ca en energy canadas mining industry ma 102309

8/4/2019 CA en Energy Canadas Mining Industry MA 102309

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Canadas Mining

IndustryOpportunities throughMergers & Acquisitions

Fall / Winter 2009


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Deloitte & Touche LLP and affiliated entities. Mining in Canada: Opportunities through Mergers & Acquisitions i

Table of contents

Executive Summary ..................................................................... 1Introduction to Canada ................................................................. 2Canadas Mining Industry ............................................................ 4Mining M&A in Canada .............................................................. 10Making the Deal Work ................................................................ 12Legal & Regulatory Considerations ........................................... 17Business Taxation ...................................................................... 22Accounting Standards ................................................................ 25Conclusion ................................................................................. 29Appendix 1 Currency conversion table, monthly averages .... 30Appendix 2 Top 50 TSX mining companies ........................... 31References ................................................................................. 32


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Deloitte & Touche LLP and affiliated entities. Mining in Canada: Opportunities through Mergers & Acquisitions 1

Executive Summary

Canada represents a unique opportunity withinthe global metals and mining market. Driven by apowerful combination of abundant naturalresources and a secure investment climate, it hasfirmly established itself as a global mining centre.Over 1,400 mining companies now list onCanadas national exchange, which is a majorityof the worlds listed mining firms. Thisconcentration of mining activity has also thrustCanada into the global mergers and acquisitions

(M&A) spotlight. Canadian mining companieshave taken centre stage, both as acquirers andtargets, as demand for minerals and metals hascontinued to surge upward. Although M&Aslowed in 2008 and 2009 due to the globalfinancial crisis, the sector still produced manynotable deals.

Looking forward, the fundamental factors thathave driven M&A in the mining industryconsolidation to achieve economies of scale andpricing power, scarcity of large producing assets,and high-demand for minerals and metals fromindustrializing nations are expected tostrengthen through the end of 2009 and beyondas the global economic recovery takes hold. Inview of this, the Canadian mining industry, withits significant worldwide holdings and leadposition in exploration, will be an important playerin global markets. Notably, two important trendsare expected to persist within this M&A activity:first, Canadian companies will continueconsolidating in order to increase their globalclout; and secondly, they will increasingly look forglobal partnering opportunities to advance large-scale projects and leverage their expertise.

Business EnvironmentUnderpinning these deals has been Canadasattractive environment for doing business. Itsbanking system was recently ranked the worldssoundest in a survey by the World EconomicForum and its economy is supported by strongfiscal fundamentals, including low inflation,competitive interest rates, a relatively low debt toGDP ratio, and declining levels of taxation.Canadas skilled workforce, well-developedinfrastructure, and many trade agreements also

contribute to making it a first-class destination forconducting business.

Mining IndustryThe strength of Canadas mining industry hasbeen a key driver of economic growth. As one ofthe worlds largest producers of metals andminerals holding twelve top-five productionrankingsmining is vital to Canadas economy,contributing $40 billion in 2008. It is also an

important supplier to global markets, with over80% of production exported. Having led the worldin exploration spending since 2004, the outlookfor mining in Canada remains robust.

Investing in CanadaForeign investment has played an important rolein Canadas economic progress. Investors andacquirers from abroad can expect a stable legaland regulatory environment with few barriers infact, only several select industries are protected.And although significant foreign investments arereviewed, they are typically approved provided

there is a net benefit to Canada. As a result,Canada is home to a considerable, and growing,amount of foreign direct investment.

This presents a compelling opportunity for globalmining and investment firms. However, investorsmust still navigate much unfamiliar territory if theyare to include Canada as part of their globalstrategy. Precise knowledge of Canadas legal,tax, and accounting environments is particularlyimportant. Also important is possessing an M&Aexecution capability from screening to closingthat is focused and fast-moving.

All dollars Canadian, unless otherwise noted. See a endix 1 for currenc conversion table.

Total Population: 33.7 million

Gross Domestic Product (GDP): $1.6 trillion

Public Mining Firms: 1,400+

Global Production Rank:

1st Potash, Uranium

2nd Nickel, Cobalt

3rd Aluminum, Titanium, Platinum

4th Gypsum

5th Chrysotile, Molybdenum, Zinc, Salt

Canada at a Glance


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2 Mining in Canada: Opportunities through Mergers & Acquisitions Deloitte & Touche LLP and affiliated entities.

Introduction to Canada

Canada is well established as a secure,welcoming home for foreign investment. It hasone of the most open economies in the world,with high levels of trade and foreign directinvestment. This, combined with its soundgovernment finances and administration, hashelped foster an extended period of stableeconomic growth.

Political LandscapeCanada is a democratic federation of tenprovinces and three territories. Its nationalgovernment often referred to as the federalgovernment is responsible for national matters,such as foreign affairs and the military whileprovincial governments are responsible for thedelivery of most services. Responsibility fornatural resources generally belongs to provincialgovernments.

Canadas public finances have weathered theglobal recession in a relatively strong positionhaving enjoyed a long period of budget surpluses

prior to the re-introduction of deficit spending in2008. This has resulted in a net debt-to-GDPratio that remains well below the G7 average(figure 1).

Canadas political outlook remains stable.Although it has experienced a period of minoritynational governments, its two main politicalparties the Conservative Party of Canada andthe Liberal Party of Canada have bothpromoted tax and economic competitiveness askey pillars of their respective policy platforms.

Economic OverviewCanada had experienced a prolonged period of

economic expansion prior to the recent globalrecession. Its gross domestic product (GDP)amounted to $1.6 trillion in 2008, a 0.4% increaseover 2007. Although the Canadian economy isexpected to contract in 2009, the InternationalMonetary Fund expects Canada to have stronggrowth coming out of its recession, given its lowdebt-to-GDP ratio and stable financial system.

Recent GDP growth has been primarily driven bythe service sector - the largest contributor to theCanadian economy - which grew by 2.1% in2008, however, the fastest growing industry has

been construction which grew 2.8% due tolarge engineering and construction projects,primarily in the oil sector.

Although the Canadian economy is diversified,service sector industries combined accounted formore than two thirds of GDP in 2008. Other keycomponents of are manufacturing andconstruction, with mining traditionally contributing3.3% to 3.9% of GDP.

Contributing factors to Canadas growth haveincluded low inflation, competitive interest rates,

and a skilled workforce (figure 2). The Bank ofCanada, the countrys central bank, plays anessential role in the economy. It has a mandateto promote the economic and financial well-beingof Canada by keeping inflation low, stable, andpredictable. Its aim is to keep inflation at 2%, themidpoint of a 1% to 3% target range.

Figure 1: Canadian Federal Public Debt

In billions $ and as a percentage of GDP

10%

25%

40%

55%

$450

$500

$550

$600

Debt Debt-to-GDP Source: Government of Canada


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Figure 2: Selected Economic Indicators

Annual Real GDP Growth Annual Inflation* Prime Rate

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0.0%

0.5%

1.0%

1.5%2.0%

2.5%

3.0%

3.5%

4.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

*Consumer Price Index

Source: Statistics Canada

Open for Investment and TradeCanada has one of the most open economies in

the world. This has been built through a reliablehistory of welcoming foreign investment by way ofminimal regulatory barriers, numerous trade andinvestment agreements, and incentives.

One can observe the openness of the Canadianeconomy by examining foreign direct investment(FDI). In 2008, there was an accumulated $500billion of FDI in Canada and over $600 billion ofCanadian FDI abroad.

Only a small number of industries in Canada aresubject to regulatory restrictions on foreign

ownership level, includes are broadcasting,insurance, airlines, financial services,telecommunications, uranium production andcultural industries. Otherwise, foreign investmentis welcomed with minimal regulatory intervention.A review process does exist for significant foreigninvestments; however these reviews aregenerally approved, provided there is a netbenefit for Canada.

The Canadian economy is highly dependent ontrade. In 2008, it exported nearly $490 billion ingoods - $47 billion more than it imported. Natural

resources are its most important export,accounting for approximately half of all exports.

The U.S.A. is Canadas largest trading partner bya significant margin. This relationship is definedby the North American Free Trade Agreement,which also includes Mexico. The agreementprovides access for Canadian businesses to over400 million customers and a combined GDP ofover $11 trillion. Other important trading partnersinclude Japan, China and the U.K.

Looking ForwardThe Bank of Canada forecasts that the Canadian

economy will contract by 2.3% in 2009 before re-entering a period of growth, expanding by 3.0% in2010 and 3.5% in 2011. These figures have beenrevised slightly upward from earlier projectionsdue to a more modest retrenchment in businessand household spending than expected.

