Pwc Global Mining Deals 2012 Review / 2013 Outlook
www.pwc.com/ca/miningdealsDown, but not outGlobal Mining Deals2012 Review2013 OutlookMarch 2013
B Global Mining DealsAuthors:Amy Hogan+1 416 941 email@example.comStephen Mullowney+1 416 687 firstname.lastname@example.orgJohn Nyholt+1 416 815 email@example.comResearch team:Jodi Cecchi, Peter Cheetham, Sarmad Gilani, Madison Pearlstein* A special thanks to Brenda Bouw, PR Associates
PwC 1ContentsIntroduction 2Commodity prices 4Volume and values 6Top 20 Global Mining Deals in 2012 8Deal activity by resource 10Deal activity by geography 142013 Outlook 16Interview with Eric Edwards, President & CEO, Lupaka Gold 18Race for growth 21Interview with Clive Johnson, CEO, B2Gold Corp. 24Two strategies emerge with Chinese investors 26New foreign investment rules in Canada pave way for more certain M&A future 28Methodology 30Mining Excellence@PwC 31Contacts 32
2 Global Mining DealsIt was far from the most active year formining mergers and acquisitions (M&A),but 2012 had its share of excitingtransactions and trends.The obvious deal-of-the-year was theannounced $54 billion blockbustermerger between Switzerland-basedGlencore International plc and UnitedKingdom-based Xstrata plc to form one ofthe world’s largest diversified miners.There was some controversy around thedeal in terms of offer price and retentionbonuses, but as it works its way throughfinal regulatory approvals, “Glenstrata” isexpected to go down in history as one ofthe largest mining marriages in history.There was some concern in the marketwhen the deal was announced inFebruary 2012 that it might have cursedcommodity prices, which took a dive inthe first half of the year. However, as2012 wound down, prices of gold, silver,copper, zinc and other metals rebounded.While “Glenstrata” dominated newsheadlines, 2012 was not a one-hitwonder for M&A activity. Copper was themost sought-after metal when measuredby deal value in 2012, and evident inFirst Quantum Minerals Ltd.’s $6.7billion hostile bid for Inmet Mining Corp.That said, copper couldn’t outpace goldin terms M&A deal volume. While 2012didn’t yield any blockbuster gold deals,the mining community did witnessplenty of interest in the gold space. Thetwo largest gold deals in 2012 includedPan American Silver Corp.’s $1.4 billionpurchase of Minefinders Corp. andB2Gold Corp.’s $1.2 billion purchase ofCGA Mining Ltd. Interestingly, one of thelargest deals by a miner in 2012 wasoutside of the mining industry. InDecember, Freeport - McMoRan Copper& Gold Inc. spent $9 billion on two dealsacquiring oil and gas assets in the Gulf ofMexico. Freeport shares dropped asmuch as 17% following the deal,highlighting shareholder anxiety.For some major miners with money tospend, the lower valuations createdbuying opportunities. Consider U.S.silver producer Coeur d’Alene MinesCorp.’s decision in early 2013 to buyVancouver’s Orko Silver Corp. for $350million, breaking up a deal Orko hadmade previously with First MajesticSilver Corp. At the time the deal wasannounced, CEO Mitchell Krebs notedthat lower valuations and tight financemarkets made it an attractive time tomake a move.Companies with financial constraintshave been forced to get creative when itcomes to raising money to fundacquisitions or advance projects. Weanticipate the need for creativity tocontinue well into 2013. Equity investorsare still content to sit on the sidelinesuntil a marked improvements in themarkets appears. Expect miners tocontinue to consider the bond market,joint-ventures and streaming agreementsto finance their projects.IntroductionM&A in 2012: Not just aone-hit wonder
PwC 3What we don’t expect to see in 2013 aremega-mergers. With a rash of write-downs in 2012 related to significantacquisitions completed in prior years,shareholders are wary, not willing tostomach the risks associated withmega-mergers. Many of the CEOsassociated with the announced write-downs have been replaced by leaderspeddling a new mandate, bottom-linegrowth.To meet bottom-line targets executiveswill place a significant focus on assetrationalization; as such, it’ll be a keytheme amongst senior miners in 2013.Many senior mining companies such asBarrick Gold, BHP Billiton, Anglo-American and Rio Tinto have disclosedthey are in the market to sell. As seniorslook to divest non-core assets,intermediates with strong cash positionsand a track record of successfullybringing projects on-line will beopportunistic, looking for strategic“tuck-in” acquisitions.In addition, seniors and intermediateslooking to de-risk projects will pursuejoint venture partners. We expect Chineseand other Asian investors to continue todisplay interest in these joint ventureopportunities as they look to increasetheir global holdings in the resourcesector. Joint-venture arrangements offerChinese investors many advantages tothat of a straight-up takeover, includingtransfer of skills and knowledgedemanded in certain sub-sectors.As for juniors, the road will remainbumpy. In the absence of availableequity, we began to see junior miningcompanies team up with one-another in2012, in an attempt to move theirprojects forward. Looking to pair thestrength of one company with thestrength of another, mergers can helpcreate a stronger, more resilient miningcompany – better positioned to ride outthe equity down-turn.Overall, those participating in the dealmarket will remain cautious not tooverpay for assets or make investmentsthat appear too risky to shareholders.While 2012 was already a disciplinedyear for M&A activity, miners will be atleast as cautious in 2013.“As a buyer we see a lot ofopportunity right now in thesenon-producing companies,where the capital marketshave been mostly unavailableto them and where they don’tseem to be receiving the samekind of value as they havebeen, especially in this priceenvironment, so we see that asa terrific opportunity.”Mitchell Krebs, CEOCoeur d’Alene Mines Corp
