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Gwen Preston – “Third Time’s A Charm – One More Comment on M&A”

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Gwen Preston – “Third Time’s A Charm – One More Comment on M&A”

 

 

 

 

 

I thought my M&A addendum last week was it; I thought I had nothing further to say about why I think the mining sector is about to see a wave of mergers and acquisitions. Then I saw an email from my colleague Dave Forest, editor of the International Speculator.

The email was titled This Critical Commodities Indicator Is Surging. He went through a similar argument to mine: that big resource firms position for growth when they see a strong market coming. They go out and buy – companies, projects – so that they are positioned to profit when commodity prices perform.

Importantly, they make these moves before metal prices really start to rise. As such, the data show an increase in M&A activity in the year or two before metals make their moves.

To demonstrate, Forest added up the value of M&A transactions and equity financings in mining yearly since 1990. He then charted those alongside the commodities index (CRB Index).

 

 

Thanks to Dave Forest and his team at Casey Research for putting the chart together. Check out Casey Research’s offerings here.

You can see that money flows started to increase in 2001 and 2002 before the CRB started rising. In fact, the CRB Index declined in those years yet deals and financings in mining increased. That quiet setup prefaced the best bull market the mining sector has ever seen.

Look at recent data. Money flows into mining increased notably last year. And 2019 is on track to generate a bigger number yet again. The mega Newmont-Goldcorp merger is part of that, but so too are things like CITIC Metals investing another $450 million in Ivanhoe Mines (TSX: IVN) to take its total stake to 29.9% and its total investment to $1 billion. Ivanhoe is advancing three world class projects, including the incredibly high grade Kamoa-Kakula copper project in the Democratic Repubic of Congo. The newest discovery at Kamoa-Kakula is Kamoa North, where drilling just pulled hits like 13% copper over 22 metres and 15.8% copper over 16.7 metres.

And while there haven’t been a huge number of deals lately, the ones we have seen span the commodities spectrum, from gold to copper (as above) and on to lithium. Last week Wesfarmers announced an all-cash takeover for Kidman Resources (ASX: KDR) valued at $776 million, which represents a 44% premium to KDR’s 90-day volume-weighted average share price. Wesfarmers is targeting Kidman’s 50% stake in the Mt Holland lithium project in Western Australia, a joint venture with lithium leader SQM and a rare, advanced, long-life, and high-grade lithium asset.

Posted May 14, 2019

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