Shifting ground

Mining industry taking renewed look at mergers and acquisitions as companies prepare for a new wave of opportunities

Photo courtesy of Tugliq Energy and Raglan Mine, a Glencore Company

In this edition of our Canadian Mine series, we’ve analyzed the performance of the TSX-listed issuers in the mining industry for the 12-month period ended December 31, 2018, with a focus on the top 25 listings by market capitalization.

Mining industry reacting to a shifting investment climate

The mega deal returned to Canada’s mining industry in 2018 after a lengthy hiatus, as large companies decided to take advantage of their improved balance sheets to begin replenishing reserves and optimizing their portfolios through mergers and acquisitions.

The previously announced marriage of Potash Corp. of Saskatchewan Inc. and Agrium Inc. to create Nutrien Ltd. marked the beginning of this cycle, followed a year later by Barrick Gold Corp.’s purchase of Randgold Resources Ltd.

The trend continued into the beginning of 2019 with highly publicized deals involving Goldcorp Inc. and Newmont Mining Corp., which then also found itself the target of a takeover bid by Barrick Gold. In the end, Newmont and Barrick Gold reached an agreement to form a joint venture related to the two companies’ assets in Nevada. And in April 2019, Lundin Mining Corp. announced a $1-billion deal to acquire a Brazilian copper and gold mine from Yamana Gold Inc.

 

The heightened level of deal activities, most of which have been in the gold sector, may well spark further moves among intermediate players seeking to grow into multi-project companies.

A new phase of industry consolidation could pave the way for more exploration and mine development and boost investor interest and activity, but companies should expect transactions to face intense market scrutiny given disappointing results from some mergers in the past.

"Last year marked a turning point for the mining industry, and 2019 brings even more possibilities for companies to position themselves for the next stage of growth. While recent mergers were a sign of a wave of consolidation that will help companies better compete for capital, we can expect even more M&A activity in the near future. That creates a cascading effect of further deals as companies sell off non-core assets, which brings new opportunities for management teams to build the next big Canadian mining company."

Dean Braunsteiner, National Mining Leader, PwC Canada

TSX-listed miners: Recovery underway from late 2018 decline

Mining stocks moved largely in line with the broader TSX market in 2018. The aggregate valuation of all mining companies on the TSX declined 12.7% last year, to $253.9 billion, compared with a 10.8% decrease in the market capitalization of the entire TSX market.

Most mining issuers began to rebound in step with a broader market comeback and had recovered 2018 losses by the first quarter of 2019. The sector remained the third largest, comprising 10% of the TSX’s total value, behind only financial services (29%) and industrial products and services (12%).

Performance was hampered by a downward shift in most commodity prices, following a strong showing in 2017. Spot prices for base and precious metals decreased across the board. Zinc tumbled 25%, copper 17% and nickel 6%. Even cobalt and lithium prices, which have registered strong gains over the past five years, suffered double-digit declines in 2018.

Prices for several base metals, including copper, zinc and nickel, have shown significant gains in the first few months of 2019.

Several TSX-listed mining companies were insulated from some of the effects of weaker prices for metals in 2018 thanks to their high exposure to gold, which remained relatively stable. Bullion prices ended the year down only 2%.

The top 25: Earnings stable for mining industry’s big players

Nutrien overshadowed other members of the top 25 during its first year of operation as the merged entity of Potash Corp. of Saskatchewan and Agrium. With a market capitalization of approximately $40 billion, it was almost twice as large as No. 2-ranked Barrick Gold ($21.5 billion) and more than double the valuation of No. 3-positioned Franco-Nevada Corp. ($17.0 billion) as of Dec. 31, 2018.

Barrick Gold has since narrowed the gap with Nutrien as a result of the gold giant’s merger with Randgold Resources in January 2019. The combined company had a valuation of $32.1 billion as of March 31, 2019, while Nutrien had also risen to about $42.6 billion.

Gold remained the most dominant commodity among the top 25, with 21 companies having exposure to the precious metal, up from 19 a year earlier. Fourteen companies have exposure to copper and four to nickel. As for zinc and silver, nine companies have exposure to those metals.

Kirkland Lake Gold Ltd. and OceanaGold Corp. proved to be the strongest performers in 2018 in terms of valuations. Their market capitalizations surged by 87.3% and 55%, respectively.


