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How to spot M&A before it happens

mining M&A

Mining and exploration companies typically have telltale attributes that show they’re amenable to mergers and acquisitions (M&A).

This idea was unpacked at the Mines and Money conference in Melbourne last week, where a panel discussion explored M&A’s impact on investment, and what makes a strong M&A candidate.

The panel discussion was positioned from the advisory end, with partners and directors from the likes of Greenhill, White & Case and Pacific Road Capital speaking about the deals that come across their table and what advice they give companies when they’re involved in a transaction.

Matt Fifield – managing partner at Pacific Road Capital – asks himself two questions when identifying an M&A candidate.

“The best way to spot an M&A target, is to think about who’s doing the acquiring and what do they want,” he said during the panel discussion.

“There’s a strategic reason people undertake M&A. When you see someone (a company) that has a portfolio with a lot of jurisdictional risk, and that jurisdictional risk is being brought up, it makes sense that they will grow their project portfolio to have more Australia, Canada or US and less Peru, Argentina and Chile.”

When Campbell Cooper – managing director at Greenhill – considers potential M&A, he goes back to the basics.

“Long-life, low-cost orebodies is usually a good place to start,” he said. “There’s a lot of explorers here (at the conference) and junior companies, and you can tell pretty early on in the evolution of a mining asset, what it looks like.

“Is it going to be a big, scalable asset? Inevitably the big, scalable assets in quality jurisdictions, if you look through history, get picked off by someone at some point. So that’s always a good place to start.

“There’s also specific situations where there might be a stranded asset where there’s a logical acquirer next door.”

Cooper said people often underestimate how difficult it can be for a single-asset company to bring a project all the way from discovery and into production – another theme that can influence M&A.

“Some people do it (take a project from discovery to production),” he said. “But there’s a myriad of challenges there, whether it be finding the capital … (or) finding the people to help you build the project – that inevitably makes management teams and major shareholders of these companies more amenable to M&A and engaging with a larger company on M&A.”

When Westgold Resources launched its takeover bid for Musgrave Minerals in early June, it highlighted Musgrave’s “ambitious” plan to construct a new processing plant within trucking distance of two larger processing plants in the Murchison region of WA.

Musgrave is developing its Cue and Mt Magnet South gold projects in WA – located adjacent to each other – and holds some exploration tenure in South Australia.

“Their proposed development path costing $121 million in start-up capital at a PFS (pre-feasibility study) level of certainty materially escalates risk to Musgrave shareholders, as it exposes them to all the uncertainties, challenges and dilution associated with project development,” Westgold managing director Wayne Bramwell said.

Whether Musgrave has the capacity to go it alone or not, Bramwell’s point validates Cooper’s views that many junior companies often require the support of a larger company to get a development project into production.

This is where M&A might enter the equation.

The Mines and Money panellists also noted how the ‘single asset’ theme is also pertinent to the development of critical minerals projects, considering these assets can be more difficult to develop depending on the commodity.

“We worked in 2017–2018 for Kidman Resources, they were in a joint venture with SQM (and) they ultimately got acquired by Wesfarmers,” Cooper said.

“They did offtake arrangements with Tesla, amongst others, and it was really important to Tesla to have a really credible party like Wesfarmers developing that asset. Not to say that the Kidman team couldn’t have done it, but clearly, for a junior mining company, it was going to be much more challenging to develop a really large-scale asset.

“So the point you made around another driver of M&A, particularly in battery minerals, is going to be the supply chain wanting to see the right people owning and building these mines.

“At the end of the day, for the likes of Ford, Tesla and GM, they don’t want to be in the business of mining, they just want to have the security of supply.”

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