M&A deals in 2010 to outnumber 2009, says Fasken Martineau (March 22, 2010)

Last year, Fasken Martineau advised on 78 M&A deals valued at about $8 billion and the head of the law firm’s global mining group says he expects that number will grow in 2010.

“There is a sense that there should be quite a bit of M&A activity this year,” John S.M. Turner, head of Fasken Martineau’s global mining group told The Northern Miner in an interview. “There should be quite a slew of deals over the next couple of months.”

Coming out of the financial crisis last year, the priority of most firms was to firm up their balance sheets and the focus was on raising capital and equity and selling gold and silver streams, Turner says. Today balance sheets are stronger, and in the intermediate sector in particular, there is a feeling that if you stand still you’re going to be eaten.

“There’s going to be some sorting out of which intermediate companies survive and grow and which ones get taken out,” he argues.

This will certainly play out in the gold sector, where there are a lot of companies producing gold in the 100,000 -400,000 oz. range. Some of the M&A will be driven by a desire to lower costs.

Companies are also looking at various regions and saying there are ‘x’ number of new gold producers in Africa and ‘x’ number in South America, so there could be consolidation based in particular regions, Turner adds.

One question will be whether some of the majors will be looking at some of the intermediate companies as well in order to increase resources and reserves.

“Some of the major companies know they need to replenish resources; most have several projects in the pipeline, so the balance will be whether they like what they have or whether they want to give priority to new projects that catch their eye,” he explains.

The Chinese may also start looking at more intermediate-sized companies. Over the last year, Chinese companies have done a number of junior acquisitions of companies listed in North America with projects in South America and Africa.

“It will be interesting to see whether that trend continues and to see if they start looking a little higher up the food chain at companies that are in production or near production,” Turner says. “They were taking out companies of a few hundred million dollars of market capitalization and my suspicion is that they may start looking at companies of $1-2 billion market cap with mines already in production.”

There will also be involvement in the intermediate mining sector from state-owned enterprises seeking strategic investments, he argues. Last year, a Korean state-owned company purchased just under 20% of Denison Mines, for instance. And a consortium of Japanese companies acquired just under a 20% interest in Uranium One. Later in the year, Russia’s ARMZ purchased just under 20% of Uranium One as well.

“It depends on what minerals various governments see as strategic,” Turner says. “Certainly in uranium a number of these countries have large reactor industries and need uranium to make sure over the medium-to long-term that they have enough supply for their reactors.”

Turner adds that it will be interesting to see whether coal is seen as strategic. “It’s certainly possible,” he says, “and it’s possible with other metals too such as rare earths, where people start to get concerned with long-term supply.”