Rising costs could drive M&A activity

Miners are looking to shore up their positions following a volatile 2011.

THERE could be a flurry of mergers and acquisitions activity in the Western Australian resources sector as companies respond to volatile commodity prices and rising operating costs, according to a pair of professional services firms.

Several operations or projects changed hands in 2011, particularly in the gold and iron ore sectors.

Atlas Iron has been at the forefront of the activity, following a merger with Aurox Resources and an $828 million takeover of Giralia Resources with the acquisition of junior iron ore miner FerrAus.

The Western Australian miner also sold two magnetite iron ore projects it gained through those acquisitions – the Balla Balla property to Forge Resources for $40 million and the Yerecoin project to Cliffs Natural Resources for $18 million. 

Atlas managing director David Flanagan described the transactions as a way for the company to grow its resources through consolidation, while building scale, reducing costs and maximising cash flow.

Meanwhile, Evolution Mining was formed through the merger of gold miners Conquest Mining and Catalpa Resources.

The new company was left with one WA-based project, Edna May, out of a portfolio of five producing mines.

Merrill Lynch’s natural resources managing director David Wood believes such consolidation in the gold sector could establish a trend for future M&A activity.

When asked about the gold sector, Mr Wood said he thought it was likely companies would continue to consolidate to reduce project risk and attract investors, particularly those that rewarded size and diversification.

“I think there will be further rationalisation in the junior-mid cap sector,” he said.

“Investors reward the de-risking of businesses which have multiple sources of cash. And with capital costs remaining high, consolidation better positions smaller companies to grow their business.”

Mr Wood added that cashed-up companies with virtually no debt would take an opportunistic view into 2012 due to low equity prices.

“On the M&A front I expect it to be a strong year for several reasons. One reason for this is that equity prices have been down to flat for the past six to 12 months,” he said. “Although a number of commodity prices have gone up, like gold leading to higher margins, gold equities across the board have not rallied.

“Even in iron ore and copper where we have seen a substantial decrease in price, the price from a historical perspective is still relatively strong and therefore margins are quite healthy.”

Deloitte national resources leader Tim Richards believes rising costs in the industry could force companies into M&A activity.

In its annual ‘tracking the trends’ report, Deloitte rated ‘the cost of doing business’ as the top trend facing mining companies in 2012.

Mr Richards said it made sense for companies of Conquest and Catalpa’s size to merge “to withstand some of those cost pressures better”.

“It’s public knowledge about the strategy around Evolution that they have four or five operations that give them a bit of protection rather than a company relying on one,” Mr Richards told WA Business News.

“If we put different types of operations together it provides balance across your portfolio.”

Deloitte believes resources companies are being forced into managing costs differently before committing to new projects or expansion due to the current level of volatility in the markets.

Mr Richards said companies may have previously evaluated costs in a reasonably narrow range that had now stretched to around 40-50 per cent. 

“Some companies do that and realise they are going to be exposed; then one of the natural ways to address it is to look at M&A or partner with someone,” he said.

Ramelius Resources is a company operating in the Goldfields that has been able to keep costs low at its flagship Wattle Dam project, while generating a large amount of cash for its size.

The company produced about 80,000 ounces at Wattle Dam last calendar year and has forecast that figure to increase to more than 100,000oz in 2012.

Cash costs have historically been low at Wattle Dam as it is a small operation capable of producing a large amount of gold.

Ramelius managing director Ian Gordon told WA Business News that cash costs were rising at Wattle Dam but were still low on a comparative basis.

“The gold at Wattle Dam is mainly high grade and it is a small operation,” Mr Gordon said.

“We don’t have a lot of people on site or require a lot of machinery to produce the ounces so the costs tend to be lower than what you would see elsewhere.”

Ramelius has been actively looking for growth through acquisitions, most recently purchasing an 80 per cent interest in a mining lease from Beacon Minerals for $4 million.

The lease, which is located between the company’s Mt Magnet and Burbanks treatment plants, contains the Barlee gold resource.

Mr Gordon said Ramelius would continue to look for new gold acquisitions, but added they weren’t easy to come by at the moment.

“It’s always a possibility, but at the moment we aren’t talking to anyone,” he said.

“Everyone wants a gold project and the competition is pretty hard, but we made a couple of small acquisitions last year and we’re certainly looking for new acquisitions.” 

Mr Gordon expects gold to stay robust in the year ahead, suggesting prices for the precious metal could move up towards the $US2,000/oz mark.

“We’re planning on having a gold price of about $US1,500 an ounce or above,” he said.

“Gold may have come back a bit but it has just come back to the growth rate of the past four or five years.”

Merrill Lynch’s Mr Wood said larger, cashed-up companies on the lookout for acquisitions would find some good opportunities in single-asset companies.

“There are companies out there which seem to be good value at the moment,” he said.

“Larger companies will be questioning whether it is cheaper to build or to buy now that equity prices have come off.

“With capital costs remaining high, maybe going down the road of an acquisition makes a quicker, faster option to build the scale of the company.”

This could mean further investment into the state from Asian nations such as China and Japan, which have consistently targeted WA resources.

“China and Japan have been fairly aggressive; both have shown they can move swiftly when required.”