M&A in the Gold Mining Space

Why companies are looking at making more deals of smaller sizes...

BIGGER isn't always better. Companies are choosing to make multiple smaller deals as they keep the M&A thesis alive. In this interview with The Gold Report, Keith Phillips, head of Cowen and Company's Metals & Mining Investment Banking Group, tells investors what they can learn from those deals, the biggest problems facing the gold equities market and how they can take advantage of what he calls the strongest debt-financing markets in history.

The Gold Report: There have been some recent acquisitions for cash and shares in Mexico. What should investors pay attention to?

Keith Phillips: These deals are in an attractive jurisdiction in Mexico. From an investment banking perspective, seeing two different, quality companies competing for a junior mining asset in an environment where people thought the merger and acquisition (M&A) business was dead is encouraging. 

TGR: Are high-quality silver assets more likely to be targets than similarly valued gold assets in this market?

Keith Phillips: There are many targets in gold but very few buyers currently. Silver is a smaller business with fewer quality targets but a relatively large number of healthy buyers. 

TGR: Canada's National Bank Financial put out a note that it saw potential for assets in the Americas, notably Canada, the United States, Mexico, Chile, Brazil and Peru, and also in Australia. Which jurisdictions do you favor?

Keith Phillips: Each jurisdiction is unique. They are all evolving, but very few are moving in a favorable direction. The mining industry is an easy revenue target, and I can't think of many jurisdictions that are getting better for mining. We have seen permitting difficulties within Canada, in British Columbia, and there has been some pressure within Quebec on taxes and on the mining business. 

There's been pressure on taxes in Nevada, considered by many to be the best jurisdiction in the United States, and pressure on taxes in strong mining regions like Australia and Chile. The pressure tends to be from governments to either raise more money through taxes or to stop development all together for community reasons.

TGR: Will analysts have to raise their discount rates in some of these once relatively stable jurisdictions?

Keith Phillips: I suspect analysts will be cautious in adjusting their models until the reality has changed. I wouldn't expect meaningful changes to discount rates in places like Nevada. Having said that, in a place like British Columbia, some projects will get built and some won't, and it will all be based on the merit of each project and its impact on the environment. That's the reality. Similarly, some projects in California are getting built against all odds.

TGR: What would a discount rate be on, say, Ontario; Nevada; Sonora, Mexico; Ghana; and Peru?

Keith Phillips: I think everybody would use the same discount rate within Canada and Nevada and the better parts of Mexico. My guess is people would use a relatively low discount rate for Ghana, and, presumably, Peru would be higher.

TGR: National Bank Financial also shortlisted what it calls "high-quality acquisition candidates." 

Keith Phillips: The list of companies that have attractive projects that are available is long; the problem is very, very few buyers exist currently.

TGR: Do you see that changing in the gold space within the next 18 months to two years?

Keith Phillips: Inevitably, the bigger companies currently focused on internal operating challenges will come back. Nobody has a portfolio that can keep it going indefinitely; every gold company needs to review new opportunities.

TGR: So the M&A thesis in the gold space isn't dead—it's just a long thesis?

Keith Phillips: That's right. The most critical issue is this abundance of available assets and dearth of buyers. If you have a nice asset like Rainy River Resources in Ontario, the real list of buyers is somewhere between 5 and 20 names. And those names are looking at dozens and dozens on the same list of acquisition opportunities, and out of the 20, at least half are not interested in transacting right now. 

TGR: What about China? Are some of the big Chinese mining companies venturing into the small-cap space?

Keith Phillips: The Chinese are always on the buy list. As a group they have not been aggressive in precious metals in North America, but we all continue to call them and try to get them interested. I know the Chinese bought a company in Ecuador. It's a good time to be a buyer, whether you are a North American company or an international company.

TGR: Are you noticing any other trends in this and the M&A space?

Keith Phillips: The good news is the things that drive M&A activity are CEO confidence and capital markets and financing. CEO confidence on the M&A side is very low right now. But the financing market, especially debt-financing and private equity markets, is open and ready for business.

Debt-financing markets are the strongest they've been in the history of time—literally. If you are an acquirer, you have an opportunity to use debt to finance a company—operating companies, not project companies. Some folks are reluctant to use debt in the mining business, but I think you can use it prudently and attractively to deliver the real cost of capital.

TGR: Thanks for your insights.