As a result of significant excess supply in theCanadian Economy and the resulting price leveladjustments, inflation has been slowing. TheBank of Canada projects that core inflation willfall to 1.4% by the end of 2009, before a gradualreturn to 2% in the second quarter of 2011. Due

to these factors the Bank of Canada lowered itstarget for the overnight rate the rate at whichmajor financial institutions borrow and lend one-day funds among themselves in April 2009 to0.25% and has since maintained a conditionalcommitment to hold the rate at that level until theend of the second quarter of 2010.


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Canadas Mining Industry

Canada is one of the worlds largest producers ofmetals and minerals. Its total production value in2008 was estimated at $45.3 billion, a 12%increase from its production value of $40.4 billionin 2007. Potash led all minerals, accounting for$8.2 billion, or 18.1%, of the total. A contributingfactor was the 172% appreciation in the price ofpotash over this period. Other large contributorswere nickel, at $5.9 billion, and copper, at $4.4billion. Coal significantly increased its annual

value, contributing $4.3 billion, a 94.6% increasecompared to 2007 due to its dramatic priceescalation. In total, Canadas top ten mineralsaccounted for a combined value of $36.2 billion(table 1). In a global context, Canada has twelvetop-five production rankings. It ranks first inpotash and uranium; second in nickel and cobalt;third in titanium, aluminum, and platinum-groupmetals; fourth in gypsum; and fifth in chrysotile,zinc, salt and molybdenum. Previously, Canadahas also held a top five position in gold, silver,lead and copper.

Table 1: Top 10 Canadian Production ofMinerals, 2008

Mineral UnitQuantity

(millions)Value

($millions)

Potash t 11 8,243

Nickel kg 251 5,856

Copper kg 581 4,438

Coal t 68 4,292

Gold g 95 2,824

Iron Ore t 31 2,427

Diamonds carats 15 2,404

Sulphur t 8 2,389

Cement t 14 1,792

Uranium kg 9 1,488

Source: Natural Resources Canada; Statistics Canada, Catalogue26-201-X

To achieve this level of production Canada has61 metal producing mines and 780 non-metalproducing mines. Its metal mines are primarilylocated on the Canadian Shield which stretchesfrom Yellowknife, through Flin Flon and southernOntario to Labrador City and is renowned for itsmineral deposits of nickel, gold, silver andcopper. Canada also has considerable mineralprocessing capabilities, including 34 non-ferrousmetal smelters and refineries several of which

contain both a refinery and a smelter. Canadianproduction of selected refined minerals is detailedin table 2. This strong presence is spread acrossCanada in both small towns and urban centers(see map of Canadian mining clusters onpage 8).

Canada attracts a considerable amount ofexploration spending. In 2008, it was the recipientof 19% of global exploration spending, rankingfirst ahead of Australia and the U.S.A.

Table 2: Canadian Production of Selected Metals- In tonnes,p

Preliminary

Metals 2007 2008p

Aluminum 3,082,625 3,120,148

Cadmium 1,388 1,409

Cobalt 4,883 4,867

Copper 453,453 442,050

Lead 236,688 258,431

Nickel 162,646 175,522

Zinc 802,103 764,312

Source: Natural Resources Canada; Statistics Canada


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Minings Contribution to the CanadianEconomyThe mining industry is a significant contributor tothe Canadian economy. It currently, andhistorically, has represented approximately 3.3%to 3.9% of Canadas GDP (figure 1). In 2008, the

industry contributed $40.3 billion to the Canadianeconomy; eight times more than forestry anddouble that of agriculture.

The mining industrys contribution to overall GDPcan be divided into several key components.Primary mineral production, including mining andconcentrating, contributed $9.4 billion; metal

production, including refining and smelting,contributed $11.8 billion; non-metallic mineralprocessing, including gypsum and abrasives,contributed $5.7 billion; and metal fabrication,including machining, stamping and forging,contributed $13.4 billion (figure 2).

As a relatively small nation by population, muchof Canadas mining production is for export. In2008, mining exports accounted for 19% ofCanadas total domestic exports. Major exportsincluded aluminum, nickel, copper, gold, uranium,coal, potash, zinc, diamonds, iron and steel, andiron ore. Exports of these products in 2008 each

ranged from $1.9 billion to $17 billion in value.

Mining Sector ExpertiseA strength of the Canadian mining industry hasbeen its large skilled workforce, experiencedmanagement and technical expertise. Theindustry employed 351,000 people in exploration,extraction and value-added activities in 2008,accounting for 2.1% of Canadas workforce.

This level of employment has resulted in asubstantial concentration of expertise. Over 2,360service and equipment firms provide support tothe mining industry annually, including hundredsof firms in the engineering, environmental, legal,and financial fields. Government statistics notethat most of these goods and services are highlyspecialized, resulting in supplier firms employeesbeing highly educated 25% possessinguniversity degrees in a scientific discipline.

The Canadian mining industry has also investedaggressively in research and development(R&D). In 2006, the sector invested $648 million,with primary metal R&D accounting for 42% ofthis total, followed by metal manufacturing R&D

with 37% and non-metallic mineral manufacturingR&D with 12%. The fastest growing R&D areahas been in non-ferrous metals, which grew by42% from 2002 to 2006. As a result, significantcapacity and expertise has been developed inmining and mineral R&D. Statistics Canadaindicates that approximately 6,850 employeesnow work in this field.

Figure 1: Minings Economic Contribution

In billions $ and as a percent of GDP

3.2%

3.4%

3.6%

3.8%

4.0%

$28

$32

$36

$40

$44

2003 2004 2005 2006 2007 2008

Mining GDP % of Total GDP

Source: Statistics Canada

Figure 2: Mining Sector Breakdown

Percentage of GDP, 2008

Primary MineralProduction

Metal Prod uctionNon-metallic

Mineral Processing

Metal Fabrication

33%14%

29% 23%

Source: Statistics Canada, 2008


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Mining OutlookThe outlook for the Canadian mining industry isbright. This is demonstrated by sustained highlevels of capital investment and explorationspending, both of which indicate confidenceamong management and investors.

Capital investment in the Canadian miningindustry totalled $11.3 billion in 2008,representing a 11% increase from 2007. Thecomponents of this include: $4.7 billion ofinvestment in metal ore mining, $574 million incoal mining, and $2.3 billion in non-metallicmineral mining for a total capital investment of$7.6 billion in mining. Secondary manufacturingwas the recipient of $3.7 billion in capitalinvestment (figure 3).

There has also been a substantial increase inexploration spending in Canada. This is perhapsthe best benchmark of the health of the industry,indicating future production trends. Spending onexploration totalled $2.8 billion in 2008, overdouble the level of 2005 and four times the levelof 2003 (figure 4). Junior mining companiesdefined as exploration companies that do nothave significant income from producing minesfunded a greater proportion of this effort than didsenior companies. The top destination forexploration spending was precious metals with$1.1 billion, followed by base metals with $709million and uranium with $377 million. Globally,Canada has been the top destination of

exploration spending since 2004.

Increasing commodity prices also contribute tothe positive outlook for mining in Canada.Although most metal prices declined significantlydue to the global recession, they have sincerebounded largely as a result of demand fromindustrializing countries. Gold, on the other hand,has continued to surge, having gone fromUS$665 to over US$1,000 an ounce sinceAugust 2007.

Figure 3: Capital Investment in Canada

By mining sector, 2008

Metal Ore Mining42%

Coal Mining5%

Non-MetallicMineral Mining

23%

Primary MetalManufacturing

18%

Non-Metallic

MineralManufacturing

10%

Fabricated MetalManufacturing,

8%

Source: Mining Association of Canada

Figure 4: Exploration Spending in Canada

In billions $, by company size

$-

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

2004 2005 2006 2007 2008p 2009i

Senior Junior

pPreliminary,

iIntentions


Combined, mining capital expenditure and explorationspending in Canada exceeded $14 billion in 2008, indicating avery positive outlook for the industry.


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FinancingCanada is a global leader in mining finance. TheTSX-TSXV has more mining listings than anyother exchange in the world. Combined, its over1,400 mining issuers valued at $278 billion bymarket capitalization account for 57% of the

worlds listed mining companies. Many of thesecompanies are of a considerable size, including33 that have market capitalizations greater than$1 billion. The benefits of such a large peer groupinclude visibility of transactions, analystcoverage, mining-specific indices and specializedlisting requirements.

This concentration of mining companies has alsoresulted in the TSX-TSXV being home to a largeproportion of global capital raisings. In 2008, theTSX-TSXV ranked first among world exchangeswith 138 new mining listings (figure 5) andsecond in total value of mining financings, raisinga total of $8.3 billion in equity (BOVESPA raisedonly one financing in the amount of $11.7 billion).

