed bids' then anyone with any gumption gravitates towards the business of launching endless new issues rather than creating groups out of what is already available. The world's miners have not been created out of such gormless behavior."

Meanwhile, Ecclestone insisted, "The Canadian-listed mining company lives in a jungle with no predators. Even the smallest creatures have no one to prey upon them. There is no food chain. In their eyes the corporate denizens of this world would have created the perfect environment for low stress evolution."

The "Rosemary's Baby" of the agreed merger is the break-up fee, Ecclestone suggested. "This insidious beast is the weapon that managements use against shareholders to ensure that the best deal is obtained for management."

"Frankly, regulators should come out against these fees, which have spread like a weed through capital markets transactions over the last ten years" Ecclestone advised. "Basically, when boiled down, they are a means by which management scares off any higher competing bids that would almost certainly benefit shareholders. Why shouldn't shareholders be open to receive a competing offer?"

"There is a legitimate reason to have break-up fees which compensate for the out of pocket transaction expenses that the spurned party may have spent when the ‘runaway bride' dashes from the church. But nowadays the breakup fees are being concocted at punitive levels to be killers for competing bids," he noted.

"Regulators though should move in on the whole practice and enforce breakup fees that are related to the transactional costs of termination and nothing more," he asserted.

Meanwhile, Ecclestone said Hallgarten has been intrigued "by meeting Canadian miners who crave retail shareholder bases and then regard institutions as something they will add on later. This is almost opposite of what a corporate in the US or UK would want. Is it that the retail shareholder base in Canada is easier to control via a "divide and rule' strategy? They have clearly been acquiescent in the ‘no hostile bids' philosophy promoted" in the corporate halls and corridors of the TSX.

"Obviously the current lie of the land suits the institutional community in Canada. Keep it small, keep it a closed circle, keep it to ourselves," he claimed.

Nevertheless, Ecclestone noted "not all institutional shareholders are prepared to be the frog in the boiling water of management's indulgences. Then again is a hedge fund an ‘institution'?"

Ecclestone suggested the failed HudBay/Lundin merger "was one where the backlash was fatal for the management that tried to ride roughshod over shareholders."

Hallgarten also misses the swashbucklers. "Call us nostalgic but one does pine for the days when people like Robert Holmes A'Court roamed the global markets spreading terror like Godzilla."

Instead, Ecclestone asserts, "The Canadian mining space has fallen to the soporific management steel of geologists and mine managers because financial movers and shakers were declared beyond the pale after Bre-X blew up in the faces of people who should have known better. ...In what other industry would a geologist, with no previous management experience, be put in charge of a major industrial enterprise?"

"If it comes to a mud-wrestling match between a skilled financial operator building a major mining group or a geologist who can go into a trancelike state over a porphyry outcropping we would not been putting our money on the geo," Ecclestone proclaimed. "Nevertheless, the hothouse environment of the Toronto (and Vancouver) mining scene...has become the happy (non-) hunting ground of geologists who want to be friends with everyone."

"Most of the geologists ensconced in management positions wouldn't know what had hit them until they were in the digestive tract of some top-level predator," he joked.

"Graveyard humor aside, many of the more passive audience at the mining games in Toronto are doing themselves a disservice by allowing the current regime to go on," Ecclestone advised. "Moreover, management in companies with ambitions to grow, and the wherewithal to do so, are shortchanging themselves and their investors by allowing the pygmies of the marketplace to rebuff their overtures with impunity."

"Speak softly and carry a big stick," he concluded