With Brandon Munro, Executive Chairman & MD of Bannerman Energy Ltd, and Todd Ross, MD & CEO of Nordic Nickel Ltd.

Recording date: 11th April 2024

Resource Sector M&A: Navigating Challenges and Opportunities

Mergers and acquisitions (M&A) play a crucial role in the resource sector, enabling companies to achieve synergies, access capital, and advance projects. However, M&A also presents challenges around realizing promised benefits, aligning incentives, and securing appropriate financing.

At its core, M&A is driven by the potential to create value by combining two entities. In the resource sector, this often involves consolidating nearby projects to share infrastructure, realize operational synergies, and reduce costs. M&A can also be motivated by a desire to access capital markets, as combining companies can create larger, more liquid entities that are included in ETFs and accessible to institutional investors.

While M&A is often justified based on potential synergies, cost savings, and access to capital, realizing those benefits is far from certain. Studies suggest only a small minority of deals ultimately achieve the synergies promised to shareholders. Post-deal integration is often more complex than anticipated, requiring detailed organizational planning to capture synergies while maintaining key talent and capabilities.

Management incentives also play a role in M&A. Carefully structured incentives are needed to motivate value-creating M&A while avoiding misaligned enrichment of executives. Overly generous change of control provisions could motivate executives to pursue deals primarily for personal gain, while having no protection could make them oppose even sensible deals out of fear of losing their livelihoods.

Debt financing for single-asset resource projects is becoming increasingly scarce, with many banks withdrawing from the sector in recent years. Those that remain have tightened lending requirements, shortened tenors, and imposed more restrictive covenants. As a result, resource companies are turning to alternative financing options to enable M&A, such as credit funds, bonds, convertible notes, streaming, and royalty deals. While these options provide capital that may not otherwise be accessible, they typically come at a significantly higher cost.

Ultimately, the capital needed to drive resource sector M&A and project development exceeds what companies can access on their own, especially for critical minerals and the energy transition. Greater support is needed from both government and industry. Initiatives like the Inflation Reduction Act and the European Critical Minerals Act are spurring huge investments in downstream processing, but more focus is needed on securing the raw materials to feed those facilities.

Collaboration with larger industry players can also help de-risk and finance projects, such as BHP's Xplor program that provides mentoring and expertise to attractive junior companies. However, if government doesn't play a role in making the journey more viable for smaller players, it could lead to a concentration of power amongst the very large companies, which is not ideal for a resource sector that needs to increase production significantly between now and 2050.

In conclusion, M&A remains a crucial tool for resource companies to unlock synergies, access capital, and advance projects. But realizing those benefits is not always straightforward. Careful deal structuring, scarce traditional financing, and the need for greater government and industry support are all factors that companies must navigate. By pursuing smart M&A and collaborating to solve key funding and permitting challenges, the resource sector can position itself to supply the materials the world needs.

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