This recent predominance in mining financeextends a historical trend. From 2004 to 2008 theTSX-TSXV led world exchanges with 33% of theglobal value of mining financings (figure 6). TheTSX-TSXV also led world exchanges during this

period in the number of mining financing deals,having completed 81% of the over 10,000 deals.Canada is known to have a particularly strongprivate-placements market.

Much of the capital raised on the TSX-TSXV hasbeen committed to exploration outside Canada.This has provided Canada a strong internationalpresence in mining, particularly in regards toexploration. Of the 9,500 mining projects held byTSX-TSXV companies, 50% are outside Canada.50% of TSX-TSXV mining companies are outside

North America (figure 7). Significantconcentrations of TSX-TSXV mining companiesare found in South America (252), Africa (164)and India/Asia (104) (figure 7). This global reachis further reflected by Canadian miningcompanies ranking first in exploration spending inthe U.S.A., Latin America, Central America,Europe and Africa, in addition to Canada.

A product of this financing activity has been the

development of mining expertise within theCanadian investment services sector. Thousandsof brokers, analysts, bankers, exchange workers,financial consultants and securities lawyers workwith the mining industry on a regular basis.

Figure 6: Mining Equity Financings

Global Value, 2004 - 2008

TSX-TSXV40%

Other19%

Nasdaq 1%

Amex 1%

NYSE 3%

ASX 10%

LSE-AIM26%

JSE, 2%

Nasdaq, 1%Amex, 1%

Other, 5%

Source: TSX Group

Figure 5: New Mining Companies

2008

TSX-TSXV47%

LSE-AIM 5%

Amex 3%

NYSE 1%

HKEx 2%

JSE 1%

ASX 15%

Source: TSX Grou

Figure 7: Global Reach of TSX-TSXV Companies

Companies listed on TSX-TSXV, June 2009

Source:TSX/Infomine

138322

199 53

7831

164 104

77252


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Listing and Disclosure RequirementsMining companies listed on the TSX or TSXV aresubject to a comprehensive regulatory frameworkthat has been specifically adapted for theindustry. This includes listing and disclosurerequirements that pertain directly to the nuancesof the mining industry.

The TSX and TSXV divide the mining industryinto tiers based on stage of development,historical financial performance and financialresources of the issuer. The TSX refers to itsmore established mining companies as exemptcompanies and its less established ones asnon-exempt companies. The TSXV refers to itsmore established mining companies as Tier 1issuers and its less established ones as Tier 2issuers.

TSX mining companies are usually established,well-capitalized businesses, however, TSXslisting requirements also set out criteria for listingcompanies that have not yet reached profitabilityat the time of listing but are able to forecastprofitability. TSXV mining companies are usuallyat an earlier stage of their development (table 3).

Mining companies are also subject to generallisting requirements, which include requirementsregarding management and board, auditcommittee, share distribution, scope of financialinformation, pro-forma financial statements,financial statement preparation, and auditexecution.

Figure 8: Canadian Mining Clusters

The Canadian mining industry has a significant presence across Canada, both in small towns and urban centers,which includes 61 producing metal mines, 780 non-metal mines, and 34 non-ferrous metal smelters and refineries.


Vancouver(Allied industries, junior

exploration/mine financing,904 mining firms)

Kamloops(Copper,

molybdenum, gold)

Kitimat(Aluminum)

Fort McMurray(Oil sands, allied

industries)

Yellowknife(Diamonds)

Athabasca(Uranium)

Flin Flon(Gold, copper, zinc)

Thompson(Nickel, cobalt)

Trail(Lead, zinc)

Elk Valley(Coal)

Fort Saskatchewan(Nickel)

Saskatoon/Esterhazy

(Potash, salt)

Timmins(Zinc, copper,

lead, gold)

Sudbury(Nickel, copper,

cobalt, gold,pgm, alliedindustries)

Toronto(Allied industries, senior

exploration/ mine financing,329 mining firms)

Montreal(Allied industries,52 mining firms,

R&D centre)

Becancour(Aluminum,magnesium)

Thetford Mines(Chrysolite)

Windsor(Gypsum)

Bathurst(Zinc, lead)

Saguenay(Aluminum, niobium)

Labrador City/ Sept-Iles(Aluminum, iron)

Val-dOr(Gold, copper, zinc,

allied industries)

Rouyn-Noranda(Copper, allied

industries)

Red Lake/Helmo(Gold)


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Ongoing Disclosure RequirementsA mining company that is listed on the TSX orTSXV is a reporting issuer that has ongoingreporting and disclosure obligations. Reportingissuers must provide shareholders withmeaningful information regarding materialinformation, the business, management,

operations and financial position of the companyas well as information about transactions such asprivate placements, the issuance of stock optionsand acquisitions. These obligations arise underboth securities rules and requirements of the TSXand TSXV. The documents that must be filed aspart of continuous disclosure responsibilitiesinclude:

Annual and Interim Financial Statements; Managements Discussion & Analysis; Annual Information Form; Material Change Reports;

Material Information News Releases; and Business Acquisition Reports.

Standards of Disclosure for MiningProjectsNational Instrument 43-101 is the CanadianSecurities Administrators (CSA) policy governingthe scientific and technical disclosure by miningcompanies and the preparation of technicalreports. It requires that all technical disclosure isbased on advice by a Qualified Person (QP). Thisperson must be a practicing member of a CSArecognized professional association with fiveyears industry experience and specific expertisein the disclosure of the company. Issuers arerequired to make disclosure of reserves andresources using definitions approved by theCanadian Institute of Mining, Metallurgy andPetroleum, except for disclosure pertaining tocoal. Technical reports must be filed on SEDARand follow a defined format that specifies thecontent required in the report.

To report using a foreign code, the issuer mustapply to securities regulators for exceptive relief.

Table 3: Minimum Listing Requirements for Exploration and Mining Companies

TSX Senior(Exempt)

TSX Producer(Non-Exempt)

TSXExploration(Non-Exempt)

TSXV Tier 1 TSXV Tier 2

Financial Commercialproduction

$7.5M net

tangible assets$300,000 Pre-taxearnings and$700,000 pre-taxcash flow

Adequate fundsto commercialize

$4M net tangible

assets18 monthprojection ofsources anduses

$750,000 workprogram

$3M net tangible

assets$2M workingcapital

18 monthprojection ofsources anduses

$500,000 workprogram

$2M net tangible

assets$100,000unallocated

$200,000 12-month workprogram

$100,000unallocated

Technical 3-years provenand probablereserves

3-years provenand probablereserves

3-D continuityand interestingeconomic grade

50% ownershipof property

Material interestin a property(substantialgeological merit)

Significantinterest inqualifyingproperty

Distribution Public float of$4M

300 publicshareholders

Public float of$4M


Public float of$4M


Public float of$1M and 20% ofissued andoutstanding


Public float of$500,000 and20% of issuedand outstanding


Source: TSX Group


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Mining M&A in Canada

Recent M&A activity in Canada has beensubstantial. Total annual deal value increasedrapidly from 2003 to 2007, rising 284% to $311billion (figure 1). And while the pace of dealsslowed in 2008 and 2009, the total value of dealshas remained significant, with $110 billionoccurring in 2008 and over $100 billion year-to-date in 2009. Within these amounts, transactionsinvolving the mining industry have played asizeable role, as have cross-border transactions.

A recurring theme within Canadian M&A activityhas been globalization with foreign players fromthe United States, China, Russia, Sweden, Indiaand elsewhere acquiring Canadian resource andmanufacturing companies and some of Canada'slargest companies shopping for foreign assets. Infact, cross-border transactions accounted for53% of all activity in 2008, with Canadiansacquiring 289 foreign companies, valued at $22billion while foreigners acquired 174 Canadiancompanies, valued at $36 billion. This trend hascontinued in 2009 with several notable dealsinvolving China, including PetroChinas US$1.9billion investment in Athabasca Oil Sands Corp.,China Investment Corporations US$1.6 billioninvestment in Teck Resources, and EldoradoGolds pending acquisition of Sino Gold, an ASXlisted gold miner focused on China.

The mining industry has figured prominently indeal-making. The sector experienced aparticularly dramatic increase in M&A activity in2006 and 2007 (figure 2), and as a resultaccounted for a substantial proportion of allactivity approximately 20% in both years. In2008, the industry remains an active participant in

M&A activities, accounting for 19% of the totaldeal value.

