Major producer early-stage exploration M&A up for 2nd consecutive year

Introduction

The major mining companies¹ significantly increased their M&A activity targeting the junior sector in 2021 with a 29% rise year over year in the number of deals and financings involving junior companies and early-stage projects. The increase was mostly for gold exploration, whose share of deals rose for a second consecutive year. Lithium deals spiked in the second half, and base metals deals — mainly for copper — fell sharply from a nine-year high in 2020.

Major mining company deals involving the exploration sector reached a 10-year high in 2021 with a rise of 29% year over year, the largest in six years. Gold exploration accounted for most of the increase, while base metals deals declined, mostly due to a one-third drop in copper deals after three strong years. Acquisition of all or part of junior exploration companies accounted for all the increase, with purchases of equity in early-stage projects declining slightly.

While almost every other aspect of the mining industry pulled back under the initial shock of the pandemic in early 2020, majors' acquisition of junior explorers and exploration-stage projects did not flinch. Instead, they increased year over year on a second-half surge as the industry emerged strongly from a first-half downturn. The full-year total of 95 deals was a 7% increase over 2019 and the second highest in nine years. The majors further increased their investment in the exploration sector in 2021 with a 10-year high of 123 deals.

A list of major-company exploration-focused M&A deals and financings is available here.

¹Companies with annual mining revenue of at least $500 million. Company classifications are available on S&P Global Market Intelligence's Corporate Exploration Strategies Product Support page.

Gold, lithium increase most

Metals prices had a mixed influence on the numbers of deals for different commodities. The strong increase in gold deals took place amid a new gold price plateau of about $1,800 per ounce since mid-2021. In contrast, copper deals fell by one-third year over year despite a strong and steady increase in the copper price through most of the year. The decline in copper deals could have resulted from the high level of pandemic-related disruption of mining activity in Latin America in 2020, which is the world's primary copper region. In addition, major copper producers have been focusing their exploration spending more on their existing mines and projects than on grassroots exploration.

A 140% jump in the lithium carbonate price between July 2020 and December 2021 and the promise of a further 23% increase by end-2022 have attracted more major companies into the race to supply the battery metal. They had an annual record of five lithium exploration deals in 2021, all in the second half. Two were by Sibanye Stillwater Ltd., which agreed to spend $490 million on exploration and development to acquire a 50% interest in Ioneer Ltd.'s feasibility-stage Rhyolite Ridge lithium project in the U.S., followed a month later by a $72.2 million private placement for a 7.12% interest in Ioneer itself. In the largest lithium deal, Zijin Mining Group Co. Ltd. paid $765.3 million in cash in January to acquire Toronto-listed Neo Lithium Corp. and its feasibility-stage Tres Quebradas lithium project in Argentina.

Metals prices have not been the only driver of majors' support for early-stage exploration, however. Over the past two years, the pool of attractive projects in low-risk locations available for acquisition has shrunk in a wave of mergers and consolidations. Major companies taking a longer-term view on replacing mined reserves have been increasing their investment in exploration, including a 27% year-over-year increase in budgets for exploration at their own projects in 2021 and a greater investment in smaller companies and their earlier-stage projects.

Majors' investment in junior companies up 50%

Major company participation in junior company equity offerings jumped 50% to 63 in 2021 from 42 in 2020, and their takeovers of juniors rose 180% to 14, from five in 2020. The large increase in company acquisitions was almost entirely focused on gold. It was reflected in a 62% rise year over year in the majors' share of junior and intermediate company financings from all sources, as analyzed in our monthly Industry Monitor series.

Although most metals prices are currently at historically high levels, the number and value of exploration financings plunged month over month in January and recovered only slightly in February. Russia's invasion of Ukraine late in the month added further turmoil to the investment climate and will likely cause the majors to pull back from exploration deals until hostilities end. Since there have been historically few major-junior deals involving Russian assets, sanctions against Russia will have minimal direct effect. However, after the end of conflict and a return to relative stability in Eastern Europe and world markets, metals demand and prices will likely remain elevated, and major company investment in the exploration sector could resume quickly.

Majors' participation in projects through purchase and earn-in deals began 2021 tentatively with only 17 deals in the first half, the fewest since the second half of 2017. It recovered strongly in the second half, spiking to 29 project deals, a 10-year high. The total of 46 project deals for the year was two less than the 48 in 2021 and the fourth-highest in the period. The number of project deals is down considerably in the first few months of 2022, suggesting that project deals by the majors will be on the historically low side for the full year.

Deals for Canada-US assets soar

Mining assets in the Canada-U.S. region have been by far the most frequent targets of major company exploration deals in the past 10 years, with 363, or 44%, of the global total of 829 deals. Latin America is a distant second with 189 deals, or 23%, followed by Asia-Pacific — mostly Australia — with 146, or 18%. In 2021, deals for Canada-U.S. assets jumped 67% year over year to 72, compared with an increase of 29% for Asia-Pacific. Latin America struggled under pandemic impacts, with only four deals in both the last half of 2020 and the first half of 2021, but the region bounced back to 11 deals in the last half of 2021, beating the eight-year pre-pandemic average of 10 per half-year.

By country, Canada has hosted the most deals in the 10 years with 267, followed in order by Australia with 117 and the U.S. with 96. Major-producer deals for Canadian assets almost doubled in 2021, rising 91% to 61 from 32 in 2020, which was the second-highest year for Canada in the period despite the pandemic's impact in the first half. Australia rose 35% year over year, and the global increase was 29%.

Rising demand, metals prices supporting majors' exploration M&A despite geopolitical upheaval

Major-producer exploration sector acquisitions have largely tracked metals prices since at least 2012. Despite the impact of the pandemic in 2020, the annual deal total has risen in each of the past two years. Record drilling activity by the juniors in 2021 and early 2022 underpins the ongoing interest of exploration investors, including the majors, who play a relatively small role in financing the sector's efforts to find new deposits. Sustained high gold prices and projected deficits or tight markets for industrial metals copper, nickel and zinc are the main drivers, along with the need for new deposits to replace reserves and resources lost through production.

Following closely on the heels of the pandemic, the geopolitical upheaval arising from Russia's invasion and ongoing siege of Ukraine has thrown strongly recovering markets into new uncertainty. To date, Russia's role as a major producer of precious and most industrial metals has been spared from direct sanctions, although foreign buyers are looking hard at alternative sources.

It is difficult to predict the resulting impact on major-company investment in the exploration sector; however, with only five major exploration deals in the first two months of 2022, the outlook is for a year of low activity. If the Russia-Ukraine war ends fairly quickly, however, and markets respond well, the outlook for deal activity could brighten considerably, given the underlying factors.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}