M&A lifelines fall short

IN DIFFICULT times for commodity markets, resource companies can protect shareholders and safeguard temporarily unmarketable assets through consolidation. Unfortunately, this process can be so bureaucratic, the small-caps that need it most are left out in the cold.
M&A lifelines fall short M&A lifelines fall short M&A lifelines fall short M&A lifelines fall short M&A lifelines fall short

Justin Niessner

A report earlier this year by New York-based business software services provider Intralinks recognised Australian companies as among the highest-performing global firms in creating shareholder value from mergers and acquisitions.

The study considered 18,000 companies actively engaged in M&A activity, including 625 Australian companies, and awarded top marks to Silver Lake Resources, Austin Engineering, Mineral Resources and Sheffield Resources, along with a slew of major non-mining services and retail companies in the country.

It's an encouraging report considering the recent swell in deal making across the local mining sector, with BHP Billiton's spinoff of South32 in May seemingly opening a floodgate of divestments, acquisitions, mergers, consolidations and corporate rebirths.

Some of the more outstanding examples have included Independence Group's $A1.8 billion tie-up with Sirius Resources and the rise of the mid-tier gold miners with Evolution Mining's purchase of the Cowal mine in New South Wales and Northern Star Resources swooping on Tanami Gold's operation in the Northern Territory.

Researchers such as GlobalData are suggesting that as the broader downturn persists, M&A activity with continue to increase in the mining space.

But with some notable exceptions including Brumby Resources' merger with private entity Marindi Metals, micro-level deals are failing to make a splash.

Trafford Resources and Ironclad Mining boss Ian Finch told RESOURCESTOCKS that small-cap companies were suffering partly because of the inhibitive red tape involved in what could be lifesaving mergers.

"What you're finding now is there are junior companies going belly up all over the place. Had it been easier for two complimentary juniors to get together and merge, the shareholders in both could have benefited down the track," he said.

"Whereas you've got two companies whose shareholders probably got nothing for their investment."

Trafford made sure this didn't happen to Ironclad, which it spun off at the height of the iron boom to develop its Wilcherry Hill project in South Australia. With a more than $US100 collapse in the per-tonne iron ore price over the last 12 months, Trafford took the struggling Ironclad back into the fold.

The reunified company, known as Tyranna Resources, will explore for gold in SA's northern Gawler Craton using cash from the sale of Ironclad's substantial infrastructure assets. Some tin and lead-zinc projects, also in SA, will round out the diversified company.

"Not many juniors would do what we've done, simply because of the length of time it takes and the cost," Finch said.

"A lot of other juniors would have merged if the corporate governance for such a move were not so onerous. I really believe that if you've got juniors of market caps of $A5-10 million, they shouldn't have to go through what BHP and Rio have to go through to merge two companies - that immense cost over a length of time.

"In terms of Ironclad and Trafford, it was a necessary thing to do and I'm very proud of the fact that we've done it because it wasn't easy.

"We felt that the best thing for all shareholders was to remerge it back and then go forward with some other projects and some other entity. That gave those shareholders a chance to make a profit. Otherwise we would have had to abandon shareholders who followed the Ironclad story for seven years - and we weren't going to do that."

Trafford sped up the process by manoeuvring the spinoff as the acquiring company.

The value of the merged group has been estimated in the rage of $28-29 million, with Trafford contributing a project-rich but cash-poor component and Ironclad offering potential cash from its idling but saleable assets.

The share takeover was on a one-for-one basis, reflecting the relatively equal value of the two companies.

So what about the iron at Wilcherry Hill?

"It can come off the backburner very quickly," Finch said.

"We've seen how virtually overnight, you can go from $US140/t down to $48/t. That is a massive drop, and it all happened in a matter of months, and you can have the reverse happen.

"We never write anything off. Once you've got a resource there, you sort of quarantine it and you say, it's on the backburner, but we'll keep our eyes very firmly on prices. All the work has been done, bar a little bit, so it's really only waiting for the right price."

*A version of this article was first published in the July-August 2015 edition of RESOURCESTOCKS magazine.