June/July 2010

Too big to feed?

Mining industry trends explored at CIM Conference and Exhibition

By P. Caulfield

Michael ChenderVery large companies might begin to fall out of favour with investors, suggested mining consultant Michael Chender at the recent CIM Conference and Exhibition’s Management and Finance Day.

Chender, of the Halifax-based Metals Economics Group, was one of several speakers who addressed the topic of global outlook and discussed recent trends in financing and acquisitions activity. He began by noting that financings have recently rebounded for base metals and gold. In addition, the number of initial public offerings (IPOs) has grown since the beginning of 2010.“Although the IPOs have tended to be small so far, there are some big ones in the works,” he added.

In addition to IPOs, other sources for money that have been coming into the market include China’s state-backed companies; sovereign wealth funds, such as Singapore’s Temasek Holdings; and private equity. “A lot of money has been flowing into mining from cyclically dormant sources,” Chender said. “Some funds have shifted from three per cent in commodities to five per cent or more. And new funds have started up to invest in mid-tier companies.”

He added that many investors have a growing appreciation of commodities as a long-run investment because they are disappointed with the performance of some financial assets.  “There has been a big, long-anticipated jump in acquisitions in the past two months,” Chender said. “Investors are feeling comfortable about the prospects for mining and they expect the recovery to continue.”

But is now the best time to be making acquisitions? “Nobody knows what the future will bring and now might be the top of the market,” Chender said. “Whether the acquisitions pay off depends on whether prices keep going up.” Chender said most acquisitions don’t pay off because they’re made at or near the top of the cycle. “Few acquisitions are made at the bottom of the cycle, which is the best time,” he explained. “Most get made once a robust recovery is well underway and investors are feeling more confident.”

In addition to acquisitions, investment dollars are flowing into old projects.“Because discovery rates are down, old projects — those that have had jurisdictional or environmental problems — are being recycled,” Chender said. “A lot of projects are starting to look attractive again. Many are very large, however, and come with big capital costs.”

The trend towards bigger companies and projects might change in the future, he argued. “Size has its advantages, such as being able to take advantage of economies of scale and greater investor visibility, but size comes with a price, too. As companies get larger, the number of projects large enough for them to economically take on shrinks. Some big companies may become like dinosaurs — increasingly hard to feed.”

Because smaller projects are overlooked by big companies, and because investors today have access to large amounts of sophisticated information, Chender said smaller companies, developing smaller projects at favorable returns, could attract more attention in the future. “Some big companies might even eventually have to consider dividing themselves into smaller entities,” he added. “Nothing grows without limit.”


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