Traditionally a major recipient of drilling dollars, Latin America took a tumble on the exploration front this past year. Nevertheless, there has been plenty of activity on the corporate front.
While most mining forecasts at the end of 2008 were apocalyptic –with investors alarmed after the September 2008 Lehman Brothers bankruptcy, and in the wake of the biggest global economic recession of recent times – the industry nevertheless managed to keep afloat through equity markets.
Despite slashed metal prices, and with mining companies’ market caps more than halved by the fourth quarter of 2008, global stock exchanges registered record highs as confidence made a sudden recovery in the second and third quarters of 2009.The industry bounced back with recapitalized cash flows – through shares and long-term bonds — to pay short-term debt committed in the midst of the 2006-2007 mergers and acquisitions (M&A) effervescence.
The fast global financial recovery was aided by generous government stimulus plans on infrastructure, namely railways, roads, ports, among other major projects. A revamped BRIC (Brazil, Russia, India, and China) demand boosted metal prices gradually throughout 2009.In Latin America, the economic recession was battled with diverse incentive plans.Chile’s government launched a $4bn stimulus—funded through a conservative fiscal plan that saved $22bn of copper earnings in sovereign funds and new bonds; Argentina announced a record $ 32bn in public works for 2009 and 2010, after nationalizing its private pension funds. And Brazil agreed to a $28bn spending plan financed partially by the country’s state development bank.
“While it is true that the monetary authorities have used every tool at their disposal to restore order to the financial system — including firing up the printing presses—it is also true that the magnitude of the downturn was so severe that there appeared to be plenty of slack in the global economy, allowing central banks to stimulate without generating runaway inflation,” reported HSBC 2009 Gold Book. Jittery bankers halted the few available loans last year forcing the industry to tap the equity markets with considerable success.Globally, miners raised $180bn from January to October, “but virtually none of it was for IPOs,” Ernst & Young official Lee Downhnan told Reuters.Rights issues and secondary offerings represented $70 bn, and bond issues hit a record of $60 bn.Mining giant Rio Tinto alone raised $15.2 bn in rights issues and gold-rich Barrick raised another $ 4.3 bn. Latin America, meanwhile, was able to raise $3.1 bn in Toronto, a year record for the region in the TSX and TSXV.Other global exchanges experienced similar enthusiasm.
Latin America also enjoyed some financial strengths in the midst of the crisis, according to the Fitch Ratings report Bruised but Not Beaten, “due to their higher EBITDA margins as a result of high ore grades, modern technology, dynamic workforce and flexible labor laws.”The report adds that, liquidity positions, which will come under pressure, appear to be manageable. The region’s mining companies median cash/short-term debt coverage ratio – which measures the firms’ ability to pay debt with annual cash flow from operations— was 1.6 times, a significant fall from the peak of 2.5 times seen in 2006.
The M&A markets, on the other hand, were rather quiet.Most global mining firms –particularly junior exploration ones — were on survival mode for most of 2009, mainly focused on overcoming the current financial crisis. Some were worried about keeping their business afloat, and prioritised the conservation of cash by sacrificing exploration plans, drilling, or developing new mines – or simply closing uneconomical ones.As a consequence, the Latin American region suffered thousands of layoffs. In Mexico alone some 14,000 jobs were lost in the second half of 2009.
Analysts’ predictions point to a more positive 2010 in terms of consolidations, as well as a dynamic equity primary and secondary markets, propelled by enhanced BRIC metals demand with renewed appetite from China and Brazil. “Let’s say there is a couple of $4 to $5 bn IPOs and a handful of smaller ones; you could easily get to $ 20 or $30 bn of new capital on the exchanges from entities that are not already listed,” revealed Ernst & Young’s Lee Downhnan.
LatAm Exchanges and the TSX
The TSX and the TSXV, Toronto’s two exchanges and the global mining leaders, broke records in mining financing, which reached $ 22bn from January to November 2009.Latin America also achieved record highs with $ 3bn raised among the region’s 81 listed mining companies, with 396 properties in the TSX and 176 exploration firms with 610 properties in the TSXV, according to the exchange data. Mexico was Toronto’s Latin American leader in 2009. The country got financing for 66 companies and 192 mining properties listed on the TSX, and for 131 firms with 393 projects in the TSXV. Argentina had 33 companies with 81 exploration properties registered in the TSX and 34 firms with 143 projects in the TSXV. Chile, despite its openness to mining operations, lacks a flourishing equity market; only 22 Chilean companies with 56 mining operations are listed on the TSX, and 35 with 84 in the TSXV.Peru, for its part, has a greater presence in the TSX, with 36 mining companies with 114 properties and 53 firms with 143 projects in the TSXV.