4 Global Mining DealsIt was a roller-coaster year for commodityprices in 2012, but dire predictions of theend of the mining “super cycle” wereproven to be little more than fearmongering. While China’s economyslowed to 7.8% GDP in 2012, after severalyears of double-digit growth,construction and manufacturing activityremains robust. It should also be notedthat today’s growth is happening on thebase of a much larger Chinese GDP, ascompared to the double-digit growthexperienced of years past, meaning thebar is much higher.China also recently surpassed the U.S. asthe world’s biggest trading nation in2012, which could bode well for futurecommodity demand. Despite this,markets and observers appear cautious asthey wait to see how China’s economywill transition in the near term.Regardless of investor doubt copper, zinc,silver and gold all saw priceimprovements in 2012. Copper was up3%, and is currently trading around$3.60 a pound. While copper is downfrom its record of $4.60 a pound, set inearly 2011, it’s up considerably from late2008 where it sat at $1.30 per pound.Some investors are betting global copperproduction will begin to wane as highercosts and shaky markets lead to a delay inproject development and slow productionin the short term. The theory is that aproduction slowdown will create supplyconstraints down the road, if copperdemand remains steady, which couldhelp support strong prices long-term.At the same time that copper prices wererecovering in 2012, investors continued tobuy gold as an inflation hedge and a solidlong-term investment amid the globaleconomic unease. Bullion is currentlytrading around $1,600 an ounce, havingedged back from about $1,500 in mid-2012. The uptick is due in part toaggressive monetary policies continuedby Europe, US and Japan with the intentto boost their lagging economies.Commodity pricesCommodity prices beat naysayerexpectationsAnnual performance of select miningcommodities (% change from Jan. 1- Dec. 31 2012)Zinc +11%Silver +9%Gold +7%Copper +3%Met Coal +0.4%Iron Ore +0.2%Nickel -10%Thermal Coal -15%Source: S&P Capital IQ, PwC analysis, Bloomberg
PwC 5The price of gold is also supported by anincrease in buying from central banksaround the world. A World Gold Councilreport released in February 2013 showsthis trend is continuing. The report saysannual gold demand in 2012 was 15%higher than the average for the previous5 years, “with much of that growthcoming from the physical bar segment ofinvestment demand and central bankpurchases.” According to the report,central bank demand for gold grew to12% in 2012, as compared to 10% in2011. Total net purchases by centralbanks of 534.6 tonnes exceeded 2011’salready strong total “and signaled areturn to levels of buying last seenalmost 50 years ago,” the report states.Since first becoming a net purchaser inthe second quarter of 2009, the Councilnotes that central banks have addedalmost 1,100 tonnes to global goldreserves, “almost reversing the 1,143.0tof net sales conducted over the precedingthree years.”40045050055060065001/01/1201/02/1201/03/1201/04/1201/05/1201/06/1201/07/1201/08/1201/09/1201/10/1201/11/1201/12/12Central banks consolidated assets vs. gold pricesHSBC global base metals indexSource: Bloomberg, PwC analysisSource: Bank of Japan, European Central Bank, Swiss National Bank, US Federal Reserve, Capital IQThe HSBC global base metals indexis comprised of over 35 publiclytraded companies with a combinedmarket capitalization of over $140billion. This graph shows thatwhile there was some volatilityearlier in 2012, by the end of theyear the index was up by 3%.This graph demonstrates that overthe past ten years there has beena strong correlation between goldprices and central bank balancesheet expansion. This correlationhas strong potential to continue inthe future.CentralBankAssets($UStrillions)GoldSpotPrice($US/ou)Total Assets ($US trillion)Gold Spot Price ($US/ou)1,8001,6001,4001,2001,000800600400200-109876543210Year2000200120022003200420052006200720082009201020112012
6 Global Mining Deals05001,0001,5002,0002,5003,000030,00060,00090,000120,000150,000180,0002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012VolumeValue(US$millions)$0 – <$500$500 – $1,000>$1,000 – $5,000>$5,000VolumeMarket uncertainty and volatile commodity prices took their toll on the volumeof M&A transactions in 2012. There were 1,803 transactions in 2012, the lowestlevel since 2005. Volume in 2012 was also down more than 30% as compared to2,605 transactions in 2011. However, for some context, 2011 was the secondbusiest year for mining M&A activity in history. Still, the drop in 2012 reflectsthe nervousness many miners had to finance future growth. Many buyersweren’t ready to put up the funds, while sellers were reluctant to agree totakeovers at lower valuations.The value of mining deals also dropped in 2012, as compared to the year before.In 2012, M&A values totaled $110 billion, which includes the Glencore-Xstrata$54 billion merger. Without this merger deal value plummets to $56 billion. Thatcompares to a total deal value of $149 billion in 2011.Volume and valuesA lot of M&A took to the sidelinesin 2012Global mining M&A volume and aggregate valueSource: S&P Capital IQ, PwC analysis
PwC 7-50,000100,000400450500Q12012Q22012Q32012Q42012Value(US$millions)VolumeValueGlobal mining M&A average deal valuesVolume and value by quarterSource: S&P Capital IQ, PwC analysis050100150200FY2005FY2006FY2007FY2008FY2009FY2010FY2011FY2012incl.Glencore-XstrataFY2012excl.Glencore-XstrataValue(US$millions)Source: S&P Capital IQ, PwC analysis
8 Global Mining DealsAnnouncedDateTarget/Issuer Target/IssuerHeadquartersTotal GrossTransaction ValueTargetResource Type02-07-2012 Xstrata plc Switzerland $54,000 Diversified Metals10-28-2012 Inmet Mining Corporation Canada $6,700 Copper08-23-2012 Anglo American Sur SA United Kingdom(Chile)$2,900 Copper02-01-2012 Richards Bay Mining (Pty) Ltd.Richards Bay Titanium (Pty) Ltd.South Africa $1,910 Diversified Metals01-17-2012 Roy Hill Holdings Pty Ltd. Australia $1,560 Iron Ore01-22-2012 Minefinders Corp. Ltd. Canada $1,430 Gold09-25-2012 KazzInc JSC Kazakhstan $1,400 Copper03-08-2012 Neo Material Technologies Inc. Canada $1,300 Rare Earth Metals01-05-2012 Kolwezi Investments LimitedFrontier SprlLa Compagnie minière de Sakania SprlRoan Prospecting & Mining SPRLSouth Africa,DemocraticRepublic of Congo$1,250 Copper09-18-2012 CGA Mining Limited Australia $1,196 Gold12-31-2012 ArcelorMittal Mines Canada Inc. Luxembourg(Canada)$1,100 Iron Ores03-01-2012 Eramet SA France $1,035 Diversified Metals07-20-2012 Kumba Iron Ore Ltd. South Africa $909 Iron Ore11-19-2012 Talison Lithium Limited Australia $769 Diversified Metals10-09-2012 AuRico Gold de México, S.A. de C.V. Mexico $750 Gold06-29-2012 Allied Gold Mining PLC Australia $650 Gold04-26-2012 Trelawney Mining and Exploration Inc. Canada $613 Gold12-14-2012 Mimosa Investments Limited Zimbabwe $550 Precious Metals12-07-2012 Camrose ResourcesDaletona Properties LimitedDemocraticRepublic of theCongo$549 Copper10-29-2012 Billion Win Capital Limited British VirginIslands$537 Iron OreTop 20 Global Mining Deals in 2012(by value, $US million, historical rate)
