As summer holidays beckon, investors typically exchange their screens for a beach. However, with increased volatility in the market and more rate cuts expected this month by both the Bank of Canada and the European Central Bank, investors should gear up for moves in the market as well as increased M&A.
As summer holidays beckon, investors typically exchange their screens for a beach. However, with increased volatility in the market and more rate cuts expected this month by both the Bank of Canada and the European Central Bank, investors should gear up for moves in the market as well as increased M&A.
The mining sector is uniquely positioned to benefit from rate cuts because of strong commodity demand and prices, delays to bringing projects into production and historic earnings from majors.
Commodity prices have seen strong growth over the past few years despite some pullbacks in nickel and lithium. Gold hit a record high of US$2,449.89 per oz. on May 20, about a 77% jump during the past five years. Silver is at its highest point since 2012 and copper has passed US$10,000 a tonne.
Aggressive growth in commodity prices and an increasing awareness of an underlying supply gap has started to pique more investors’ interest. With more potential rate cuts in sight, it’s expected that commodity prices will see a further increase as investors shift away from bonds or lower yielding assets. As prices rise, this also sparks conversations in the board rooms of major mining companies around tapping the capital market or looking for attractive assets to purchase.
Widening gap
Bringing mines into production has historically been a challenging ordeal. Increased regulation has just added to the problem. S&P has estimated that the average time to bring a mine from discovery into production ballooned from 12.7 years between 2005 and 2009 to 17.9 years during from 2020 to 2023.
Whether the wider gap is due to permitting, environmental or political concerns, it’s still the overarching factor causing global commodity supply shortfalls. And it’s also pushing some companies in M&A as a shortcut to new production because they’ve struggled with projects.
A good example is Chilean state-owned miner Codelco’s Rajo Inca project. It was was supposed to start output in 2019, but now the company is aiming for 2026 and reviewing its US$1.4 billion capital cost.
Teck Resources’ (TSX: TECK.A, TECK.B; NYSE: TECK) QB2 project in northern Chile is another example. It started production last year but at almost double the original budget.
M&A shift
In 2023, the mining industry saw $121 billion in deals, according to London-based GlobalData. Bear in mind that those agreements were considered with rates at the highest level over the past circa 20 years. Therefore, it is relatively safe to assume that when rates drop and borrowing costs decrease, we will see an even more appealing scenario with potential returns on proposed M&A deals more attractive.
The market is coming off great first-quarter earnings for the major miners as it gears up for second-quarter earnings season. Results have shown lower mining costs paired with record commodity prices leading to a significant beat in earnings by multiple companies. There are still some troubled companies who are having issues with increasing costs and lower output. However, on a wider basis, results for the sector are expected to impress.
Despite the rising earnings, there is still a divergence between the share price of miners compared to underlying commodity prices. Although this should suggest that there will be a regression to the historic average, in the meantime this creates a huge opportunity. Miners are beginning to look more and more undervalued, which is good for companies looking to acquire peers.
As seen in BHP’s (LSE: BHP; NYSE: BHP; ASX: BHP) recent US$49 billion attempted take-over of Anglo American (LSE: AAL), Anglo’s share prices increased by about 25% so far this year.
A similar situation occurred in late 2023 and early 2024. Dundee Precious Metals (TSX: DPM) tried to acquire Osino Resources (TSXV: OSI; US-OTC: OSIIF) for $287 million, a 37% premium, only to be out-bid by Yintai for $368 million, an additional 32% premium to the Dundee offer.
Undervalued assets
Significantly undervalued companies present a great opportunity for majors to seek an acquisition. It can help their longevity by increasing resource reserves as well as operating timeline, all for a discounted price. If the share price doesn’t trend higher and an attractive offer comes on the table, how can a board responsibly turn it down?
Moving into the second half of 2024, it is likely that majors will continue to acquire undervalued assets and share prices will rise.
The Canadian and European central banks are to meet on July 24 and 18, respectively, after quarter-point cuts in June. Forecasting what the United States Federal Reserve will decide when it is due to meet July 30-31 is a bit more challenging. However, keeping rates stable until at least September is reasonable to expect.
While pundits must wait and see how much declining rates may boost commodity prices and mining sector M&A, it’s clear the majors will be watching closely to pounce. It’s only a matter of time until the next blockbuster deal is announced, and with lower rates, we might not have long to wait.
The authors
Kenneth Kaczkowski is an M&A professional based in Munich, Germany. He has worked on global transactions in excess of US$20 billion. He has a Masters of International Business from Smith School of Business at Queen’s University and a BA in Economics from Western University.
Alejando Montt is lawyer based in Santiago, Chile. He has extensive experience in the mining industry, in the private and public sectors both in Chile and abroad. He has a Law Degree from Pontificia Universidad Católica de Chile and an LL.M from Harvard Law School.
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