M&A Best Practices in the Mining Industry. The case of St Barbara Ltd and Allied Gold Mining Plc

Research Paper (postgraduate), 2017
70 Pages, Grade: 72%


Table of Contents



- 1.1. Background of the research problem:
- 1.2. Rational and Research Problem Statement
- 1.3. Evaluation of the research from an academic perspective:
- 1.4. Research design:
- 1.5. Structure of the research:



- 2.1. Introduction:
- 2.2. Aims and Objectives:
- 2.3. Literature review
2.3.1. M&A definition:
2.3.2. Merger Motives: Growth, Synergies, and Management Growth: Internal or External Geographical growth: Managerial: Synergies
- 2.4. M&A Success & Failure:
- 2.5. Overview of the Mining Industry:
2.5.1. M&A in Mining Industry:
2.5.2. M&A trends in the Mining Sector:
- 2.6. Hypotheses:

- 3.1. Research framework:
3.1.1. Design and methodology:
3.1.2. Case study approach:
- 3.2. Data Collection Methodology:
3.2.1. Procedure of data collection:
3.2.2. Selection of the merger case
3.2.3. Procedure of data analysis:
- 3.3. Methodology Limitations:

- 4.1. SWOT Analysis:
- 4.2. Pre-Merger Phase:
4.2.1. ALLIED GOLD MINING PLC ( ALD AU) Valuation: Recommended Price SBM could Offer for ALD:
4.2.1. 2. Analysis of Discounted Cash Flow (DCF):
4.2.2. Ratio Analysis: (see Appendix 8)
4.2.3. Share price movement:
- 4.3. Post-Merger Scenarios:
4.3.1. Expected Synergies: First Scenario: Growth =7% YoY Ratios: Share price movement: Second Scenario: Growth = 4% Ratios: Share price movement: Third Scenario: Growth =10% Ratios: Share price movement:
- 4.4. Post-Merger Phase:
4.4.1. Synergies: Financial Synergies: Strategic Synergies:
4.4.2. Ratio Analysis:
4.4.3. Share price movement:
- 4.5. Case Discussion:
4.5.1. Hypothesis 1: “The quality of pre-merger process positively affects the likelihood of M&A deal Success ".
4.5.2. Hypothesis 2: “The quality of post-merger integration process positively affects the likelihood of M&A deal success".
4.5.3. Hypothesis 3: “The quality of both pre and post-merger processes positively affects the likelihood of M&A deal success".
4.5.4. Hypothesis 4 : “Factors unique to mining sector, beyond those explored in other industries drive the success of M&A deals ".

- 5.1. Conclusion:
- 5.2. Limitations and suggested further research:


Executive summary:
- 6.1. Background and key findings of the research:
- 6.2. Key implications of research findings to managerial decision-making:
- 6.3. Recommendations and benefits based on research outcomes
- 6.4. Recommendation for decision making:




Globalisation and the increased importance of Mergers & Acquisitions (M&A) in the corporate world, continue to be the focus and centre of attention of many. The constant increase in volume of transactions and deal value in all sectors, has led to many researches in the field of M&A, focussing on deal structuring, integration process identification, and also success factors. Being unique, a limited research has been focussed on the mining sector, hence it is valuable to investigate M&A factors of success in the mining industry. Therefore, the research question of “Critical success factors for M&A, and best practices in the mining industry" has been raised. Comprehensive list of critical success factors has been identified through a broad literature review, to endeavour the practicality of each factor to the mining sector. Also, the author has conducted a case study analysis method, to provid a real life expertise of M&A in the mining industry, based on seconday data and annual reports. The case of ST Barbara Mining Limited (SBM AU) takeover of Allied Gold Mining (ALD AU) was investigated, in order to identify critical factors of success pre and post-merger in the Gold mining sector.

Addressing the research question, the findings indicate that success factors of an M&A deal in mining industry depends on the time of the deal announcement, geological assessment of the target assets, and the geo-location of the mine. The research conclude that success factors, if aligned to a company strategic plan, could increase chances of success of an M&A deal in the mining sector. The findings contribute valuable guidance to both practitioners and researchers in the mining field.

For companies operating M&A in the mining sector, It is recommended to focus on pricing efficiency, and the integration process post-merger. For the target company, management should be lenient towards deal price disagreement and compromise to avoid post-transaction completion issues. For the acquirer firm, overpayment should be avoided, coupled with an increase in efficiency and professionalism during integration process, as well as preventing conflict of interest.


I would like to thank Dr. George Alexandrou for all the support he has provided and his commitment throughout the process of this research, without his valuable advice this report would have not seen the light. Also, I would like to thank my wife for all her support and patience during this year.



Table 1. ALD AU Capital Structure

Table 2. ALD AU values for WACC Calculation

Table 3. WACC Calculation for ALD AU

Table 4. SBM AU Capital Structure.

Table 5. SBM AU values for WACC Calculation

Table 6. WACC Calculation for SBM..

Table 7. ALD AU Market Capitalisation..

Table 8. SBM AU Market Capitalisation..

Table 9: Assumed ALD AU Cash Flows in perpetuity.

Table 10: ALD AU reserve based Cash Flow growth in perpetuity.