PwC 9Acquirer AcquirerHeadquartersTransaction Status(at February 25, 2013)Target StockPremium - OneMonth Prior (%)Glencore International plc Switzerland Announced 17.8First Quantum Minerals Ltd. Canada Announced 43.7Mitsui & Co. Ltd. JapanChileClosed N/ARio Tinto plc United Kingdom Closed N/APOSCO South Korea Closed N/APan American Silver Corp. Canada Closed 45.8Glencore International plc Switzerland Closed N/AMolycorp Inc. United States Closed 33.6Eurasian Natural Resources Corp plc United Kingdom Closed N/AB2Gold Corp. Canada Closed 46.9POSCOCSC Steel Australia Holdings Pty Ltd.South KoreaAustraliaAnnounced N/AFonds Stratégique dInvestissement SA France Closed 0.0Anglo South Africa Capital (Proprietary) Limited United Kingdom Closed (11.8)Windfield Holdings Pty Ltd. China (Australia) Announced 15.6Minera Frisco, S.A.B. de C.V. Mexico Closed N/ASt Barbara Ltd. Australia Closed 81.2IAMGOLD Corp. Canada Closed 35.8National Indigenisation and Economic Empowerment Fund Zimbabwe Announced N/AENRC Congo B.V. United Kingdom Closed N/AProsperity International Holdings (H.K.) Limited Hong Kong Announced N/ATop20
10 Global Mining DealsGold and copper dominated M&Aactivity in 2012, as miners tookadvantage of lower valuations to fundfuture growth. These two metalstogether accounted for half of the Top 20deals in 2012, even before consideringtheir mix in diversified metal mergers.Excluding the mega Glencore-Xstratamerger, 30% of M&A value was in thecopper space, followed by gold at 27%.That compares with copper at 23% andgold at 13% of the value of all deals in2011, when coal was the dominantcommodity accounting for 26% ofdeal value.Continued interest in gold is expected in2013, with new interest from Chineseinvestors pursuing off-shore gold assetsexpected. Shandong Gold’s acquisitionof Australian Focus Minerals for $225million and Zijin Mining’s acquisitionof Australian Norton Gold Fields for$223 million are recent demonstrationsof China’s emerging interest in globalgold assets.Gold accounted for the highest volume ofdeals in 2012 at 30%, followed by copperand diversified metals at 14% each. Goldand copper weren’t far off from last year’sdeal volume of 31% and 13% respectively.Gold and copper are both popular metals,for different reasons. With gold, investorsare turning to the precious metal as ahedge against currency debasement andgeneral economic uncertainty. Copper,on the other hand, is considered a bet onthe future health of the global economy.The fact that both copper and gold pricesrose in 2012, when they are normallysupposed to perform opposite of oneanother, proves just how volatile marketswere in the year. No wonder investorswere so skittish.Iron ore also turned up a few timesamong the Top 20 deals of 2012,particularly among steelmakers lookingto boost access to this key steelmakingingredient. South Korea’s POSCO, theworld’s fourth-largest steelmaker,purchased a stake in Australia’s Roy Hillproject in early 2012, and at the end ofthe year it was part of a consortium thatbought a 15 per-cent stake inArcelorMittal Mines Canada Inc. AngloAmerican also increased its stake inSouth African iron ore producer KumbaIron Ore Ltd. by 4.5% to just under 70%,at a cost of $909 million.Strong deal activity in the iron ore spaceis not anticipated for 2013. With themajority of large diversified miners stillnursing their wounds from recentwrite-downs, executives will be morefocused on their existing portfolio ofprojects, cost containment and free cashflow – with little resources and appetiteleft for acquisitions.Deal activity by resourceCopper and gold dominate,for different reasons
PwC 11Uranium, on the other hand, appears tobe making a comeback as producers takeadvantage of prices that have beendepressed since the March 2011Fukushima nuclear facility disaster inJapan. As Japan slowly restarts itsnuclear plants and China continues itsaggressive nuclear power plant build out,uranium prices are expected to see a lift,creating some M&A incentives. So farthis year we’ve seen Denison Mines Corp.offer a stock-swap deal for Fission EnergyCorp., while Russia’s state uranium firmARMZ proposed to take Canada’sUranium One Inc. private in a $1.3 billiondeal. There have also been reports thatthe European governments (Germany,Britain and the Netherlands) that ownUrenco, the world’s second-largestnuclear fuel vendor, are looking to sell.Cameco Corp. CEO Tim Gitzel toldReuters in February that his company ismonitoring the potential sale of Urenco,but isn’t sure it would make a bid. “We’rewatching the file,” Mr. Gitzel said. “Wethink there are some synergies betweenuranium production and enrichment.”Value (includes Glencore-Xstrata deal) Value (excludes Glencore-Xstrata deal)VolumeIron OreOtherGoldCopperDivesified Metals561414610%CopperGoldIron OreOtherDiversified Metal301414438%Iron OreOtherCopperGoldDiversified Metals1027301221%Source: S&P Capital IQ, PwC analysisSource: S&P Capital IQ, PwC analysisSource: S&P Capital IQ, PwC analysis
12 Global Mining DealsGoldTop buyers*: Canada 44%, Australia 14%, US 11%Top targets*: Canada 35%, Australia 14%, US 11%Average deal value: $60 millionAverage deal premium**: 47%Iron OreTop buyers*: Australia 26%, Canada 12%, China 9%Top targets*: Australia 26%, Canada 18%, China 9%Average deal value: $137 millionAverage deal premium**: 18%CopperTop buyers*: Canada 39%, Australia 18%, US 8%Top targets*: Canada 38%, Australia 18%, US 8%Average deal value: $112 millionAverage deal premium**: 62%Closer look by resource* expressed as % of total buy side volumes.** expressed as % premium over share price one month prior to announcement
14 Global Mining DealsDeal activity by geographySwitzerland leads? Canada strong,China continues momentum
