The Pick News

Equities specialist says M&A will boost mining growth - The Pick Online Magazine

Written by Staff Writer | Sep 4, 2019 11:07:18 AM

The global equities pool for mining has divided into a two-speed market where survival will now depend on getting bigger through acquisition as the dearth of major new mineral discoveries limits opportunities to add mineable ounces and reserves.

And the current sentiment for those companies with a capitalisation less than A$500 million, has been described as “one of the toughest markets every experienced”.

Chairing the opening session of the three day Africa Downunder mining conference in Perth, corporate advisory firm PCF Capital Principal, Liam Twigger, said nearly all gold, base metals, battery metals, mineral sands, diamonds, rare earths, iron and phosphate plays to name a few, were in the search for capital.

“These players are certainly in the search for more buying as they have entered the 2020 financial year against a backdrop of a global trade war and a two speed market,” Mr Twigger said.

“This has now split into those with plus $500 million market caps – that are on the radar of the passive funds and exchange traded funds (ETFs) – and those that aren’t,” he said.

“For those on the wrong side of $500 million, it is probably one of the toughest markets we have ever experienced. It is like being in a rain shadow with all the rain falling on one side of the mountain and very little on the other.

“This has created a big incentive to grow and get into the orbit of the passive funds and ETFs.

“However, I believe the ETF model of buying mining stocks simply on the back of some set of specific buying guidelines or algorithms, will ultimately be a flawed one.

“The inflow of funds to ETFs will ultimately push valuations over the top and eventually there will be a run for the exits – which will be brutal, but that may be some time off.

“In the meantime, bigger is better and it is creating a huge valuation gap between the haves and the have nots and this in turn is delivering excellent acquisition opportunities.”

The PCF principal pointed to the recent move by Randgold to merge with Barrick Gold in a nil premium $46 billion deal as the type of transaction now sending “a big signal” to the market.

“If the two largest gold companies in the world are merging to become of greater relevance to the investment community, what does that mean for everyone else?” Mr Twigger asked.

“And, of course, this transaction happened alongside Newmont’s big-ticket takeover of Goldcorp, so the top end of the world’s gold sector is now dominated by these two giants.

“Whilst equity markets might continue to be fragile and fickle, the next 12 months will see a renewed push into M&A, as size and total market cap are now the real value drivers.”

Other buy side indicators of this emerging trend he said, included Resolute Mining’s recent US$274 million bid for Toro Gold announced in July, and the current $167 million takeover of copper play, Mod Resources, by Sandfire Resources.

“In a market environment where there is little world-class greenfields success to report, growth-through-acquisition as miners look to buy their next generation of ounces or tonnes will likely continue to be the dominant theme,” Mr Twigger said.