Table 11. SBM Shares offered for exchange

Table 12. SBM Shares offered for exchange

Table 13. SBM Shares offered for exchange.


Figure 1: Pre- and Post- acquisition Phase "Critical Success Factors and Studies of Interrelationships

Figure 2: Commodity price analysis and its effect on Mining

Figure 3: SBM AU & ALD AU share price: (AUD$ before takeover).

Figure 4: SBM AU share price: (AUD$ after takeover).


illustration not visible in this excerpt




1. Introduction:

Companies are faced with a dilemma of internal or/and external growth, due to the constant changing market conditions. Bruner (2004), argue that one of the best ways to mitigate these conditions is Mergers and Acquisitions (M&A), where most research see M&A as a performance optimization strategy (Mirvis and Marks, 1992), Javidan et al (2004) defines it as a process of assets combination and managerial practices. The complexity of M&A process in company integration success or failure is determined by many factors, which consist of a clear structure of the deal to maximise potential success (Weber et al, 2014). The research purpose is to identify the factors affecting success and failure of M&A deals in the Mining sector, and establish best practices in the industry.

1.1. Background of the research problem:

M&A deals have flourished for the past century, with a myth of creating wealth and generating growth, yet two third of those deals fail to deliver the expected outcome (Weber et. al., 2014). The value creation synergies expected from any M&A deal; such as economies of scale or operational optimization of resources ...etc., leads to profitability for firms (Duksaite, 2009), yet less than 25 percent accomplish financial objectives (Marks and Mirvis, 1992). This is no guarantee, as more than half of all deals destroy value and 70 percent fail to produce any benefits (McKinsey & Company, 2017). M&A failure rate is even higher, ranging between 70 to 90 percent (Christensen et al, 2011). Regardless of the findings, even higher spending by firms is recorded, $3.8 Trillion in 2015 (Baigorri, 2017). M&A activity continues to break records (Weber et al., 2014). Nevertheless, the success or failure of M&A remain unsettled, although more research is committed to define factors of success and failure (Weber et al., 2014).

For the last thirty years, the mining industry has seen tremendous M&A activity, marked by the latest wave of 2007 (commodity boom) driven by emerging economies, which has seen increased profitability for mining companies (PwC, 2017). This activity has been fluctuating in response to the economic instability since the 2008 crisis, leading to the end of the commodity super-cycle in 2012.

This research will focus on analysing the takeover case of ALLIED GOLD MINING PLC (ALD AU) by ST BARBARA MINING LIMITED (SBM AU), to establish critical success factors and draw best practices for M&A in the mining industry.

1.2. Rational and Research Problem Statement

The recent decline in M&A activity in the mining industry and the change of growth strategy of mining giants such as XStrata Glencore, Rio Tinto, BHP Billiton,...etc has triggered a question of how these companies measure success and failure in an M&A?, and what are the strategic factors affecting a deal?

Considering the uniqueness of each process and the significant differences in M&A deals, the research problem is to identify “ Critical success factors for M&A deals, and draw Best practices in the mining industry".

The rationale behind the research is to identify the factors affecting the success or failure of M&A deals in the mining industry globally, as well as post-merger process implementation, in order to draw best practices for future M&A deals. The research will address the decision making process of the acquirer firm, by assessing SBM AU takeover case of ALD AU in 2012. This is to identify factors affecting the outcome of M&A deals and draw future recommendations for acquirer firms in the mining sector.

The research will provide more insight to the broadly investigated M&A field. Success factors is a recommended approach to support management decisions (Rockart, 1978), the probability of success of a project will increase if success factors are identified and controlled to mitigate risks of failure (Gomes et al., 2013). The motivation to investigate M&A deals success and failure by means of case study approach was driven by the limited work available on the mining industry. The research will provide a descriptive analysis of a successful M&A case in the Gold mining sector, highlighting the success and failure factors followed by the acquirer, to determine parameters of best practices for M&A in the mining sector.

1.3. Evaluation of the research from an academic perspective:

No such research of success and failure of M&A in the mining industry was found after a comprehensive literature search (Part2).

1.4. Research design:

The research is a qualitative method designed based on an inductive approach, developing a theory from data collection and analysis of a small sample to better understand the phenomenon.

The research data collection will be based on secondary data, investigating annual reports, prospectus, magazines, merger plans, publications and literature review of the chosen case. There are six complementary sources for case study evidence collection, interviews, documentation, archives, physical artefacts, direct observation, and participant-observation (Yin, 2009). Archival records and documentation will be used in this research, the strength of these two sources lay on documents being established and reviewed continually, contains information that are correct and not biased by this research, with a varied coverage of events in different time periods. Weaknesses of this type of data sources is that evidence could be difficult to find or retrieve.

Furthermore, the case study analysis will be based on a selected successful M&A deal that had achieved the intended aim of the takeover, in order to draw on success factors and mitigate risks of failure for M&A in the mining industry.