PwC 15Canadian-based mining companies werethe most active on the M&A stage in 2012,when the Switzerland-based Glencorecommodities giant is excluded from thepicture. First Quantum, Pan American andB2 Gold were the Canadian buyers in the 10largest deals of the year. U.K.-basedcompanies were the second biggest buyers,followed by Australia and China.China’s deal activity at 5% of value(including Glencore-Xstrata) is down fromlast year when it accounted for 11% of value.But don’t mistake this as a retreat from theworld’s largest consumer of commodities.Excluding the Glencore-Xstrata deal, Chinamade up 9% of deal values. Furthermore,China has expressed continued commitmentto hunt for opportunistic deals in the globalresource space.China has also increased its foreigninvestment targets, specifically in the goldand copper space, which bodes well forfuture Chinese M&A activity in the globalmining sector.Overall, after a tumultuous year in placessuch as South Africa, which struggledthrough political unrest and violent strikes,mining companies are looking for security.Social and political conflict remain the keyinvestment barrier for the mining sector inregions rich with resource potential, butcurrently wrought with risks.Buyer Country by Value (includes Glencore-Xstrata deal)Buyer Country by Value (excludes Glencore-Xstrata deal)Source: S&P Capital IQ, PwC analysisSource: S&P Capital IQ, PwC analysisUnited StatesChinaUnited KingdomOtherSwitzerlandCanada521435521%OtherChinaCanadaAustraliaUnited KingdomUnited States2999 11636%
16 Global Mining Deals“It’s an unusual time for the miningindustry,” Teck Resources CEO DonLindsay told PwC. “It’s challenging to getprojects built because of issues withpermitting and concerns in the marketaround rising costs. At the same time it’schallenging to buy existing assets as themarket is concerned about over-paying.”Rightfully so? With the number ofcrippling write-downs announced in2012 by senior mining companies,shareholders are discouraging executivesfrom pursuing expensive acquisitions.Rio Tinto, Anglo American, Barrick Goldand Kinross, to name the main headlinegrabbers, all had to break the news toshareholders in 2012 of multi-billiondollar write-downs.It’s safe to say mega-mergers will beplaced on the shelf while executives seekto prove they are being prudent withshareholder dollars and are able torealize positive results on significantacquisitions made in the past few years.With mega-mergers out of the way andthe importance of the bottom-line frontand centre, 2013 will be all about assetrationalization. Deal activity will bedriven mainly by two things: seniorminers looking to divest non-core assetsand seniors looking to de-risk projectsthrough joint-ventures. Where will thebuyers come from? Expect to see Chinastep-up to the plate, especially wherejoint-venture opportunities in the goldand copper space are concerned. Chineseinvestors appear to be more and moreinterested in teaming up withexperienced world players who offer theopportunity to de-risk their portfolios,gain knowledge related to projectdevelopment and production efficiency.As for juniors, their struggle to raiseequity will create opportunities forintermediates looking for strategic“tuck-in” acquisitions. But the marketwill only support such acquisitions if theacquirer boasts a strong cash positionand track record of successfully bringingprojects into production. Unfortunately,2013 is not looking any sunnier forjuniors, with equity markets expected toremain closed to higher risk investments.2012 saw much resistance from juniormining executives unwilling to handover their company at current valuations.With dwindling cash, challenging equitymarkets and senior miners focused oncost containment, not M&A, juniors maynot be able to turn their backs onopportunist offers from intermediatemining companies in 2013.What we may see more of in 2013, isjunior miners finding opportunities forvalue creation in one another. Takingstrength from one company andmatching it with strength from anothercompany, junior miners are merging tocreate a stronger, more resilient company.For example, a junior with a stellar assetbut weak cash position may considermerging with a company that has a strongcash position, but struggling asset.2013 OutlookAsset rationalization will lead todivestitures and joint-ventures
PwC 17Streaming and royalty agreements, whilenot part of the traditional M&A fold,continued to make an impact on themining sector in 2012. Notable dealswere announced by Silver Wheaton andFranco-Nevada. Silver Wheaton agreedto pay $750 million for life-of-mine silverproduction from two of HudBayMinerals’ assets, their 777 mine inCanada and Constancia project in Peru.Later in the year, Silver Wheatonannounced a $1.9 billion acquisition ofgold streams from Vale’s mines inCanada and Brazil. As for Franco-Nevada, they struck an agreement withInmet Mining. In exchange for $1 billionin project financing, Inmet agreed to sellfuture gold and silver production fromtheir Cobre Panama copper mine. Weexpect streaming companies to continueto play a key role in project financingthroughout 2013.As we conclude our outlook for 2013, weexpect this to be a slow year for miningdeals, well below last year’s reducednumbers. While the majors will beactively divesting of non-core assets,those will be cautiously evaluated andwhere the opportunities make sense,we’ll see some deals happen. Juniorsserious about shareholder value will haveto consider sensible mergers. And lastly,look for more joint-venture deals aslarger players look to de-risk. In short,while far from a block-buster year, 2013should shape up to be challenging, butstill way more than “mildly interesting”for mining M&A.In the next section of this report we takea look at opportunities and challengesexpected to influence 2013 deal activityincluding confidentiality and stand-stillagreements, new legislation that’scleared the way for more certain foreigninvestment in Canada’s mining sector –specifically investment from Chinesestate-owned enterprises, opportunity forminers to create value through re-ratingand lastly, we’ll look at an example oftwo juniors joining forces for the benefitof both shareholder groups.
