At the 2013 Cambridge House Vancouver Resource Investment Conference (VRIC), Sid Rajeev, the head of research at Fundamental Research Corporation, presented his outlook on 2013 and why mergers and acquisitions (M&A) might be something investors want to put on their radar for the upcoming year. In particular, Rajeev focused on the mining and exploration sectors and laid out his reasoning as to why increased M&A activities are likely to continue over the near to mid-term.
The presentation itself was well-laid out and explained five key factors acquiring companies use when considering a purchase, such as
- Location & quality of assets
- Synergies
- Stage of development
- Financial position
- Valuation
To access the slide deck from the presentation, click here.
Paying attention to costs
What was most interesting about this particular presentation was the connection Rajeev made between the performance of precious metal prices relative to the performance of the TSX Venture and precious metal companies. Specifically, he highlighted that free cash flows for mining companies have dropped 39% per annum in the past three years largely as a result of increasing capital costs.
In other words, the cost of developing mines has increased substantially leaving less money in the hands of the companies themselves. As a result, in order for larger mining companies to pursue a project (and the smaller companies that may be running them), the economics have to make sense in this high cost environment. This helps to explain why there has been such a divergence between the rising prices in precious metals without an expected increase in the stock prices of mining companies for precious metals.
For investors, this means that the fundamental case for investing has to factor in rising costs, something that introduces substantial uncertainty when trying to value a potential investment. For risk-averse investors, steering clear of uncertainty has made more sense than embracing it. With all the pessimism, however, stock prices on quality projects (i.e. those where the economics and costs are contained) have become attractive, which is the base case for Rajeev’s outlook that 2013 might see increased M&A activities.