1.5. Structure of the research:

The study will be structure as follow: Part one; chapter one will highlight the problem formulation. Part two, the research report including; Chapter two which present the appropriate literature review of mergers and acquisitions, with empirical evidence, motives and potential factors influencing M&A outcome; Chapter three will focus on research methodology, data collection, process and sample selection ; Chapter four will present the findings of the analysis and the outcome of the research by evaluating the selected case study and identify the factors influencing success or failure of the M&A deal; Chapter five will provide a summary of the research, highlight its limitations and provide suggestions for further research. Finally, Part three; the Client report will translate the findings into recommendations and best practices for acquirer firms, investment companies and intermediaries operating in the mining industry.



2.1. Introduction:

Mergers and acquisitions (M&A) phenomenon has become a popular way of firms development and growth (Cartwright and Schoenberg, 2006), Sherman (2010) define M&A as the primary mean for firms to provide returns to stakeholders. The growth pace of M&A between 2000 and 2004 has seen a positive trend with over 30 000 deal accomplished (Cartwright and Schoenberg, 2006: Gaughan, 2001). Increasing number of Mergers activity is explained by different factors such as low inflation, rising stock markets and deregulation (Sikora, 2006). The rise in M&A transactions has triggered fast growing academic research in the area of M&A, which requires constant updates on the field (Gaughan, 2011; Sherman, 2010). A short introduction of current study on mergers will be presented in this chapter, which will include motives and structures on how to recognize M&A success and failure.

2.2. Aims and Objectives:

The objective of this research is to investigate the factors affecting success or failure of an M&A in the mining sector, and draw best practices for the industry. More specifically, the first aim is to investigate M&A in the mining sector for the last twenty years, the second aim is to focus on the main factors and the impact of M&A growth strategies, the third aim is to investigate a real case of successful M&A, by looking at the quality of its pre and post-merger processes, and the fourth aim is to identify the industry unique factors, in order to establish best practices for M&A deals in the mining industry.

A vast number of research has been done in the past addressing the aims above, although no specific work has been done on the mining industry, this research intend to summarise and evaluate a successful case to fill this gap in M&A field.

2.3. Literature review

2.3.1. M&A definition:

M&A are firmly linked, however isolating a merger from an acquisition is vital. Gaughan (2011) characterizes a merger as "a blend of two partnerships in which just one organization survives and the consolidated company leaves presence", which means assumes control over the advantages and liabilities of the consolidated organization. An acquisition is "to assume control, responsibility for an organization, firm, company ...etc." (Johnson et al., 2006). A merger is characterised as being "a mix of more than two organizations, where the advantages and responsibility of the offering entity(s) are consumed by the purchasing company (Sherman, 2010).

As important is distinguishing between an acquisition and a merger, it is likewise essential to recognize a consolidation from a merger. Which represent a mix of at least two firms, joining to frame a totally new organization. An additional term utilized generally in M&A is the term takeover. Gaughan (2011), stated that this word is unclear at times, depending on different circumstances it might allude to both types of mergers, friendly and hostile.

2.3.2. Merger Motives: Growth, Synergies, and Management

The vital explanations behind organizations M&A strategies are various. Starting by accomplishing economy of scale, to decreasing risk, and fulfil executive and investors' growth appetite, and also new market penetration. This section will provide a wide introduction to various thought processes and procedures for M&A. to begin with, the most widely recognized explanations behind M&A are the intentions of growth and development externally, by controlling a firm within the business sector or regional geography, where the organization desires to grow, which may prove to be faster compared to domestic growth. Synergies created through expansion may be beneficial, for example, when two lines of a business supplement each other. Synergies happen when combined parts generates more benefit and prove profitable compared to individual segments. Financial variables prove likewise to be key in defining intentions in M&A. The significance of the acquiring firm may be considerably bigger in market value post-merger with its target firm (Sherman, 2010; Gaughan, 2011). Growth: Internal or External

Organizations looking for growth are confronted with a decision between internally organic development, and growth through M&A, which might be significantly quicker. A Merger might be a compelling and proficient approach to new market entry, include another manufacturing station, or increment a firm's logistics. When a firm look for growth in a particular sector, it might presume that internal development might not be a worthy method for an extension. As an organization grows gradually through inward expansion, contenders may react rapidly by exploiting a restricted gap of opportunity to grow their market share. Favourable circumstances of a firm may vanish over time on account of activities of others, and one arrangement here might be to takeover another organization. By and large, as appeared in the examination introduced on merger waves, M&A is driven by a key pattern within a given industry. These key patterns influence the topic of internal or external development. Key patterns inside an industry can be innovation, rivalry, changing buyer inclinations, influence on costs control, and a drop in demand (Sherman, 2010; Gaughan, 2011). Geographical growth:

A second example on using M&A to encourage growth, when an organization needs to grow to another geographical area. A corporation may well already be a national firm looking to increase its market share regionally or internationally. Sherman (2010), states that many organizations constrained by globalisation are pushed to investigate mergers strategies to develop a global existence and increase market share. This type of market entrance methodology is regularly practical and efficient compared to, e.g. attempting to put together a new overseas operation. Therefore, in many examples, it might be faster and less dangerous to grow geographically through M&A than internally. Many arrangements are attracted by the idea of affordability to purchase brand loyalty and client services instead of constructing them. Predominantly, this might be valid for external expansion, as numerous qualities will be needed in order to flourish in a new region. Firms will have to understand all the difficulties of entering a new areas of business, managing different obstacles, for example language barriers, recruiting staff, regulations...etc. M&A might, accordingly, be low risk and fast entry choice. Successful organizations with good products nationally might perceive cross border mergers as a method for accomplishing more income and profits. Also, a cross-border arrangement might empower the acquirer to gain know-how from its target, together with the local personnel and network of suppliers (Gaughan, 2011; Sherman, 2010).