18 Global Mining DealsJuniors find value in their peers:Depressed markets lead to a shift inacquisition targetsEric EdwardsPresident and CEOLupaka Gold
PwC 19In a market where financing can seem asdifficult to dig up as the precious metalsbeing mined, juniors with available cashin the bank have a distinct advantageover their peers. Cash-positive juniors areleveraging this advantage to distinguishthemselves in a market saturated byjuniors under water.“In a depressed equity market, cash inthe bank is very appealing to investors,”Eric Edwards, President and CEO ofLupaka Gold, said during a recentinterview with PwC. “It provides a senseof comfort to investors that they won’t bediluted, that the company can absorbunexpected shocks, and that theexecutive team can implement thebusiness plan and even escalate growth ifthe circumstances are right.”“Ultimately, cash gives investors a senseof stability,” Mr. Edwards said.Yet, with so many juniors grappling to geta portion of the limited cash available,executives are being forced to considerall available financing options, as theyseek to balance short-term survival withlong-term growth.“Junior mining companies, especiallythose with a single exploration asset, arefinding it very difficult in this riskadverse market to successfully sell theirstory,” Mr. Edwards said. In 2012 alone,more than US$955 million of minefinancing was cancelled on the TSX. Thisis up 250% from 2011, when the marketexperienced cancelled credit/loanfacilities and IPOs worth a total US$380million. “Right now you go where themoney is; that means being willing toexplore every financing option out there,”Mr. Edwards said.Challenging finance conditions, matchedwith an abundance of juniors looking forfinancing, has thrown the junior miningecosystem out of balance. Compoundingthe problem is increased scrutiny amonginvestors toward M&A activity as a resultof the recent increase of significantwrite-downs in the senior mining sector.Executives are being encouraged to focuson bottom-line growth, as opposed toincreasing their resource exposure. As aresult, a number of juniors that wouldnormally be acquisition targets have beenleft to fend for themselves in a volatilemarketplace.Lupaka Gold is part of this current trend.“My discussions with senior producers inPeru were not favourably received. Theywere not interested in new projects;they’re content,” said Mr. Edwards. “Withstrong commodity prices and cash flow,government support and healthyoperations, senior producers are beingvery selective in terms of acquisitionopportunities.” There are many juniorsholding excellent assets in Peru, but Mr.Edwards said they don’t have the cash tomove forward. Senior producers havebecome inundated with juniors pitchingthem projects.After investigating a number of financingoptions, Lupaka settled on merging withanother junior company, AndeanAmerican Gold. Lupaka was looking toaggressively explore and develop itsCrucero Gold Project, a 5,500-hectaregold property located in southern Peru,and decided that this merger was the bestcourse of action.Lupaka Gold Corp.Peruvian focused gold explorerHeadquarters:Vancouver, CanadaAssets:Crucero Gold ProjectInvicta Gold Project17% stake in Southern Legacy Minerals Inc.