Figure 2: Canadian M&A Activity Mining

0

100

200

300

$-

$25

$50

$75

2002 2003 2004 2005 2006 2007 2008 2009*

Billions Number

Deal Value Deal Number

*2009 YTD (Jan-Sep)

Source: FP Advisor

Figure 1: Canadian M&A Activity - All

0

625

1250

1875

2500

$-

$100

$200

$300

$400

2002 2003 2004 2005 2006 2007 2008 2009*

Billions Number

Deal Value Deal Number

*2009 YTD (Jan-Sep)

Source: FP Advisor


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In 2008, the $29 billion in mining deals wasprimarily driven by large transactions exceeding$1 billion, which combined contributed 59% oftotal deal value. Table 1 details the largestCanadian deals for 2008, 2007 and 2006 in themining sector.

Mining transactions captured the top threepositions in the largest Canadian deals of 2006.The largest of these was Vales acquisition ofInco, a large Canadian nickel producer, in a dealvalued at over US$20 billion. A similar sizedtransaction saw Xstrata acquire Falconbridge, aglobal diversified mining company based inCanada, after a bidding war with Inco and PhelpsDodge. Goldcorps acquisition of Glamis forUS$8.7 billion was the third largest transaction.

In 2007, there were three mining and metalsdeals in the top ten largest Canadian deals, all of

them foreign acquisitions of Canadiancompanies. The largest was Rio Tintosacquisition of Alcan; followed by SwedensSvenskt Stals acquisition of IPSCO, a steelsupplier; and then Russias Norilsk Nickelsacquisition of LionOre, a nickel and goldproducer.

Also notable in 2007 was the continuingconsolidation of the Canadian mining industry.Teck Comincos friendly acquisition of AurResources, a copper and zinc producer, forUS$3.6 billion was the largest of such

transactions. Another significant result of thisactivity was the creation of Uranium One, Inc. aglobal uranium producer with assets in Australia,Canada, Kazakhstan, South Africa, and the U.S. which was created by the combination of SXRUranium One and URAsia. Earlier in the year,SXR Uranium One acquired Canadian basedEnergy Metals Corp, another TSX listed companyfocusing on uranium.

Table 1: Top Canadian Metals and Mining Deals

In US$ billions

2009 Year to Date (includes pending deals):

Deal Value

Eldorado buys Sino Gold 1.6

China Investment Corp invests in Teck 1.6

Uranium One buys TOO Karatau 0.4

New Gold buys Western Goldfields 0.3

Lake Shore Gold buys West Timmins Mining 0.3

Wuhan invests in Consolidated Thompson 0.2

Jilin Jien Nickel buys Canadian Royalties 0.2

2008:

Deal Value

Teck buys Fording Canadian Coal 11.3

Barrick Gold buys the Cortez Mine 1.7

Merger of New Gold, Peak Gold and Metallica 1.6

Goldcorp buys Gold Eagle Mines 1.3

Kinross Gold buys Aurelian 1.0

Sherritt buys Royal Utilities 0.9

Cameco buys the Kintyre Project 0.5

2007:

Deal Value

Rio Tinto buys Alcan 43.9

Svenskt Stal buys IPSCO 7.7

Norilsk Nickel buys LionOre 5.8

Hindalco buys Novelis 5.7

Teck Cominco buys Aur Resources 3.6

Yamana Gold buys Meridian Gold 3.2

SXR Uranium One buys URAsia 2.9

2006:

Deal Value

Vale buys Inco 20.4

Xstrata buys Falconbridge 18.2

Goldcorp buys Glamis 8.7

Kinross Gold buys Bema Gold 3.0

Lundin Mining buys EuroZinc 1.6

Gold Fields buys Barrick S. Africa 1.5

IAMGold buys Cambior 1.2

Source: Capital IQ, Globe and Mail


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Making the Deal Work

The basic reality is that acquisitions are complex successfully acquiring and integrating acompany is a significant undertaking that requiresfocus and expertise. This is particularly the casein the mining sector where companies faceintense competition for high-quality assets, a factdemonstrated time and time again by biddingwars for companies such as Inco andFalconbridge.

As a result, acquirers must take a much morestructured approach to M&A activities bringingdiscipline and focus to every step of the process.At Deloitte, an integrated methodology has beendeveloped to assist our clients in this endeavor(figure 1). This recognizes the interdependenceof each phase of the process with prior phasesand focuses on long-term value creation.

Figure 1: The Deloitte M&A Methodology

Acting with focus and discipline throughout the M&A lifecycle will greatly enhance a companys M&A capabilities.The figure below illustrates the Deloitte integrated M&A methodology, which focuses on long-term value creation.

FunctionalIntegration

Organization &Workforce

360Communications

Customers,Markets

& Products

Synergies &Cost Reduction

M&A ManagementOffice

Locations &Facilities

M&A

Strategy

Target

Screening

Due

Diligence

Transaction

ExecutionIntegration

Develop M&A

Strategy

Plan Target

Screening

Plan M&A Due

Diligence

Develop M&A Deal

Structure

Develop M&A

Execution

Capability

Screen

Target

Candidates

Establish M&A Due

Diligence

Protocols

AnalyzeSynergies

Select M&A TargetsConduct M&A Due

Diligence

Analyze Target

Valuation

Develop M&A

Target Approach

Finalize M&A Due

Diligence Results

Plan M&A

Integration

Develop M&A Deal

Documentation

Negotiate M&A

Deal

Conduct M&A Deal

Closing

Source: Deloitte


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Phase 1: StrategyClarity of purpose is vital to success in M&Aactivities. Too often companies, especially thosethat do not see M&A as a central function, lackdirection regarding M&A strategy, responsibilitiesand processes. This can put them at a

considerable disadvantage in todays competitiveenvironment. This has become apparent in themining industry as acquisitive companies, suchas Vale, have outpaced competitors viasuccessful acquisitions.

Developing an M&A strategy which isconsistent with its corporate strategy is a criticalfirst-step for a company to achieve this clarity.This helps ensure that all M&A opportunities areconsidered within a disciplined, well-controlledframework of existing strategy, the businessenvironment, cultural fit, opportunity, risk andreturn. It will also assist in proactively identifyinghigh-value opportunities and avoiding time-wasters.

In building this strategy a company should firstverify its business strategy. This will befundamental to deciding how M&A activity canenable success. Within this, it needs to definegrowth objectives and compare growth vehicles.Growth through organic means is limited byvarious constraints, particularly in mining; M&Aactivity can be an important tactic, but onlythrough careful analysis can this balance bedetermined.

The value of having an M&A strategy isreinforced by many studies and surveys thatexamine the failure rate of acquisitions.Consistently, these conclude that having a soundstrategy upfront will significantly increase thechances for a successful acquisition. Anotherbenefit will be the savings in time and moneyfrom not chasing opportunities that are a poorstrategic fit.

Phase 2: Target Identification andScreeningIt is no longer sufficient to rely on superficialresearch on potential targets. Given the pace atwhich mining M&A activity is conducted,acquirers need to devote significant resources to

identification and screening. To meet thechallenge from competitors, acquirers must beable to move quickly.

The ability to identify and screen targetseffectively is facilitated by having an M&Astrategy upon which to establish a clear set ofcriteria. This process can be compared to afunnel, in that it starts out broad and narrows ascompanies are eliminated from considerationbased on progressively more comprehensivecriteria.

Initial Screen.The initial screen is based onrelatively general criteria. This may includemineral and metals produced, proven andprobable reserves held, exploration activitiesunderway, geographic location of miningoperations considering country risk, companysize and financial health.

Feasibility Screen.The feasibility screen will beapplied to those companies that have satisfiedthe initial screen. This may include analysis onmarkets, management and organization.

Detailed Screen. The detailed screen will closelyexamine the company. Often this involvesorganizational and competitive intelligence, suchas reviewing shareholdings, and preliminaryfinancial and operational due diligence.

As this process of identifying and screening takesplace, a strategy on approaching targets must bedecided. Legal and regulatory matters will play avery important role in this, particularly if thecompany is publicly-listed.


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Phase 3: Due DiligenceA critical component of the M&A lifecycle issystematic due diligence by the acquirer on thetarget business, its assets and liabilities. Thisprocess allows the acquirer to gain a deepunderstanding of the value and risks associated

with the business.

Several trends also necessitate a greater focuson due diligence. First, as increasing complexitybecomes the norm in todays business, regulatoryand accounting environments, the ability tounderstand the risks of a deal become morechallenging. In addition, the current sellersmarket in the mining industry can mean limitedinformation and time compounding the problem.

Generally, due diligence can be grouped intothree major focuses: financial issues, includingforecasts, tax matters and financial statements;strategic and operational issues, includingsystems infrastructure and customer/supplieragreements; and transactional issues, includingthe corporate structure of the target and businessintelligence. In a mining context, these issues canbe particularly complex as mining specificregulations, taxes, incentives and environmentalliabilities are considered.

