Dec '08/Jan '09

Turn, turn, turn

A season of change ahead for 2009

By D. Zlotnikov

To everything, there is a season. This cyclical reality could possibly serve as a credo for the mining industry, which, over time, has certainly witnessed its fair share of climatic shifts. The last couple of years have seen sunny skies for mining companies across Canada and around the world. While both operators and junior firms had to face increasing capital and operating costs, record-high prices for many commodities brought with them an enormous amount of investor attention. With oil, and consequently diesel fuel, commanding record prices earlier this year, companies needed more money to complete every stage of the process, but that capital was relatively easy to come by.

Although change is inevitable, few were prepared for the unexpected jolt precipitated by the drastic about-face of the financial markets a few months back. Since that time, the mining industry has been in a tailspin as regular sources of financing are effectively disappearing.

Forecast for 2009: cloudy

As we approach the end of the year, the multi-million-dollar question on many peoples’ minds is, “What will the future hold for 2009?”

“Most of the news for the next six months — or however long this market crisis takes to resolve — is going to be bad,” said Charles Oliver, senior portfolio manager handling the precious metals and the all-cap investment funds at Sprott Asset Management.

R. Anthony (Tony) Hodge, president of the International Council on Mining and Metals (ICMM) voiced similar but less pessimistic views. “The economic crisis will have a dramatic effect on the mining industry,” he said. The impact, according to Hodge, will be felt in a number of ways. “First of all, every mining company I am aware of is trimming its budgets,” Hodge explained, adding that projects viewed as non-essential are likely to be scaled back or cancelled outright. “Secondly, you’re likely to see an immediate and quite dramatic decrease in exploration activity,” he continued. And finally, Hodge suggested that with so much panic selling going on in the stock markets, the weakened share price of so many well-established companies will lead to an increase in acquisition activity. “There are many companies out there right now that are valued according to their market share price, which is well below their book value,” he explained. “This makes them very attractive for acquisition activity.”

Of course, mergers and takeovers are nothing new for the industry. “Consolidation has been occurring for some time and typically comes in waves,” said Vince Borg, senior vice president, corporate communications at Barrick Gold. “But now the juniors who, a couple of years ago, could tap the credit or equity markets to fund a project, or their share of a project, are going to be seeking alternative arrangements, whereas before they would not have considered it.” This creates an environment in which some companies are not merely undervalued, but are more willing to sell, as a way to fund continued operations.

“Some of the juniors are priced at ridiculous levels and don’t have any access to capital, which is making things very hard for them,” agreed Oliver, adding that there are a rare few who have successfully formed joint ventures with the bigger firms. “There are some things going on, but it probably won’t be until the markets calm down a bit before you see things pick up,” he said.

While Tim Sullivan, president and CEO of equipment designer/manufacturer Bucyrus, agreed with the expectation of a decrease in exploration activity, his view of the impact of such a decrease is less negative. “There has been such a huge increase in exploration spending in the last couple of years that a little easing off might not make much of a difference anyway,” he said. Sullivan also pointed out that brownfields projects, which focus on the expansion of existing operations, might have an easier time securing financing than the higher risk junior exploration firms. “It is more difficult when you walk into a bank and say ‘we have this property that we think is really good, and here is what our studies show,’ versus, ‘look at this mine that we’ve been operating for 10 years and would like to expand by 20 percent,’” Sullivan explained.

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