Opportunity knocks in Canada’s mining sector

By Eden Oliver, Bennett Jones LLP
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While Canada remains the leading marketplace for the global mining industry in terms of finance, multinational and international transactions, and exploration and development decision-making, this sector continues to weather a “shakeup”.

Challenges

Canada’s mining companies face an unprecedented combination of market and operating challenges. With mining equities and commodity prices generally depressed, and difficult capital markets expected to persist, the mines and metals business is clearly becoming an investors’ and buyers’ market. The stress factors are higher than anticipated operating and capital costs, low cash balances and scarce financing.

Eden Oliver
Eden Oliver

The decline in metal prices, especially precious metals, has put pressure on project economics, especially for projects with high all-in capital and operating costs. This has resulted in asset write-downs and an extensive drop in equity prices. Investors in larger capitalized companies have imposed cost control requirements on management. Corporations have cut spending, putting some operating projects on care and maintenance, and delaying project development. Reductions in operating and capital expenditures, including in acquiring junior companies, have hurt the exploration and development industry.

With extensive losses suffered by stock market investors, investor withdrawal has further negatively impacted prices, and companies are having a harder time raising capital. Many companies that have been unable to raise capital through public financings have turned to stop-gap measures. Some lenders are looking to sell their debt positions. While an eventual return to supply and demand balance can be expected to push prices up again, the indicators suggest that anticipated recovery will take time.

Opportunities

In the meantime, development project and corporate opportunities with good economics are becoming available for those with investment mandates, at attractive valuations and with their management and operating expertise still intact. Junior exploration and development companies, facing challenges in raising capital in the public markets on which they have traditionally relied, are seeking alternative sources of capital and many are under pressure to find risk capital before having to mothball their projects and lay off those with the technical expertise to advance them. Investors who can take a longer term view will benefit from these markets and the uplift that can be expected from what will eventually be decreased supply relative to demand.

Mining continues to play a central role in the Canadian economy, and an extraordinary infrastructure of technical, operational and professional expertise supports the industry. The financial structures and tools used in making investments include public mergers and acquisitions, private investments in public equity, acquiring direct interests in projects, product off-take agreements, precious and base metals stream financing, and royalty agreements.

Given the buying opportunities available, we are starting to see the market participation of funds that have not traditionally invested in resources. Many investors appear to be fixing on advanced stage projects with shorter timelines to commencement of production.

In addition to the traditional structures listed above, restructuring procedures can be used to help facilitate asset and share purchases, “cleanse” target companies and assets, and provide mechanisms to help secure and place new financing. Creative financing packages (including convertible debt or debt combined with new equity) can be implemented as part of a restructuring plan. Court approved debtor-in-possession financing charges can give new lenders (or existing lenders for new advances) priority over existing liens and security. Mergers and amalgamations can be combined with debt restructuring to cleanse target companies of unwanted liabilities and obligations, and implement reverse takeovers or amalgamations to potentially make use of stock exchange listings and other assets.

Conclusions

Businesses in India that need to import metals and minerals, and those with the capacity to invest, should consider participating and acquiring issuers and projects listed on the Canadian stock exchanges. Depending on the circumstances, investors may wish to consider taking listed companies private.

Potential off-takers of products may be metal producers, such as steel manufacturers. Companies that need metals for their products and services, and for infrastructure development, can benefit from the low asset valuations. Resources used in fertilizers, such as potash and phosphates, as well as energy resources, such as oil sands, are products that may be of interest to Indian investors.

The economic “shakeup” in the Canadian mineral industry is yielding an unprecedented opportunity for domestic and international investors in Canada.

Eden Oliver is a partner at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Dubai and Doha, and representative offices in Washington DC and Beijing.

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