20 Global Mining Deals-20,000100,00080,00060,00040,0000100050030002500200015002008 2009 2010 2011 2012AggregateValue(US$millions)Volume“Andean was struggling to sell their storyin the marketplace, recognizing thatbeing a single asset company has itschallenges,” Mr. Edwards said. “As aresult, Andean’s shareholders believedthat combining their company withLupaka Gold would provide the greatestlong-term value growth proposition.” ForLupaka, completing a deal with Andeancreated value in a number of ways. WhileAndean’s $13 million cash position wasvery attractive, there were additionalAndean assets and other factors thatwere of significant interest to Lupaka.Lupaka is a Peruvian focused goldexploration company; Andean had twoassets in Peru. Lupaka was looking for agood retail investor shareholder base;Andean had 3,000 retail shareholders.“Taking all these factors intoconsideration, it was a natural fit that webelieve will benefit Lupaka’s shareholdersgoing forward,” Mr. Edwards said.Equity financings: TSX/AIMEquity financings: All mining companies, all exchanges-3,0002,0001,0007,0006,0005,0004,0000400200120010008006002008 2009 2010 2011 2012AggregateValue(US$millions)VolumeSource: S&P Capital IQ, PwC analysisSource: S&P Capital IQ, PwC analysis
PwC 21The mining industry has taken some hitsin recent quarters. A handful of majorminers have announced multi-billionwrite-downs on assets purchased just afew years ago, when markets were morefocused on growth. To build backinvestor confidence, many miners areseeking ways to add notable shareholdervalue.A potential way for mining companies tocreate shareholder value is bysuccessfully developing or acquiringpre-production properties. The boost inounces helps them to achieve anintermediate producer re-rating.“Obtaining intermediate status providessignificant strategic advantages,” saysStephen Mullowney Mining CorporateFinance Leader, PwC Canada. “Typicallysenior gold producers aren’t as wellpositioned for growth as they battle tomaintain production volumes and growreserves,” shares Mr. Mullowney. Noting,it’s difficult as a senior producer to movethe overall valuations needle through thesuccessful execution of small to mediumsized projects. “There is a sweet spot inthe gold mining industry right aroundthe two-to-five million ounce range, as itprovides the best leverage to growth,”says Mr. Mullowney.A company that has built its businessusing this theory is New Gold Inc. NewGold sought to increase shareholdervalue through the merging of junior goldmining companies that possessed strongproduction potential. In 2008, New Gold,Metallica Resources and Peak Goldformed a three-way merger to form thenew, New Gold. Then again in, New Goldmerged with Western Goldfields. In awindow of just two years, New Goldjumped from being a feisty junior miner,to successfully obtaining an intermediatere-rating.“Growth is good as bigger companiestend to receive better valuation thansmaller companies,” New Gold CEO BobGallagher said in the aftermath of itsgrowth spurt. “But the real growth comeswhen you can acquire an undervaluedasset as your growth on a per share basisbecomes accretive.”This strategy has led to a 198% increasein New Gold’s net asset value, since themerger with Western Goldfields.“Pre-production companies offertremendous potential for value creation,”says Mr. Mullowney. He said successfullybringing properties into production ontime and on budget can lead to avaluation uplift of anywhere between$45 and $135 per ounce.New Gold isn’t alone in its pursuit of thebenefits associated with being a well-established intermediate producer.B2Gold Corp recently finalized itsacquisition of CGA Mining Inc for $1.1billion, increasing production toapproximately three-hundred andeighty-five million ounces. “With a 133%increase in production, the market wasquick to rewarded B2Gold with are-rating,” says Mr. Mullowney. “Themarket favours companies with a strongmanagement team and a track record ofsuccessfully bringing projects intoproduction.”So why aren’t more companiescapitalizing on this opportunity? Mr.Mullowney argues that it’s not easy.Doing this kind of deal requires patience,experience, healthy balance sheet andthe right team. For companies that arewell-equipped, Mr. Mullowney says thevalue is there for the taking.Gold’s race for growth:Creating shareholder valuethrough re-rating
22 Global Mining Deals$70.5Source: Capital IQ, PwC analysis, company reportsFebruary 14, 2013Source: Capital IQ, PwC analysis, company reportsFebruary 14, 2013By stage of development$210.5$166.5$82.1$34.4$35.6$19.4Avg.EV/OunceofResourceEV/ResourcePotential re-rating uplift$45 -$135per oz.All-Costsrange from$85 -$130per oz.ExplorationPre-ProductionAcquisition PriceConstruction Costs($65 to $80 per oz.)Senior andIntermediateProducer ValuationP.E.A.Pre-FeasibilityFeasibilitySmallIntermediateSenior$200$150$100$50$-$200$150$100$50$-$210$170$130$85+ $65+ $90$20$40
24 Global Mining DealsB2Gold CEO warnsof more hostile bidsas miners refuseto sellClive JohnsonCEO, B2Gold Corp.
PwC 25When B2Gold Corp. went hunting for itslatest acquisition it was surprised by thenumber of closed doors.After all, its target was small-to-mediumsized miners, many of which werestrapped for cash as a result of highercosts and lower valuations. A sale shouldhave been something at least to consider,according to B2Gold CEO Clive Johnson.“The problem we faced was the barrierbetween us and the shareholders,”Mr. Johnson said in a recent interviewwith PwC.As Mr. Johnson sees it, there are toomany juniors vying for investment inthese volatile markets.“It’s time for consolidation,” Mr. Johnsonsaid. “The market needs consolidation,but junior mining executives need to bewilling to accept this fate.”Eventually, B2Gold struck a deal withCGA Mining Ltd., but not without firstfacing many roadblocks with otherpotential targets.According to Mr. Johnson, too manyexecutives are tied to their position orcompany to act in the best interest ofshareholders. In his experience, manyjunior mining executives are refusing tosign confidentiality agreements (CAs) orhandcuffing their companies withstandstill agreements.“They are either playing games insigning confidentiality agreements oraren’t otherwise receptive to potentialdeals,” Mr. Johnson said.As a result of its latest M&A experience,B2Gold changed its CAs process.“If within three months we don’t geteverything in the agreed schedule, whichincludes all the technical and financialinformation on the company, then theStandstill Agreement goes away,” Mr.Johnson said. “If a company won’t signthat agreement it means all they aretrying to do is handcuff us for two years.”If juniors don’t open up to potentialM&A, particularly in this market, Mr.Johnson believes companies can expectto face more hostile deals.These are strong statements from theseasoned mining executive, but Mr.Johnson said he’s publicly expressingwhat many other company executives arefeeling. Mr. Johnson said a handful ofinstitutions are calling him for namesand numbers of companies that arerefusing to sign CAs.“If we are going to force directors andexecutives to act on behalf of theshareholders we need two things: CEOsto continue to challenge the issue of CAsthat tie us up for two years andinstitutions to stand up and call out CEOswho refuse to sign CAs,” Mr. Johnson saidB2Gold Corp.Three producing gold mines:La Libertad, NicaraguaEl Limon, NicaraguaMasbate, PhilippinesDevelopment projects:Gramalote, ColumbiaOtjikoto, NamibiaProjected Gold production:350,000 ounces 2013CGA Acquisition:Deal announced Sept. 20, 2012Share transaction valued at approx.$1.196 billion or $3.18 per CGAshareRepresents a 20% premiumB2Gold shareholders 62% ownership/CGA shareholders 38% ownership ofcombined companyClive Johnson on being leveraged for success:“What I like about being in the intermediate space is not being solelyleveraged to the gold price – the deal has to be accretive from a reserveresource basis and cash flow basis. The increase in ounces may look goodon your company’s growth chart, but if you ultimately cannot deliver onthe project – your success will be short lived. Our strategy is to beleveraged to growth.”Importance of due diligence:“We’re rooted in technical capabilities, because the hardest part of ourbusiness isn’t doing deals its finding gold in economic quantities andproducing it for a profit. Take your time and spend your money wisely byfocusing on economic geology.”