Castellani and Zanfei (2006), stated on their research on global organisations, that advancements by M&A was a standout amongst the incessant structures utilized by multinationals to grow their markets internally and externally. Managerial:

Management is regularly under steady strain to show effective development, particularly when the organization has previously accomplished growth. At the point when an organization's products or services experiences sluggish interest, it becomes harder to keep on growing. At this point, executives regularly turn to M&A as an approach to trigger growth (Gaughan, 2011). Nonetheless, management needs to ensure that the development will create returns mutually for investors and the board. According to Gaughan (2011), there are examples where managers might have the capacity to keep on generating satisfactory returns by maintaining the organisation at a certain size, however, they choose to follow hostile growth throughout M&A. Some M&A is forced by a change in an organization's culture, the target organization might direct the acquirer firm toward another path or incorporate new capacities (Sherman, 2010). Others might see a survival approach in M&A by the executive team than growth. At times firms are required to takeover or be taken to continue to exist and efficiently reduce expenditure (Sherman, 2010). A further managerial method on M&A motives is management pride or hubris hypothesis. This entails that managers takeover firms for personal satisfaction, not exclusively for the firm's financial profits (Gaughan, 2011). Enhanced managerial skills may well be a motive, as acquiring organisation’s executive could improve control of the target’s assets. Firms might trust that the managerial skills of its executives will have a significant impact on growing the target's value under its control. The managerial enhancement argument might have some legitimacy in M&A cases with large firms taking over smaller ones, or rising entrepreneurial corporations (Gaughan, 2011). The absence of managerial capability possibly will obstruct firms’ growth, restricting its capacity to contend in a broader marketplace, hence, capital management is an asset for bigger firms. Synergies

Synergies principle means the whole is superior to the total of components (Sherman, 2010). Gaughan (2011), define the word synergy as "the responses that happen when two substances or elements join to deliver a more prominent impact than that which the total of the two working autonomously could represent" The phenomenon of 2 + 2 = 5” is referred to as synergy, which in M&A means the capacity of a firm blend in generating higher profitability than individual components of a consolidated organizations. Two primary sorts of synergies are identified; First, financial synergies, focused on cost reduction by combining two or more firms to reduce cost. Second, operations synergies which is two types; Cost reduction and revenue growth, the later might be harder to accomplish compared to cost reduction (Gaughan, 2011). Numerous possible sources of income growth exist, which might differ from one deal to another. This could include but not limited to market opportunities, marketing, products development, brand name and reputation, or strong distribution network. Despite the fact that sources of revenue-growth synergies are immense, they are frequently hard to accomplish. Improvements are hard to evaluate and incorporate in M&A forecasts and valuation frameworks, resulting in synergies related to cost being frequently emphasized and discussed in M&A preparation, yet not obviously characterized. M&A strategists seem searching for ways to reduce cost, but regularly these improvement areas are fundamental basis for the firm operations. This might be the outcome of scaling cost reduction for the company, and risk spread, innovation, research, or acquisition of new energy resources (Sherman, 2010; Gaughan, 2011).

2.4. M&A Success & Failure:

Success and failure in M&A is a focal subject in the current research. By picking a case of M&A that did not get finished or failed during the process, clearly, the case can be categorized as a failure. It is as yet vital to scrutinize why it turned out inadequately. But also, similarly critical in comprehending why a successful M&A picked in the current research is deemed a successful case. While breaking down success and failure in an M&A procedure, we should take a glance and analyse the thought processes, methodologies, aims and objectives during pre-merger arrangement, to contrast against outcomes and results post-merger. As indicated by previous research, failures incorporate an absence of satisfactory planning, an excessively vigorous timetable to close the deal, an absence of system monitoring of plausible post-merger integration issues and anticipating synergies that end up being deceptive (Sherman, 2010). An investigation of management of the acquirer organization's found 44 % of takeovers made weren't satisfying to the set goals, also, around 70 % of mergers accounted for failures (Peng, 2006; Cartwright and Schoenberg, 2006). Effective M&A are not craftsmanship or science, however procedures and processes. Hence, comprehending M&A procedure while examining the result or outcome is vital. A complex operation such as an M&A has numerous potential issues and pitfalls. A considerable set of these issues emerge in the preparatory phases of the process, for example, constraining a deal which should not go through, as a consequence of errors, blunders, hasty or ambiguous planning, or for the reason that the post-merger integration turns into a nightmare (Sherman, 2010). The pitfalls and issues highlighted can certainly turn out to be costly for the organizations. It is in some cases harder to assess the foreseen benefits and impacts of an M&A. Possible income enhancements are regularly referred to as benefits for M&A, yet are not distinctly evaluated and quantified. This is one motive a few deals neglect to show the expected advantages, and the motive could originate from weak pre-merger planning (Gaughan, 2011). The absence of consideration of multiple factors during pre-merger and post-merger phases affect the expected results (Jones and Miskell, 2007). In the pre-merger stage, synergy trap could be the reason for failure, especially when firms pay excessively for the target due to hubris or management intentions. During post-merger stage, combination issues can be additionally considered while investigating failures. Organizational and strategic fit in a merger or acquisition must be accomplished, meaning systems, cultures and association in structures, could ease the process (Peng, 2006; Lubatkin, 1983).

