Being strategic in resources: JVs remain key

Global mining deals outlook / March 2014
Being strategic in resources
JVs remain key
Joint Ventures (JVs) have been an important part of the
mining industry for decades and have been instrumental
to the development of many major resource projects.
In recent years, JVs have taken on special significance
given the restriction in availability of capital and debt
finance, increased capital costs for projects, and greater
complexity of mining projects in an environment of
heightened commodity price volatility.
These factors manifest themselves in a few ways:
• A reluctance by managers to commit to large mergers
and acquisitions;
• Difficulty in funding large resource projects,
particularly those with commissioning risk;
production. Instead of all-out takeovers, many miners
are collaborating through JVs. By advancing a project
together, miners don’t have to assume all of the risks
associated with making a full acquisition on their own.
“JVs allow companies to share capital investment and
project risk,” says John Gravelle, PwC’s Global Mining
Leader. “They can act to fill an exploration gap in a
company’s business strategy.”
The reasons to seek out a JV vary and can include:
• Mega projects where a number of parties share the
financial and development risk;
• Renewed focus on cost cutting and risk sharing.
• Transactions being undertaken between companies
with existing cash and funding capacity and those with
quality development projects or existing production
with growth potential; and
There is a de-risking taking place across the mining
industry. Still, companies need to continue finding
ways to grow their reserves and secure future
• Investors (particularly in Asia) seeking to secure
off-take agreements as part of their funding of an
investment into a resources project..
• Pressure to reassess the viability of existing or near
term projects;
Ideally, these arrangements feature each participant
bringing particular expertise to manage specific risk
elements and an allocation of capital that allows each
organization to focus absolutely on what it does best.
www.pwc.com/ca/mining
Global mining deals outlook / March 2014 / Being strategic in resources / JVs remain key
Conditions right for JVs
“
In any joint venture, there has to be two willing parties
with aligned objectives to enter into the deal. Above that,
conditions, be it financial or technical abilities as well as
market cycles, play a major role in making that decision.
”
Marz Kord
President and CEO, Wallbridge Mining Co.
A number of JV agreements are being
struck in the mining industry around the
world, and across various commodities.
One recent example is Wallbridge Mining
Co. Ltd.’s JV with Lonmin plc to explore for
platinum group elements, copper, nickel and
gold in the mining-rich region of Sudbury,
Ontario, Canada. Wallbridge has had a
long-term strategy of de-risking exploration
by maximizing on JV opportunities, says
company President & CEO Marz Kord.
“In any joint venture, there has to be two
willing parties with aligned objectives to
enter into the deal,” he says. “Above that,
conditions, be it financial or technical
abilities as well as market cycles, play a major
role in making that decision.”
Wallbridge has had success generating
projects and attracting major mining
companies to participate in the exploration
efforts, he adds. “On the one side, Wallbridge
is trying to de-risk exploration and utilize
their technical expertise in finding PGM
in Sudbury. On the other are platinum
producers with need for diversification and a
lack of technical expertise in PGM discovery
in North America,” says Kord. “These factors
make the conditions right.”
Another recent example is the JV agreement
Nordgold N.V. struck last fall with Columbus
Gold Corp. for the rights to a 50.01% interest
in certain licenses at Columbus Gold’s Paul
Isnard Gold Project in French Guiana, in the
Montagne d’Or gold deposit.
“Montagne d’Or is a project with real
potential and we look forward to taking it
forward,” Nordgold CEO Nikolai Zelenski
told us recently. He said the company’s focus
remains on developing its organic pipeline,
as well as opportunities to develop a number
of highly prospective deposits in its portfolio.
“However, in addition, we are looking at
listed junior companies with promising
assets in emerging market geographies for
small-scale and bolt-on acquisitions. We are
not restricted by geography but we do have a
firm set of criteria that any potential project
needs to match,” he says. “Our competitive
advantage is that we have a demonstrable
track record in project execution and
operations in diverse emerging markets
jurisdictions, and this gives us significant
geographic scope in which to look.”