This type of comprehensive assessment hasseveral aims. Overall, it seeks to identify anypotential deal breakers to determine if they areserious enough to walk away from the deal. More

specifically, it aims to answer the followingquestions.

What is the quality of company assets? Are there any contingent liabilities? Are there any potential synergies? Are there any operational risks or

opportunities? Are the companys earnings sustainable?

The importance of clear answers to thesequestions, combined with tight timelines andlimited access to quality information can make

the due diligence process challenging - evenmore so if it must be performed in a data roomenvironment or as part of a hostile transaction.This fuels a demand for a due diligence team withan enhanced appreciation of what is knowableand the experience and ability to extract issuesand synergy opportunities from available filearchives.

Provision for Mine Retirement.A companysobligations for retirement and reclamation can besubstantial. The laws and regulations applicable tothe mine must be carefully reviewed, and costestimates confirmed to ensure an accurate liabilityhas been recorded.

Mine Inventory. Mining operations must oftencarry considerable inventory such as heavy tires,explosives, and spare parts. Accordingly, it isimportant to ensure provisions for obsolescenceare not understated which be complicated by theabsence of an aged inventory list.

Mining Equipment. Delayed maintenance onheavy equipment can result in significant upgradecosts to an acquirer. Thorough investigation isrequired to determine the quality of assets.

Mining Taxes and Incentives. Explorationactivities can often result in significant tax-losscarry-forwards and other tax credits, thisnecessitates analysis to determine expirationschedules and potential deal structureconsequences.

Suppliers. Mining operations often depend onsuppliers, such as transportation firms, to maintainproduction. These relationships and contracts needto be reviewed in order to determine if any riskexists.

Customers. Mines can have significant customer

concentration risk, making the evaluation of theserelationships and contracts essential.

Foreign Exchange Currency Risk. In reviewingcustomer and supplier contracts, currency riskexposure should be assessed.

Hedging. Any open hedging positions that may bepassed on to the acquirer must be identified.

Environmental Exposure. Environmentalconsultants are often required to assess a minesenvironmental related exposures.

Reserve Base. Validating the proven, probableand possible reserve base, as well as its quality, iscritical in determining the value of the property.Certificates of titles must also be reviewed in thisverification.

Source: Deloitte

Top Issues in Mining Due Diligence


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Figure 2: What Drives Value in Mining?

Identifiable IntangibleAsset Value

(Mineral Claims)

Tangible Asset Value

(Machinery & Equipment)

Monetary Value

(Working Capital)

Business

Value

Unidentifiable IntangibleAsset Value

(Goodwill)

Risk

Source: Deloitte

Phase 4: Transaction ExecutionHow to enter into a transaction, and how it isstructured, is a highly technical area in M&A. Itoften requires coordination between financial, tax,accounting and legal professionals, however,doing this well can produce significant benefits,

including tax savings both immediate and future and limitation of liability.

Typically, the starting point of transactionstructuring will be whether the buyer shouldacquire the shares or the asset(s) of the target. InCanada, this decision is often driven by taxconsiderations, which generally lead sellers toprefer share deals and buyers to prefer assetsales.

Sellers generally prefer a share deal for severalreasons. Firstly, the proceeds are taxed at thecapital gains rate, which is generally lower thanthe integrated business income/dividend rate.Secondly, there may be a capital gainsexemption and/or deferral available whichprovides additional tax savings. Buyers may alsoprefer a share deal, but usually only if the targetbusiness has significant tax attributes that it canutilize (such as non-capital losses, high tax basisin assets, etc.).

More often, buyers will prefer to structure atransaction as an asset deal as the buyer may beable to structure the purchase to provide forfuture income tax deductions. An asset deal also

allows buyers to select which assets to purchaseand what liabilities to assume. In an asset deal,additional tax considerations may include landtransfer tax, sales tax, and provincial miningtaxes. These will depend on the Canadianprovince in which the mining operations arelocated.

In Canada, mining activities are grantedpreferential income tax treatment. In both ashare and an asset purchase/sale the buyer canacquire the sellers historical mining resourcepools provided certain criteria are met. To the

extent the resource pools relate to a particularmine, the purchaser can then use these pools toshelter future income from taxes in respect of thatmine. The successor rules are extremelycomplex and require careful analysis to ensurethe desired results are achieved.

Other matters that may impact structuring arelegal concerns, such as liability andconveyancing, the methodology for repatriatingmining profits and future exit strategies.

The complexity and interaction of theseconsiderations particularly in terms of a cross-border mining transaction make the need forskilled technical advice invaluable for maximizingvalue.

Valuation AnalysisThe valuation of a target mining company orasset can employ several approaches. Broadly,these can be divided into three groups: incomeapproaches, which examine the targets incomeor cash generating capability; marketapproaches, which refer to market indicators; and

asset approaches, which examine the targetsliquidation or book value.

The value these approaches strive to measure iscomprised of several components, such astangible and intangible assets which may or maynot be identifiable (figure 2).


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Mining transactions can also present uniqueissues in valuation, particularly in regards to thevalidation of reserves, lack of comparables andvarying extraction costs (text box below).

The accurate determination of a targets value tothe acquirer including synergies will be very

beneficial when negotiating, often leading tobetter terms. Or, alternatively, will provide aneffective basis for knowing when to walk awayfrom a deal.

Phase 5: IntegrationThe ability to extract the maximum value from atransaction in the shortest timeframe is a must foracquirers. Too few treat the integration as aseparate part of the overall transaction. Bestpractice firms start planning for the integration inthe pre-deal phase, addressing it at each phase.

Mergers can easily become high-risk growthstrategies with little guarantee of success. Oftencompanies celebrate the completion of a dealand fail to pay enough attention to the integration.Experience shows that in this situation, themerger will ultimately fail, not because thecompany has chosen the wrong business,although some do, but due to poor integration ofthe acquisition.

Failure to integrate effectively decreases staffmorale and proves to be a distraction to senior

management. Getting the merger of twoorganizations right and capturing the momentumof the deal is critical to extracting the maximumpotential value. Planning the integration beforethe completion of the deal is imperative to ensurethat the companies do not prematurely think thehard work is over. The opposite is nearly alwaystrue and the toughest decisions are still to bemade.

The most important aspect of integration isensuring day-one readiness. Not only must anacquirer plan to maintain efficiency levels, but it

must also address how it will realize synergytargets. This involves taking a holistic view thatalso considers customers, markets,communications, employees and facilities.

Best practice shows that change must beimplemented quickly. Typically, an integration hasa 90-day, post-deal window in which to succeedor fail. It is usually determined by the quality ofthe planning which can start well before the daythe deal closes. As a guide, most merger activityshould be planned and costed over the 90-dayperiod prior to the first operational day of the

merged business. The integration will not becomplete at this stage, however, the mergerblueprint or strategy, financial goals, operationaldelivery plans and communication plans shouldhave been developed and agreed to so maximumbenefit can be derived from day-one.

Validation of Resource/Reserve Base.Determining the certainty of the resource andreserve base, as well as any exploration potential,is fundamental in any valuation. This will involve anassessment of proven and probable reserves aswell as the indicated and inferred resources.

Uncertain Market Conditions. Anticipating marketconditions and mineral prices over the long-termcan present a challenge, particularly when marketsare volatile and analyst projections lackconsensus.

Lack of Comparables. Individual mining projectsare naturally unique. As a consequence, findingcomparable transactions similar in geography,geology, risk and size is difficult.

Risk Factors. Mining projects present a host ofrisk factors, such as country specific risk andpotential environmental liabilities, which can be

significant. These must be carefully consideredand incorporated into the valuation.

Varying Geological Conditions. Understandingthe geological conditions and associated extractioncosts is critical to an accurate valuation. Forexample, it is common to have varying levels ofextraction complexity within the assets resourcebase, which can lead to dramatically differentproduction costs.

Synergies. Synergies are an important element ofM&A for strategic acquirers. In the mining industry,synergies can be gained in many ways, including

from the consolidation of operations, introduction ofimproved mine operating practices and costreduction though reallocation of customers to lowercost production sources. However, these can oftenbe challenging to value.

Source: Deloitte

Top Issues in Valuing Mining Projects


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Legal & Regulatory Considerations

In Canada, the areas of the law most applicableto M&A transactions contract, securities, realestate and employment are under provincial

jurisdiction. As a result, it may be necessary toaccommodate parallel provincial jurisdictions if abusiness has strong ties to more than oneprovince. Generally speaking, Canadian businesslaw is quite similar to that of the U.S.A. and U.K.