Likewise, stakeholders’ post-merger anxiety might be an issue, as jobs being at stake, responsibility restructuring, and reduced power. This will add to a merger failure (Bekier and Shelton, 2002). Economical, commercial and financial factors influence the result of the pre -planning but also Human Resources, as the human capital has a significant task in the success of M&A (Waight, 2004). An in-depth M&A plan is important for the implementation and execution process, which must include basics such as structure, management, products and services, as well as business processes. The speed and the course of integration can be deemed a success factor (Renjen and Camara, 2004). M&A process has a more prominent prospect to succeed if firms and management have the know-how from previous mergers. Lubatkin, (1983), stated that “the better the strategic fit is the easier to succeed", as the strategic match between the two firms is also a success factor. Chapman (2004), argues that pre-planning and screening stages are additionally basic success factors, as the latter will affect all business areas and the process of integration. As stressed by Firstbrook (2007), it is also important that the acquirer firm clearly assesses the post-merger role of the target during the planning phase, as Strategic appropriateness is probably going to be more challenging in few circumstances than others. The cultural factor, is another sensitive aspect in resolving vital inconsistencies, which demands particular attention, especially in cross-border takeovers, (Mayer and Altenborg, 2008). Also, when national politics is influencing the M&A deal, the likelihood of resolving strategic fit issues is low (Bruner, 2005). Another important factor is the organizational fit (systems, structure, and culture), Peng (2006) underlines the significance of exploring the organizational fit prior to acquiring a firm, as about 80% of acquirers did not complete proper studies. Management motives are central to understanding success or failure factors in M&A, it could as well be practical to look at management, as a universal issue in M&As (Pablo, 1994). Change management could be another major issue for the target firm, as the acquirer managers could force their own agenda and pressure the target firm managers with performance expectations. Also, the size difference and the beliefs of superiority among the two firms, managers see their importance fading in the overall M&A, loosing status, and relative powers. The most essential root cause of merger failures are the acquirer firm’s values and convictions about predominance and inadequacy towards the target (Hambrick and Cannella, 1993). Gomes et al (2012), identified the success factors and the links between pre-merger and post-merger phases through empirical research, presented in figure 1 below:

Figure 1:

illustration not visible in this excerpt

2.5. Overview of the Mining Industry:

Mining industry has an important significance and is strongly correlated with other industries. For example, copper, nickel, aluminium, Iron Ore, asbestos...etc. are fundamental products utilized in the car, aviation, construction, pharmaceutical, and other industries. This sector employs around 2.5 million individual worldwide. Furthermore, one employment in mining is identified with 3-5 jobs in other industries (ICMM, 2017). Since the mid-2000s, mining industry role in the economy worldwide has significantly expanded (ICMM, 2017). The aggregate worldwide estimation of delivered minerals was US$214 billion in 2000, tripled in size in 2010 and reached around six times in 2012, resulting in price rise of commodity and a boost in minerals production. Developing nations output have impressively extended their global mineral market share. As per the IOC/WMC report (2015), from 2002 to 2013 minerals production levels in developing nations rose by 84.2%, whereas in developed nations by just 15.6%. In spite of the fact that mining is a basic activity of the broad industrial and business activity, it has numerous unique characteristics. First, projects in mining have a limited lifecycle, relative to its assets, and deposits, which ultimately diminish or economically not viable (Annels, 2012). Also, the mines cannot be relocated to an alternative geographical area with good economic, political, and legal environment, Its operations are rigid due to technological and geological constraints, mining firms cannot altered its production capacity to optimise revenue and mitigate metal prices fluctuations.

2.5.1. M&A in Mining Industry:

For the past thirty years, mining industry have experienced tremendous changes in the sector, driven by different M&A waves. The industry have seen three major waves of M&A .In the mid- nineties and mid-two thousands, Two waves driven by high commodity prices, and in 1999-2001 one wave driven by low returns and depreciating metal price, due to oversupply (Humphreys, 2015).

The focus of mining companies at that time tend to be more lenient towards geographical rather than commodity diversification, Phelps Dodge in 1999 divested part of its gold and coal assets after the acquisition of Cyprus Amax to concentrate in copper (Humphreys, 2006).

The two types of M&A seen during these waves are completely different, as when the prices of commodity are high the Industry tent to be driven by demand and ambition to grow market share, and when the price drop the industry react by reducing cost, and economy of scale to maintain profitability. The mining companies with diversification strategies, tend to mitigate the risk of the price volatility by mergers, the WMC Resources acquisition by BHP Billiton in 2005 is a good example, which have seen BHP strengthen its position in copper and enriched its energy portfolio (BHP Billiton, 2006). Increased demand of minerals from China and other emerging economies has led to the creation of global giants such BHP Billiton, Glencore, Rio Tinto, and Anglo American ...etc.

