A mergers and acquisitions (M&A) agreement can make or break a mining company’s growth aspirations.
It is no secret that a decline in investor trust can be linked to companies engaging in highly priced M&A that offers little promise for real growth.
In Deloitte’s 2021 Tracking the Trends report, it highlights that mining companies are on a journey to win back investor trust.
One way of achieving this is by engaging in M&A deals that will almost certainly deliver additional value to shareholders.
Deloitte partner, corporate finance, Nicki Ivory, says there needs to be a particular purpose for joining two companies together.
“It shouldn’t be growth for the sake of growth, the kind we’ve seen historically, where there is a huge, inflated price or a big control premium,” Ivory says.
“M&A between big and small companies has historically struggled to provide value.”
What Ivory believes to be an ideal M&A deal is one that involves two companies of a comparable size. This will open up a different narrative on why the transaction takes place.
Such a strategic and deliberate use of M&A implies that an agreement is more of a merger than a takeover, which the deal between Northern Star Resources and Saracen Mineral Holdings represented when it was finalised earlier this year. Touted as a merger of equals by the measure of their relative share prices, production, reserves and resources, and management team, Ivory says the concept of paying a high premium should slip into the background.
“It is about forming something bigger and better than the individual units,” Ivory says.
“The term collaborative is a really good way to join together benefits for both the sector and shareholding groups. Benefits and synergies are being joined together without having to incur a massive premium.”
A different type of M&A agreement that the mining sector may now witness is a consolidation of different scales, Ivory says.
Companies might make an investment along their supply chain to, for example, secure volumes of critical minerals.
Ivory also pre-empts a disruptive kind of M&A, such as that portrayed by Wesfarmers’ interest in acquiring Lynas Rare Earths in 2019.
“You’ll see people you wouldn’t usually see investing in mining suddenly being in mining. Wesfarmers, for example, owns a chemicals business,” she says.
“But its proposal was about integrating the future-looking minerals (from Lynas) to Wesfarmers’ chemicals business.
“Tesla has also made comments that they wanted to get closer and closer to critical minerals to ensure it has certainty of supply down the line.”
If there’s one rule of thumb that mining companies need to go by to preserve shareholder trust before conducting M&A, it is to ask themselves whether they are pursuing a deal to build an empire.
To rebuild investor trust through M&A, Deloitte suggests to:
Protect value. “Miners should remain focused on preserving value, delivering consistent returns and extracting synergies for investors.”
Leverage scenarios in the M&A planning process. “Today’s altered landscape … (it) is a good moment in which to reimagine the future scenarios on which your planning currently depends. This may involve engaging a broader set of stakeholders to foresee alternative pathways that can inform your portfolio strategy and transactional focus in the years to come.”
Use M&A strategically. “The mining sector seems ripe for a range of disruptive moves, and as mining companies develop their strategies for the next three to five years, there is a real opportunity to consider a range of defensive and offensive moves.”