Lima’s access to equity is not limited to Toronto. The Lima Stock Exchange (BVL for its Spanish acronym) is the region’s most dynamic, with an impressive 168 percent growth rate in 2006.One BVL operator is Minera IRL, a gold company with operations in the Peruvian Andes, with dual listings in London and Lima. Minera IRL launched its IPO in London in April 2007, and injected liquidity through the BVL eight months later. “The Lima listing has been a real success and helped us increasing our volume and shareholders base, limited to the traditional markets,” says IRL Executive Chairman Courtney Chamberlain.
The BVL offers lower listing costs compared to those in London. In addition, Chamberlain notes some other advantages of belonging to the BVL: “Peruvians feel we are a local company because we are listed here.” What’s more, the BVL has favored Minera IRL to keep very good relations with local governments. IRL’s Corihuarmi gold mine, which began operating in March 2008, employs 400 Peruvians at 5,000 meters above sea level. Corihuarmi works to improves the living standards of its workforce through generous medical and educational programs, and sustainable development when the mine is closed.
TSX managers acknowledge the Latin American equity potential, and have visited Latin America on several occasions in the last two years. TSX Senior Manager Greg Ferron says, “We are trying to raise awareness of the Toronto Stock Exchange to persuade the Latin American managers to consider the TSX when raising capital. So far, we’ve been three or four times in Colombia, and several times in Brazil, Chile, Peru, Argentina and Mexico.”
The TSX team has also provided guidance to the local exchanges, especially those interested in junior markets. Much of the Toronto Exchange Venture’s know-how and experience has been handed down to local exchanges through its Corporate Finance Manual. The BVL, for instance, launched the Lima Stock Exchange Junior based on the Toronto model.
Listing locally has other benefits. One mining expert in the region who requested anonymity explains that “the real value of the listing in those countries is the creation of business ties with local investors. That helps the governments to be very careful with any changes they may make that could affect the company. With the listing, it may impact voters or pension funds contributors.”
Unfortunately, most Latin American countries have not encouraged the development of equity markets. Hallgarten & Company strategist Christopher Ecclesstone says that the fact many countries in the region have turned to the political left underscores the governments’ lack of interest in tapping into the capital markets. “Sometimes they simply do not understand the benefits of equities and the exchanges are certainly not a government priority.”
Despite declining metal prices, gold continues to be the bright spot in 2009, averaging $925, and forecasts show the trend will go on.Due to the economic turmoil, gold was considered a “safe haven” by anxious investors looking to protect their capital from the falling US dollar.Inflation and devaluation fears rocketed after the American government announced its $ 787bn stimulus plan for the 2009 fiscal year.Nonetheless, thanks to the downturn’s severity, inflation fears did not materialize.
This trend continues benefiting gold operations in Latin America, keeping miners rubbing hands with sparkly future productions.Goldcorp’s Peñasquito Mexican mine announced it expects to enter into commercial production in January 2010.Kinross Gold and its Ecuador’s mega-rich Fruta del Norte (FDN) project recommenced drilling in November and expects production by 2013.Some cash flow will come from its Chile’s Lobo-Marte mine, scheduled to become an operating mine in 2012, one year earlier than FDN.Barrick, meanwhile, finally got permission to begin the Pascua Lama construction in the Chile-Argentina border, and is scheduled to produce in 2013.
Other metals, however, did not have as bright performance as gold.Copper and nickel prices were still depressed in 2009, averaging $ 3,553and $ 10,036, respectively, half of their prices in 2008. Iron ore fell from a $127 average in 2008 to $89 a year later, although the metal is still $24 higher than 2007.Silver has gone down slightly from $14.97 to $12.50 in the last 12 months.Low copper prices frustrated Peru’s Conga project, a copper-gold project, and a JV between Newmont and Buenaventura.
