Toronto-based Yamana Gold’s [TSX:YRI;NYSE:AUY] sale to South Africa-based gold producer Gold Fields [JSE:GFI] for USD 7.35bn, announced on 31 May, was notable for two reasons. First, it marked a clear return to paying premiums in large mining deals. It also proved to be the largest transaction in Canada in the first half of 2022.
The transaction mitigated how slow the start of the year was for Canadian M&A. Some drop off would logically have been expected after USD 147.3bn in deals in 2021, one of the strongest years in nearly three decades of Dealogic data. But even with Yamana included, only USD 46.2bn in deals were announced in 1H22. That pace would translate to a drop of about one third in deal value for the year.
Canada is not insulated from the supply chain and inflation woes the world is grappling with, notes Krisztian Toth, a partner at law firm Fasken. After a few years of low-to-no-premium mergers of equals in the mining sector, the need to pay premiums could now slow down M&A in that industry. Declining stock prices also could take some companies off the board. With commodity prices bouncing around and a looming recession, agreeing on valuations of energy and mining projects can be difficult.
"In 20 years, I've never seen something like this," Toth said. "Usually there is at least one port in the storm."
Rock solid, for now
Despite the mining sector’s rising premiums, M&A value in 1H22 kept pace with recent years. The USD 12.6bn in mining deals in 1H22 – which also included Rio Tinto's USD 2.64bn acquisition of Turquoise Hill Resources in March, in addition to Yamana’s deal – puts the sector on track to match its 2021 performance.
Combined with the forestry and paper and oil and gas industries, deals involving companies that produce from natural resources represented almost exactly half of total deal value in 1H22. That is significantly higher than in recent years. From 2018 to 2021, the three sectors annually represented between 19% and 37% of deals, according to Dealogic data.
Breaking the logjam
Once the market finds bottom, Toth says, deal flow could kick back up. Certainty and stability provide a foundation for dealmaking. Capital needs will force some companies to sell equity, even if they are doing so at less-than-desired valuations. Zach Austin, an associate at Fasken, notes private equity funds are flush with cash and could bargain hunt in the back half of the year.
Battery metals miners have a lot of runway to grow while investors seeking stability could turn to gold and drive up deal flow there, predicts Toth. Smaller miners such as Pure Gold Mining [TSX.V:PGM], a Vancouver, British Columbia-based metals miner that announced a strategic review process this month, could be one of the likeliest targets, a mining executive says. Ridgeback Resources, a Calgary, Alberta-based oil and gas company, also reportedly may be hitting the market.
The media sector could see some activity too, adds Toth. Bell Media, a Canada-based multimedia company, is reportedly considering selling an interest in Pinewood Toronto Studios, a Canadian film studio.
One other situation to watch is Rogers Communications' [TSX:RCI] stalled CAD 26bn acquisition of Shaw Communications [TSX:SJR]. The deal has been tied up at the same time as regulators and elected officials develop new antitrust laws and rules. The lack of a final set of rules, a Canadian executive believes, could be dampening dealmaking.
