TORONTO (miningweekly.com) – Merger and acquisition (M&A) activity in the North American mining sector will continue strong this year and could exceed the levels seen in 2010, insiders said, amid record prices and surging demand for metals and minerals.

Increasing competition to secure attractive, large deposits could result in more bidding wars, while the spinning out and listing of single mines and projects may also play an increasing role in shaping the sector.

“My sense is that the pace of deals will quicken in 2011,” said John Turner, who heads the global mining group at Toronto-based law firm Fasken Martineau.

“We are at a point in the cycle where winners are starting to become evident, the market’s had a good run for a while and I think people will be anxious to complete deals in a hot market,” he said in an interview.

With share prices having risen across the sector, boards will be more willing to consider offers at a reasonable premium to their market price, he commented.

At the same time, companies, especially larger producers with more financial muscle, are looking to secure resources and future production of key commodities like copper and uranium, that appear headed for supply deficits.

And despite the doomed BHP offer for Potash Corp last year, there is also still a good likelihood of big M&A action in 2011.

“For those larger companies, it is going to take significant deals to move the dial, so they are not going to bother with doing small explorationtype transactions,” Turner said.

In a mid-September survey of mining executives conducted by KPMG, 70% of respondents said that their companies were likely to pursue M&A activity in 2011, and more than half of the respondents (54%) cited the need to increase reserves as the main driver for deals.

Corporate activity in the Canadian mining sector last year reflected the renewed availability of capital, opportunities and returning confidence compared with 2008 and 2009, said Kellie Manchester, a senior manager in Ernst & Young’s (E&Y’S) M&A practice in Vancouver.

While the number of deals was relatively flat in Canada between 2009 and 2010 – at around 1 000 – the value of transactions in the industry rose almost 50%, she said.

“And that speaks to the renewed confidence in the sector.”

MEGADEALS

Manchester said she expects to see foreign companies moving to acquire or buy stakes in Canadian mining and development firms.

“We have seen obviously China be very, very active and account for a number of transactions in Canada, and I think we will continue to see that, but I also think there are going to be a number of global players out of Brazil, the UK and the US that will be active.”

The biggest transaction last year in Canada’s mining sector was Kinross Gold’s C$7,4-billion acquisition of Red Back Mining.

There were 14 deals worth $1-billion and up – E&Y’s definition of a ‘megadeal’ – in the sector in 2010, compared with none in 2009, Manchester commented.

“And certainly everybody is looking for the next megadeal to happen.”

High prices mean that gold and silver companies are likely to see action this year, and there is ongoing buzz around uranium assets and future supply.

There is also a lot of attention on coal and copper assets which are commodities that are typically in demand as economies expand. This could translate into deals in 2011, said Darryl Levitt, a Toronto-based lawyer at Macleod Dixon.

Walter Energy, a US producer, agreed last month to buy Canada’s Western Coal for C$3,3-billion to create a new senior pure-play metallurgical coal miner.

Levitt also commented that some Canadian companies are prepared to look further afield to what are perceived as more risky jurisdictions, in order to secure resources.

“There is no doubt about it, that as the prices of commodities improve, people are willing to take on more risk,” he said.

“But of course there are certain jurisdictions where people will still be very cautious.”

Salman Partners analyst Raymond Goldie told Mining Weekly Online he expects to see dealmaking ramp up in the copper sector, as firms jostle to get their hands on big resources.

Even when new deposits are discovered, permitting and financing requirements mean that it is taking longer to bring the mines on stream, he commented.

“And so instead of trying to find one, there are going to be more and more companies looking to go out and buy.”

Besides the potential for larger mergers and acquisitions, Fasken Martineau’s Turner said he would also not be surprised to see mid-tier firms looking at so-called ‘mergers of equals’.

In March last year, for example, base-metals firms Quadra Mining and FNX Mining announced plans for a merger, joining their operations in Chile, the US and Canada’s Sudbury basin.

“It wouldn’t surprise me to see more of those deals, particularly on the gold side, where people are either trying to get to a particular size, or some of them are trying to do geographical plays where they become, say, an intermediate producer focused on a particular region,” Turner said.

SPIN-OFFS

Corporate activity in 2010 was not limited to M&A, with a handful of new mining and development companies created through spin-offs of assets by other firms.

Vancouver-based based Goldcorp sold its Escobal project to Tahoe Resources, a new initial public offering (IPO) led by former Goldcorp CEO Kevin McArthur.

Goldcorp also spun out its San Dimas mine in Mexico to junior Mala Noche Resources, which changed its name to Primero Mining before moving up to the main TSX board. Primero, interestingly, is headed by another familiar name – ex-Iamgold chief Joseph Conway.

“I do think we will see the single-mine IPO continue to garner attention within the mining industry,” E&Y’s Manchester told Mining Weekly Online.

“I know that several of our clients have asked about it.”

Assets may become available when larger firms buy a company for a specific asset and then spin out the target company’s other less attractive or earlier stage properties, as well as through majors looking to streamline their mine and project portfolios, Turner agreed.

BIDDING WARS

The increasing competition for certain assets and deposits could lead to more competitive situations, such as the current bidding war for Baffinland Iron Mines. Steelmaker ArcelorMittal and private-equity-backed Nunavut Iron Ore are fighting for control of the Canadian junior’s iron-ore deposit.

There were also a number of acquisitions in 2010 where, although deals went through smoothly, there were several other players in the background which had been engaged in something of a race to get the first bid in, Turner commented.

“They didn’t decide to go hostile after the bid was announced, but I think we may see more of that this year as the significant targets become more evident.”