Securities regulations are administered and

enforced on a provincial basis through securitiescommissions. All TSX issuers are reportingissuers in Ontario and are subject to securitieslaws in the province of Ontario, plus any other

jurisdiction in which they are a reporting issuer.All TSXV issuers are reporting issuers in BritishColumbia and Alberta, and are subject tosecurities laws of the provinces of BritishColumbia and Alberta plus any other jurisdictionin which they are a reporting issuer. Althougheach province has its own local securitieslegislation, rules and practices, the provincialsecurities commissions have, to a considerableextent, standardized their codes and procedures.

Competition LawsThe federal Competition Actregulates mergersand acquisitions from an antitrust perspective. Itsintent is to encourage competition in order topromote efficiency and adaptability of theCanadian economy. Administration of the Actiscarried out by the Competition Bureau, which hasthe authority to review any merger. Advancenotification must be given to the Bureau ofproposed transactions when the value of targetfirm, or its assets, exceeds $50 million or the

value of the merged company exceeds $70million, and when the combined value of theparties, together with their respective affiliates,exceeds $400 million.

Parties to a transaction that meets notificationrequirements can apply for an advance rulingcertificate that, if approved, allows the transactionto proceed without challenge. The review of non-complex transactions will generally happenquickly, within 14 days, however, very complextransactions can take substantially longer. The

Competition Actempowers the Bureau to makecorrective orders regarding proposedtransactions that substantially lessen competition.

Foreign Investment ReviewForeign investments in Canada are regulated bythe Investment Canada Actwhich is administeredby the federal Minister of Industry. The Canadiangovernment encourages foreign investmentprovided it can be demonstrated to contribute a

net benefit to Canada.

Foreign investments will be reviewable if theasset value exceeds certain thresholds. ForWorld Trade Organization (WTO) memberinvestors this threshold is $295 million. Thethreshold is $5 million if the investor is not a WTOmember or if the investment is in a business thatengages in the production of uranium and ownsan interest in a uranium producing property inCanada; provides a financial service; provides atransportation service; or is a cultural business.

Foreign investment reviews will seek todetermine if the investment is of net benefit toCanada. This determination will consider the:

effect of the investment on the level ofeconomic activity and employment in Canada;

degree of participation by Canadians in thebusiness and the relevant industries;

effect of the investment on productivity,industrial efficiency, technological development,product innovation and product variety;

effect of the investment on competition; compatibility of the investment with certain

national policies; and contribution of the investment to Canadas

ability to compete in global markets.

Reviews under the Investment Canada Actareusually completed within 45 days, however, thisperiod can be extended for an additional 30 days.


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Asset/Private Company AcquisitionsIn acquiring a Canadian business one mustdecide whether to do so via purchasing its assetsor its shares. This following is a discussion of thelegal consequences of each type of transaction;in the case of share deals it will focus on those

associated with a privately held company. Thischoice often arises when an acquirer ispurchasing a mining property that is organized asa private subsidiary of a publicly-listed company.

The acquisition of a companys assets is oftenpreferable to the acquisition of its shares. Themost important advantage of an asset deal is theability of the purchaser to choose what assets tobuy and what liabilities to assume. In a miningcontext this option is particularly useful when anacquirer is interested in purchasing only onemineral property from a publicly-listed seller thathas many. The necessity of an asset deal inthese cases overrides many other non-taxfactors, many of which will favour a share deal.The following is a summary of the legal mattersthat an acquirer should consider when decidingbetween a share or asset deal.

Shareholder Approval. A sale of all, orsubstantially all, of the assets of a corporationrequires shareholder approval under the CanadaBusiness Corporations Act. If shareholderapproval is required it typically takes the form of aspecial resolution, which a supermajority isneeded for passage.

Conveyancing. An asset deal can becomplicated from a conveyancing perspective. Ina large mining asset deal there will be numerousconveyancing, assignment and transferdocuments required for individual assets suchas real estate, equipment leases, vehicles andservice contracts as well as for mineral titles.

Employment Issues. There are a number ofemployment issues that may arise in an assetdeal. If the asset is an operation with unionizedemployees covered by a collective agreement,

they will be transferred with the asset. In addition,it will need to be determined which employeesnot covered by a collective agreement will beoffered employment with the purchaser and howbenefits will be handled.

Third-Party Consents. An asset deal cantrigger third-party consent requirements for theassignment of leases and contracts. It can betime consuming to obtain these consents. Ashare deal may also trigger similar requirements

through change of control clauses, however,there are usually far fewer.

Confidentiality Agreement. It is customary for apotential purchaser to enter into a confidentiality

agreement. This ensures that confidentialinformation provided to the purchaser remainssecure and is not used for any other purpose.

Letter of Intent. A letter of intent, ormemorandum of understanding, states the basicterms of the transaction and forms the basis onwhich the deal will proceed in regard to thirdparties and regulatory bodies. Typical provisionswill include:

an exclusivity period; a drop-dead date to enter into a purchase

agreement; access to materials to conduct due diligence; guidelines for public announcements; and allocation of responsibility for expenses.

Possible additional provisions that are lessbinding, may include the subject matter of thesale, the price and terms of payment, and theclosing conditions.

Purchase Agreement. A definitive purchase andsale agreement will typically include:

any deal protection measures; comprehensive representations and warranties

of the sellers business; representations of the purchasers business, if

there is a financing condition or if its shares arebeing offered as consideration;

a minimum tender condition to ensure asecond-step transaction can take place;

purchase price and form of payment; pre-closing covenants, such as agreement by

the seller to carry on its business in theordinary course until closing;

a provision for indemnification for breaches ofcovenants or representations;

conditions of closing, such as delivery of allregulatory approvals and a no material adverseeffect clause; and post-closing covenants, suchas a non-competition clause.


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Acquisition of a Public Companys SharesThe acquisition of a publicly-listed Canadianmining company can be completed via a friendlytakeover bid, a hostile takeover bid, anamalgamation or a plan of arrangement. Themost suitable type of transaction and course of

action will often become evident as planning andnegotiations progress. Factors such as desiredtimeline, availability of financing methods, taximplications, regulatory processes and otherissues will be important determinants.

Canadian laws that govern these transactions aredesigned to ensure the equitable treatment ofshareholders by ensuring equal considerationand the disclosure of all relevant information. Asecondary intention is to provide a stable andpredictable framework of rules for bidders, targetsand financiers. This has created an environmentthat is conducive to M&A activity and hasfacilitated an increasing number of transactions,particularly complex cross-border transactions.

Takeover Bid BasicsTakeover bids are regulated by the corporate andsecurities laws of each province. The laws ofmore than one jurisdiction will often be applicabledepending on the targets shareholderdistribution, however, in practice the rules arenearly uniform in their application. Takeover rulesare triggered when a bidder, and its associatedparties, will acquire more than 20% ownership of

a target. Once triggered, the bidder must makethe same offer to all shareholders communicatedby a takeover bid circular.

It is also possible for a takeover bid for aCanadian company to trigger both Canadiantakeover rules and U.S.A. tender offer rules.However, cross-border exemptions are availablethat allow the bid to proceed under the lawswhere the target is incorporated.

Takeover bids can be either friendly or hostile. Afriendly acquisition is one where both partiesundertake the transaction willingly. This hasseveral advantages including easier access toconfidential information for due diligence,potential negotiation of deal protections andgreater flexibility in structuring the transaction.

A common reason for a friendly acquisition tooccur is the presence of a controllingshareholder.

Hostile bids are also common in Canada and

often lead to a change in control, however, inmany cases the initial bidder is not the successfulacquirer in the ensuing auction. An advantage ofhostile bids is that a bidder has greater controlover the timing of the offer and the initial priceoffered. As well, it is less likely that news of thedeal, which could result in a share price increase,will be prematurely released. These advantagescan be particularly useful if few bidders areexpected and the company is vulnerable. Ahostile bid can also become necessary ifattempts at a friendly transaction have failed.

In considering a takeover bid it is important tonote that public communication regarding the bidis closely regulated and subject to liability to bothsecurities regulators and the investmentcommunity. Accordingly, considerable duediligence is required to ensure thatcommunication in regulatory filings and to thepublic are accurate.

Merger BasicsThe main alternatives to a takeover bid areamalgamations and plans of arrangement, bothof which are essentially mergers.

A plan of arrangement is the most flexible way toacquire a Canadian target. It is a courtsupervised procedure available to companies thatwish to merge, but cannot achieve the desiredresult through amalgamation statutes. Thisflexibility can make it particularly useful incomplex merger transactions that may otherwiserequire multiple steps. The principal terms of thetransaction are agreed to in a contractualarrangement that then must be approved by thecourt. A statutory amalgamation is a less flexibleprocedure that allows two or more companies tobe merged.