2.5.2. M&A trends in the Mining Sector:

M&A activity has seen an all-time high in 2015 across all sectors. This pinnacle was motivated by the announcement of several mega deals, including the planned US$160 billion Pfizer and Allergen merger, and the US$106 billion Anheuser-Busch InBev and SABMiller merger (KPMG.COM.AU, 2016). Though, the mining sector exceptionally shows a different view for the last five years globally; 2,863 mining transaction in 2011 were announced globally, with a total value of US$215 billion. In 2012, the sector experienced a slight decline in deal value and volume, before plummeting in 2013, to 2,033 transaction with total value of US$76 billion. The sector slightly bounced back in 2014, however in 2015 the number of transactions plummet to 2,133 with total value of US$36 billion (KPMG.COM.AU, 2016).

The status of M&A deals in mining echoes the supply and demand discrepancy faced by the industry, as well as the significant fall in commodity prices.

The period between 2003 and 2010, have seen a significant growth in commodity prices. As a result, mining firms enjoyed a lengthy period of ‘excellent profits’. Companies in the mining sector focused their strategies on purchasing production capacity and extend projects. But the period between 2008 and 2010, have seen the commodity prices collapse, nevertheless, mining firms continued to look for production capacity. Since 2010, shareholders of major mining firms were discontented to see much of the cash generated retained by the firms and no distribution of profit was made. Since 2013 until now, the mining sector has seen an end to the price growth and a fall in commodity prices. The industry has shifted focus to cost reduction and enhancement in productivity, as the drop in commodity prices has affected firms M&A strategy in the sector (KPMG.COM.AU, 2016).

Figure 2: Commodity price analysis and its effect on Mining

Abbildung in dieser Leseprobe nicht enthalten

Source: KPMG.COM.AU, 2016.

2.6. Hypotheses:

M&A as company’s growth strategy can present positive synergetic result with a proper implementation and execution (Gaughan, 2012). Through M&A process, firms consolidate and grow their market share, by increasing competitiveness (Weber et al., 2014). In order to achieve their aims, companies in the mining sector need to follow best practices and understand critical success factors in all stages of the transaction. Most empirical research divide M&A deals into two phases “pre and post" merger. Therefore, the first three hypotheses are examined:

Hypothesis 1 : “The quality of pre-merger process positively affects the likelihood of M&A deal Success ",

Hypothesis 2 : “The quality of post-merger integration process positively affects the likelihood of M&A deal success".

Hypothesis 3 : “The quality of both pre and post-merger processes positively affects the likelihood of M&A deal success".

Regardless of the extensive study on M&A for the past two decades, there is not in depth amplifications of the procedure in the mining industry, the lack of real mining related case study narratives, entail that additional empirical study in the sector would be important insight to the sector operators and related industries. Thus, Hypothesis four is examined:

Hypothesis 4 : “Factors unique to mining sector, beyond those explored in other industries drive the success of M&A deals ".


3.1. Research framework:

3.1.1. Design and methodology:

The strategy of the research is based on inductive approach, where a theory is developed based on data collected and outcome of analysis. This approach is based on study of small sample, which allow a good understanding of the phenomenon (Saunders et al., 2011). This is a qualitative research, based on rich and full data collection, allowing the possibility to investigate the issue in real manner.

3.1.2. Case study approach:

Most studies of the effect of M&A efficiency used a cross-section analysis, which typically consist of a big number of M&A and using a statistical model. The benefit of the cross-section method is allowing statistical tests that control variables influencing M&A performance, resulting in a statistically generalised outcomes. But criticisms of the adequacy of this approach to industry-specific or company-specific peculiarity, have resulted by the emergence of industry focused analysis and/or firms focused analysis. Due to the small sample of observations, case studies cannot statistically be generalised. Nevertheless, the case study approach can offer insights of industry or company behaviour and performance which might not be available through cross-section research. The case study approach might use industry specific or company specific data that are unique to the target, these information help explain behaviours and identify unique situations that cross-section analysis cannot identify. In this case, the case study approach can help draw best practices and an understanding of success and failure of M&A in the mining Industry.

3.2. Data Collection Methodology:

3.2.1. Procedure of data collection:

The most important aspect of a research is the data collection, which can be attained through primary sources (direct observation, interviews, surveys) and secondary (e-resources, reports and publications). This research is focused on secondary data which have been previously collected for other purposes and publically available (Saunders et al., 2009). Both sources of data collection methods, primary and secondary offer a comprehensive understanding of the study and answer the research question. Data in case study investigations can be sourced from various sources, there are six corresponding basis for gathering case study data, physical artefacts, archival files, documentation, interview, participant statement, and direct examination (Yin, 2009).

Secondary data based on documentation and archival records was used in this research. The sources will be the previously mentioned literature review, government papers, companies financial reports, prospectus and M&A plan, industry specific reports and news articles, as well as additional resources, such as magazine articles, and online resources. The validity of documentation as basis of data is that they can be frequently reviewed, they are unobtrusive; they are not specifically created for the case, they include exact event details and references, covering a wide array of time, events, and settings. Limitation of this approach might be the ability to retrieve these documents; their availability to the public, the access problem as they can be intentionally withdrawn for diverse reasons (Yin, 2009).