“
We are looking at listed junior companies with
promising assets in emerging market geographies
for small-scale and bolt-on acquisitions. We are not
restricted by geography but we do have a firm set of
criteria that any potential project needs to match.
Nikolai Zelenski
CEO, Nordgold N.V.
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Global mining deals outlook / March 2014 / Being strategic in resources / JVs remain key
Problems can arise
Like any form of M&A, JVs have their pros
and cons.
One potential problem is the risk projects
run of not moving forward due to the
involvement of two boards. This opens
the door for disagreements in strategy
between the parties on both sides and could
potentially lead to delays in the decisionmaking process. That’s because every
fundamental decision needs to be made by
both boards given that the project is under
joint control. That’s not something you see
in most strategic sub investments by finance
providers or investors, which is what makes
JVs different.
with communities and governments, many
of which depend on the tax revenues and
jobs that will be generated from the projects.
JVs might also create a shift in deal strategy
away from mega-deals which otherwise
would potentially lead to diversification
either by commodity or region. That said,
JVs can feature more strategic, low-risk, cost
consolidation opportunities.
The major terms of
a JV agreement include:
i.
ownership;
ii. proportion of capital to be
committed and timing of capital
injections;
iii. board representation and decision
making process;
iv. operator agreement;
v.
anti-dilution and buy-back
terms for failure to make capital
injections.
“When a 50/50 JV is formed, there is usually
a lot of discussions on who retains the
ultimate veto on major decisions such as
mine plans, capex spend and capital calls. As
there is usually a dilution mechanism, this
can lead to potential problems down road if
one party is not able to make capital calls,”
says Stephen Mullowney, PwC Canada’s
Deals Mining Leader.
A delay in mega projects could also impact
global supply and demand of metals. An
imbalance could have an impact on global
commodity prices or, possibly lead to missed
opportunity, particularly if commodity prices
are on an upswing. Finally, project delays
can also negatively impact relationships
“
When a 50/50 JV is formed, there is usually a lot
of discussions on who retains the ultimate veto on
major decisions such as mine plans, capex spend and
capital calls. As there is usually a dilution mechanism,
this can lead to potential problems down road if one
party is not able to make capital calls.
Stephen Mullowney
Canadian Deals Mining Leader, PwC
3
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Global mining deals outlook / March 2014 / Being strategic in resources / JVs remain key
Outlook: JVs expected to play
a key role in M&A activity
We expect JV activity to continue into 2014 as companies
search for growth, or capital, without having to go it alone.
“
[Seeking investment partners for our Simandou
deposit] is really a significant change for the project and,
quite frankly, reduces the risk profile for us.
”
Sam Walsh, CEO, Rio Tinto
When we studied the top five M&A deals of
2013, (see our report, Strategically Picking Up
the Pace: 2014 Global Mining Deals outlook)
we noticed the changing nature of M&A
in the mining industry today. Instead of
outright takeovers, companies are buying
and selling smaller portions. That led to
significant drop in deal values, by about 35%
to about $39 billion (US) in 2013, compared
to $56 billion in 2012 (not including
Switzerland-based Glencore International
plc’s $54-billion takeover of United Kingdombased Xstrata plc in 2012). We expect M&A
activity to pick up slightly, but miners will
continue to turn to safer transactions such as
JVs, for reasons mentioned earlier.
JVs will also continue to evolve as interests
of the participants change. An example is the
Clermont Mine, a coal producer in Australia.
This was an existing JV, however Rio has sold
its 50.1% stake for $1 billion to Glencore
Xstrata (who will take over management)
and Sumitomo.
Financial investors will also become
important JV partners in 2014. BHP
Billiton has said it may seek partners to
develop its massive Jansen potash project
in Saskatchewan, Canada. In an earnings
conference call with investors in early 2014,
BHP CEO Andrew Mackenzie said the
company is talking to a number of players,
including customers and competitors.
“There are people who would like to invest
strategically alongside us in developing this
operation,” he said.
