Facts ‘n’ figures – Potash bid tops Q2 M&A activity: KPMG report

The following is an edited excerpt from KPMG’s Mining M&A Quarterly Newsletter. For more information and to see the full report visit www.kpmg.com

A blockbuster potash bid announced between Potash Corp. of Saskatchewan and K+S Group in June could propel global deal value for the second quarter of 2015 to US$16.5 billion. K+S rejected the friendly offer two days after quarter-end. Excluding this deal, the quarter still generated US$7.8 billion in deal value, up from US$3.7 billion recorded in the first quarter. Deal volume also rose by 29%.

While the potash deal was the largest announced deal in the quarter, iron ore and nickel each posted a major transaction, and gold was involved in a spate of smaller deals.

Potash

On June 25, PotashCorp made a friendly US$8.6-billion offer to the board of Germany’s K+S Group, Europe’s major potash supplier and the world’s largest salt product supplier. The bid represented a 40% premium to shareholders. K+S is poised to bring a new potash mine into production next year — the Legacy project in Saskatchewan, not far from PotashCorp’s mines, with a similar capacity of 3 million tonnes per year. PotashCorp is also interested in the dominant market position for nutrients that K+S holds in Europe.

On July 2 the K+S board rejected PotashCorp’s offer — saying the price undervalued the company — and expressed concerns about the interests of its 14,000 employees. K+S believes that PotashCorp does not need additional production from Legacy in current market conditions, and that it intends to curtail all but its lowest-cost operations. PotashCorp denies these comments, saying the transaction would simply combine two best-in-class companies with minimal overlap to create a global producer. The Canadian company remains interested in pursuing its bid, and not ruling out the possibility of going directly to K+S shareholders.

Iron ore and nickel

At a time when China’s steel industry is slumping, China-based Zhongrun Resources is making a major investment in Mongolia’s iron ore sector. Intending to raise US$4.6 billion through a share issue, Zhongrun will spend US$1.9 billion of that equity to acquire three Mongolian firms: Iron Ore International (Mongolia), Mongolia New La Le Gao Te Iron Mining and Shiny Glow. The second-largest deal of the second-quarter comes at a time when the coal and iron ore industries are also suffering through slow demand and lower prices.

The third-largest transaction of the quarter is an all-Australian affair. Independence Group is spending US$1.4 billion to acquire all the issued capital of Sirius Resources for shares and cash. The prize for Independence Group is the Sirius Nova-Bollinger nickel-copper project in southeast Australia that is fully financed, under construction and expected to begin production in 2017. With Independence Group’s diverse portfolio of multi-metal assets and a US$2-billion combined market cap, the combined entity could become an ASX 100 company.

Gold

For deals under US$1 billion, gold holds down the lion’s share of transactions. The second quarter’s largest gold transaction was all-American, as Newmont Mining made a move to acquire the Cripple Creek & Victor (CC&V) gold mine from AngloGold Ashanti for US$820 million in cash. Newmont will raise most of the cash through a share issue. CC&V is a 20-year old mine in Colorado that is being expanded with a new leach pad, recovery plant and mill. With it Newmont can add 350,000 oz. gold per year at a low all-in sustaining cost. Canada factored into all remaining gold transactions for the quarter. In an all-Canadian deal, Alamos Gold and AuRico Gold engaged in a merger of equals to create a leading intermediate gold producer. The combined company could yield 375,000 to 425,000 oz. gold from producing mines in Ontario and in Mexico, with growth potential reaching 700,000 oz. The development portfolio includes a number of projects in North America and Turkey.

Barrick Gold has sold an asset in Australia to Australia-based Evolution Mining for US$550 million. The Cowal gold mine in New South Wales is a large-scale, long-life open-pit mine that produces 230,000 to 260,000 oz. per year. The all-in sustaining cost of production is US$850 to US$900 per oz. The acquisition gives Evolution a total of seven Australian operations. Evolution will fund the acquisition through an entitlement offer and credit facilities.

Barrick Gold has also agreed to sell a 50% interest in the Porgera gold mine in Papua New Guinea to launch a strategic partnership with Hong Kong-based Zijin Mining Group. Zijin will pay US$298 million for this investment. Barrick and Zijin have agreed to collaborate on future projects and investments, leveraging the strengths of each company. Barrick contributes strong operating experience and assets, while Zijin brings engineering and construction management capabilities and access to the Chinese market.

Coal

Patriot Coal, currently embroiled in its second Chapter 11 bankruptcy case, has agreed to sell its operating assets to Blackhawk Mining, a privately held company. The price of the sale is US$643 million. The companies are working to establish a formal purchase agreement, which will be subject to approval by the U.S. Bankruptcy Courts.

In another all-American coal deal, Westmoreland Resource Partners has agreed to acquire 100% of the outstanding equity interest in the Kemmerer mine, located in Wyoming, from Westmoreland Coal. The transaction is part of a “drop-down” strategy by Westmoreland, the oldest independent coal company in the U.S. Upon closing, Westmoreland Coal will receive US$135 million cash and US$95 million in Westmoreland Resource Partner shares.

Copper and lithium 

Copper was saved from inactivity this quarter by a single transaction. In an arrangement similar to Zijin Mining’s deal with Barrick Gold, Zijin will co-develop the Kamoa copper project in the Democratic Republic of the Congo with Ivanhoe Mines. To begin the strategic partnership, Zijin will acquire 49.5% of Ivanhoe’s interest in the project (95%) for US$412 million in cash. The DRC government is reviewing its options relating to its interest (5%) in the project, as well as the interest (49.5%) to be sold to Zijin Mining. With its high copper grade and large tonnage, Kamoa could become one of the world’s largest copper mining operations.

Finally, two Canadian lithium companies have agreed to combine their operations and assets. Western Lithium will “take over” Lithium Americas in an all-stock deal valued at US$64 million. Both see an advantage in combining their expertise, technology and two of the leading lithium development projects in the world, located in North America and South America.