Madsen headframe, mill tailings, facility and mine village at Pure Gold Mining's Madsen gold project at Red Lake in northwest Ontario.Handout
The country's largest mining companies have lost their way, according to geologist Mark O'Dea.
Heavy debt loads, a hangover from the last commodity boom, along with cost overruns on megaprojects and five years of weak metals prices have combined to all but paralyze the industry's major players, in Mr. O'Dea's view. He sees the sector's collective state of stupor as fatally short-sighted; big-name companies are chewing through reserves and failing to replace them by acquiring new mines.
This is an oft-heard rant in mining circles. It's a call to action for Mr. O'Dea. Already a proven midwife to mining projects, the British-born and Newfoundland-raised mining executive has built a merchant bank, Vancouver-based Oxygen Capital Corp., that's taking advantage of the industry's collective lack of interest in junior mining plays by incubating a series of startups.
Unlike traditional mining promoters, who find a property with the goal of flipping it to a larger company, Mr. O'Dea and his colleagues at Oxygen have the resources needed to take a mine from concept to production. The team has capital and credibility after selling several promising plays to senior miners. The biggest win came in 2011: Mr. O'Dea was co-founder and chief executive officer of Fronteer Gold Inc. and sold it to Newmont Mining Corp. for $2.3-billion.
"We describe Oxygen as an incubator," Mr. O'Dea said. "We try to add value at companies we back through all stages, from exploration to development and right into production."
Oxygen's stable of junior companies currently includes Pure Gold Mining Inc., which has a $100-million market capitalization and this week announced a 48-per-cent increase in the gold resources at a property near Red Lake, Ont., and Discovery Metals Corp., which owns a silver and zinc project in Mexico and raised $12-million last month in the first stage of a private placement that's still under way.
The mix of metals in companies backed by Oxygen reflects the company's history of successfully working with miners in several sectors, including uranium and nickel, along with precious metals. Mr. O'Dea said he simply looks for promising projects, and "while I believe in gold, I'm not a gold bug."
While Mr. O'Dea is downbeat on the current state of affairs in mining, he sees the sector in the early stages of a comeback. While Oxygen is glad to back exploration plays with patience as they become producing mines, companies in its stable are also potential takeover targets, and Mr. O'Dea expects we're about to see a new round of deal-making reshape the mining sector.
The latest merger and acquisition (M&A) cycle may have begun in recent months, according to Mr. O'Dea, as major companies have started to wake up to the fact that they are running down reserves, and return to snapping up junior miners.
"There's been very little courage in the sector … some of the biggest mining companies lost the premium valuations they enjoyed because of their diminished growth prospects," Mr. O'Dea said. Over the past year, several mid-tier miners staged successful takeovers, and Oxygen's CEO said: "It's now okay to do M&A."
Statistics support Mr. O'Dea's view that deal-making is picking up in the mining sector, and that small companies are once again targets. There were 123 M&A deals announced by Canadian base-metal miners in the first three months of 2017, a 66-per-cent year-over-year increase, according to data compiled by investment bank Crosbie & Co. Precious-metal companies announced 93 transactions, an 82-per-cent jump from the previous year. The pace of activity stayed at roughly the same level in the second quarter this year.
While the number of mining deals picked up, Crosbie managing director Ian Macdonell said the value of transactions in the sector remains "modest" at approximately $2.5-billion a quarter; or an average transaction size of around $100-million. By comparison, $14-billion of M&A activity reshaped Canada's energy sector in the second quarter of 2017.
There are reasons to be skeptical about the prospects for mining M&A: any slowdown in the Asian and North American economies would knock back commodity prices that are only starting to recover from cyclical lows, and diminish interest in deals. And most large mining companies have got religion on paying down debt, and are unlikely to start borrowing in order to fund acquisitions until they see signs of a prolonged commodity boom.
But if Mr. O'Dea has it right, and a new round of M&A activity has begun in mining, we're going to see a fascinating dynamic play out.
The last generation of industry leaders, such as Goldcorp and Barrick Gold in precious metals and Teck Resources in base metals, will be forced to match wits with a new generation of intermediate miners that aspire to the premium valuation that comes with being a senior producer. All of these companies will be targeting promising juniors.
If the mining sector has indeed lost its way in recent years, takeovers are a proven way to get back on track.
Andrew Willis