Keith Phillips: M&A Prey Offer Compelling Buying Opportunities

Keith Phillips, a managing director and head of Cowen & Company's Mining Investment Banking Group, says strong companies with solid balance sheets are on the hunt for precious metals development projects or small producers trading at steep discounts. In this interview with The Gold Report, Phillips explains that these juniors represent unprecedented value for acquirers with longer-term goals, and he tracks some potential M&A prey.

The Gold Report: Canada's Financial Post reports that as of July 30, 2014, there have been 41 mining deals worth a combined CA$7.1 billion (CA$7.1B) in 2014. The total value of the deals reached CA$9.3B in 2013. Do you believe that total will be eclipsed before 2015? 

Keith Phillips: I expect so. Aggregate deal volumes are really driven by one or two large deals in a given year. This year, Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) bought Osisko Mining Corp. (OSK:TSX) for about $4B, which has obviously had an impact on the aggregate numbers. I wouldn't be surprised to see one or two more billion-dollar deals, and that would drive us above 2013 levels. Obviously, there is a lot of merger and acquisition (M&A) dialogue going on. I'm optimistic that activity will continue to be strong and, with any luck, be stronger than last year.

TGR: You said there is dialogue going on. What have you heard?

"NOVAGOLD's Donlin is one of the premier undeveloped gold assets in the world."

KP: We are in regular dialogue with our clients about their strategic objectives. For a period in the downturn in 2012 and 2013, companies were purely internally focused, driving operating and general and administrative costs to more sustainable levels. In the past several months—and we've seen this on the deal calendar—companies that have dealt with their internal issues are now trying to capitalize on lower target valuations to achieve longer-term goals. I suspect there will be some positive activity.

TGR: Are you suggesting that M&A activity in the mining space will be a value play?

KP: Yes. Value is always a core component of merger dialogue, but in today's market, buyers are increasingly focused on doing value-accretive deals. Institutional investors will punish buyers seen chasing growth for growth's sake. Explorers and developers are currently trading at steep discounts to the larger producers, so the value arbitrage for buyers is very attractive.

TGR: Will M&A be aided by rising metals prices, or will the impact be minimal?

KP: I don't see metals prices testing the highs from two or three years ago in the near-term, but I remain positive about the longer-run outlook. The thesis in M&A is not necessarily dependent on commodity prices improving. With commodity prices where they are, many situations are undervalued, and it's a compelling buying opportunity for those that are properly positioned.

TGR: As you mentioned, the biggest takeover deal so far this year was Yamana Gold and Agnico-Eagle Mines joining to buy Osisko. What are some things investors learned from that deal?

KP: A handful of things. The deal started with an aggressive approach by Goldcorp Inc. (G:TSX; GG:NYSE), which was a wakeup call for some people. Unsolicited takeover activity is considered more acceptable by aggressive boards than it used to be. That won't be the last time that a board will be aggressive if it sees an undervalued situation.

"Pretium Resources Inc.'sBrucejack is a spectacular asset."

Two strong gold producers, Yamana and Agnico, with strong balance sheets, were ready to react when a compelling situation was presented. They may have paid full value, but I see the deal as a win-win, and I think both buyers are stronger.

We don't often see joint bids in mining: Joint-venture activity is far more prevalent in the oil and gas business. I wouldn't expect a flurry of joint venture activity, but it was fascinating to see two competitors get together.

Assets of the quality of Osisko and the Canadian Malartic mine are scarce. It's a big asset in a politically friendly place that was derisked with a 15-year mine life. It was a unique opportunity for two companies to change their strategic profiles.

TGR: Do you expect more M&A between similar-size companies with complementary assets, be it cash or projects?

KP: There have been a series of "mergers of equals" (MOE) in recent years, where two management teams and boards come together to create a vehicle that's more substantial industrially, and also that's more compelling in the capital markets. All things being equal, institutional investors prefer bigger, more liquid companies, and those ultimately collect valuation premiums in the public markets. MOE activity will continue, but traditional "acquisitions" will always be more plentiful.

1 2 3 4
View single page >> |

Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.