M&A in mining -recent trends

Hallgarten & Company

Christopher Ecclestone

12 November 2009

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Key Considerations

• Mining boom over last seven years• Proliferation in quoted names in Toronto, Amex, AIM &

Australia• Broad pyramid – few large caps, many small & micro caps• Almost no debt in 90% of companies• No debt in explorer group

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The Pressure on Miners

• Falls were outsized in the mining sector – the financing crunch combined with a fall in metals prices

• Most sectors (excepting oil/gas) did not see such devastating price collapses

• Sector has its own specialist financiers (Canadian, Australian and Sth African banks) who have become more cautious

• Hedge funds had become important takers of placings • Hedge funds had also become important physical players• Key players went down…. (Oz Minerals)• Majors such as Lundin, Teck, Rio Tinto and Xstrata had

problems

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Drivers for M&A

• Some companies have sound projects but lack the finances to take them the last mile to production

• Some companies already in production have excess cashflow and are looking for targets in the (near) pre-production phase where they can make a meaningful difference in valuations

• Companies have excessive GS&A, even amongst producers. Mergers offer economies of scale

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Mitigating Factors

• Ego, ego, ego• Revival in metals prices gives some the delusion that they can

survive• Some managements would rather go for highly dilutive

financings than participate in a less dilutive merger in which they lose their sinecures

• Ambitious managements are loathe to break with the “non-aggression” approach favoured by Canadians

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Two ways: Capstone/Sherwood•In September 2008, Capstone, a successful gold/copper/silver miner In Mexico announced its merger with Sherwood, a near producer with its main asset in Canada.

•Production of 85 million pounds of copper in 2008, increasing to 110 million pounds in 2009, with significant by-products of gold, silver, lead and zinc, as previously disclosed. Low cost production with forecast total cash costs of under US$1.00 per pound of payable copper in 2008 and 2009, including all off-site costs and net of by-product credits,

•Consideration for the acquisition was paid in Capstone shares on the basis of 1.566 Capstone shares for every Sherwood share. This necessitated the issue of 84 million new Capstone shares, slightly more than doubling shares on issue.

•CS.to was around $2.40 per share when the announcement was made and copper was around $3 per lb. In the next two months CS plunged to as low as 69 cts. The company has recently recovered to around the deal price level. PCU, for instance is now trading around similar levels to that time.

•Silverstone which was majority-owned by Capstone has now been acquired by Silver Wheaton

•Capstone is now bulked up and cashed up and on the road looking for targets to acquire

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Two ways: CGH/Suramina

• Both companies in the Lundin family’s mining group• Not currently part of Lundin Mining though• Canadian Gold Hunter’s main prospect is in Mexico in Vera Cruz

state• Suramina is primarily assets in Argentina. This company was

created by the spin-off of exploration assets from Tenke at the time of its takeover by Lundin Mining

• Merger of equals as both parties are equally unadvanced!• Offer of 0.7541 shares of CGH for each Suramina share• Both companies had cash of around $6mn each at time deal

was announced • Creates a pan-Latin mining group (with CGH having a major

prospect also in Canada)• Talk that the exploration vehicle (Sanu Resources – SNU.v) in

Africa of the Lundin group might also be folded in the expanded structure

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Two ways: Silverstone/Silver Wheaton• Silverstone was the separately-quoted silver arm of the Capstone

grouping• Silverstone owns the rights to three silver streams from low-cost copper

mines: Minto in Canada, Cozamin in Mexico, and Neves Corvo in Portugal. These three operations will generate 4.5 million ounces of silver equivalent in 2009.

• Silver Wheaton is the silver VPP aggregator that was originally a spin-off from Wheaton River Mining (now merged into Goldcorp).

• Shareholders of Silverstone were offered 0.185 shares of Silver Wheaton for every share held

• The all stock deal was valued at $190 million• The acquisition increases Silver Wheaton’s total reserves and resources

to 1.4 billion ounces of silver and 405,000 ounces of gold. The company forecasts sales of 17 million to 19 million silver equivalent ounces this year,

• Silver Wheaton removes its only rival in the VPP business

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Three ways – the Good

• New Gold was created out of the highly creative three way merger of Metallica Resources, Peak Gold and New Gold in 2008

• In early June 2009 the company acquired Western Goldfields in an all-stock transaction

• The combined companies have reserves of around seven million ounces

• The 2009 proforma production forecast for the combined company is between 330,000 and 360,000 gold ounces, between 1.1 million and 1.3 million silver ounces, and between 13 million and 15 million pounds of copper. The 2009 total cash cost forecast is between $490 and $510 per ounce, net of by-product sales.

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Three ways – the Bad

• International Minerals (IMZ).. Not one of our favoured names because it is under the thumb of Hochschild (HOC.L) at its Pallancata mine

• We thought it was rather over-valued even before it…• …announced would acquire Ventura Gold (VGO.v) in an all stock

transaction• Ventura Gold’s main asset is the Immaculada property which it

owns (ugh!) with Hochschild • Then IMZ waded into the “marriage” between Solitario

Resources and Metallic Ventures Gold (MVG). IMZ overbid by offering $24mn in cash and 8 mn of its shares. Solitario dropped its offer saying it was fully priced. MVG owns the Ruby Hill royalty and gold properties in Nevada.

• While we still do not like any fraternising with Hochschild, IMZ is “sort of” doing the right thing in using its over valued stock to go snapping up bargains. More could follow this example.

