Andrew Forrest sparks a merger and acquisition race for small miners
Iron ore billionaire and green energy crusader Andrew Forrest has just fired the starter’s gun on what’s likely to be a wave of merger and acquisition (M&A) activity among small miners.
Forrest’s $760 million bid for nickel miner Mincor (ASX: MCR) is set to succeed, not because it’s a particularly generous offer, it’s more case of him having liquid cash firepower at a time when financial markets are in turmoil.
The offer was pitched at $1.40 and there is a new valuation of $1.95 on Mincor from Royal Bank of Canada (RBC) which described Forrest’s proposal as “opportunistic”.
It clearly is because Mincor was trading at $1.85 just two months ago.
But whether anybody has the time (and money) to become entangled in a bidding duel with Forrest is unlikely given his capacity to outbid most rivals with his personal $32 billion fortune.
Forrest demonstrated his capacity to outbid rivals in his hunt for nickel assets when he blasted BHP (ASX: BHP) out of the way in a race for Canadian nickel explorer Noront Resources.
His vehicle Wyloo Metals successfully completed the acquisition of Noront in April last year.
Potential competitor bids
BHP, in theory, could be drawn into the race for Mincor because it is keen on nickel as a “future facing” commodity and is already a buyer of Mincor’s sulphur rich nickel ore which is essential blending material in BHP’s Kalgoorlie nickel smelter.
But a long-term contract means that if Forrest wins Mincor, BHP will have to live with Forrest, despite any animosity over the Noront loss and past clashes over access to BHP’s iron ore rail network.
IGO (ASX: IGO), another WA nickel producer, might be tempted to counter Forrest’s $1.40 given that it’s already sitting on 7% stake in Mincor with speculators appearing to believe that IGO or someone else will enter the game, lifting Mincor’s share price to $1.48.
Mincor, however, is not the only small miner likely to find itself in play as two big investment and financial themes clash.
On one side of the market is the unstoppable shift to the electrification of everything, including vehicles, which means strong demand for a broad family of metals such as copper and nickel which are essential in batteries.
On the other side is the challenge of raising funds from banks and investors running scared after the effective collapse of one of the world’s biggest banks, Credit Suisse, and the failure of several smaller US banks.
Whether the financial sector is slipping into a re-run of the 2008 global financial crisis (GFC) is unknown but the fact that some people, including former Australian Government Treasurer, Wayne Swan, have hinted at a banking and funding crisis is feeding on fears that financial conditions will get worse before they get better.
What that means for investors with an eye on the small end of the mining sector is that companies with valuable resources (especially those close to a development decision) will need to raise capital from alternative sources or look for a merger partner with cash.
It also means the rich and opportunistic investors such as Forrest will be able snap up bargains which have recently been marked down by market uncertainty, such as Mincor.
M&A activity underway
Conditions conducive to M&A activity in the small end of the mining have been improving since this time last year when central banks started raising interest rates and cash became a highly desirable asset after several years in the sin bin of near zero returns.
BHP’s bid for OZ Minerals (ASX: OZL) was a top end move, which followed a series of smaller miner mergers such as Genesis acquiring St Barbara in a gold sector merger which is yet to be completed and Brightstar pushing ahead with its Kingwest merger after negotiating altered terms.
Deep pockets were a factor in both the moves, with IGO and Tianqi having the financial muscle to develop Essential’s lithium assets, while Catalyst has been helped with its expansion plans by securing the support of another WA iron ore billionaire with spare cash, Gina Rinehart.
Pantoro (ASX: PNR) merging with Tulla Resources (ASX: TUL) is another gold deal driven by the appeal of lower costs through the combination of resources, while tiny Duke Exploration (ASX: DEX) is looking to merge with True North Copper.
More activity expected
More M&A activity can be expected as small companies with promising projects seek strong financial backers, and companies with cash use the current downturn to snatch a bargain, which is what Forrest appears to be doing at Mincor.
As an investment theme M&A is perfectly valid and with cash tighter than at any stage in the last 10 years there is an incentive for companies to deal.
But as a guiding principle it is invariably better to buy the target in a takeover than the bidder given the tendency of a bidder to overpay to secure an asset.