We may also see an increase of ventures
with partners with different backgrounds,
such as sovereign wealth funds (SWF) and
downstream players. For miners wishing to
retain control of a mining project, a SWF or
trading house may be a more advantageous
JV partner versus another miner. SWFs and
trading houses typically take a minority
interest in the project and are more concerned
with off-take as opposed to operating the
project. Based on our experience, this usually
makes the negotiation of the terms and
conditions a little easier.
In addition, a JV structure might suit private
equity as an investment method. The large
amounts of capital raised by dedicated
private equity funds in 2013 will need to
be deployed in the near future or risk being
returned to shareholders. Co-investing with
a major will provide private equity with both
technical expertise as well as a possible exit.
JVs may not only arise around the resource
base. For instance, Rio Tinto has announced
that it is looking at investment partners
for the infrastructure portion of the giant
Simandou deposit. “It’s really a significant
change for the project and, quite frankly,
reduces the risk profile for us,” Rio CEO
Sam Walsh told investors on an earnings
conference call in February, calling it “an
important move.”
We expect JV activity to continue into 2014
as companies search for growth, or capital,
without having to go it alone. JVs may not
be as immediately accretive as a merger or
takeover, but for pragmatic executives (not
to mention their shareholders), it can be
an effective alternative in today’s market to
mitigate risk.
“
There are people who would like to invest
strategically alongside us in developing [our
Jansen potash project in Saskatchewan].
Andrew Mackenzie, CEO, BHP Billiton
4
”
Global mining deals outlook / March 2014 / Being strategic in resources / JVs remain key
Let’s get together:
Recent JV examples
The deal
Snapshot
Tianjin Materials and Equipment Group Corporation (Tewoo)
invest in African Minerals’ Tonkolili iron ore mine in Sierra Leone.
Tewoo receives a 16.5% economic interest in the Tonkolili project
and a 20-year off-take agreement
Constantine Metal Resources Ltd. and Japan’s Dowa Metals &
Mining Co., Ltd. on Constantine’s Palmer VMS project in Alaska.
Dowa has the option to earn a 49% interest in the project by making
aggregate expenditures over a 4-year period. The Agreement
includes terms that allow Dowa to acquire off-take rights during and
upon completion of the earn-in option period Constantine is the
operator for work programs carried out during the earn-in period.
Rio Tinto sells 50.1% stake in the Clermont Mine in Queensland,
Australia to Sumitomo and Glencore Xstrata (who will take over
management).
Apart from the normal regulatory process, the deal is dependent
on approval by the remaining original JV partners (Mitsubishi
Development, J-Power Australia, J.C.D. Australia).
Copper Fox Metals joins with Teck Resources to further explore
and develop the Schaft Creek project in British Columbia, Canada
Teck took a 75% interest and will become operator of the project.
The JV agreement also means Teck will arrange equity and debt
financing for its construction
Polar Star Mining Corp. strikes a deal with Newmont Mining
Corp. to explore and potentially develop the Montezuma project
located in the Antofagasta and Calama districts of Chile.
A three phase earn-in over a 7-year period, allowing Newmont to
own up to a 75% beneficial interest in the concession.
Sarama Resources Ltd. enters JV with Savary Gold Corp. to
develop Sarama’s Sérakoro 1 and Savary’s Houndé South properties
in Burkina Faso.
The joint venture will be held 35% by Sarama and 65% by Savary
and Savary will be the operator.
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Mining Excellence
at PwC
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The mining sector is facing a range of competing trends and a rapidly changing
global business environment. Against the backdrop of commodity price
fluctuations, miners need to balance shareholder dividend expectations whilst
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Safety, environmental and community principles also continue to shape the
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“
The positive story for miners
is that the long-term growth
fundamentals remain intact. But,
mining companies are facing
significant downward pressure.
As an industry, we need to fully
address the confidence cisis,
before we are able to move on to
the next phase of the cycle.
John Gravelle,
Global Mining Leader, PwC
”
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6
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Sources
Bloomberg
S&P Capital IQ
Intierra
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