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Three ways – the Ugly

• A rather disgraceful transaction was the merger between IMA Exploration, International Barytex and Kobex

• Essentially the three were cash-boxes, though IMA had a stake in a copper property in BC called the Island Copper project.

• IMA had around $18-20mn in cash• KBX had around $17mn in cash• IBX had around $6mn in cash.• The former was ostensibly a member of the Grosso group• The latter two were parts of the Shlanka group• Companies were strong-armed into a merger which strongly

undervalued the power of cash at the given moment• The malevolent force was a newsletter writer with key stakes

held by his omnipresent “family trusts” • The market doesn’t get to see the Wizard of Oz behind the

curtain

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Cat Fight: Fresnillo/MAG Silver

• Fresnillo is a major silver producer, spun out of Peñoles in 2008, with a separate listing in London

• MAG Silver is a cashed up (CDN$55mn) silver producer with operations in Mexico

• They are partners in the Juanicipio joint venture property, owned MAG (44%) and Fresnillo (56%). Indicated Resource are 83 million ounces of silver, 210,000 ounces of gold and 155 million pounds of lead and 269 million pounds of zinc. The Inferred Resources contain an additional 106 million ounces of silver, 356,000 ounces of gold and 301 million pounds of lead and 498 million pounds of zinc.

• Initial bid in December 2008 was unsolicited and has become rancorous over valuation issues. Fresnillo offered $4.54 cash per share of MAG. Fresnillo held already 19.8% of MAG when it launched the bid.The bid valued the company at around CDN$230mn

• Bid dropped on June 22

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Forced Seller: Teck

• Decided (July 2008) to acquire Fording Coal Trust for $13.6 bn in cash and stock. In order to finance the acquisition Teck entered into bridge and term financing facilities with a consortium of banks for a total of US$9.8 billion. Then the crisis hit…

• February 09 - sold its indirect interest in Sociedad Minera El Brocal to Buenaventura (BVN) for US$35 million cash.

• February 09 - Teck’s 50% cent interest in the Williams and David Bell mines for US$65 million sold to Barrick Gold.

• April 09 - the company sold 5.6 million shares of Kinross Gold acquired in January 2009 on the sale of Teck’s 60% interest in the Lobo Marte property in Chile. Teck received US$18 per share, or gross proceeds of approximately US$101 million. This brings Teck’s gross proceeds on the sale of Lobo Marte to approximately US$141 million.

• April 09 - its 90% held subsidiary Minera Carmen de Andacolla sold the NSR from the mine for $300mn to Royal Gold, effectively removing Teck’s requirement to fund start-up of the mine

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Failure: Capital Gold/Gammon Gold

• Capital Gold is a small gold producer in Mexico with around 80K ozs per annum, however low cash cost of around $290 per oz

• Gammon Gold is a sizeable producer with a relatively new mine that has had many teething problems. Its cash cost was an amazing $755 per oz. As a result the company was bleeding red ink in 2008

• Gammon however had a market cap of nearly $1bn while CapGold was closer to $100mn

• The offer in March 2009 consisted of 0.1028 Gammon Gold shares for each Capital Gold common share outstanding. At that time the offer represented a value for each Capital Gold share of US$0.76 (a premium of 29% to the av. weighted price in the previous ten days)

• Two big shareholders (who seemed to have been tipped off) approved the offer while minority shareholders felt like they were having their company sold out at bargain basement levels.

• Gammon is more of a silver producer than a gold producer.• Gammon’s price sank lowering the value of the deal for CapGold.• In a mysterious announcement Gammon pulled out of the deal not

citing any reason but the market has its own views on what took place.

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Taking Stakes

• Quadra Mining in Far West Minerals• IAMgold in Oromin• Hochschild in Lake Shore Gold• Nyrstar taking 19.9% stake in Ironbark (owner of zinc property

in Northern Greenland)• HudBay taking a stake (11%) in Polar Star Mining • HudBay taking a 14.9% stake in Aquila Resources• China Non-Ferrous blocked from taking a 51% stake in Lynas,

the Australian REE producer

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Property only transactions

• IAMgold buying the Essakane mine from Orezone• Nyrstar acquired the Coricancha mine in Peru from Gold Hawk• Nysrtar acquired the Mid-Tennessee Mine in the bankruptcy

courts for $10mn• Nyrstar acquired the East-Tennesee zinc mine from Glencore

for around $126mn

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Other Transactions

• Hochschild takeover of Southwestern Resources• Failed bid by HudBay to takeover Lundin Mining• Eldorado Gold takeover at Sinogold• Fortuna takeover of Continuum Resources• Failed bid by Linear Gold takeover of Central Sun Mining• Travails of Minmetals in buying Oz Minerals• B2Gold bought Central Sun• Excellon Resources takeover of Silver Eagle • Inmet takeover of Petaquilla Copper• Mercator Minerals in Stingray Copper• Failed “offer” by Xstrata for Anglo-American • Randgold (and Anglogold) bidding for Moto Goldmines (thus

blocking Red Back Mining)• ZCI took over African Copper PLC

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Precipitating Action

• Trading – this opportunity is now largely past on the short side

• Precipitating M&A transactions via stake-building and cajoling of management

• Taking part in restructurings

• Creative financings – NSRs, asset sales, predatory accumulation of positions from distressed portfolios

• Work with managements to improve investor perceptions and thereby enhance share prices