Following staggering price drops in oil, gas and precious and base metals, many investors and reporters have painted a very bleak picture of the commodities market. It’s hard to argue that this isn’t a full on crisis.
But while equity holders are definitely feeling the plight of commodity companies of all sizes, not every player shares the cynical view. In fact, various international investors see this as an opportunity to pick up prime assets.
In the case of metals and mining, total production costs have risen well above spot prices of gold, silver, copper and other metals for almost all producers. (By-product revenue has not been able to save them, either.) Most large producers, including senior Canadian gold miners, still have enough liquidity to continue operations and avoid costly shutdowns. However, smaller producers with only one project to generate cash flow are in a more pressing situation, positioning them as prime targets for those who believe that commodity prices will increase in the next few years.
Just recently, this theory materialized when Australia’s MinQuest submitted a conditional purchase offer for the Wolverine Mine, a zinc and silver operation that achieved commercial production in 2012, to Canada’s Yukon Zinc Corp.
Oil and gas producers have found themselves in similar situations, at the mercy of Middle Eastern politics and fluctuations in demand from Asia. All actors in the Canadian energy market have felt the impact of price declines, from software providers to drilling equipment operators and Calgary landlords.
However, some firms believe in a turnaround (eventually). PrairieSky Royalty reported that it spent $52 million on acquisitions during Q2 2015. The company expects further acquisition opportunities in the future and raised $190 million (on a bought deal basis nonetheless!) this month specifically for future acquisitions.
This may very well be a turning point for the commodities market. As many investors exit commodities and some altogether abandon hard-assets-only strategies, there are others with a growth appetite for just that. What might be a natural resource disaster for some is turning out to be a perfect storm for others.
Posted by Olga Ivleva, Senior Associate, Range Advisors
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