Mining’s M&A revival

Concern over the momentum of China’s economic growth may have knocked some of the shine off previously booming base metals, such as copper and iron ore, despite latest rallies, and gold’s seemingly unstoppable rise towards $2,000 an ounce may have been checked – for a time – but this very state of affairs could provide the trigger for corporate manoeuvres.

AIM companies seen as attracting potential deals include London Mining, with iron ore projects in Sierra Leone, Colombia, Saudi Arabia, Greenland and China, Patagonia Gold, targeting annual production of 200,000 oz from Argentina in four years, Papua New Guinea gold hopeful Triple Plate Junction and Zanaga Iron Ore, with a four billion-tonne resource at 33.9 per cent iron ore in the Republic of Congo (not the troubled Democratic Republic of Congo). There are many others in the frame too, though doing deals in this sector is not always easy and there can be many a slip between cup and lip, especially where a big project partner has a stake and will not bid but can deter others from doing so or where the motive for a deal is cash shortage rather than anything positive.  
 
Mining shares, which even during the headiest phases of the resources boom often traded at heavy discounts to their established or estimated asset values, have tended to fall faster than metals in any commodity price setback. This discount reflects the mining risk and expense, though it can ignore the transformational possibilities of major discoveries for junior mining concerns. It also provides food for thought for larger groups anxious to secure future supplies and able to take a long-term view.  

Swiss-based mining conglomerate Xstrata, linked to recently floated commodities trader Glencore and with a controlling operator’s stake in Zanaga’s project, is understood to have some $10 billion (£6.6 billion) available for acquisitions over the next four to five years. Rio Tinto is among other major mining groups with abundant cash at their disposal.

How far such giants will seek to buy companies, rather than projects set up by those companies, remains to be seen, though for investors seeking an exit either could be acceptable, depending on the terms. And then there are the Chinese, single-mindedly trawling resource-rich regions of the world to fuel an economic transformation that may have its pace interrupted from time to time but is hardly going to go into reverse.

In the summer, South China’s Guangdong Rising Asset Management group snapped up AIM-quoted Caledon Resources for £313 million for the sake of its 1.2 billion-tonne Minyango coking and thermal coal deposit in Queensland, Australia, paying nearly 20 times the price at which Caledon shares had been languishing a year earlier.

Another Chinese concern, nickel producer Jinchuan Group, later paid around £800 million for South African miner Metorex, trumping a bid from Brazilian iron ore giant Vale in the process. In the spring, Guangdong Nuclear Power was talking about making a bid worth around £700 million for AIM counter Kalahari Minerals, which has a key indirect stake in Namibia’s Husab uranium project, with estimated potential reserves of nearly 329 million lbs of uranium oxide U3O8.

The fallout from Japan’s Fukushima nuclear disaster put paid to that bid. However, that doesn’t mean that another player from the fuel-hungry East or elsewhere will not be attracted in the future.

Opening shots
Companies in regions newly emerging as worthwhile mining provinces can also emerge as bid targets. Little Sheba Exploration, quoted on the PLUS market and operating three gold and base metal licences in northern Ethiopia’s Tigray region, recently accepted a shares-and-cash bid from Centamin Egypt, which operates the Sukari gold mine in Egypt, in a deal worth nearly three times Sheba’s pre-bid price.

Ironically, Centamin itself, steered by formidable Australian-Egyptian entrepreneur Josef Al-Raghy, has come in for bid speculation following its shares’ plunge from nearly £2 to below 70p on fears that the ‘Arab spring’ could somehow thwart its plans to take annual production from Sukari to 700,000 oz of gold by 2015. In such circumstances, however, agreeing an acceptable price could be difficult.

The field is littered with mining companies where bids or other deals have foundered, though sometimes this may represent a postponement rather than finally closing the door. A case in point could be AIM-quoted Triple Plate Junction, which recently raised £2 million at 4.5p to maintain participation in its key Papua New Guinea (PNG) projects.

Steered by former RAB Special Situations investment fund luminary Fraser McGee, the company saw off a bid at 4p last year from Newmont Mining of America, the world’s leading gold producer. Newmont ended with 26 per cent of Triple Plate, which has extricated itself from unsuccessful Zambian ploys initiated under its previous boss, Australian entrepreneur Ian Gowrie-Smith.

