Juniors with Undeveloped Assets Attractive Candidates

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The Canadian mining M&A scene is red hot, and investment bankers expect much more activity in the months to come.

In the first few weeks of the year, investors have already seen friendly takeover bids for Consolidated Thompson Iron Mines Ltd. ($4.9-billion) and Norsemont Mining Inc. ($520-million), a proposed merger of equals between Inmet Mining Corp. and Lundin Mining Corp. ($9-billion), and a protracted takeover battle for Baffinland Iron Mines Corp.

It is mating season right now, bankers say, and deals of all shapes and sizes are likely.”Commodity prices are strong and mining companies are feeling good about the fundamentals for the long term,” says Rick McCreary, head of global mining at CIBC World Markets.

Ted Larkin, managing director of equity capital markets at UBS Securities Canada, says corporate development teams are running numbers on every possible acquisition opportunity, and that companies are also seeking more advice on defence strategies, as they realize they could go into play at any time.

The mergers seen so far provide a glimpse of the type of transactions that are likely to happen: larger companies buying juniors with undeveloped assets (Norsemont), and companies bulking up to increase scale to fund large-scale projects (Inmet and Lundin).

Cormark Securities banker Darren Wallace says 2011 is a “crossroads” year for juniors, as they own a lot of projects that are ready to be built. He expects many of those companies will choose to sell, as Norsemont did, rather than try to hire a mine-building team and raise all the capital to build the mines themselves.

These projects, in turn, are just what the seniors want.

“I do think companies that are earlier-stage and have very high-quality assets are the types of opportunities that some of the larger companies are looking at,” says Mike Boyd, head of M&A at CIBC World Markets.

He says that since mining company valuations are now driven by growth rather than size, there is a greater need for the seniors to seek out these assets. Last year’s US$7.1-billion takeover by Kinross Gold Corp. of Red Back Mining Inc. was a prime example.

The wild takeover activity early in the year is also expected to provide its own jolt to the M&A market. Bankers say that after Inmet and Lundin decided to join forces, every other competitor is being forced to look at what it can do to keep up and continue to position itself for growth, particularly those that have a thin project pipeline.

“This commodity cycle and the increased M&A activity is forcing companies to be pro-actively looking at all strategic options,” says Alain Auclair, head of investment banking at UBS Securities Canada.

Read the Full Article from the Financial Post HERE

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