May 2007

Commentary on the financial state of mining

By D. Zlotnikov

First Canadian Place, the Bank of Montreal tower in the heart of Toronto's financial district


Take a look at the state of today’s mining industry and you will see a healthy industrial sector, set to continue growing and bringing in money. Cash flow is up, commodity prices are reaching record highs, and the analysts say this state of affairs will continue. But will investors continue to view the mining boom favourably or are there concerns about a possible bust soon to end the current boom?

Past

To find the reasons for the sector’s current success, one need merely look at the business section of the daily paper. The nation making daily headlines is China. “The Chinese are quickly becoming the largest consumers of pretty much everything metal,” said Bart Melek, senior economist, BMO Capital Markets. “You also have the emergence of India that’s playing large on the minds of investors, and you have the developing world doing well at the same time.”

But to see the cause for the sector’s difficulties, one needs to look in a different direction. The biggest problems the industry faces today are a shortage of qualified labour and a lack of major new discoveries. And the root causes of both lie in the past.

“The mining sector was suffering from chronic under-investment in exploration and development,” Melek explained, “especially following the Asian financial crisis.”

The bust part of the cycle meant companies cutting less essential programs and expenditures. Financial focus shifted from exploration and R&D to utilizing the already established deposits, using existing, proven methods and techniques. Investors were reluctant to buy into new projects unless they were clearly able to turn a profit. With commodity prices low, projects that once would have been feasible were suddenly sliding off the edge of the balance sheet.

Just as exploration and R&D budgets shrunk, so did the salaries for new hires and funding for mining schools. Things got so bad, according to Ferri Hassani, professor, mining, metals, and materials engineering, McGill University, that “when you look at mining schools from the last four to five years, you see in some of the schools there were no students whatsoever. Some of them were on the verge of shutting down, and there are still a couple where there’s a good possibility they will shut down.”

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