VRIC 2023: Junior metals M&A to remain muted in 2023

Mining personality and resource speculator Rick Rule harbours little hope that the pace of junior resource sector mergers and acquisitions activity will quicken in the coming 12 months as quality companies are scarce.

On Sunday, he told the Vancouver Resources Investment Conference that what gets in the way of junior M&A is what he calls ‘real yield’ – the salary and bonuses to officers and directors.

“If they think that their listing will fail and they’re not going to get paid next year, they’ll do a transaction. If they think they can get paid, they won’t do a transaction,” he told a well-attended audience in the Vancouver Convention Centre.

Rule said the financing window for juniors was currently open and would serve to hinder M&A activity.

He expects much more robust deal activity among the mid-tiers since the market has shown that as companies get bigger, their trade liquidity increases, bringing other benefits. The share price also increases, and the cost of capital decreases, which, according to Rule, makes for a durable competitive advantage in a capital-intensive business.

Rule also suggests the mining industry has been kept on a short leash by the shareholders in terms of M&A, particularly the gold majors, “given all the incredibly stupid transactions that took place in the prior decade.”

“And I think the restraint, the institutional restraint, the adult supervision is gradually coming away from the sector,” Rule said.

“I think, too, that the sector has perhaps been too conservative in capital deployments for the last 10 years, which is to say that among the majors and the mid-tiers, the exploration pipelines are empty. The development pipelines are empty, and the assets generating cash sort of look like me, you know, past their prime,” he said.

According to Rule, from an investor’s viewpoint, if one happens to be a shareholder, or rather a victim in an ill-considered transaction, one will lose money even though, as a whole, “M&A is a virtuous process.”

Rule continued by underlining that from the industry’s viewpoint, lots of M&A is needed because of the “great sin” the industry is committing regarding the level of general and administrative (G&A) expense relative to assets under management.

“If you look at the junior mining industry, what you see is a ‘salary machine.’ Probably 2,500 entrants and 200 are viable, and we need fewer issuers. M&A, or extinction, are the two alternatives in capital markets,” Rule said.

Natasha Kiernan, a lawyer and director of Empress Royalty, also expects significant consolidation activity this year. “I think there’s going to be liquidity constraints on a lot of companies, and then on the flip side, I think certain companies have done very well and built up a lot of cash. And in an inflationary environment, you don’t want to sit on cash. People don’t want it to be sitting around losing value,” Kiernan said.

Whose incentive to sell?

Another value-sucking evil of junior M&A revolves around egregious change control clauses that reward management or insiders for conducting a deal. “They’re clearly to the detriment of shareholders because someone has to pay for those control clauses, and it’s the shareholders,” said Adrian Day of Adrian Day Asset Management.

“When a company’s share price goes from $40 to $18 and gets taken over at the low price, and the insiders are rewarded by $12 and $13 million bonus packages for change of control, their incentive is to sell the company at any price,” Day warned.

On the flip side, should management succeed in eliciting a takeover bid at a premium, they get rewarded on a relative basis, just like all shareholders would.

Rule offered a solution to concerned investors – read the proxy documents. “This stuff is all spelled out there,” he said.

M&A only works if the fundamentals are there, Kiernan said. “Two plus two does not always equal four. It can, but I think people must be honest with themselves when doing M&A,” she said.

She has seen cases where M&A deals are pursued by executives solely based on psychology, the ego of a CEO who just wants to be bigger, gain a different listing, or a particular property.

Kiernan suggests that should markets head for a recession, it could further deflate equities, “Most of the M&A deals that ended up to be accretive for companies are done in down markets. So, I think there is the potential opportunity for good deals if people can make decisions based on the right fundamentals,” Kiernan said.