Deals in the Canadian north

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This article originally published in the 2012 Fall issue of Canadian Mining Magazine. Posted with permission.

Deal making in the mining sector in northern Canada has recovered significantly since the global financial crisis. But with financing drying up as a result of the recent sovereign debt crisis in Europe and a slowdown in China’s economic growth, companies are still having to find new ways to get their projects off the ground. Other factors—such as miners looking to sell assets and cutting back on costs, and the availability of infrastructure—will also have an effect on the deals market. Issuing stock in today’s challenging capital markets can have an overly dilutive effect on the equity of mining companies. Instead, miners have found ways around that by looking for strategic partners abroad to help finance projects. This is especially true for smaller miners.

“Deal making in the mining sector in northern Canada has recovered significantly since the global financial crisis. But with financing drying up as a result of the recent sovereign debt crisis in Europe and a slowdown in China’s economic growth, companies are still having to find new ways to get their projects off the ground.”

Iron ore

Century Iron Mines Corporation, one of Canada’s largest holders of iron ore claims with interests in northern Quebec and Labrador, wanted to build a world-class iron ore business and to do that, it needed capital. The company required a significant amount of capital to get projects started, but it also needed access to additional capital during the life of those projects—with total capital expenditures to production estimated at more than $5 billion. It turned to Wuhan Iron and Steel (WISCO), a company it successfully raised funds from along with Min-Metals on its major financing in early 2011.

On top of WISCO’s initial investment, Century received an additional $120 million from WISCO on executing the joint venture agreements, and will support the debt financing of the projects. WISCO now holds a 25 per cent equity interest in Century, with an off-take arrangement for 40 per cent of production from three projects and rights to an additional 20 per cent.

This was somewhat similar to an agreement between New Millennium Iron Corp. and India’s Tata Steel, one of the largest steel producers in the world. New Millennium entered a pact where Tata would fund up to $300 million for the DSO Project in northern Quebec and Labrador and purchase the ore production for the entire life of the mine.

New Millennium and Tata have also jointly commenced a feasibility study on the potentially much larger Taconite Project, located near the DSO Project. Following a positive investment decision, Tata has agreed to ar range the financing for the capital expenditures for this project, which are estimated at just under $5 billion. Tata would have an 80 per cent stake in the project while New Millennium would hold 20 per cent.

Luxembourg-based ArcelorMittal and private equity player Nunavut Iron Ore bought Baffinland Iron Mines for $590 million in 2011. The two originally bid against one another before making a joint bid. Arcelor and its partner continue to work through all the approvals required before developing Baffinland’s Mary River Project, at an expected cost of $6 billion.

Diamonds

Diamonds may be forever but some of the global players are looking to get out of the business. BHP Billiton and Rio Tinto both announced in the past year that they were looking to sell off their diamond operations with principal operations in Canada’s far north. Both companies want to focus on their larger mining business assets, where they have larger market shares.

Harry Winston has a 40 per cent stake in the Diavik mine in the Northwest Territories, which is majority-owned by Rio Tinto. The press has recently reported that Harry Winston is interested in buying 
BHP’s nearby Ekati mine, although this has not been confirmed.

Infrastructure development

It seems like mining projects are rarely “conveniently” located! No matter how big the find is, having the right proximity to infrastructure can affect whether or not a project goes ahead. A number of provincial governments are looking at ways to support mining projects in the north by assisting with infrastructure development.

The Quebec government’s Plan Nord, launched in spring 2011, is expected to lead to more than $80 billion in investments over 25 years: $47 billion towards renewable energy and $33 billion for investments in the mining sector and public infrastructure such as roads, rail, ports and airports. But following the recent election of Quebec’s Parti Québécois government and Jean Charest’s resignation as leader of the Quebec Liberal Party, investors are wondering if the devel opment of northern Quebec will continue to be a priority for the new government.

The Ontario government recently reached a framework agreement with Cliffs Natural Resources for an investment in the province’s Ring of Fire, located in the James Bay Lowlands. But before the project can get underway, the necessary power transmission and transportation lines need to be completed.

British Columbia’s government has supported the Highway 37 Northwest Transmission Line, which is expected to be completed by 2014. The project is expected to open up the northwestern part of the province to development and spur the creation of about a dozen mines in the region.

It’s unclear how the deals market in northern Canada will unfold in the months and years ahead. With challenged capital markets, it is currently a buyer’s market. But buyers have to have deep pockets to fund capital expenditure requirements to bring projects on line and to address infrastructure development needs.

John Nyholt is a former Partner in PwC’s Transaction Services Group and the Mining Deals former Leader for Canada. Nochane Rousseau is a partner in Audit and Assurance Group and the Mining Industry Leader for the province of Quebec.

Perspective North: PwC’s vision for the sustainable and integrated development of Northern Quebec.