June/July 2009

Meeting of a multiplicity of minds

Mining Management Finance Day brings together financial and mining elite

By M. Paduada

Gavin Graham


An impressive assembly of high-profile leaders from the fields of mining, banking, law and business came together recently at the 2009 CIM Conference and Exhibition in Toronto to address the challenges and opportunities posed by the current economic environment. Tphe Mining Finance and Management Day — a first for the conference — consisted of a full-day series of presentations held on the last day of the technical program.

“The session was driven by the inherent interest in bridging the information gap that has been silently growing between technical and financial professionals in both the mining and fiscal sectors,” explained Thomas Rannelli, senior mining engineer, BMO Capital Markets and 2009 CIM conference chair. ”The necessity for dialogue has become even more apparent during these challenging economic times. The session was designed to bring forward real opinions and candid dialogue, with meaningful mentorship by our respective industry leaders as the underlining objective.”

Overall, the day served up an interesting and balanced mix of market data, observations, predictions and advice.

By the numbers

As was to be expected, attendees were interested in the numbers, both historic and projected. And they were not disappointed as the bankers came well-equipped with data. Gavin Graham, director of investments, BMO Asset Management, compared the current economic state to previous economic cycles, highlighting conditions around all the bear markets since the Great Depression. “We’ve actually had the worst bear market since the Great Depression,” observed Graham, “but that’s as bad as it gets…unless, of course, it’s Great Depression two. Now we’re up 35 per cent, which is the mean immediate return after a bear market. In the 12 months following a bear market, you get substantial positive double-digit returns. If you lose that much, you’re going to at least get a pretty decent rebound.”

For more current data, Elizabeth Wademan, director equity capital markets, mining, BMO Capital Markets, indicated that the VIX (Volatility Index) on the Chicago Board Options Exchange is off its peak but still quite a bit above historic ranges. Accordingly, she postulated that we should continue to see near-term volatility in the market, characterized occasionally by large rallies and declines. On forecasts, Wademan said, “I don’t have a crystal ball, but I do have an economics department.” She shared their current outlook, cautioning that it was subject to change. “We’re seeing four to five quarters of contraction, with recovery emerging in late 2009 and 2010 in Canada and the U.S. respectively.”

For those attendees with a voracious appetite for numbers, David Davidson, a partner at Paradigm Capital Inc., provided a wealth of data that outlined the trends and outlook for metals and minerals. “We will likely go through some summer volatility and a downturn in metal prices,” predicted Davidson. “Nevertheless, I think the stage is set for a spectacular fall and spring 2010 for all commodities.” However, he foresees that some commodities will see more upward movement than others. “Some are capped because there is production that has been built out,” he explained. “Nickel is a good example. On the copper side, we didn’t build all these big $4 billion dollar projects in Panama and Chile. So, I think the future looks pretty promising for copper.”

Dealing with uncertainty

Amid the abundance of numbers, statistics and graphs conveying the details of things we’ve seen and things to come, several broader themes emerged: dealing with uncertainty, turning challenges into opportunities and reasons for being optimistic.

Kim Goheen, senior vice president and CFO, Cameco Corporation, had some sage advice for dealing with uncertainty. He commented that Cameco’s prudent approach to projects, ventures and acquisitions — once criticized as being overly conservative — had left the company well-positioned to act smartly on the opportunities that have arisen as asset prices have fallen. “Our solid revenue base, our strong customer relationships and our excellent uranium reserves are built for the long term and have recognized value even in the tough economic market,” he said. Goheen explained that the key is to know your risk tolerance and act accordingly. “My risk tolerance may be relatively low compared to others, but I’m okay with that, and so are Cameco’s investors,” he said. “We won’t overextend. But, if the right deal is there, we also won’t be afraid to raise new money, however much it takes.”

Banks are also understandably concerned about managing uncertainty in their debt financing activities, attested David Konarek, managing director and industry head, corporate banking, global mining with Scotia Capital. Konarek commented that lending remains constrained, though most of the issues are general market issues and not specifically mining-related. The implications for the mining industry, as he indicated through a mock financing example, are that loan sizes have decreased, the terms of loans tend to be shorter, pricing over LIBOR (London Interbank Offer Rate: an interest rate benchmark) has increased, and the syndication and underwriting terms have changed.

Opportunity knocking

Though uncertainty may make some uncomfortable, several of the presenters highlighted that it is possible to change uncertainties into opportunities, with the right approach.

It is precisely because of this uncertain market environment that particular merger and acquisition opportunities exist, as Cam Mingay, senior securities partner at Cassels, Brock & Blackwell LLP described in his presentation. According to Mingay, companies with the mettle for long-term horizons have some great buying opportunities. He cited a recent statment by a spokesperson for Petro China, the world’s second largest company by market value. “China has been taking advantage of low commodity prices for such industry essentials as copper, iron and oil to bolster reservers,” quoted Mingay.

Mingay also indicated that shareholder activism is on the rise as institutional investors are realizing that shareholder activism can unlock value and is less expensive than acquiring the shares of a company to gain control. This market environment also offers them the perfect opportunity to express their displeasure at underperforming management teams. Emboldened shareholders and boards of directors also have an opportunity to reshape their executive management teams, corporate governance practices and compensation practices.

Michael Hlinka, a business commentator on CBC Radio, advised boards to better align their compensation timelines and option vesting schedules with that of the company’s actual performance, adding that they should do proper due diligence when selecting top executives.

Reasons for optimism

Managing uncertain times with bold confidence is certainly much easier said than done. Luckily, the presenters provided optimistic information and views to help carry the mining industry through the current storm. Graham drew attention to the yield curve to show that the economy should be moving up. He spoke positively about continued long-run demand for commodities in China and India. Tom King, a partner in the Toronto office of KPMG LLP, described how countries like Mongolia and Tanzania are seeking to structure their tax regimes to attract mining companies and develop the sustainable sharing of economic wealth.

In spite of economic woes, the fact-filled and insightful day appeared to leave attendees feeling satisfied. The interactive panel forum drew copious questions and comments from the crowd, who, like the panel, were representative of a wide variety of disciplines. If two heads are better than one, then hopefully, a meeting of a multiplicity of minds can serve as the first step to a greater mutual understanding of the important intersection of the worlds of finance and mining.

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