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Amid pestilence, rumours of M&A

Even though COVID-19 has led to mine closures and reduced output at mining properties as the planet goes into lockdown, in London there is chatter about M&A.
Amid pestilence, rumours of M&A Amid pestilence, rumours of M&A Amid pestilence, rumours of M&A Amid pestilence, rumours of M&A Amid pestilence, rumours of M&A

Richard Wachman in London

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That may seem strange as it's difficult to value assets mothballed or partially mothballed, or at the very least stymied by supply chain disruption during a time of a global pandemic.

Perhaps it's talk half generated by the kind of boredom that comes from brokers working at home where many are pulling their hair out. They hanker for the buzz and camaraderie of big bank trading floors - half the fun of the job in the first place, right?

That aside, they argue we need look no further than Naguib Sawiris, the so-called Egyptian Goldfinger, who engineered last week's C$1 billion takeover of Semafo by his vehicle, Endeavour Mining, for proof the virus-ridden M&A market is far from dead.

Two other companies are said to be plum takeover targets by bankers in London. First, London-listed Centamin,  perhaps Sawiris's next target - the Egyptian is still smarting from an unsuccessful tilt at it last year.

Secondly, Canada's First Quantum Minerals, by either Rio Tinto or Mark Bristow's Barrick Gold. More on that shortly.

Sawiris, reckoned by Forbes to be worth US$4 billion, and also head of private company La Mancha Resources, has been a gold bug for years. His style has been to build up sizeable minority holdings in listed companies such as Endeavour, based in Toronto, and, Australia's Evolution Mining to drive, or change management, to improve returns and expand the acquired business to add value.

In November, Endeavour, where Sawiris's La Mancha owns 32%, tabled an offer for Centamin which controls the Sukari gold mine in Egypt -a prized asset with decent ore grades, despite recent setbacks.

"Mining companies should consolidate right now and come together because these are difficult times"

Centamin would have been appealing to Sawiris, and will be for others, for another reason: it is sitting on a cash pile of around US$300 million. That's just the ticket for a company such as Endeavour which had net debt of more than US$500 million.

Centamin, which never liked the idea of being taken out by Endeavour, and suspecting it was eager, above all, to get its hands on its cash, managed to shake off the predator. The two sides, it was said, were unable to reach agreement over terms. But Sawiris, say sources here, hasn't gone away. And that's given rise to another rumour - one that says Centamin will use the cash to acquire a company itself, bulking up in order to bolster its market value, to put itself out of reach of Sawiris, and anyone else for that matter.

Sawiris, however, is in an expansive mood, illustrated during a Bloomberg interview on the day of the Semafo takeover last week when he said, "mining companies should consolidate right now and come together because these are difficult times and we need to extract synergies to reduce our overall cost".

Certainly, the Endeavour-Semafo deal makes sense, creating the largest gold miner in West Africa, with production of more than 1 million ounces. Fund managers, however, haven't yet piled into Endeavour's shares, baulking at jurisdictional risk, despite the geological attraction of a company doubling down on assets in the highly prospective Birimian greenstone belt.

Elsewhere, there is noise around First Quantum Minerals. Analysts suggest FQM would be an easier target for Barrick than Freeport-McMoRan which has so far rejected informal overtures from CEO Mark Bristow, who's mulling diversification into the copper space.

Yes, FQM is smaller, but at least there's no risk of future wrangling with the Indonesian authorities who have made life difficult for Freeport and its flagship copper asset, Grasberg.

What's more FQM has kicked off production at Cobre Panama, a massive new openpit copper operation in Latin America.

But with about $7 billion of net debt perhaps FQM needs a suitor with a larger balance sheet, so step forward Rio Tinto.

That cat, it's argued, is already out of the bag as Philip Pascall, chief executive of FQM, said in November the company had held discussions with Rio about a deal to develop Le Ganja, a huge untapped copper deposit in Peru that Rio acquired in 2005. A partnership, it would seem, is already moving ahead.

FQM's copper assets are already viewed as ‘in play' as Jiangxi Copper, China's top producer of the metal, has built up an 18% stake over the past nine months, but is unlikely to go hostile, leaving the way open for others.

More generally, what we are seeing is a push to scale not only in mining companies, but in almost every other sector. In other words, the larger equity funds are getting larger inflows than the smaller ones, so the funds are getting larger and fewer, so positions they need to run are both larger and fewer.

Nevertheless, one school of thought holds that a number of smaller gold miners are attracting interest even as the virus wreaks havoc. Their margins have risen due to higher gold prices, lower fuel costs, weaker local currencies, and lower interest cost on debt, where applicable.

Rumour has it the following offer value in the current environment due to their strong balance sheets, proven management and robust cash flows: Anglo Asian Mining, Highland Gold, and Shanta Gold.

Polymetal is more likely to acquire assets rather than companies, say these same sources.

On a valuation basis, many companies are indeed looking cheap, so at some point a flurry of activity seems highly probable.

*The writer doesn't hold stock in any of the above companies.