26 Global Mining DealsTwo strategiesemerge withChinese investorsChina has become a formidable investorin the global mining sector in recent years.In 2012 alone, China had twotransactions in the Top 20 global miningdeals. Chinese investors also dominatedinvestment activity among its BRICgrowth market peers in 2011,representing nearly half of market-leddeal activity, which is a 40% increasefrom market peaks in 2006.“Chinese outbound investment patternshave continued to evolve over the lastdecade, but resources remain a focus forChinese investors. By value, resourcesrepresented approximately 60% of allChinese outbound investment in 2012,”said Ken Su, Mining Leader of PwC China.According to Mr. Su, there seem to betwo strategies emerging when it comesto Chinese investment activity. Thisincludes larger companies that areseeking big projects in stable countriesand smaller investors willing to take achance on early-stage projects in riskierregions. Mr. Su noted while Chineseinvestors tend to focus on one of thenoted strategies, some investors withsufficient capital may be able to pursueboth strategies.“These are opportunistic strategies,”said Mr. Su.In particular, he said large Chinesestate-owned enterprises are taking onthe business tone and strategy of largermining companies. That includes a morecautious approach as a result ofincreased government oversight when itcomes to M&A approvals.“There is even competition in the marketamongst Chinese companies for deals, asthey contend alongside non-Chineseinvestors for the dwindling number ofstrong assets available,” shared Mr. Su.
PwC 27As China seeks to aggressively pursuestrategic overseas acquisitions, Mr. Suexpects increased consolidation to occurin certain pockets of the Chinese miningsector – leading to the eventual creationof “national champions”.“China has been investing in off-shoremining for years now and has gained therequired experience to compete for worldclass assets,” says Mr. Su. Consolidationwill create the strength and presenceneeded to aggressively pursue strategicoverseas acquisitions – enabling them toslug it out toe-to-toe with the world’slargest senior mining companies.Mr. Su also noted a shift in commoditypreference by Chinese investors, awayfrom steel-making ingredients such as ironore and into base and precious metals.Similar to other global miningcompanies, Chinese companies havefaced significant issues getting iron oreprojects off the ground. As a result, Mr.Su expects to see more acquisitions in thebase metal sector, specifically copper.However, the real star in 2013 may verywell be gold, he said.“Iron ore has cooled off and gold is hot,”Mr. Su said. “As gold becomes moreimportant to China than ever before wecan expect to see strategic deals made byChina in the gold space.”06,0004,0002,0008,00010,00012,00014,00016,0002008 2009 2010 2011 2012Value(US$millions)EuropeAsia / Pacific emerging marketsAsia / Pacific developed marketsAfrica / Middle EastLatin America and CaribbeanUnited States and CanadaSource: S&P Capital IQ, PwC analysisChinese acquisitions 2008-2012, by value
28 Global Mining DealsWinning in a changing world:Canada & emerging marketsIn June 2012, four policy expertsincluding Thomas d’Aquino, LenEdwards, Derek Burney and FenHampson published a report titledWinning in a changing world: Canadaand emerging markets. The reporturged Canada to adopt Australia’sapproach to foreign investment - anapproach that would create a clearer,tougher line with investments fromstate-owned entities. While Australia’sapproach with foreign investors isdone on a case-by-case basis it hasmade clear to the global miningcommunity that the Australiangovernment will not allow foreigngovernment acquisition of thecountry’s strategic mining assets.Prime Minister Stephen Harper lookedclosely at Australia’s approach toforeign investment when amendingCanada’s foreign investment strategy.Canada consults Australia,paving the way for more certainglobal foreign investmentFor Chinese firms eager to invest in theresources sector abroad, the Canadiangovernment’s approval of China NationalOffshore Oil Corporation’s (CNOOC)$15.1 billion acquisition of Calgary-basedNexen was deemed a break through.However, some mining companies have adifferent perspective, viewing theCanadian government’s changes toforeign investment policy as a turningpoint for the country. Upon approvingthe CNOOC-Nexen deal, Canadian PrimeMinister Stephen Harper called hisgovernment’s decision “not the beginningof a trend, but rather the end of a trend.”Added Mr. Harper: “Foreign state controlof oil sands development has reached thepoint at which further such foreign statecontrol would not be of net benefit toCanada.”“It’s not as cut-and-dry as it sounds,” saidDerek Burney, Senior Strategic Adviser atNorton Rose LLP.In a recent interview with PwC, Mr.Burney said the decision strikes a delicatebalance between Canada’s need forforeign investment in its resource sectorand concern regarding foreign control ofCanadian resources. “The hard reality isCanada needs approximately $650 billionin capital, mostly foreign, by the end ofthis decade,” Mr. Burney said. “Mr.Harper was careful not to send themessage Canada was shutting its door onforeign investment, including investmentfrom state-owned entities.”Instead, Mr. Burney said he expects thegovernment to maintain an open,market-based approach to foreigninvestment in the mining sector.“That being said, significant foreigninvestment in mining will still undergocareful government scrutiny, withinvestment interests from state-ownedentities undergoing even more scrutiny,”Mr. Burney cautioned.