3.2.2. Selection of the merger case

The M&A case was not indiscriminately selected. Certainly, the case was selected based on features that cause an M&A deal to result in efficiency gains or losses. Those features involve but not limited to: (1) Medium size firms, (2) firms with only one M&A deal during the selected period, and (3) M&A that took place in recent years, where cost reduction and efficiency had a great attention in the mining industry. Based on these features, the selection of M&A for analysis was a focused selected criteria. First, the acquirer firm was compulsory to have less than $1 billion in assets at the time of M&A, and the target firm was required to be more than half the acquirer size. The requisite that the target is fairly large compared to the acquirer is a must in an attempt to capture the effect and also reflect on the data of the combined firm. Second, the acquirer must have had only one M&A deal during the analysed period, to assess the impact and conclude on the factors of deal success and failure risks, as well as avoiding biases. Third, the selected case must have taken place post 2000, during which there was a lot of emphasis on cost reduction in the mining industry.

3.2.3. Procedure of data analysis:

Documentation is a wealthy resource in data collection for a research, which referring to Flick (2014) serves three standards in qualitative study; the basis data for research findings, foundation of interpretations, and the main vehicle for presenting the research. This technique might also be used in forming new hypotheses regarding M&A phenomena and illuminating its effect on mining industry. Unlike the single-case design, multi-case design is considered as being more vigorous and compelling, although they do not serve the same purpose (Yin, 2009). Qualitative method term is used to include mutually comparative methods and case studies. George and Bennett (2005) explain that case study technique is contained by case examination of single cases and comparison of a small sample, as there is a general agreement on use of combination to draw the best outcome from case studies.

The analysis of the selected case will be done through different phases. First, a pre-merger analysis based on both companies financial reports to estimate the value of the target for the acquirer, and contrast with the actual purchase price paid by the acquiring firm, this phase is to determine if the target was correctly valued or overestimated by the acquirer, as well as the potential strategic alignment value. Second, a post-merger analysis based on financial and strategic performance, in order to establish whether the acquiring firm have achieved its aims and accomplished the implementation process of its strategies. Share price movement and ratios analysis (profitability & efficiency, and liquidity) will be conducted for both phases in order to quantify our findings.

Last, an analysis of success and failure risk factors of the M&A case will be conducted, in order to draw best practices for M&A in the mining industry.

3.3. Methodology Limitations:

The case study method limitations comprises a relative incapacity to deliver judgement on representativeness and regularity of the cases. Also, biases on case selection process is a further concern compared to statistical focused research, researchers intentionally select specific case studies leading to specific result. Case study method still powerful when considering how and whether one variable is important to a result compared to measuring its significance. Another concern is the " Degree of freedom issue", in statistical examinations, levels of freedom are fundamental in establishing specific study design powers, where in case study freedom difficulty is constant due to being based on fewer factors. Also, by contrast to statistical studies that allocate a lot of time to choose a representative sample, it is difficult and counterproductive for case study.

In terms of data selection, the focus on secondary data and the need of additional data resources can be seen as limitation to the research, as reliance on documentation for evidence raises some concerns regarding the purpose of these documents and its audience. Hence, it is essential to assess the raisons why these documents and reports were created and its initial use. Also, whether the context of the research is aligned with the documentation used.


4.1. SWOT Analysis:


ST Barbara Mines LTD (SBM AU) is a gold mining firm with activities in mining exploration, development & distribution of gold mineral ore and gold. The firm has processing plants in Southern Cross and Leonora and operating three mines in the Eastern Goldfields region. Leonora operations comprise King of the Hills mine and Gwalia mine and processing plant. Southern Cross operations consist of an underground mine in Marvel Loch and a processing plant. ST Barbara Mining ltd HQ is in Melbourne, Australia (Stbarbara.com.au, 2017).

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Allied Gold Mining (ALD AU) is a gold mining firm with operations in the Pacific region. The firm has exploration, production and development projects in the Solomon Islands and Papua New Guinea. The Simberi gold mine in Papua New Guinea has a proven reserve nearing the 6 million once, with expected production to increase by 95,000 OZ per annum in 2012. The gold ridge mine in the Island of Guadalcanal (Solomon Islands) started operating in March 2011 and expected to generate 100,000 oz per annum for the next Ten years. Further feasibility studies are being prepared for potential expansion in both sites (Stbarbara.com.au, 2017).

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4.2. Pre-Merger Phase:

4.2.1. ALLIED GOLD MINING PLC ( ALD AU) Valuation: Recommended Price SBM could Offer for ALD:

Based on our below calculations and considering the risks involved and the possible value of ALD to SBM, $3.74 per ALD share would be a sensible offer from SBM, totalling $764.150,868 million . The proposed price is the average share price of “$2.25 to $ 5.23" that SBM could afford to pay without diluting its shareholders' EPS. The price represents ALD AU current share price plus a premium of 66%. This is a fair value, considering the market and company risks involved, as well as potential synergies and strategic fit generated post-takeover. Assuming the offer would be financed with cash and debts.

