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Keith Phillips: M&A Prey Offer Compelling Buying Opportunities

 -- Published: Wednesday, 27 August 2014 | Print  | Disqus 

Source: Brian Sylvester of The Gold Report  


Keith Phillips, a managing director and head of Cowen & Company's Mining Investment Banking Group, says strong companies with solid balance sheets are on the hunt for precious metals development projects or small producers trading at steep discounts. In this interview with The Gold Report, Phillips explains that these juniors represent unprecedented value for acquirers with longer-term goals, and he tracks some potential M&A prey.


The Gold Report: Canada's Financial Post reports that as of July 30, 2014, there have been 41 mining deals worth a combined CA$7.1 billion (CA$7.1B) in 2014. The total value of the deals reached CA$9.3B in 2013. Do you believe that total will be eclipsed before 2015? 

Keith Phillips: I expect so. Aggregate deal volumes are really driven by one or two large deals in a given year. I wouldn't be surprised to see one or two more billion-dollar deals, and that would drive us above 2013 levels. Obviously, there is a lot of merger and acquisition (M&A) dialogue going on. I'm optimistic that activity will continue to be strong and, with any luck, be stronger than last year.


TGR: You said there is dialogue going on. What have you heard?


KP: We are in regular dialogue with our clients about their strategic objectives. For a period in the downturn in 2012 and 2013, companies were purely internally focused, driving operating and general and administrative costs to more sustainable levels. In the past several months—and we've seen this on the deal calendar—companies that have dealt with their internal issues are now trying to capitalize on lower target valuations to achieve longer-term goals. I suspect there will be some positive activity.


TGR: Are you suggesting that M&A activity in the mining space will be a value play?

KP: Yes. Value is always a core component of merger dialogue, but in today's market, buyers are increasingly focused on doing value-accretive deals. Institutional investors will punish buyers seen chasing growth for growth's sake. Explorers and developers are currently trading at steep discounts to the larger producers, so the value arbitrage for buyers is very attractive.


TGR: Will M&A be aided by rising metals prices, or will the impact be minimal?


KP: I don't see metals prices testing the highs from two or three years ago in the near-term, but I remain positive about the longer-run outlook. The thesis in M&A is not necessarily dependent on commodity prices improving. With commodity prices where they are, many situations are undervalued, and it's a compelling buying opportunity for those that are properly positioned.


TGR: Do you expect more M&A between similar-size companies with complementary assets, be it cash or projects?

KP: There have been a series of "mergers of equals" (MOE) in recent years, where two management teams and boards come together to create a vehicle that's more substantial industrially, and also that's more compelling in the capital markets. All things being equal, institutional investors prefer bigger, more liquid companies, and those ultimately collect valuation premiums in the public markets. MOE activity will continue, but traditional "acquisitions" will always be more plentiful.


TGR: Heading into 2013 and then into 2014, many mining pundits believed that private equity was going to be quite active in the mining space as valuations sunk lower and lower. Why hasn't private equity been more active?


KP: There have been numerous private equity investments in the space but we haven't seen the blockbuster deals. Most traditional private equity firms prefer private, "control" situations, and the mining business tends to be a "public company business," particularly in the precious metals space. Also, the traditional leverage buyout model doesn't work well in mining because commodity cash flow swings are too volatile. It's tough for private equity to fund preproduction assets. It happens, but it's challenging.


The mining-focused private equity firms have actively been pursuing minority investments, and that will continue—these are deals where people buy, say, a 19% position in a company and take a board seat.


TGR: Please compare the current deal flow at Cowen & Company versus this time last year.


KP: It's much stronger now. A year ago, clients were really internally focused and trying to understand where the bottom might be in the gold market. People tend to believe we've since hit the bottom. The breakout has not happened, but people feel there's more opportunity on the upside than risk to the downside.


TGR: Parting thoughts?


KP: The most important thing we haven't talked about is the institutions. Long-only institutional investors largely abandoned the gold space a couple of years ago, based on declining gold prices, rising capital and operating costs, and disappointing performance by many companies. With gold prices having stabilized and bounced off the bottom, and companies successfully improving their cost positions, we are beginning to see institutions looking at the sector again, particularly at these low valuations. The strong M&A activity is also attracting investors, as shareholders in the mining majors of the world have been rewarded with strong premiums in 2014.


TGR: Thank you for your insight, Keith.

Keith Phillips is a managing director and head of Cowen and Company's Metals & Mining Investment Banking Group. Phillips joined Cowen upon Cowen's acquisition of Dahlman Rose, where he had similar responsibilities. Previously, he was with J.P. Morgan, where he headed the investment bank's metals & mining practice. He previously ran the metals & mining investment banking groups at Bear Stearns & Co. and Merrill Lynch. Phillips has worked with over 100 metals & mining companies during his 28-year Wall Street career, including established global leaders such as Rio Tinto, Vale, Barrick Gold and Peabody Energy, successful growth companies such as Goldcorp, Yamana Gold and Pan American Silver, as well as exploration and development stage-companies such as Silver Standard Ventures, NOVAGOLD, Seabridge Gold, Guyana Goldfields and Gold Canyon Resources. Phillips received his master's degree in business administration from the University of Chicago and a bachelor's degree in commerce from Laurentian University in Canada.


1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor.
2) Streetwise Reports does not accept stock in exchange for its services.
3) Keith Phillips: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.


Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.


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