Both an amalgamation and plan of arrangementrequire supermajority approval (66.67%) at ashareholders meeting of the target.


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Figure 1: Takeover Bid Timeline

Pre-transaction IssuesOnce a potential target has been identified thereare several issues that should be consideredprior to the transaction being launched.

Insider Trading.Directors and officers involved

in a deal should be aware of their responsibilitiesas insiders under Canadian securities laws. Anytrades involving these individuals during the sixmonths prior to the bid will need to be disclosed.It is recommended that bidders have internalpolicies to prevent insider trading and selectivedisclosure of non-public information.

Acquiring a Toehold.Companies planning a bidmay choose to acquire a share position, ortoehold, in the target company as part of theirstrategy. Share purchases via the market canhave the benefit of reducing the overall price paidor providing some benefit if tendered to a higherbidder, however, non-market private purchasesare less attractive due to pre-bid integration rules.

Early Warning Disclosure. In Canada,purchases of the targets shares prior to a bid cantrigger an early warning disclosure requirement.This is triggered when the purchaser crosses athreshold of 10%, at which point it must state its

investment intentions via a press release and filea report with regulators. Further purchases maytrigger additional disclosure requirements.

Lock-up Agreements. Lock-up agreements arearrangements to secure certain shareholdersparticipation in a deal. As part of the agreementthe shareholder(s) will agree to deposit theirshares into the bid and vote in favour of the bid.This strategy is common in Canada and is viewedas an alternative to acquiring a toehold. If theagreement is for 10% or more of the targetsshares it must be immediately disclosed.

Second StepsA second-step transaction is often necessary in aCanadian acquisition. This procedure allows thebidder to acquire the remaining shares that werenot tendered in the initial takeover offer. Theexpediency of this process will be dependant on

the percentage of shares acquired through thetakeover offer. If this percentage is over 90%, acompulsory acquisition of the

remaining shares can take place withoutshareholder approval and, hence, very quickly. Ifless than 90% of the shares have been tendered,a squeeze-out transaction can take place,provided the bidder stated its intention to do so in

the takeover bid circular and has at least 66.67%voting rights.

Announcement

If a transaction is friendlyit will be announcedeither during thenegotiating period or

when a merger orsupport agreement issigned.

Circular

A bid can be commencedby either publishing anadvertisement or mailinga circular to

shareholders. If a bid iscommenced via anadvertisement, a circularmust be mailedsubsequently.

Target Response

The target directors mustrespond to the bid in acircular within 15 days ofcommencement of the

bid. The circular mustinclude arecommendation andprovide rationale.

Expiration

A bid must be open for aminimum of 35 days. Ifthere are any changes tothe bid, it must remain

open for a minimum often days after thechange.


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Duties of Target DirectorsThe target boards actions and conduct aregoverned by the corporate laws of its area ofincorporation, which set out a fiduciary standard,and by the securities regulators national policyon defensive tactics, has four underlying

principles.

1. The protection of shareholders interests isparamount, which is best served through themaximization of their share value.

2. The interests of directors and managementcan differ from those of shareholders in thatthey may be displaced by a successful bid.

3. Target directors and management shouldseek to provide information and alternativesto shareholders, which will best enable themto decide whether to tender their shares.Directors and management must not hinderor block this informed voting right.

4. Unrestricted auctions produce the mostdesired outcome.

Deal ProtectionsIn a friendly transaction the parties will often seekto protect the deal from third party interferencethrough negotiated terms. These measures cantake several forms, but cannot go so far as tojeopardize the target boards fiduciaryresponsibilities.

No-Shop Clauses. This prevents the target from

seeking competing offers, however, this does notprevent the target board from consideringunsolicited competing offers.

Go-Shop Clauses. This allows the target boarda period of time, usually 30 60 days, to seek outa higher bid. This clause is more common if anauction has not been conducted and the targetboard believes its fiduciary duties require it tocheck the market.

Break Fees. A break fee, or termination fee, isusually paid if a target abandons a negotiatedfriendly transaction to pursue a higher bid. Breakfees that are too high unduly hindering otherbidsmay contravene the target boardsfiduciary duty.

Asset Lockups. Asset lockup clauses grant abidder some form of rights over the targetsassets. This is uncommon unless it can bedemonstrated that the transaction would notproceed without it, or that it facilitates an auctionby attracting a new bidder.

Defensive tactics against a takeover bid arepermissible in Canada if they can be justified on thebasis of maximizing shareholder value. Securitiesregulators will examine defensive tactics within theframework of their national policy and its four

principles.

Just Say No. Target directors recommend in theircircular that shareholders not tender their shares,providing information that the bid undervalues thecompany.

Poison Pills. A poison pill defense consists of atarget adopting a shareholder rights plan that willfrustrate an unsolicited bid. In Canada, securitiesregulators will terminate a poison pill once anauction has been initiated.

Court Proceedings. A target may seek to preventa takeover by challenging the bidder on legal or

regulatory grounds. The two most common actionsare based on antitrust grounds or the biddersregulatory compliance.

Greenmail. A Greenmail defense involves thetarget buying back its shares held by the bidder ata premium. This is not permitted in Canada.

Alternative Transactions. Transactions that aredesigned purely to hinder a hostile bid, such asselling or optioning assets, are not permissible inCanada; however, recapitalizations involving aspecial dividend are allowable. The success of thistype of transaction often depends on its taxconsequences.

White Knight. A common defense tactic byCanadian targets is to attract a friendly bidder thatis willing to bid at a higher price. This will oftenaccompany other tactics that provide the targettime to find a bidder.

Charter or Bylaw Measures. A target may havedefensive measures built into its charter or bylaws.Generally, this is uncommon in Canada as most ofthe charter tactics seen in the U.S.A. are invalidunder Canadian law, however, the presence ofdifferential voting rights is allowed and is commonamong family controlled companies in Canada.

Source: Deloitte

Defensive Tactics in Canada


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Business Taxation

Companies in Canada pay taxes to three levelsof government: federal, provincial and municipal.Taxes on business income, the primary tax forbusiness, are collected at the federal andprovincial levels. Mining taxes, or royalties, areassessed at the provincial level. Municipalgovernments collect property taxes and variousfees, primarily for public works, however, theseare typically of a much smaller magnitude thanfederal or provincial taxes.

Generally, governments in Canada haveencouraged mining, adopting policies andoffering incentives that are favourable to theindustry. In most jurisdictions, generoustreatment is provided for exploration anddevelopment expenses, allowing miningcompanies to recover their initial investmentbefore paying a significant amount of tax.

Federal TaxThe federal government assesses tax onbusiness income. The rate of tax is currently

19%; however planned decreases will reduce therate to 15% in 2012 (table 1). Losses can becarried forward and applied against income for 20years.

In addition to income tax, the federal governmentalso collects a value added tax on goods andservices (GST). This is currently 5%, having beenreduced over the past three years. Companiesare expected to collect this tax when they maketaxable sales and remit the correct amount to theFederal government.

In addition, companies must pay GST on taxablesupplies but receive input tax credits (ITCs) whenthey file their GST returns so the tax does notrepresent an actual cost to a company.

The Federal government also manages socialprograms primarily Employment Insurance andthe Canada Pension Plan that require record-keeping and payments both on behalf ofemployees and for the Company itself; these arenot taxes, but they are related to the tax system.

The federal government does not apply any taxeson capital nor does it charge any royalties onnon-renewable natural resources.

Provincial TaxProvinces also assess tax on business income.Rates vary among provinces from a low of 10% inAlberta to a high of 16% in Nova Scotia andPrince Edward Island (table 1). A miningcompany that operates in more than one provincewill be required to pay tax in each province that ithas a permanent establishment. The amount dueto each province will be calculated by allocatingthe companys taxable income to a provinceusing a two factor formula; revenues earned in aprovince and salaries and wages attributable to a

province.

Mining taxes, or royalties, are assessed by theprovinces. The method used to calculate miningincome subject to tax differs from province toprovince. Some calculate it on a per propertybasis resulting in each mine filing a tax return,while others do so on a company-wide basis. Anumber of provinces calculate a tax on minerevenues which will be credited against the tax onmine profits, when the mine becomes profitable.Other provinces simply calculate a tax on mineprofits. Mining taxes and income taxes also

interact, with mining taxes acting as a deductionor credit, for income tax purposes, in mostjurisdictions.

