Over the next two weeks, I’ll share my personal insights from my time as a geologist at the peak of the last mining boom.
It was a time when I witnessed firsthand the fall of the world’s largest gold miner and then the emergence of a new major player in Australia.
Part I of this story begins in Zambia and lies at the heart of one of the biggest corporate failures over the last mining boom.
And as a geologist in Zambia, I had a front-row seat to this major shake-up.
The year was 2011
Probably the most important in my career.
M&A hubris was in overdrive, and I was in the thick of it working for an Aussie-owned company called Equinox Minerals.
My role as a geologist was to help the company find new copper targets around its existing Lumwana deposit.
The sector was heating up; copper was the main game in town, and the world’s largest miners were looking to establish themselves in new emerging copper hubs.
Equinox and its frontier northwestern copper projects, located a few kilometres from the chaotic African town of Solwezi, was a prized target.
And by February 2011, Equinox was swept up in takeover fever!
The Chinese-owned MMG put a sizeable bid on the company which led us to believe we’d soon be working under a new Chinese boss!
But the deal-making wasn’t over…
Given the market’s euphoria, the Perth-based Equinox board bided its time and fished the market for a higher bid.
And it didn’t take long in the manic 2011 commodity market.
Equinox, a copper miner, struck a surprise deal with the Canadian-owned miner Barrick Gold.
2011: I learnt a hell of a lot
Even the world’s biggest gold miners tried to get in on the copper action back then!
Without much wrangling, Barrick offered the Equinox board US$7.2 billion, trumping MMG’s original offer.
This was just one of dozens of mega deals happening at the time.
The media strained to keep up with the volume of acquisitions!
Every month, a new multi-billion dollar deal was announced.
Never before had the mining industry been struck with so many offers, counteroffers, and squillions of dollars spent on overpriced acquisitions.
That was clearly an exciting time to be in the industry, if not unnerving…
You see, there could only be one outcome from this breathtaking deal-making.
Like all major investment booms, this one culminated in one final blow-off top before the inevitable bust began…
By 2012, conditions began to deteriorate
Across the globe, buyer remorse was setting in.
The reality of the enormous cost of these acquisitions was taking shape.
Shareholders and executives were becoming anxious… And from there, things deteriorated quickly!
By 2013, just two years after its takeover, Barrick announced a humiliating US$4.2 billion write-down on the Equinox deal.
| |
| Source: Mining.Com |
At a shareholders meeting, Barrick’s CEO admitted that he’d grossly overpaid in the race to nab Equinox’s prized copper asset.
A few months later, he was fired!
This marked the beginning of Barrick’s long-term demise as the world’s largest gold miner.
Seeing all that play out on the ground demonstrated that mining executives are just as prone to overpaying as everyday investors.
Symbolically, Barrick’s takeover took place just a few weeks after copper reached its all-time high of around US$4.48/lb in February 2011.
| |
| Source: ABC News |
All the majors, including BHP, Rio Tinto, Glencore, and Barrick, participated in this buy-out frenzy.
The world’s largest, most respected mining firms that employ scores of financial analysts, engineers, geologists, commodity traders, and economists…
All failed to see the market peak into a euphoric top.
This was an industry-wide catastrophe.
But if any of these executives had paid attention to the commodity cycle…
They would have avoided a sector-wide whitewash of humiliating write-downs, crashing share prices, and mass layoffs.
Don’t get me wrong; booms and busts are a normal part of active financial markets.
They’re a process of evolution in the business world, flushing out inefficiencies and making room for new contenders.
The mining sector is no exception.
However, when it comes to scarce commodities, like gold, uranium, copper, or silver, stakeholders tend to have an extreme bent to overreact excessively, either up or down.
Perhaps that has its legacy in the manic gold rushes of the past!
Where prospectors would risk their lives crossing vast deserts to reach a new find, throw everything they owned into the slim chance of making it rich.
So, what did I learn?
The key message from this story was that the hubris in 2011 left a deep scar on the mining industry.
And that’s carried through with important implications today.
Bullish emotions that culminated in 2011 made a powerful decade-long reversal.
That brought on historic underinvestment, mass layoffs, and mining fire sales… A few years after the 2011 peak, the sun had set on the early 2000s commodity boom.
Like never before, management tightened their purse strings and focussed exclusively on cash preservation.
Investment in growth vanished.
But yesterday’s bust is tomorrow’s boom
And if death and taxes are certainties in life, so are commodity cycles…
Where the sector revolves from bust to boom.
And given that we’re now transitioning from a phase of deep underinvestment… To one in which supply must catch up with future demand…
The situation is very much different from the cycle low.
But as I’ve shown you, you must tread carefully in the years ahead as conditions shift more bullish.
I have little doubt that the next generation of mining executives—and the legions of investors who follow them — are destined to repeat the same mistakes!
And while that might be true, it’s important to recognise that not every mining executive is oblivious to the commodity cycle.
In fact, I suspect some mining insiders are intimately aware of its turning but keep the information close to their chest.
And I can prove that to you next week by walking you through some perfectly timed deals!
Stay tuned for next week’s edition of Fat Tail Daily as we reveal opportunities to capture at this point in the cycle!
Regards,
 |
James Cooper,
Editor, Mining: Phase One and Diggers and Drillers
Comments