Canadian Mining Eye
The Canadian Mining Eye index gained 4% during Q2 2015 as compared to a 1% decline in Q1 2015, the first quarterly gain since Q2 2014. The Canadian Mining Eye index outperformed the S&P/ TSX Composite index, which slipped 2% during the quarter. The London Metal Exchange index (LMEX) declined 5% over the quarter, while EY’s AIM-based Mining Eye increased 13% during Q2 2015.
Canadian mining equities continued to face downward pressure due to weakness in metal prices. The S&P/TSX Composite Metals and Mining index fell 4% during the quarter as most of the companies witnessed margin contraction due to lower price realization and higher costs. A few of the Canadian Mining Eye index companies surprised investors with better-than-expected financial results, higher production data, accretive acquisitions and steady progress on planned projects, leading to a 4% gain in the index over Q2 2015.
Majors witnessed a fall of 4% in Q2 2015 compared to a 4% gain in Q1 2015, as most of them reported weaker-than- expected financial performance in the face of continued sluggishness in commodity prices, production cuts and margin squeeze amid global economic uncertainty. Companies remain cautious about their capital expenditure and are focusing only on high-return, priority investments.
It was an eventful quarter for the global economy as the focus shifted again to Greece and China. The Greek debt crisis resurfaced with a threat of the Grexit from the Eurozone, which could potentially destabilise the euro. In June 2015, a steep correction in Chinese shares after their doubling in the past year spooked investors globally, raising concerns over the state of China's economy, which is heavily indebted with significant excess capacity and falling property prices. These macro-economic concerns battered commodities, leading to a further slide in prices.
- Gold prices decreased 2% in Q2 2015 after a flat Q1 2015. A strong US dollar bolstered by the expectations of a US Federal Reserve interest rate hike, lower global inflation expectations and weak physical demand in China put pressure on the yellow metal, while the stock market sell-off in China had a little impact on the safe-haven asset. The bearish sentiment clouding gold strengthened in July 2015 as gold slumped to its lowest level in the last five years owing to further reiteration by the US Federal Reserve to increase borrowing rates later this year which will boost the US dollar. Gold was also hit by the latest Greek bailout plan, which eased down fears of Greece exiting the Eurozone, drying up safe-haven purchases.
- The slide in base metals continued in Q2 2015 due to weak Chinese demand and the Greek crisis. Copper tumbled 5% during the quarter due to the slowing Chinese economy as reflected in its recent stock market volatility. Nickel and Lead were down 3% and 5%, respectively, on the LME over Q2 2015, while Zinc slipped 4%.
Mergers and acquisitions
M&A activity in Canada maintained momentum in Q2 2015 with very few high-value transactions. Companies with complementary strengths saw value-enhancing synergies in consolidation, with the merger of Alamos Gold and AuRico Gold being a case in point. While a few companies looked to strengthen their market position and portfolio, others with surplus cash or access to capital judiciously considered attractive assets. The market also witnessed low-multiple deals as cash-strapped juniors facing financing challenges were forced to dispose their assets.
Alamos Gold and AuRico Gold completed their merger on July 2, 2015 to create a new company Alamos Gold, Inc. Certain assets of AuRico Gold, including the Kemess project and a 1.5% net smelter return royalty on the Young-Davidson mine in Ontario, were transferred to a newly created company, AuRico Metals. Under the terms of the merger, former Alamos shareholders received one share of the merged entity, US$0.0001 in cash and 0.4397 AuRico Metals shares for each share held, while former AuRico shareholders received 0.5046 merged company shares and 0.2219 AuRico Metals shares for each share held. Former Alamos and AuRico shareholders each own approximately 50% of the merged entity, which owns 4.9% of AuRico Metals. The combined entity is expected to become one of the leading intermediate gold producers, with a diversified portfolio of assets located in safe jurisdictions. The combined operations are expected to produce 375 - 425 koz of gold in 2015 in Mexico and Canada. 1,2 In connection with the merger, Alamos Gold completed its non-brokered private placement of approximately 27.9 million shares of AuRico Gold at US$2.99 per share for gross proceeds of approximately US$83 million. The shares represented 9.9% stake in AuRico Gold. 3 Analysts believe that the transaction is positive for both Alamos and AuRico shareholders as it combines the asset quality of AuRico (underpinned by the Young-Davidson mine) and the balance sheet of Alamos (no debt, and CDN$358 million of cash) to ultimately create a much more investable gold producer. 4
Western Lithium and Lithium Americas announced that they had entered into an arrangement agreement to merge their respective businesses for a total consideration of CDN$ 80 million on June 30, 2015. Western Lithium offered 0.789 shares for each Lithium Americas share with a consideration of CDN$ 0.50 per share, representing a premium of 36% on the closing price as of June 29, 2015. The offer price represented a premium of 58% to the 20-day volume-weighted average price (VWAP) of each company’s respective shares. After the completion of the transaction, existing Western Lithium shareholders and Lithium Americas shareholders will own approximately 50.05% and 49.95% respectively of the combined entity, which will own two of the leading lithium development projects in the world.5 Western Lithium believes that the combined company will result in better liquidity, market capitalization and funding opportunities.
