A new Ernst & Young survey takes a look at mining money and found the investment pool to be drying up. The value of initial public offerings (IPO) floated by juniors has fallen significantly this year compared to 2007.
"That means the credit crunch is hitting the mining sector's exploration-stage companies," says Tom Whelan, Ernst & Young partner and Canadian mining industry leader.
Although the appetite for exploration-stage IPOs is shrinking, Whelan foresees continued IPO demand for mining companies at or near production stage. Senior mining companies do very little exploration these days, so they are more than willing to buy juniors who've found an appealing resource. "The credit crunch has really hit the grassroots exploration phase of the IPO market hard, and so many are ripe for takeovers. We're anticipating many more mining mergers and acquisitions in the second half of this year."
Ernst & Young analysts expect the consolidation that resulted in so many spectacular takeover battles in the last two years will continue. Ninety per cent of the companies responding to the survey indicated that they plan to close acquisitions in the next two years. And by Ernst & Young's estimate another 40% will have to make acquisitions to meet expected growth in the market.
The growth in the market is fuelled by increased demand from countries that lack their own resources, China and India, for example. Far from diminishing, growth in these countries will continue to support strong commodity prices. And high prices spur acquisitions.
Looks like the cyclical high that began five years ago is not going to desert the mining industry any time soon.
An executive summary of "2007: The year of the hunters and the hunted" can be read at www.EY.com.
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