MARKETS

Dryblower on merger dangers

IF YOU believe what investment bankers are saying, the junior sector of the mining market is about to be hit by a wave of mergers. <i>Dryblower</i> suspects this will produce more losers than winners.

Tim Treadgold
Dryblower on merger dangers

There are two reasons for making that prediction. Firstly, countless academic studies have demonstrated that takeovers destroy more value than they create. Secondly, there are first-hand examples of big and small merger failures staring everyone in the face.

The biggest was Rio Tinto’s acquisition of Canadian aluminium producer Alcan. In one mistimed, poorly researched and overpriced swoop, Rio Tinto’s management team wiped out $40 billion of shareholder wealth.

Not content with that dog of a deal, Rio Tinto put a cherry on its poisoned Alcan cake in the form of the $3 billion flushed around the S-bend (or down the Zambezi river, to be more accurate) with its acquisition of Riversdale Coal.

Despite the astonishing waste of money in those deals, the boys and girls running the financial market reckon it is time for a return of the mergers and acquisitions caravan.

Why would they be saying that when the evidence is so grim?

It is because they need a fresh feed of the fees generated by orchestrating M&A activity, even if it impoverishes investors, especially those with an interest in the company doing the buying.

A series of reports from late last year and more recently have been trundled out by investment advisers as evidence of the rising tide of interest in M&A moves among junior miners.

Accounting firm Grant Thornton released a survey of junior miners in November that highlighted the gap between the haves and the have-nots. The survey shows that 64% of small companies have less than $5 million in cash, and 35% have less than $2 million.

The general thesis of the Grant Thornton study was that companies with cash would seek a deal with companies that had mineral exploration assets and limited cash. That is a fairly predictable development, seen on countless occasions in the commodity-price cycle.

The next voice in support of M&A came in January, when a firm specialising in the analysis and prediction of mergers tipped more deals among precious metal miners, “especially between the cash-poor and asset-rich”

No investment banker or stockbroker wants to hear Dryblower’ advice about how to handle takeover activity between the haves and the have-nots – do not get involved!

Do not hesitate to sell companies that propose a merger, or are on the receiving end of a takeover bid.

If you are a shareholder in a company on the receiving end of a takeover bid, take the money or sell into the market and do not look back.

If you are a shareholder in a company making a bid, sell as fast as you can.

M&A, no matter what spin the investment bankers and others tell you, is invariably a destructive force that benefits no one except the advisers to the deal (both sides), thanks to the fees they are able to extract from telling directors what they are paid to know.

If the Rio Tinto fiascos do not convince you that M&A is a one-way losing bet, consider three more examples:

  • Kingsgate Consolidated merges with Dominion Mining and Laguna Resources in late 2010. This was a double-header deal undertaken at a time when Kingsgate was trading about $12 a share, more than three times its current price of $3.55
  • St Barbara Mines merged with Allied Gold last year. St Barbara was trading about $2.12 when the deal was announced and is now about $1.23
  • Silver Lake merged with Integra Mining last year, when Silver Lake was at $2.60 a share. It has since slithered to $2.11

There are, obviously, reasons other than M&A activity that have damaged companies making the merger overtures. Falling commodity prices can be an important factor.

However, even with management of the bidding company pleading that circumstances changed after the deal, a mountain of evidence supports the argument that M&A is a value-destructive force for everyone other than the fee earners on the sidelines.

So if M&A activity is really about to heat up among junior miners, the advice to investors is stand clear or, if you are caught up and cannot escape, apply the core principal of M&A: sell the bidder, buy (and quickly trade) the target.

TOPICS:

A growing series of reports, each focused on a key discussion point for the mining sector, brought to you by the Mining Monthly Intelligence team.

A growing series of reports, each focused on a key discussion point for the mining sector, brought to you by the Mining Monthly Intelligence team.

editions

Mining Magazine Intelligence Future Fleets Report 2024

The report paints a picture of the equipment landscape and includes detailed profiles of mines that are employing these fleets

editions

Mining Magazine Intelligence Digitalisation Report 2023

An in-depth review of operations that use digitalisation technology to drive improvements across all areas of mining production

editions

Mining Magazine Intelligence Automation Report 2023

An in-depth review of operations using autonomous solutions in every region and sector, including analysis of the factors driving investment decisions

editions

Mining Magazine Intelligence Exploration Report 2023 (feat. Opaxe data)

A comprehensive review of current exploration rates, trending exploration technologies, a ranking of top drill intercepts and a catalogue of 2022 Initial Resource Estimates and recent discovery successes.