Five Latin American Countries in Fraser’s Survey Bottom Ten
Once again, the Latin America mining environment was a mixed bag during 2009. Chile, Mexico, Peru, and Brazil continued as the most stable jurisdictions, while Venezuela, Ecuador, Guatemala, Honduras, and Bolivia carried on as the worst performers, according to the Canada-based Fraser Institute’s Survey of Mining Companies 2008/2009.
Sadly, the region’s Policy Potential Index (PPI) ranking has substantially decreased, averaging 37.3, a 14-point decline below its 2005/2006 PPI levels. The PPI composite index measures the public policy environments of 71 countries, analysing such criteria as regulation enforcement, taxation, socioeconomic agreements, infrastructure, environmental regulations, amongst others. Chile was number one in the region with a score of79.9, the only Latin American country to rank in the top 10, alongside some Canadian provinces. Mexico and Peru followed with a PPI of 57.7 and 56.6, respectively. Brazil was number four, with a 47.1 index, and Colombia earned a 43.0 PPI ranking. Colombia became the region’s rising star, climbing 10 positions, from 56th to 46th in the Fraser mining survey. Panama and Argentina ranked 47th and 56th.
Sadly, Latin America scored five nations in the bottom 10. Bolivia ranked 66th, Honduras 68th, Guatemala 69th, Ecuador 70th, and Venezuela 71st. The authors of the Fraser index call this a “tragedy.” Survey of Mining Coordinator Fred McMahon states that, “unfortunately, these are all developing nations which most need the new jobs and the increased prosperity that mining can produce.”
Another survey, the Minerals Industry Advisories conducted by Behre Dolbear research, ranks Chile, Mexico, Brazil, and Colombia in the top 10.“The worst performer was Argentina, which fell 4 points to a composite score of 33.This was due to the populist policies of the government, the seizure of pension funds.”Brazil, however, moved up one point as its overall economical situation continues to improve evolving into a continental leadership role, says the report.
Latin American M&As
Large mergers and acquisitions—those over a $1 bn value—occurred exclusively amongst iron ore and steel companies in 2009.Only five transactions were announced during the first three quarters of the current year, compared to 19 large deals in 2008. The announcement by Australian firms BHP Billiton and Rio Tinto of plans to consolidate their iron ore operations in a $58bn mega-deal is still pending. China, meanwhile, decided to withdraw two offers made to Australian firms. Latin America registered the only two completed steel deals in 2009.
Venezuela formally acquired Ternium Sidor for $1.97 bn, after seizing its assets in 2008.The move is part of President Hugo Chavez’s strategy to nationalise natural resources. Brazilian giant Vale S.A., for its part, poured $1.37 bn into ThyssenKrupp CSA Siderurgica do Atlantico Ltda, a steel company that will construct the largest ever steel mill built since 1980, expected to begin in 2010.Vale is securing an exclusive right to supply iron ore and guarantee allocation of the metal to an increasing global demand.
On the gold side, however, elevated price of gold caused mining firms to overpay for their acquisitions during the last decade, according to the HSBC Gold Book’s analysis of 150 transactions.As a consequence, gold companies have largely transferred benefits and premiums to target firms, and with inflated operating costs the return of investment capital (ROIC) have been depressed.The most M&A active firms were Harmony with 19 transactions, Newmont with 11 deals, Goldcorp and Kinross with eight acquisitions, and Goldfields, Yamana and Kinross with six, five, and four transactions, respectively.
Under the $100m level, where most of the M&A transactions occur, 2009 recorded some good, mediocre, and bad experiences, according to Christopher Ecclesstone.He states that one of the brilliant M&As was the three-way Canadian gold combination between New Gold, Metallica Resources and Peak Gold, announced in May 2008—a trio of companies with market caps worth $ 100 to $300m— which merged into a much more powerful one. “If you are a 300m firm you can only take over a $60m company.But if you are $ 900m firm you can easily purchase a $ 400m company,” comments Ecclestone on the successful merger.
Indeed, over a year later, in June 2009, the new New Gold Inc. acquired Western Goldfields in an all-stock transaction. The firm has operating mines in Australia, Brazil, and Mexico, and development stage projects in Canada and Chile.
Another interesting combination was the two–way merger of Capstone Mining Corp., a gold, silver and copper firm in Mexico, and Sherwood, a near producer with Canadian assets. In September 2008, they announced their merger in a $244m shares transaction [1.566 Capstone shares for every Sherwood share.]Almost at the same time, Capstone’s Silverstone property was acquired for $190m by rival Silver Wheaton. The transaction cashed up Capstone, keeping it on the road to continue M&A shopping.
