Mining deals in Canada to pick up in 2013?

Mergers and acquisitions in the Canadian mining sector are expected to pick up pace this year after a sleepy 2012, but at a lower gear as companies scramble to regain the trust of shareholders that are wary of overpriced deals and rising costs.

The slowdown in deals last year, partly reflects a sign of economic times. But it also highlights a period of growing investor skepticism about deals gone amiss. And there is a list of out-going chief executives that are paying the price for too-aggressively pursuing deals during the frothy days of the commodity super cycle.

"There is a bit of a sea change going on in terms of leadership at some of these global mining companies," said John Nyholt, Canadian mining deals leader at PwC, who cited recent leadership changes at Rio Tinto, Barrick Gold, Anglo American, Kinross and BHP Billiton.

"All of those companies have gone down the road of ambitious acquisitions in the past five years. All of them have taken multi-billion dollar write downs as a result of those after the fact," he added.

"A write down is an accounting mechanism that basically says you paid too much for what you bought. The returns aren't there."

Last year, some US$110 billion worth of deals were made, down from $149 billion in 2011. If you subtract the massive, $54 billion dollar proposed takeover of Xstrata by Glencore International, said Nyholt, it paints a dismal picture of the value of overall deals.

Amid uncertain global economic times, companies have not been able to raise more money on the stock market, and have not been able to issue more shares, which has squeezed the amount of dollars doled out for deals. As well, investors are taking a growing interest in holding mining executives' feet to the fire when it comes to company performance.

Quoting relatively new Barrick boss, Jamie Sokalsky, Nyholt said chief executives are expected to be more focused, keeping tight tabs on costs and shareholder returns.

"Returns will drive production. Production will not drive returns," Sokalsky said in a report last year.

'Cautiously optimistic'

At the very least, deals should be supported by a steady pick up in commodity prices. This week data showed the Scotiabank Commodity Price Index started 2013 on a stronger note, after losing significant ground in late 2012.

Patricia Mohr, the bank's vice president of economics and commodity market specialist, said the bounce was due in part to the fourth-quarter rebound in China's economy and a partial resolution of the U.S. fiscal cliff. Both factors helped to buoy investor confidence.

In that time period, copper prices got a boost from China's growth and surged as high as $3.71 per pound, while spot iron ore prices also strengthened. However, the gains were offset by softer gold prices as hedge funds scaled back positions on signs that additional "quantitative easing" by the U.S. Federal Reserve is increasingly unlikely, said Mohr.

But the fact that some industrial commodity prices and equity markets quickly eased back again in February highlights how skittish market conditions remain.

Given all these factors, Nyholt, who is presenting PwC's 2013 outlook next week at the PDAC mining conference, said he was "cautiously optimistic" for deals in 2013, a year that is expected to be a dawn of a new era of conservatism in the mining sector.

Optimizing capital

Bruce Sprague, Ernst & Young’s national mining and metals leader, said the downturn in Canadian deal value and volume last year was part of a broader global trend. Global transactions value and volume declined by 36 per cent and 7 per cent, respectively, from 2011.

It was the lowest number of deals since 2008 and the smallest by value since 2009, added Sprague.

But over the next year there should be an investment increase at a slower pace, with the majority of Canadian companies doing deals looking to "scale-up existing operations by acquiring 'de-risked' assets,” he said.

There is an ongoing trend of companies shifting gear from "growth for growth’s sake" to “capital optimization," Ernst & Young says in its recently released 2013 outlook report.

Deal focus will likely be on the disposing of non-core assets to generate cash, while more and more juniors may see a merger of equals, said Srague.

"Those two things jump out at me as things you're going to see because one would think they're accretive," he said.