(Kitco News) – With elevated commodity prices, the global mining sector is generating significant revenue for investors; however, one group says that there is still more work to be done to unlock value.
During the Denver Gold Mining Forum, the Shareholders Gold Council, in their latest sector report, said that as merger and acquisition activity picks up in the mining sector, companies are faced with rising Break-fees.
“Break-fees are intended to compensate companies from costs that must be incurred during a transaction, even if it fails, especially when deals have extenuating circumstances. Too often, though, parties instead negotiate unreasonably high break-fees to deter competitive bidders from emerging,” the council said in its latest report.
In its research, the SGC said that, on average, the mining sector has a Break-fees fee of around 3.7%, compared to 2% to 3% seen in other industries. The council also noted that since 2020, Break-fees expenses had averaged 4%.
The council noted that the recent Fortuna Silver/Roxgold merger is a good example of out-of-control Break-fees.
“The stock-for-stock deal, which combined a gold/silver producer with assets in Latin America with a West-African gold producer, was saddled with an egregious 4.9% Break-fee. Unsurprisingly, no competing bidders emerged and only 84.8% of Roxgold shareholders voted in favor of this transaction,” the council said. “Even worse, since the deal was announced, Fortuna Silver’s stock price has declined by 47%, grossly underperforming the GDXJ’s 18% drop.”
The SGC said that with no regulatory bodies in North America or Europe supervising takeover procedures, it is up to the industry to self-regulate. The members said that they would like to see a 1% limit on Break-fees fees, a regulation that is in place in Australia’s mining sector.
“The idea is not to eliminate entirely Break-fees but to advocate more disciplined practices from publicly traded companies regarding the size and scope of break fees. Excessively large break-fees are clearly an egregious form of value extorsion as they can deter competitive bidders,” The report said. “The SGC is of the view that management of publicly traded gold producers too frequently enter arrangements that are detrimental to shareholders by preventing superior proposals from rival bidders.”
The Shareholder Gold Council was spearheaded in 2017 by billionaire investor John Paulson, founder of Paulson & Co, as an advocacy group to create more value in what has been a beleaguered sector. Members of the council include Adrian Day, president of Adrian Day Asset Management, John Hathaway, a precious metal portfolio manager for Sprott.
The council is currently led by its Chair, Christian Godin.
Over the last three years, the group has proposed various solutions to creating value among mining companies, including recommending boards take higher ownership stakes in their companies and having boards more aligned with shareholder values.