CIARAN RYAN: I’m talking to Reginald Demana and Richard Damant from Nedbank Corporate and Investment Banking. Reginald is a mining and resources specialist with 14 years of investment banking experience and Richard works in the mining advisory team and has worked on a number of mining M&A and equity capital raising transactions during his time at Nedbank. Good morning to both of you.
Can we kick off by reviewing the level of mergers and acquisitions activity in mining over the last year, and can you tell us what were some of the bigger deals and why they were important?
REGINALD DEMANA: What we have noted is that 2018 and 2017 were quite slow in terms of M&A activity in mining. However, some of the big notable transactions would be Harmony Gold’s acquisition of some assets from AngloGold – Moab Khotsong, down in the Free State – so that was quite a sizeable transaction and it certainly helped Harmony grow in scale. Secondly, some of the notable transactions would be Sibanye’s takeover of Lonmin and that transaction is still going through; they need to approve [it] but it’s a big one in the platinum space.
Again, in the gold sector I think we certainly can’t ignore Barrick and Randgold, as well as, now in the last couple of weeks, the Newmont and Goldcorp transactions. Why are these transactions important? One is that I think we are returning to the theme [that] bigger is better in mining corporates, but it is different now. You will recall that in the early 2000s there were a lot of acquisitions done for cash, as well as big new greenfields projects introduced into the market, and that obviously triggered quite a lot of oversupply on the supply side – but also, money that was spent during those times was never really returned to shareholders. Shareholders didn’t see a return. This time around, however, transactions have been structured differently with share-for-share acquisitions.
We are returning to bigger deals, consolidation using shares, and that is a new thing we are noting.
The other [reason] why some of these big deals are important is that out of the mergers there could be some non-core assets or sub-economic assets that are then sold off by those new, bigger companies and you are likely to see a string of mid-tier producers emerging out of those assets.
End of an era for gold
CIARAN RYAN: All right, good, so you mentioned Newmont and Barrick as being involved in some of these mega deals and I guess the whole purpose of that is they’re trying to drive down their costs and give them longer lives. AngloGold Ashanti looks like it has been left behind. However, in South Africa it’s got the deepest mine in the form of Mponeng – [but] it’s not been able to get its costs down significantly, so there has been talk that it might have to sell Mponeng and exit South Africa altogether. One of your colleagues at Nedcor Securities, Leon Esterhuizen, has been quoted as saying that AngloGold may have to offer a steep discount to offload Mponeng. I know we are speculating here, but what do you think the South African gold mining sector will look like in five years?
REGINALD DEMANA: I think it is very likely that in the next couple of years we are looking at a gold sector that does not have AngloGold, as well as Gold Fields, and maybe anchored by Harmony Gold and some of the juniors there, Pan African, as well as DRD Gold. You will note that while Sibanye is quite a big gold producer currently, it has also moved into platinum. So I think from a pure gold play point of view you are only likely to see Harmony, Pan African and DRD Gold. Gone are the days where our stock market, as well as the economy, was heavily dominated by gold. It is the end of an era that we are seeing, quite frankly.
CIARAN RYAN: You’ve mentioned Sibanye Gold being involved in the takeover of platinum miner, Lonmin. Gold Fields is the only South African mine that hasn’t made a profit in a year. Are we likely to see more M&A activity in South Africa as a potential way out for struggling mines?
REGINALD DEMANA: I think there is certainly a case to be made that in the platinum space the ownership is way too fragmented. We think consolidation is important, particularly in the platinum space, [since] it will give bigger companies, which will now have a couple of assets, the opportunity to close down unprofitable ounces – versus the current situation where companies have one or two assets and they are unable to make the tough decision to close down unprofitable ounces, which does not help or support the platinum price going forward.
CIARAN RYAN: We talked about consolidation but what are some of the other drivers of M&A activity in mining?
REGINALD DEMANA: Certainly in the South African environment you cannot ignore black economic empowerment transactions, as they remain one of the key drivers of transactions. There’s also some exit that is taking place. I think some of the bigger mining companies that now have one or two assets left in the country – it makes a lot of sense for them to exit completely, instead of maintaining high fixed-cost overheads by retaining the assets in the country. So I think there is some exit taking place. There are BEE transactions that continue to drive this, and consolidation as well.
CIARAN RYAN: So there are some quality assets coming up for sale, driven by companies looking to divest from South Africa such as Moab Khotsong and South32 coal assets – this does start to look like a rush for the exit door. What’s your comment on that?
