What impact has Covid19 had? And what might we expect post crisis?
COVID19 has been the biggest disrupter of any industry, ever. As with all major disruption this produces opportunities as well as risks. In the mining industry operations have been affected by outbreaks and government mandated shutdowns. At the same time demand for some commodities has fallen in line with the fall in industrial output. The major exception has been precious metals. Gold traditionally benefits in times of uncertainty and this is a trend that we are seeing again. Silver and uranium have also seen significant upticks.
The mining industry has seen some loss of production but hasn’t been affected as much as we expected. M&A has stayed very active particularly in the precious metals sector. We are in raging bull market which has been a surprise in the pandemic.
The difference between the financial and mining crash and now is that mining balance sheets are in a much healthier place. A decade of prudent management has placed the industry in a strong position. Companies with positive balance sheets are taking advantage of the current situation to look at acquiring additional operations. This is partly just good business sense and partly a desire to mitigate risk by greater global coverage.
In a recent Mines and Money webinar, Warren Gilmore, CEO, Queen’s Road Central Capital Ltd., had the following insights.
“There is a lot of acquisition capital available due to the high precious metal prices. One of the most important aspects of M&A is doing due diligence, which ultimately translates to putting boots on the ground, visiting the property to make sure you have reduced every possible risk. Not visiting the site makes M&A riskier than it usually is. There has also been a sharp increase in the number of hostile takeovers, usually they are rare because you can’t do due diligence but at the moment the ability to visit the site is removed to everyone. The most important element of any deal is the quality of the ore body and the best way to assess the ore is to go and see it and touch it”.
Deals have been going through during the lockdown and not just in the precious metals space. Warren, however, estimates that two thirds of these deals were in the pipeline before lockdown. Many companies are also relying on top-ups from existing investors. If mining companies are to carry on securing new investment, they need to be able to meet investors and investors need to be able to visit mine sites. The industry has embraced new technologies to provide the practical inputs but the ability to meet a team face to face remains high on the list of must haves for investors. There is a much greater acceptance of virtual meetings than previously but the inability to carry out boots on the ground due diligence is having an impact on contracts.
Amelia Polisano, Lawyer, Harvey Law Group said “As Lawyers, due diligence for any M&A is extremely important and as such COVID19 and its restrictions has made it that little bit more difficult to assess and advise. Reviewing tangible assets of a mine based on paper, public records & articles has had an impact on the agreements. Investors are looking to protect themselves; they want an opt-out if something goes wrong. We have seen a lot of movement and additional clauses included in documentation we have been preparing”
She continued “Here in Hong Kong we are ahead of the curve in terms of alternative mobility options. The protests and then COVID19 have made individuals and companies review the options available to them. Many countries insisted that international workers return to their home countries given the unrest. This has meant that key staff have not been onsite to oversee operations or have been unable to leave site. We are now talking to several executive boards about how they prevent this limitation in the future. The freedom of movement and ability to travel when others can’t, gives you a major competitive advantage. We are outlining the residency and immigration options that will allow key staff the option to travel in the event of a repeat of the Covid19 situation. This gives them the flexibility to maximise operations and keep the business moving forward. By considering different citizenships and global mobility, companies can create a buffer so that they aren’t put into this position again. Reviewing all options should be part of a resilient leadership strategy”
See the presentation below conducted in Mines and Money Online Connect in June 2020:
Standard theory suggests there are three stages of a crisis – respond, recover, thrive. The world has now largely moved into the recovery phase, the next step is to thrive. The mining industry is best placed to do this quickly. It will form a major part of the overall global economic recovery. I would add another stage to the management of crises – prevention. The companies that ultimately come out of COVID19 strongest will be the ones that put plans in place to ensure they aren’t affected by similar crises in the future. International travel is a necessity we should never take for granted again.
Please join us for the seminar – Travel in the Age of COVID19 – July 8th , 3pm (Hong Kong Time).
Find out more here.
General Manager – Mines and Money