Mergers and acquisitions back on the mining industry’s agenda

The dominant theme to emerge from 2018 was the excitement and possibilities created by the return of big deals activity to the mining industry, which injected much-needed liquidity into the sector after years of growing fragmentation, especially among gold companies.

Competition for investment dollars has grown more intense across the entire mining industry in recent years, as investors shift funds to what they consider to be less risky royalty and streaming companies and ETFs that hold physical inventories of gold and other commodities. A significant amount of risk capital has also gone into the emerging cannabis sector.

The January 2018 merger of Potash Corp. of Saskatchewan and Agrium to create Nutrien signalled a new phase in the latest deal cycle. But the greatest opportunity for mergers and acquisitions lies in the gold sector, where the largest mining companies command a much smaller portion of the market than their counterparts in the base metals field.

The joint-venture deal between Barrick Gold and Newmont Mining, which had only recently announced its plans to merge with Goldcorp, was a notable development that other large gold mining companies could look to emulate as they examine their own options for maximizing value and achieving scale.

Large deals like the Barrick-Randgold combination will likely lead to another series of transactions as the newly merged entities move to sell off non-core assets. Mid-sized miners will be looking to purchase some of those assets and may merge or form joint ventures in an effort to become more competitive and attractive to larger investors.

Refocusing the mining industry’s approach to digital transformation

While joint ventures, mergers and acquisitions are one way the mining industry in Canada is responding to commodity and business pressures, mining companies also have a significant opportunity to improve the performance of their operations by refocusing their approach to digital transformation.

The mining industry has already been making many efforts to explore the promise of digital technologies. In January 2019, for example, a number of TSX-listed mining companies—Goldcorp, Wheaton Precious Metals Corp. and Kutcho Copper Corp.—announced a collaboration to build a new mining supply chain solution based on IBM Corp.’s blockchain platform.

The industry’s efforts to explore new technologies are promising, but to truly transform and create value, mining companies need to focus on more holistic change across their management systems and functions.

The keys to holistic transformation:

Data and information

Mining companies face a number of challenges when it comes to making holistic changes, particularly due to the tendency of the different areas of the business—such as maintenance, production and support functions like human resources—to operate independently as silos. Given that mining is essentially a physical flow of material, it’s important to understand the main drivers of variability and better coordinate and integrate all business functions to make sure the whole system performs to its true capability.

Data and information are important foundations for increasing collaboration among the different functions. If bouts of absenteeism or worker shortages are hurting production and efficiency, for example, increased sharing of data and collaboration between the human resources department and the affected production and maintenance groups can help address the issue in a more effective way.

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Culture, people and processes

The good news for mining companies is that because they have many engineers in their ranks, there’s no shortage of technical skills. But the challenge is that the more tangible ingredients, such as the technology itself, are only part of the solution, which is why some of the progress made by the industry so far has produced modest results.

Truly achieving the potential of digital transformation means looking at some of the less tangible elements of the operations—namely culture, people and business processes—to change the organization in a systemic and sustainable way.

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Agile ways of working

Agile ways of working are an important part of addressing those people, process and cultural elements. Mining companies have long used more traditional project management approaches involving separate and extended stages of concept, design, testing and implementation when it comes to transforming the business.

But to get the most out of their digital investments, they would do better to focus on short bursts of activity by cross-functional teams that deliver incremental value regularly. The approach creates momentum through early wins and helps to shift organizational culture as change becomes a constant.

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Photo courtesy of Lundin Mining Corp.

The mining industry’s prospects in 2019 and beyond

What’s the outlook for Canadian mining companies?

Learn more

Contact us

Dean Braunsteiner

National Mining Leader, PwC Canada

Tel: +1 416 869 8713

Liam Fitzgerald

Competency, Innovation & Legal Tax Leader, PwC Canada

Tel: +1 416 869 2601

Mark Patterson

BC Mining Leader, PwC Canada

Tel: +1 604 806 7160

Herman Lombard

Senior Director, Consulting, Mining, PwC Canada

Tel: +1 416 687 8864

Maxime Guilbault

Partner and Mining Leader for Quebec, PwC Canada

Tel: +1 514 205 5448

Lauren Bermack

Vice President, Consulting & Deals, PwC Canada

Tel: +1 416 815 5323

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