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- Prospective Value of ALD to SBM:

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SBM’s price-earnings (PE) ratio will be NEGATIVELY affected by the acquisition of ALD, as a recovery on earnings seems achieving (9.33), near industry average rate of (15.51) in 2011 from its lowest (-4.06) in 2009 compared to the industry average of (51.35).

ALD AU, in contrast, has a discouraging P/E ratio for potential investors:

ALD PE ratio of (-75) is VERY LOW compared to SBM’s (9.33) or the industry average of (15.51) in 2011; but for the previous year’s performance a fluctuation pattern seem taking place, 2010 was a positive year in terms of returns achieving a ratio of 26 compared to the industry average of (38.39) or even its own performance of (-29) in 2009.

Overall, this indicates a lower return on investment for stockholders but also the prospect of ALD being undervalued on the stock market due to previous long term investments by the company.

It is highly likely that SBM's takeover of ALD will negatively impact SBM P/E ratio for the short term, if the transaction take place at a price without diluting SBM's EPS. But also, the takeover could generate lucrative returns for shareholders in the long run.

4.2.1. 2. Analysis of Discounted Cash Flow (DCF):


Below is ALD AU WACC result of 14.15 %, and the discount rate estimates for the NPV calculations.

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*Assuming SBM AU cash flow growth of 7% YOY in perpetuity after the takeover (based on past earnings). (Appendix 5)

Based on estimates on table 11, SBM cannot offer shares for ALD outstanding shares, as the value is negative ranging between -0.52 to -0.56 (Any possible synergies or gains from the takeover were ignored in the valuation).

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- Valuation of Earnings per Share (g= 4%):

*Assuming SBM AU cash flow growth of 4% YOY in perpetuity after the takeover (Worst case scenario). (Appendix 6)

Based on estimates on table 12, SBM cannot offer shares for ALD outstanding shares, as the value is negative ranging between -0.54 to -0.56 (Any possible synergies or gains from the takeover were ignored in the valuation).

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- Valuation of Earnings per Share (g= 10%):

*Assuming SBM AU cash flow growth of 10% YOY in perpetuity after the takeover (Best case scenario). (Appendix 7)

Based on estimates on table 13, SBM cannot offer shares for ALD outstanding shares, as the value is negative ranging between -0.51 to -0.56 (Any possible synergies or gains from the takeover were ignored in the valuation).

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4.2.2. Ratio Analysis: (see Appendix 8)


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For the three years preceding the takeover SBM AU in terms of profitability seems in a healthy situation showing a positive ratio above (30%) for the last three years, ALD AU on the other hand showed good returns in 2009, but failed to maintain its profitability the following year (-4.05%) before bouncing back in 2011 above (10%), this fluctuation in profitability could be driven by the weather conditions in the mines or the under exploitation of its current operating mines. SBM AU Return on Equity showed a positive (11.15%) compared to losses in the past two years, where ALD AU ROE slipped back to negative in 2011 from a positive 2010 returns of (2.88%), this could also be linked to the amount of minerals produced and the weather conditions in 2011. ROCE and ROA are showing a different picture for both companies, results for ALD AU showed a negative ROCE accept for 2010 (2.79%), where SBM showed a better return in 2011(14.28%) mainly due to reduction in non-current liabilities. ROA showed the same pattern with 2010 being the only positive year for ALD AU, where SBM AU showed negative returns for the three years, this raises concerns regarding its management performance and their ability to optimise existing resources. ROI can consolidate ALD AU current non profitable situation, which could be understood under the aggressive investment strategy of its management for the last 10 years, where SBM AU seem returning to profitability in 2011 after suffering a negative two years, mainly driven by Global economic uncertainty including the Greek crisis, rising US gold prices post-2007 and geopolitical uncertainty in the middle-east and North Africa (SBM, 2011).


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Overall SBM AU and ALD AU seem enjoying a good liquid situation, both firms have a higher working capital, coupled with a current ratio that is higher than one, signalling a positive capacity of both companies to meet its creditor’s payment. ALD AU seem having a lower current ratio than SBM AU which can be explained by an increase in inventories in 2011 to $80.3M from $10.0M in 2010, and increase in current liabilities from $41.9M in 2010 to $82.6M in 2011, for SBM AU this could also be a negative sign as the firm is not investing its cash. The Quick ratio seem indicating that SBM AU is in a better liquid situation than ALD AU, as 0.34 in 2011 indicates that ALD could be struggling to meet its immediate liabilities.


Excerpt out of 70 pages


M&A Best Practices in the Mining Industry. The case of St Barbara Ltd and Allied Gold Mining Plc
Kingston University London  (Kingston business school)
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The research question is valid and has not been conclusively set in the academic literature yet. The perspective adopted in this research to look at the details of the problem within a case study in the mining industry is a valid approach. The study of the takeover of Allied Gold Mining plc by St Barbara Mining Limited is an interesting case that can indeed offer good insights into the factors of success or failure of M&As. The involved methodology is well explained and the findings are clearly presented. The recommendations are well discussed and reasonable in the light of the findings.
best, practices, mining, industry, barbara, allied, gold
Quote paper
Ahmed Harfouf (Author), 2017, M&A Best Practices in the Mining Industry. The case of St Barbara Ltd and Allied Gold Mining Plc, Munich, GRIN Verlag, https://www.grin.com/document/383442


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