REGINALD DEMANA: We won’t necessarily say a rush for the exit. We think that for every exit, as long as there’s a new entrant and the assets are in demand and there are buyers that are ready to take up those assets, it can only be positive. When we will be concerned is when companies start exiting and leaving assets under care and maintenance or closing those assets altogether. But certainly – where there’s an exit, but there is definitely demand for those assets, we won’t be too concerned about it. After all we are corporate financiers, so we make money when somebody exits and we make money when others buy in.
Factors driving capital raising
CIARAN RYAN: Sure, what are some of the factors driving capital raising for mining going forward?
RICHARD DAMANT: There have been quite a few headwinds in terms of raising capital for mining, particularly for raising equity capital in South Africa. Certainly regulatory uncertainty – last year companies were taking a wait-and-see approach with the Mining Charter and even now that the Mining Charter has been released, we’re still waiting for the implementation guidance.
On the theme of regulatory uncertainty there have often been sudden changes to tax laws, for example [in] Tanzania, or significant changes to mining codes, despite standstill clauses, in countries like the DRC. So this really has created concern among equity investors, and that, coupled with ‘risk off’ investor sentiment with South African fund managers that have been exposed to large losses such as African Bank, Steinhoff and MTN – it certainly created a risk aversion.
A number of the fund managers we speak to are more focused on avoiding large losses, than looking for 10 baggers such as new and early stage exploration projects.
Despite all of these headwinds and challenges that we face for raising equity capital for mining companies, we have seen a number of companies that are able to successfully raise both equity and debt funding for early stage development projects. I think one of the key drivers for this is strong management teams with a proven track record of developing projects, where they are able to show progress at each stage of the development life cycle.
Good examples of this are Orion Minerals, which successfully raised capital for their Prieska zinc-copper project in the Northern Cape, as well as Alphamin Resources, which has raised the full amount of funding they required to develop the Bisie Tin Project in the DRC. So certainly we have seen some successes in the space.
CIARAN RYAN: Can we talk briefly about some of the commodities that are showing signs of life in mining, such as manganese, tin and vanadium – are there others, and why are these looking promising?
RICHARD DAMANT: Yes, vanadium is one that is particularly exciting at the moment. I think at one point we saw the price up over 300% on the back of robust industrial demands, as well as the demand from the use in energy storage through vanadium redox batteries. This, combined with supply side constraints and limited prospects for new supply, which resulted in a sharp rally in the price. So, similarly to manganese, the increase in these prices has led to renewed profitability in these sectors and renewed interest from an M&A perspective.
However, it is quite challenging in this environment to do M&A transactions in this space because valuation becomes a big challenge, where acquirers are raising concerns about valuations based on current vanadium or manganese prices, and to be able to justify valuations based on these prices can certainly be quite challenging.
Then another commodity where we have seen a lot of interest is copper; there’s a lot of exploration activity taking place around copper. Orion, I have already mentioned, is exploring in the Northern Cape. Another example is MOD Resources with their project in Botswana – they recently announced that they had received commitments for US$10 million through a private placement, as well as $5 million for a fully underwritten rights offer. So definitely these commodities that have strong fundamentals are creating opportunities for M&A and exploration capital.
CIARAN RYAN: Finally, when it comes to raising capital for M&A, is there still interest in South Africa as a mining investment destination? What about the future and what are some of the trends and focus shifts that we should look out for?
REGINALD DEMANA: I think there is still appetite. The overall conclusion that we can come to, having looked at some of the precedent capital raising, you look at how Harmony Gold managed to place $100 million worth of shares some time last year to allow them to finalise the acquisition of those AngloGold assets. Sibanye-Stillwater raised quite a lot of money, debt and equity, to complete the acquisition of Stillwater.
You also have Royal Bafokeng Platinum, which did raise some cash to complete the acquisition of the Maseve platinum concentrator. So I think what we have observed over time is that, indeed, money will always follow good assets. So when good assets come to the market you will not find a shortage of debt and/or equity capital that will be available to support such acquisitions.
We have certainly seen that with Harmony buying AngloGold assets – there was money available for that. Sibanye-Stillwater raised several billion for the acquisition of Stillwater in Canada. Royal Bafokeng placed some shares in support of the acquisition of Maseve Platinum. The list goes on really; there is no shortage of good assets. What is still a problem from a South African point of view is support for junior exploration companies. Most of that money is unfortunately still coming from Canadians and Australians, that’s where it is still easy to raise exploration capital and we think that trend is still to continue.
CIARAN RYAN: We’re going to leave it there. That was Reginald Demana and Richard Damant from Nedbank Corporate and Investment Banking. Thank you both very much, gentlemen.
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