Africa emerges as new frontier for gold M&A

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(Reuters) – At the massive Prospectors and Developers convention, it’s not hard to find a table full of mining executives huddled in conversation, their voices muffled by the din of thousands of participants at the event.

 

With gold prices steady above $1,650 an ounce and a growing number of juniors producing in Africa, it is increasingly likely that those discussions might be about acquisitions in places like Burkina Faso or Ivory Coast.

 

“Africa’s become … a really significant place for new business, like the new frontier,” said Peter Leon, head of the Africa mining and projects practice at Webber Wentzel, a Johannesburg law firm.

 

In a report released just before this week’s PDAC conference in Toronto – the world’s largest mining gathering – PriceWaterhouseCoopers said it expects the continent to emerge as one of the most important mining M&A geographies of 2012 with “substantial” acquisition volumes.

 

“Unparalleled resource potential and an increasingly investor-friendly climate are two of the drivers of this view,” PwC global mining leader Tim Goldsmith said in the report, which calls for record global mining M&A volumes in 2012.

 

The traditional pattern of mining M&A – larger players buying up small miners and explorers to replace their own depleted mines – fits well with the African mining landscape, analysts say.

 

Some liken it to an earlier-stage Latin America, where larger miners such as Barrick Gold and Goldcorp have since scooped up several small players or projects.

 

In Africa, by contrast, small developers still rule the landscape, leaving plenty of space for takeovers by larger players or among smaller miners looking to gain heft.

 

Robert Sibthorpe, chief executive of Burkina Faso-focused explorer Roxgold Inc, said the company has “had discussions with operating companies” in the past year, which prompted it to adopt a shareholder rights plan last fall.

 

The company, among the hottest performers on the TSX Venture Exchange, has captured the attention of investors after a series of impressive drill results that suggest a high-grade deposit at its main project.

 

Endeavour Mining, which doubled in size and production when it acquired Australia’s Adamus Resources last year, is looking to add to its current roster of mines and projects in Ghana, Burkina Faso and Ivory Coast.

 

“Our acquisition strategy is focused on West Africa. It’s focused on acquiring additional producing assets and we may acquire a late stage development project,” said Neil Woodyer, CEO of the Vancouver-based company.

 

The expected uptick in M&A this year follows a slow grind through the latter part of 2011, when volatile stock markets and uncertainty about funding – brought on by economic malaise and concerns about Europe’s financial system – forced would-be buyers to err on the side of caution.

 

But rebounding stock markets, combined with easing concerns about a slowdown in China and a rise in mining-related equity sales have boosted optimism that deals will get done.

 

“There’s lots of deals that one way or the other probably would make sense,” said Kerry Smith, an analyst at Haywood Securities, though he noted that there hasn’t been much M&A activity of late.

 

Smith said the normal obstacles to deals are at play in Africa, including disagreements over how to value a company in a still shaky market, job security for executives at the target company, and signals from investors that they may not want the added risk of a acquisitions.

“What I kind of hear (from investors) is managing expectation and meeting your guidance and a lot of investors want increased dividends and share buybacks, he said.

 

Also of concern in Africa is resource nationalism, particularly after Zimbabwe President Robert Mugabe moved to force mining companies to surrender majority stakes in their firms last year.

 

However, such moves are an exception rather than the rule, said Webber Wentzel’s Leon.

 

Rather, many governments will impose higher taxes and royalties, and in the case of some regions, the moves will provide more balance to a system that, in the past, disproportionately favored the companies.

 

Ultimately, he says, the risks of working on the continent are outweighed by business positives.

 

“You’ve got a huge consumer market, you’ve got a growing middle class, you’ve got much more economic development, more African countries are becoming democratic,” he said.

 

“Certainty in the mining space, the resource space, Africa is hugely important.” Click to read the full story