The Race is On – Chinese groups entering the M&A market

By Gilbert Chan

The mergers & acquisitions race continues to heat up in 2020 with many activities in play as we see Chinese parties coming to the table. By the time this article is posted, the “multinational mining company” that provided the superior offer to buy Guyana Goldfields Inc. [GUY-TSX] should be disclosed as Zijin Mining from China which is willing to pay $1.85 per share for the TSX-listed company.

First thing first; Chinese companies were never afraid to go to remote places for mining acquisitions. For regions that are widely considered as high-risk, they would have no problem in unlocking their mining potential, as long as the asset is not too expensive to begin with.

People may ask, out of all the mining groups in China, why is Zijin so aggressive and nimble in acquiring foreign assets?  The answer is simple; Zijin is one of the few firms that have the financial power, size and human capital and is not a state-owned enterprise (SOE). As a result, their decision making and approval process takes considerably less time. People working in China or have dealings with businesses in China can definitely tell you that negotiations can be quite difficult when it comes to SOEs. Taking China National Gold as an example, the SOE’s foreign arm China Gold International Resources [CGG-TSX] has in numerous occasions stated its intent for international acquisitions in the gold space. However, having detailed discussions and striking a deal are not easy.

This is also not the first time Zijin enters a deal as second or third bidder. Two years ago, Lundin Mining was trying to take over Nevsun and its highly acclaimed Timok Copper Project in Serbia. However, Zijin ended up trumping over Lundin by offering much more in a $1.4 billion transaction.

Other notable international acquisitions and investments by Zijin in recent years include Taldybulak Levoberezhny Gold Mine in Kyrgyzstan, Norton Gold Fields’ Paddington Gold Mine in Australia, Barrick’s Porgera Gold Mine in Papua New Guinea; and Ivanhoe’s Kolwezi Copper Field and Kakula in the Democratic Republic of Congo. Continental Gold was the substantial one acquired last year with its gold projects – the Buritica and Berlin in Colombia.

In other news, SD Gold went for a surprising move with its plans to acquire TMAC Resources Inc. [TMR-TSX; TMMFF-OTC] where its Hope Bay operation in northwest Nunavut has not been profitable in recent quarters. The Hope Bay operation produced 139,510 ounces of gold from ore averaging 9 g/t gold at a recovery of 82% during 2019.

Shandong Gold Mining (HongKong) Co., (SD Gold), an overseas subsidiary of the state-owned Chinese gold mining company, would pay roughly US$149 million (C$208 million) to acquire all of TMAC’s shares.

Just like China Gold International, SD Gold, one of the world’s largest gold producers, has been looking for various producers to acquire in the past two years. It was also in the mix of discussion for buying IAMGold before negotiations eventually broke down.

There is no secret that SD Gold is searching for potential targets. It even opened a satellite office in Toronto – but why TMAC with its problems? SD Gold must see a lot more in its potential despite the current operation’s poor economics. SD Gold’s expertise in underground mining may be able to materialize its vision for this once high-flying company.

Currently, the transaction is being reviewed by the Canadian government (Investment Canada Act) to see if this is too “strategic” to allow it to go through. This time the review is about the location more than the products because gold and silver do not worry the authorities. We will have to wait to see if this deal will go through. If it is not approved, I wonder what other parties will be willing to come and save TMAC shareholders before it is too late.

With the gold and metals market is starting to rise again, M&A activities are expected to continue to be active this year and next. Chinese mining companies will continue to be more relevant in this bull market as more new players enter the race for quality acquisitions.