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

INVESTMENT | Finance doyens debate M&A pathways to value creation

BY HENRY LAZENBY

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 Jan. 29, he told the Vancouver Resources Investment Conference that an obstacle for 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 rises, and the cost of capital falls, which, according to Rule, makes for a durable competitive advantage in a capital-intensive business.

The veteran investor also suggested the mining industry has been kept on a short leash by 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 ten years, which is to say that among the majors and the midtiers, 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.

To investors’ eyes, Rule said, 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 in the industry’s view, lots of M&A is needed because of the “great sin” the industry commits 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

From Saskatchewan’s perspective, the Saskatchewan First Act was born of a concern about federal jurisdiction creep into clearly provincial jurisdictions, Wall said.

“It’s the manifestation of what you see happening on Bill C-69, where I think now nine provinces have joined with the Alberta government’s appeal of Bill C-69,” Wall said, citing other examples, including the imposition of the federal carbon tax and its subsequent hikes.

“The federal government is essentially taking a wrecking ball to Section 92 of the Constitution Act of our Canadian Constitution. Saskatchewan will decide for itself the regulation of environmental standards, greenhouse gas emissions and other emissions and the source of fuel for electrical generation. Well, that’s exactly what Section 92 of the constitution already gives the provinces the right to do,” Wall noted.

Resources for healthcare

According to Clark, the most critical issue facing Canadians is healthcare, and in particular how it’s funded, mainly from revenues generated by the energy sector.

Clark said Canada’s healthcare system is projected to grow in cost at a rate of 5.6% annually for the next decade and makes up 40% of provincial budgets across the country. But according to OECD projections, Canada’s economy is predicted to grow at a rate of only 0.8% in the next decade.

“In other words, we have a very slow-growing economy, trying to support a very fast-growing social welfare system,” Clark said.

“We need to grow the economy faster. I would argue the single most important thing in building Canada has been the resource sector — oil, gas, metals, and minerals — we need to grow those sectors. We need to grow investment activity and employment. And that’s how we will save our healthcare system in Canada. The resource sector is the single largest contributor to our GDP,” Clark said. TNM 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 of control clauses that reward management or insid-

See JUNIOR M&A / 10

SYLVESTRE, ROGER

Sep 22, 1938

Jan - 27, 2023

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