Canada’s TSX: A global mineral plays supermarket

By Eden M Oliver and Sander Grieve, Bennett Jones LLP
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The annual March Prospectors & Developers Association of Canada convention and trade show in Toronto once again drew record numbers from the international mining industry – more than 30,000 in attendance.

Eden Oliver
Eden Oliver

Canada is the global mining industry’s leading marketplace with over 1,670 mining companies listed on the Toronto Stock Exchange and Venture Exchange (collectively TSX). Of the 2012 global equity capital raised for mineral projects, 70% was raised on the TSX.

With the Canadian mining industry’s advanced methods of exploration, development and mining operations, and an increasing global demand for mineral resources, Canada continues to be the leading destination for mining investment.

Foreign investment review

Many companies listed or based in Canada offer solid foreign investment opportunities. Such investment may trigger Investment Canada Act (ICA) review to determine if it is “likely to be of net benefit to Canada”.

Specific ICA review rules apply for state-owned enterprises (SOEs) and for investments potentially injurious to Canada’s national security, though approval is generally not required for minority interest acquisition even if the buyer is a SOE. Canada has only formally blocked two foreign takeover bids since the ICA came into force in 1985.

Recent high-profile ICA reviews (which were ultimately cleared) include Glencore International’s acquisition of Viterra Inc and two SOE acquisitions, by China National Offshore Oil Corporation (CNOOC), and Malaysia’s PETRONAS. SOE investors should note the new policy and revised acquisition guidelines that were released concurrently with the CNOOC and PETRONAS clearances in response to heightened political interest in reviewing SOE acquisitions.

Foreign investments in Canada may also be reviewed and require clearance under the provisions of Canada’s Competition Act before completion of a proposed transaction.

Structures for investment

Advanced stage mineral projects are increasingly attractive as fewer developed world-class projects are available for purchase. In addition to investment opportunities and commodity exposure, many investors seek supply security and price stability through off-take relationships. Consequently, mining investments tend to be made using one or a combination of the following structures.

Public M&A: Investors may acquire all the shares of a TSX-listed company by takeover bid (a regulated process where the same offer must be made to all shareholders, be open for at least 35 days and be fully financed if for cash), plan of arrangement (court-sanctioned series of corporate transactions resulting in an acquisition), or amalgamation (corporate combination of companies). This often involves an auction process conducted by an investment bank.

Sander Grieve
Sander Grieve

Private investment in public equity: Investors may acquire new shares (or debt convertible into new shares) of TSX-listed mining companies via private agreement. A TSX-listed company can issue new shares without shareholder approval provided the investor will not own 20% or more of the company’s shares and the issue price is within the acceptable permitted discount – 15% for shares that are C$2 (US$1.95) or more per share.

Direct interest in a project: Investors may acquire a direct interest in a mining project and, if less than all of a project is acquired, manage it by joint venture. This structure generally involves negotiating a purchase and sale agreement with one or more sellers and often results from an auction process. Direct interests may be acquired at the outset or on the exercise of an option (or earn-in), by prescribed spending on exploration or fulfilling other commitments. Option and joint venture agreements are common.

Off-take agreements/stream financing: Investors may purchase all or part of a mine’s production pursuant to an off-take agreement. In a streaming transaction, a company pays the mining company upfront for the right to purchase a percentage of future production from a project, and then makes payments over the life of the contract (often the life of the mine) for each unit of the product delivered under the agreement. This structure is popular for mining companies requiring significant capital for advanced stage projects where traditional equity financings are seen to be dilutive and capital is scarce and expensive.

Royalty: Investors may acquire, or retain in restructurings and sell-downs, the right to receive cash payments related to production. These can take a variety of forms, including net smelter return royalties and net profits interests.

In deciding which structure or combination to use, investors will consider the financial situation, market conditions and business objectives of the company, as well as their own interests, including control over operations, commodity exposure, and interest in delivery of the underlying commodity.

Eden M Oliver ([email protected]) and Sander Grieve ([email protected]) are partners at Bennett Jones LLP, a law firm with particular expertise in the energy and natural resources sectors and offices in Calgary, Edmonton, Ottawa, Toronto, Dubai, Abu Dhabi, Doha, Washington DC, and Beijing.

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