Table 1: Federal and Provincial Business Income Tax Rates

Date Federal AB BC MB NB NF NS NWT NU ONT** PEI QC SK YT

2009 19.0% 10% 11% 12.5% 12.5% 14% 16% 11.5% 12% 12% 16% 11.9% 12% 15%

2010 18.0% 10% 10.5% 12% 11.5% 14% 16% 11.5% 12% 12% 16% 11.9% 12% 15%

2011 16.5% 10% 10% 12% 10.5% 14% 16% 11.5% 12% 12% 16% 11.9% 12% 15%

2012* 15.0% 10% 10% 12% 9% 14% 16% 11.5% 12% 12% 16% 11.9% 12% 15%

* These rates apply for 2012 and all future years thereafter ** Rates include the manufacturing and processing credit applicable to mining operations


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In addition to income and mining tax, theprovincial governments can also collect aconsumption tax on goods and certain services(PST). The rate of tax varies amongst theprovinces from as low as nil in Alberta to as highas 10% in Prince Edward Island. Companies areexpected to administer the collection and

remittance of this tax when they make retailsales. Companies also pay PST in some casesand the PST is a real cost to a Company.

In some provinces, the PST has beenharmonized with the GST (as discussed above)with the result that companies are required tocollect and pay tax at a higher rate, but theyreceive ITCs for both the federal and provincialcomponents of the tax paid and, therefore, thetax does not represent a cost to the company.

Some provinces also place a tax on capital. The

rate of tax will vary amount the provinces as willthe calculation of the basis for imposing the tax.

Incentives for MiningSeveral significant incentives are available tomining companies in Canada. These arestructured to acknowledge the highly cyclical andcapital intensive nature of the industry, combinedwith the long lead time between initial investmentand production. The following is a generaldiscussion of incentives that may be available.These differ between each provincial andterritorial jurisdiction and therefore must be

examined on a case-by-case basis.

Flow-Through Shares. Flow-through sharesallow companies to renounce or f low through taxexpenses associated with certain explorationactivities in Canada to Canadian investors, whocan deduct the expenses in calculating theirCanadian taxable income and may also beeligible for federal and provincial tax credits thatcan be refundable or reduce the investorspersonal taxes otherwise payable. This facilitatesthe raising of equity to fund exploration byattaching significant incentives to these shares to

attract high net worth investors.

Exploration Tax Credit. The federal governmentand a number of provinces offer substantialincentives for companies undertaking explorationactivity. For example, the BC Mining ExplorationTax Credit is a refundable credit of 20% ofqualified mining exploration expenses in BC or30% if the exploration is in designated pine beetleareas and a similar federal tax credit of 10% iscreditable against federal taxes otherwisepayable.

New Mine Incentives. New mines and expandedmines may also qualify for provincial mining taxincentives. For example, for Ontario mining taxpurposes an exemption of up to $10 million ofprofit for the first 36 months is available for eachnew mine and each new major expansion of anexisting mine if certain requirements are met.

International TaxesCanada adheres to the international tax principlespromoted by the Organization for EconomicCooperation and Development. Its internationaltax rules are based on three broad principles.

Worldwide Taxation.A Canadian resident isliable for tax on their worldwide income. Acorporation is a resident in Canada for taxpurposes if its central management and controlare located in Canada, or if it is incorporated inCanada.

Elimination of Country Double Taxation. ACanadian resident is entitled to relief from doubletaxation in the form of a foreign tax credit inrespect of foreign source income. This relief isintended to prevent economic double taxationthat would otherwise occur from subjecting thesame income to tax both in the source andresident countries.

Permanent Establishment. A foreign entityoperating in Canada through a permanentestablishment is liable for tax only on income

generated in Canada.

Canada currently has tax treaties in place with 87countries (including the Peoples Republic ofChina) to prevent or reduce double taxation andis in the process of negotiating approximately 8new treaties. This, along with a strong miningpresence in Canada, helps make Canada anattractive country in which to invest in mining aswell as a good location for head offices ofmultinational mining companies. It also providescompanies with various options to consider whenstructuring their investment into Canada.Identifying the most tax efficient structure for any

international investment is complex and generallyunique to the specific investment and requiresprofessional advice.


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Taxation of Foreign Investment in CanadaForeign investors can conduct business activitiesin Canada either through a subsidiary, which is aseparate legal entity, or a branch, which is not.

Subsidiaries are considered residents of Canada

and are taxed as such. Specifically, income tax isassessed on their worldwide income andappropriate relief is granted for taxes paid inforeign jurisdictions if the subsidiary alsoconducts business abroad. Corporations withnon-resident investors are also subject towithholding taxes on payments made to foreigninvestors. However, invested capital can berepatriated tax free before any withholding taxesbegin to apply.

The statutory withholding tax rate for dividendsand interest is 25%, however, specific tax treatiesmay reduce this rate. The tax treaty with thePeoples Republic of China can reduce thewithholding tax rate on dividends and interest toas low as 10%. The Canadian government hasalso recently reduced the withholding tax rate oninterest paid to non-resident third party lenders tonil where the debt meets the required criteria.This change in policy has now further expandedthe financing opportunities for Canadiancompanies.

A non-resident carrying on business activities inCanada through a branch or permanentestablishment must pay tax on its incomegenerated in Canada. In addition, a branch tax isassessed on after-tax Canadian source income

that is not reinvested in Canada. This acts as aproxy for the withholding tax that would havebeen imposed on dividends if the branchbusiness had been conducted through asubsidiary. The branch tax will apply to allCanadian source income unless an exemption isprovided under a tax treaty. For example, the taxtreaty with the Peoples Republic of Chinaexempts the first $500,000 of Canadian sourceincome from branch tax, on a cumulative basis.Income from a branch may also be subject to taxin the foreign jurisdiction of the parent company.

One strategy is to launch a new business as abranch, allowing tax losses to flow through to theparent company, then reorganize as a subsidiaryonce profitability is attained. However, eachsituation is unique and requires professionaladvice.


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Accounting Standards

In Canada, guidance governing financialaccounting and reporting is developed andestablished by the Accounting Standards Board(AcSB), an independent body of the CanadianInstitute of Chartered Accountants (CICA).Standards for profit-orientated enterprises arepublished in the CICA Handbook, whichconstitutes Canadian Generally AcceptedAccounting Principles (GAAP).

The AcSB is also responsible for the conversionof Canadian GAAP to the International FinancialReporting Standards (IFRS). The strategy it hasadopted plans the implementation of IFRSreporting over a period of several yearsculminating with IFRS being the primary GAAPfor publicly accountable enterprises (PAEs) in2011 (table 1).

Table 1: IFRS in Canada: Key Dates to Remember

2009

January 1 Anticipated first date of IFRS Reporting in Canada based on tentative conclusions on early adoption publishedby the CSA in February, 2008.

December 31 As above with disclosure of the expected quantitative impacts of IFRS. The extent of detail that may berequired has not yet been communicated by the AcSB or the CSA.

2010

January 1 Date of Opening IFRS Balance Sheet an IFRS requirement (assuming entity does not adopt early). Note ifmore than one year of comparative data is prepared this date will be earlier.

December 31 Last annual financial statements prepared under Canadian GAAP for PAEs (assuming no early adoption).

2011

January 1 First day of IFRS Reporting in Canada (assuming entity does not adopt early).

March 31 First unaudited interim IFRS financial statements (with comparatives under IFRS).

December 31 First annual IFRS financial statements (with comparatives under IFRS).

Top 10 Implications for Mining CompaniesThe transition from Canadian generally acceptedaccounting principles (GAAP) to InternationalFinancial Reporting Standards (IFRS) will bedifferent for every company. However, particularindustries will experience common themes andissues. This viewpoint is based on significant

changes in accounting guidance, specific first-time adoption issues or the extent of data neededto be obtained and maintained for financialreporting differences. For IFRS and the miningindustry, here are our views on the top tenaccounting issues for Canadian issuers toconsider from a financial reporting standpoint.

1. ImpairmentThe impairment guidance in IAS 36 Impairment ofAssets applies to Property, Plant and Equipment(PP&E), goodwill and intangibles and involves

significant estimation complexities for miningcompanies. It also applies to joint ventureinterests and equity accounted investments.IAS36 sets out significantly different guidance onidentifying an asset that may be impaired and themeasurement of impairment.

Impairment is recognized under GAAP if an assetor group of assets carrying amount exceeds theundiscounted cash flows expected to begenerated through use of the asset. Theimpairment is measured as the excess of carryingvalue over fair value.

Impairment is recognized either on conversion toIFRS or subsequently if an asset or cashgenerating units carrying amount exceeds thehigher of fair value less costs to sell or value-in-


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use. This differential is also the basis formeasuring the extent of any impairment. As bothfair value and value-in-use employ discountedcash flows, impairment may be triggered moreoften or earlier under IFRS. The IAS 36 modelalso presents other differences from GAAP in thedetailed mechanics of how impairment is

measured (for example, discount rate, andforeign currency cash f

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