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Low Metals Prices Could Generate M&A; Companies Cautious – McCarthy Tétrault Partner

By Alex Létourneau of Kitco News
Thursday November 06, 2014 9:20 AM

(Kitco News) - Gold prices continue to track downwards, which could translate into some good merger-and-acquisition prospects for companies that are well positioned financially, said a partner with the McCarthy Tétrault LLP law firm.

Speaking with Kitco News in a telephone interview, Max Rogan, partner, business law, McCarthy Tétrault, said that there are opportunities for those with strong balance sheets.

Max Rogan, Partner, Business Law, McCarthy Tétrault LLP

“For the majors, with strong balance sheets, cash on hand and good, viable projects, there’s a buying opportunity for them,” Rogan said. “For the junior companies, they’re having a real rough time getting any financing at all, they’ve cut costs to the bone and are pretty much running on fumes - that creates an M&A environment in and of itself.”

Ideally, this would create some pretty straight-forward business between companies. Not so. While there has been tire kicking and interest within the sector for M&A, that hasn’t translated into the slew of deals that analysts expected earlier this year.

Rogan noted that some companies are simply overvaluing their assets, as well as the harsh reality of the previous gold-mining sector M&A run, driven by adding ounces regardless the cost.

“Over the last few years you’ve had a situation where there’s been a lot of tire kicking but, in many instances, there hasn’t been a meeting of the minds on valuation,” Rogan said. “Sellers are often looking for more than what buyers are willing to pay. If metals prices continue lower, maybe that will stimulate some companies, who really don’t have a lot of other options, to do some deal making.

“The focus is on M&A that’s accretive and responsible,” he continued. “If you look at the last round of big M&A activity in the mining industry, there were a lot of write-downs. Many of the majors are conscious about not wanting to repeat that, so any potential deals are examined in a very disciplined manner.”

Looking at the gold mining earnings that have been reported over the last week, Rogan saw some hit-and-miss financials from companies.

The silver lining, he said, was that at least they’re all on the same page regarding the need to continue to be cost disciplined.

“The focus on cost cutting was a bit of a virtue imposed by the market, and it’s positive, I think, in any business – especially in the mining industry in an environment where you have falling metals prices,” Rogan said. “Ultimately, cost cutting can’t be the sole driver of your long-term strategy in mining, or in any business.

“Given that they’ve been focused on cutting costs for two years, I can’t imagine there’s much more room left for cost reduction that will affect the bottom line if metals prices continue to fall,” he added.

Asked whether lower gold prices for a period of time would see unviable mining companies exit the sector, Rogan said it was possible.

“I’m not sure whether it’s good or bad, but the fact that the price has bounced around, and now, with the price of gold below $1,200, it’s possible we see that,” he said. “Like they say, ‘when the tide goes out you discover who’s been swimming naked.’”

By Alex Létourneau of Kitco News aletourneau@kitco.com
Follow Alex Letourneau @alex_letourneau




Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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