PwC 29What can foreign investors interested inCanada’s mining sector learn from theCNOOC deal? A lot, Mr. Burney argues.Taking into account the “net benefit’ test,which requires a company to prove itsinvestment is good for Canadians,CNOOC launched a public andgovernment relations strategy to ensurethe substance of their message washeard, Mr. Burney said.It’s a strategy he believes other foreigncompanies can learn from.“My advice to foreign entities looking toinvest in Canada’s natural resource sectorwould be to gauge the political mood atthe time and adapt your strategyaccordingly,” Mr. Burney said.That could include investments otherthan an outright takeover. For example,Mr. Burney said a joint-ventureagreement is another good option forsome investors.“A joint venture offers many strategicadvantages,” said Mr. Burney. “Therecan be a cross-pollination of knowledgeand skills.”Despite some suggestion that the foreigninvestment climate in Canada has cooled,Mr. Burney believes Canada’s miningsector will see steady, if not increasedinterest from foreign investors,particularly now that the rules have beenmade clear.Still, to keep the momentum going,foreign companies already invested inCanada must make sure to meet their “netbenefit” commitments. Broken promiseswill not only tarnish their reputation inCanada, but make it more difficult forthose that follow, Burney said.Derek BurneySenior Strategic AdviserNorton Rose LLP
30 Global Mining DealsMethodologyOur methodology for M&A analysis is set out below:• M&A data includes announced mergers or acquisitions (including less than 100%acquisitions / divestitures). Cancelled, dismissed, expired or withdrawn deals areexcluded from data (Often, however, deals can be cancelled post publication).• The acquisition of rights, special warrants and convertible debt are not included inM&A statistics (unless utilized as equity sweeteners). Strategic partnerships which donot involve the acquisition/divestiture of an equity stake are also excluded from ouranalysis.• The geography of a buyer is determined by its headquarters. The geography of atarget is determined by the location of its major projects (when such informationwas available).• Certain transactions involved buyers from more than one geography. As a result, forbuyer by region analysis, we utilized appropriate weighting to arrive at aggregatefigures.• For M&A by resource, we classified targets by their primary disclosed resourcewhere possible. In certain cases, a primary resource was not identified. These dealswere excluded from our analysis.• The main source of our data is S&P Capital IQ. S&P Capital IQ includes real estateand property deals in its data.• Deal currency is US$, historical rate, unless otherwise noted.• Transaction value refers to total consideration to shareholders, calculated as:Total Consideration to Shareholders+ Total Other Consideration+ Total Earn-outs+ Total Rights/Warrants/Options+ Net Assumed Liabilities+ Adjustment Size+ Total Cash+ Short-term Investments• Mega deals are defined as transactions valued at > $10 billion.• Mining includes Anthracite Coal Mining, Bituminous Coal and Lignite Mining,Chemical and Fertilizer Mineral Mining, Diversified Metal Ores (Copper, Lead, Nickel,Radium, Tin, Titanium, Uranium, Vanadium and Zinc Ores), Gold, Precious Metalsand Minerals, and Iron Ores30 Global Mining Deals
PwC 31Mining Excellence@PwCThe mining sector is facing a range of competing trends and a rapidly changingglobal business environment. Against the backdrop of commodity price fluctuations,miners need to balance shareholder dividend expectations whilst maintaining aninvestment pipeline in the midst of increasing operating costs. Safety, environmentaland community principles also continue to shape the industry as miners look toachieve their licence to operate and deliver on corporate responsibilities.Mining Excellence@PwC has been designed to mobilise and leverage PwC’scollective global knowledge and connections to deliver an exceptional andtailored client experience, helping our clients navigate the complex industrylandscape and meet their growth aspirations. Our team of specialists isexclusively focused on the sector and brings an industry-based approach todeliver value for you and your organisation.Mining Excellence@PwC provides our clients:“Working in the sector forover 20 years, I have seenand worked across themining sector in both goodtimes and bad. It’s fantasticto see our clients and PwCteams working together torespond to the ever-changingbusiness dynamics minersface today.”Tim Goldsmith, PwC Global Mining LeaderDelivering local solutions to global challengesconnections to our vastnetwork of mining expertsand global client portfolioWe have the widest network ofindustry experts who work out ofstrategic mining hubs across theglobe to help better connect you tovital mining markets.Our connections provide:• seamless client service deliveredwith collaborative cross-border accountmanagement• maximised deal potential through awell-connected global community ofmining leaders• a well-connected and mobile workforceto ensure effective service delivery ineven the most remote mining locations.the delivery of anexperience that meets ourclients’ definition of ‘value’With mining experts working in eachkey Australian state, our awardwinning teams are helping clientsdeliver on specific projects andorganisational growth aspirations.We offer advisory, tax and auditservices to global corporations andlocally listed companies.Mining Excellence@PwCcomplements this with:• a suite of niche mining consultingcapabilities focused on optimising valueacross mining operations and effectivelymanaging risk to help our clients grow theirbusiness and deliver shareholder value• a comprehensive client feedback programto ensure we are always improving anddelivering on individual client needs.leading edgeknowledge and insightWith significant investment inthe research behind our miningpublications and a comprehensiveindustry learning and developmentprogram, our professionals canshare both industry and technicalinsight with our clients, such as:• A library of industry publicationsdesigned to help challenge “conventional”thinking and delve into topical industryissues. This includes:–– flagship publications including AussieMine, Mine and Mining Deals–– The Insight Series focuses on specificissues most important to miners• An extensive industry developmentprogram for our people and clients.This features our annual university-stylecourse Hard Hat: The Mining Experience.Ken Su BeijingJohn Gravelle TorontoJason Burkitt LondonHein Boegman JohannesburgKameswara RaoHyderabadJohn CampbellMoscowSacha Winzenreid JakartaSteve Ralbovsky PhoenixGlobal Mining LeaderTim Goldsmith MelbourneColinBeckerSantiagoJock O’CallaghanMelbourneDarren Smith PerthWayne Huf PerthBrian Gillespie BrisbaneStephen Loadsman BrisbaneDerek KidleySydneyAndrew FormanAdelaide