Newmont also shares a joint venture with Triple Plate at Morobe in PNG, next door to another company Harmony Gold’s £1.9 billion Wafi project, which holds an estimated 40 million oz of gold and 15 million tonnes of copper. The US company has committed itself to making a bid only with approval from the board of Triple Plate, whose other projects include Crater Mountain in PNG, with a possible 500,000 oz of gold, and Pu Sam Cap in Vietnam. That would imply, if Newmont did make a move, a price significantly north of today’s 4.15p.

The coal sector has provoked several bid attempts, which have as yet come to nothing. Mozambique-focused Beacon Hill Resources received an indicative ‘non-binding’ approach from an unnamed source at 16.25p a share in August, more than twice its then AIM price, but the talks foundered because the two parties could not agree on the value of Beacon Hill’s Minas Moatize mine in Tete province. Its shares have since fallen back to 9.75p.

Closer to home, Scottish coal producer ATH Resources, which has turned from losses to profits and expanded capacity in Dumfries and Galloway, opened talks with a potential bidder in July. But, after two months, the negotiations came to nothing and ATH’s AIM-quoted shares have fallen from a year’s high of 74p to 41.5p.

Where the iron might be hot
Directors have lately been buying shares in London Mining, which expects to make its first shipment of iron ore from Marampa in Sierra Leone this year and plans to increase production from 3.6 million tonnes to eight million tonnes a year.

Steered by Canadian management consultant and venture capitalist Graeme Hossie, the company, floated at 202p in 2009 and now trading at 309.75p after hitting 436.75p, hopes to begin production in Colombia this year and complete a bankable feasibility study in Queensland soon. With £42 million in the bank and unencumbered with alliances, some see it as it as a likely possible target.

Zanaga Iron Ore, chaired by South African Clifford Elphick (former Oppenheimer luminary and now also head of Gem Diamonds), is close to completing a ‘value engineering exercise’ on its Congo project. Its shares have halved to 97p since the beginning of the year, despite Xstrata’s exercising of its option to go over 50 per cent of the project and become operator of the project, and some see this as potentially prompting corporate attention.    

Golden prospects
One feature of many junior mining companies is that their shares are fairly tightly held, which can deter deals or, on the other hand, make it more likely that those deals that are done are done on favourable terms. This applies to Patagonia Gold, whose Cap Oeste gold and silver project in Argentina’s Santa Cruz province recently showed bonanza gold and high silver grades.

Richard Prickett and Bill Humphries, the duo who built up the Brancote mining group before selling it for £220 million, steer Patagonia, itself a Brancote spin-off, but the key to corporate moves lies with director Carlos Miguens, whose influential family has opened the important local doors. At 52.25p, punters hope for a Brancote re-run.

West Africa-focused Avocet Mining, which recently increased its estimated gold resource at Inata in Guinea by 59 per cent to 3.6 million oz and has set a production target of 245,000 oz of gold a year, has as its chairman veteran investment banker Russell Edey. Steered by Australian chief executive officer Brett Richards, the company has received £106 million from selling its former South East Asian assets and at 226p could be a deal candidate if gold does not lose its lustre altogether.

Observers believe that one day a corporate deal could come the way of Cluff Gold, now at a depressed 92.75p, chaired by veteran resources entrepreneur Algy Cluff. The West Africa-focused company, whose first-half production was hit by food price strikes in Burkina Faso and political unrest in Côte d’Ivoire, hopes to be producing 250,000 oz a year by 2013.

Elsewhere, potential candidates for attention could include Metminco, at 11.5p, seeking to develop the major Los Calatos copper and molybdenum prospect in Peru and Chile’s La Piedra copper prospect. British Virgin Islands-based Ncondezi Coal, at 93p, headed by Graham Mascall, former business development chief at mining giant BHP Billiton and now also chairman of fellow AIM counter Gemfields, might also be in line for a deal.

Deals often take much longer to achieve than to devise and external factors can suddenly change the arithmetic completely. But investors can expect some action on this front over the months ahead.