NovaCopper completed the acquisition of Sunward Resources on June 19, 2015. The transaction involved an exchange of 0.30 shares of NovaCopper for every share of Sunward Resources. The exchange ratio represented an equivalent of US$0.1865 per Sunward share, based on 20-day volume-weighted average price (VWAP) of the NovaCooper shares as of April 22, 2015 and implied a total transaction value of approximately US$28 million. NovaCopper and Sunward Resources shareholders will own approximately 58% and 42%, respectively, of the combined entity. The acquisition is expected to strengthen the balance sheet of the combined company with approximately US$23 million of cash on its books, which will fund the development of Arctic and Bornite projects located in Alaska. 6,7
First Quantum Minerals closed its previously announced offering of 88.5 million common shares. Shares were issued at CDN$16.25 per share, for aggregate gross proceeds of approximately CDN$1,437 million. The company will use the majority of the net proceeds of the offering to reduce net debt, and will invest to advance and expand existing production facilities, including strategic investments to further enhance its returns and growth pipeline. 8
Tahoe Resources closed its previously announced bought-deal common shares (held by Goldcorp) financing by selling 58.1 million shares at CDN$17.2 for gross proceeds of approximately CDN$998 million. The deal represented the sale of all of the Goldcorp's interest (25.6%) in Tahoe Resources. The offering was made through a syndicate of 20 underwriters led by GMP Securities and BMO Nesbitt Burns acting as joint bookrunners. 9, 10
TMAC Resources completed its initial public offering of 22.5 million common shares at a CDN$6 per share, for aggregate gross proceeds of approximately CDN$135 million. The company intends to use the proceeds to advance the Hope Bay Project for exploration activities and for general corporate purposes.11
Metal prices are likely to continue the bearish trend in H2 2015 due to the strengthening of the US dollar and weaker global demand. The US Federal Reserve is expected to increase borrowing rates later this year, which will further boost the US dollar. The slowing economy and falling property prices in China, along with the Chinese stock market correction, will continue to put downward pressure on base metals. The strengthening US dollar will continue to impinge gold prices, as lower global inflation expectations have eroded the attractiveness of gold.
Canadian mining equities are expected to remain subdued in H2 2015 due to further margin squeeze on the backs of lower metal prices and higher costs. The margin contraction will force mining companies to prioritize spending and cut down on their capital expenditure programs to preserve cash. Companies will also continue to seek strategic consolidation for portfolio improvement, capital rationalisation, operational risk reduction and attractive investment opportunities.
1. “Alamos Gold and Aurico Gold to combine creating leading intermediate gold producer”, Alamos Gold press release, 13 April 2015.
2. “Alamos and Aurico Metals announce completion of merger”, Alamos Gold press release, 2 July 2015.
3. “Alamos Gold closes previously announced private placement”, Alamos press release, 20 April 2015.
4. ”Merger of equals creates attractive new intermediate gold producer”, Canaccord Genuity, 13 April 2015.
5. “Western Lithium and Lithium Americas announce merger, consolidating strategic lithium deposits in North and South America”, Western Lithium press release, 30 June 2015.
6. ”NovaCopper and Sunward announce arrangement”, NovaCopper press release, 23 April 2015.
7. ”NovaCopper completes the acquisition of Sunward Resources”, NovaCopper press release, 19 June 2015.
8. “First Quantum Minerals announces closing of CDN$1.44 billion equity financing”, First Quantum press release, 4 July 2015.
9. “Goldcorp Inc. announces secondary offering of entire 25.6% interest in Tahoe Resources, Inc.”, Tahoe press release, 15 June 2015.
10. ”Tahoe Resources announces closing of secondary offering by Goldcorp Inc.”, Tahoe press release, 30 June 2015.
11. “TMAC Resources completes IPO of CDN$135.0 million”, MarketWired, 7 July 2015