A remarkable deal was done by Teck Resources, Canada’s largest publicly traded based metals miner, which paid big bucks in a $10bn acquisition for Fording Canadian Coal Trust, in October 2008—a misguided move in recession times. The market rejected the transaction, and the firm’s stock plummeted from $50 to $3.35 in few months. But the company impressively recovered to $37 stock price in December, after reducing its workforce by 13%, partnering with a Chinese firm, and selling a handful of its Latin American assets —including its indirect interest in Sociedad Minera El Brocal to Buenaventura for $35m in cash, its 50 percent interest in the Williams and David Bell mines for $65m to Barrick Gold, and its 60 % ownership in Chile’s Lobo Market for gross proceeds of $101m.
Some 2009 deals were performed very poorly, though.The Goldhunter-Suramina M&A, both under the Lundin Mining group umbrella, was done only to reduce costs. Meanwhile, International Minerals Ventura Gold’s recent acquisition was an overbid that offered $24m in cash and $8m worth of its shares to Hochschild, according to Ecclestone. “It was sort of doing the right thing, but with the wrong people.I like that International Minerals is doing acquisitions, but not under Hochschild’s thumb.It could have done a much better deal.” Hochschild owns a share in the Ventura’s Immaculada Peruvian project, but the duo already co-own Peru’s Pallancata mine.
One of the most boring transactions of the year was that involving IMA Exploration, International Barytex and Kobex M&A.The three were just too similar:junior early-stage explorers with a cash boxes of $18m, $6m, and $17m respectively.
But how do we determine when a merger and acquisition is right or wrong?“A merger should be complementary,” says Ecclestone. “It should be the kind of transaction where you get one plus one equals three.You know, where it is an advantage for both parties, including shareholders.But when you have a transaction where there is not much of an improvement, it’s just an uninteresting one.” His 2010 forecast?More consolidations. He shares this outlook with PwC experts who expect cost-reduction efforts through a more vibrant M&A activity in the upcoming year.
Exploration Plunged by 42 percent
Junior mining firms suffered a major setback with a 42% drop in global exploration during 2009, according to the Nova Scotia-based Metals Economics Group (MEG).The MEG Worldwide Nonferrous Exploration Budget Report says exploration spending lost $5.5bn, the largest plunge in two decades.
However, junior exploration firms survived in a much larger number than originally forecast. Initial predictions of a dramatic 50% of exploration firms closing resulted in a modest 6%, instead, because even despite juniors’ difficulties in accessing financing, “equity markets have not been as barren as some suggest, particularly as market sentiment has improved from earlier in the year,” states the MEG report.
From January to September 2009, juniors achieved 300 exploration-related equity financings in global exchanges, and they raised a minimum of $2m each, totaling over $4.7bn. Exploration budgets were largely cut in 2009. Major, intermediate and junior mining firms reduced this early activity, with the biggest decline registered among the smaller ones.Juniors stepped away from their five-year leadership, surrendering to the majors’ deeper pockets. Planned junior exploration expenditures had climbed by 1,072% since 2004.
Once again, Latin America was the world’s favorite exploration destination for 2008, with 25% of the global budget poured into the region. Canada was second with 19%, and Africa third with 15%. Another 14% was invested in Australia and 7% throughout the United States. Within Latin America, exploration activity was focused in the most politically stable countries. Mexico led with 6%, Peru with 5%, and Chile and Brazil got 4 and 3%, respectively. Together, the four countries accounted for 18% of global exploration budgets.
The MEG research of 1,912 companies, representing 95% of those worldwide, also showed that 40% of the exploration budgets financed base metals projects [copper, nickel and zinc], which was 1% higher than that for gold exploration activity—thelowest percentage for the latter since the MEG began publishing the report in 1989. Nonetheless, the MEG research team expects gold to recover its position as the top exploration target.
Another divergence during 2008 was the exploration budget’s favouritism toward the most advanced projects. The largest yearly increase corresponds to mine site budgets with a 37% jump, followed by a 29% at late stage, and a modest 18% increase among grassroots firms. According to the MEG, last year was the fourth consecutive year in which late-stage spending outweighed grassroots spending.