Resources sector tipped to be hit by M&A flood

The start of what could be a busy year for mergers and acquisitions (M&A) got off to a shaky start this week with one deal landed and another big one which got away.

By Tim Treadgold.

Mergers  Acquisitions

Silver Lake and Red5, a $2.2 billion gold sector merger of equals, will create Australia’s fifth biggest gold producer with annual output of around 445,000 ounces, though the market reaction was uninspiring. Silver Lake slipped 13c to $1.11 and Red5 was down 1c at 32c.

The big one that got away was the proposed $80 billion takeover of Santos by rival oil and gas producer Woodside, a failure which left Woodside 2c weaker at $32.17 while Santos dropped 39c to $7.39.

That oil sector M&A failure follows a similar collapse in talks to merge rare earth specialists Lynas of Australia and MP (Mountain Pass) of the U.S.

The M&A misses and lackluster price moves speak volumes about the state of the investment market, which has drifted into the doldrums, a place in mid-ocean known for its monotonous windless weather, which has left investors bobbing around on rafts waiting for a sea change.

Morgan Stanley, an investment bank, can see a change ahead with the recent dry spell for M&A, and other forms of corporate activity such as new floats, coming to an end with strategic deal value emerging despite a soft economy, low equity multiples, and the high cost of debt.

“Yet it is in these environments that we think relative advantage can be exploited,” the bank said.

“Companies which have a relative valuation premium can argue for greater accretion (size) via M&A. Balance sheet/operating strength can provide a cost of funding advantage and easier access to capital markets.”

With that explanation, Morgan Stanley produced a list of stocks “screened for strategic value”, trading cheaply and potentially being under-appreciated by the market.

Top of the list (surprise, surprise) is Silver Lake, followed by Cooper Energy, Argosy Minerals, Bluescope Steel, Chalice, Core Lithium, IGO and Iluka, with Liontown, Lynas, Perenti and Perseus making up the top 12 M&A candidates.

The theme of Morgan Stanley’s analysis is that just as 2020/21 became a record year of deals, fuelled by cheap funding and surplus cash, the Covid-induced dry spell and a record low last year of completed M&A has created conditions for a drought turning into a flood.

It is an eye-catching forecast from a bank because another highlight of the week was a less inspiring look at what could be a record level of government intervention in the resources sector.

An attempt to save the nickel industry from a total wipeout caused by low-cost Indonesian excess production has led to calls for government tax breaks and other forms of financial assistance in Australia and overseas with the French Government moving to prop up New Caledonia’s nickel sector.

Locally, it’s only Andrew Forrest who has so far dipped into his wallet with a $31 million cash injection into troubled Wyloo Metals, his nickel business. The Avebury mine in Tasmania was not so lucky. With no saviour in sight Avebury collapsed into bankruptcy.

If nickel is the metal in the intensive care ward of Australian mining, then lithium could be the metal in rehab with encouraging signs that some of the corporate patients are learning to walk again, including Pilbara Minerals, which managed a 10c rise this week to $3.57, as well as getting a tick from Citi analysts who see the stock creeping a bit higher to around $3.60.

Encouraging exploration news, largely ignored for the past six months, attracted buyers with Patriot Battery Metals adding 5c to 77c after reporting an extension of the CV5 pegmatite in Canada, followed by a hugely upbeat report from Macquarie Bank which sees the stock flying back to $2.10.

Those moves followed last month’s (January 30) analysis of the lithium market by Sydney investment bank Barrenjoey which sees the current lithium surplus being quickly absorbed with a shortage emerging from 2026, driving prices to pre-crash levels.

Overall, the Australian market, despite the troubles of the battery metals sector, continued to edge up, gaining 0.2% this week as measured by the all-ordinaries index, taking its gain for the past four weeks to 2.8%, perhaps tracking Wall Street which took a peek over the 5000 mark, as measured by the S&P 500, before settling at 4994.

Gold, the bellwether of investor sentiment, had a mixed week, perhaps stuck in the doldrums like the rest of the financial market with the price see-sawing between US$2017 an ounce and US$2042 before settling around US$2037/oz, down US$5/oz.

Northern Star and Evolution, the twin gold leaders, shed a few cents. Northern Star was down 31c at $13.40. Evolution was down 13c at $3.10.

Other gold news and market moves included:

  • De Grey losing 3c lower to $1.19 after announcing a deal to expand its footprint in WA’s Pilbara region, acquiring the Ashburton gold project which is 290 kilometres south of De Grey’s Hemi flagship.
  • Genesis lost 7c to $1.64, a down week after a strong start to the year. Shaw and Partners reckon the stock has a long way to run, perhaps up to a target price of $2.20, and
  • Saturn Metals rose by 1.5c to 16c after investors reacted to an encouraging December quarter report. Shaw sees the next stop for Saturn at 44c.

Copper, the other battery metal, was sold off as doubts continued to dog the ability of the Chinese Government to orchestrate an economic and financial markets revival. Over the week, copper lost US10 cents to US$3.75.

Local copper stocks, led by 29Metals and Sandfire, weakened. Both losing 2c to 27c and $7.20 respectively.

Two other issues are emerging as a drag on copper. Citi, a leading copper bull for the past 12-months, hosed down its optimism with a warning that “copper consumption faces major 2024 headwinds”, and a potentially big new copper projected started to emerge in Zambia.

What makes the Mingomba discovery of KoBold Metals interesting is that it could be the biggest discovery in Zambia in more than a century and KoBold is backed by two of the world’s richest people, Bill Gates and Jeff Bezos.

Uranium stocks continued their rise in harmony with the metal, which added another US$6 a pound to trade at US$106/lb.

DevEx was the uranium winner of the week with a 5.5c rise to 33c after reporting high grade drilling results from its Uranium Hills project in the Northern Territory.

Boss Energy and Paladin also moved up with the uranium price. Boss added 8.5c to $6.03. Paladin was up 7c at $1.45.

Rare earth stocks were mixed after China announced its production quotas for the next six months which UBS said were more than it expected though the 12.5% increase to 135,000 tonnes was within industry consensus forecasts.

Lynas was the rare earth leader with a rise of 30c to $6.01, though whether because of failed MP merger or the Chinese quota report is hard to know.

Other news and market moves of interest this week included:

  • Red Hawk Mining added 7c to 73c after reporting that it had engaged a former WA Government Minister, Brendon Grylls, to head a committee looking for a way to develop the Blacksmith iron ore project as a three million tonne a year direct shipping development of ore assaying 60% iron.
  • Havilah Resources slipped 0.5c lower to 15c despite reporting encouraging copper hits during drilling at its Mutooroo project in South Australia with a best of 1% copper over 10 metres.
  • Armada Metals also sank 0.5c lower to 2.4c after reporting high grade rhodium intersections during drilling at its Bend nickel project in Zimbabwe, and
  • A series of small fund raisings were successfully completed, a sign that the market still has an appetite for risk. The list included M3 Mining raising $2.2 million. Silver Mines $10 million. Future Metals $3.3 million, and Aurum $7 million.

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