CANADIAN MINING PERSPECTIVES: Is there more consolidation ahead?

Over the last three years, the global mining industry has been consolidating, as merger after merger is accomplishe...

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Over the last three years, the global mining industry has been consolidating, as merger after merger is accomplished. Just off the top of my head I recall the takeover of Placer Dome by Barrick Gold, Falconbridge by Xstrata, Inco by Companhia Vale do Rio Doce (CVRD), Phelps Dodge by Freeport-McMoRan, Cambior by Inmet, Ashton Mining by Stornorway Diamond Corp., and these are just some of the larger deals. There has been a myriad of smaller companies doing the same thing. Yet to be concluded is the takeover of Alcan by Rio Tinto. Rumour has it that Rio Tinto itself is the target of an upcoming takeover by BHP Billiton.

To see the disappearance of some famous Canadian mining names (Noranda, for example) has been difficult. Even more difficult is the realization that control of Canada's two biggest nickel producers is now in foreign hands.

According to business industry advisor ERNST & YOUNG, there is more M&A action to come. The first issue of its "Mining EYeSight" publication spells out the situation this way:

"Ernst & Young believes the market is undervaluing mining assets by not fully appreciating how long demand will outstrip supply. While the market seems to be factoring in a sharp decline in commodity prices (something it has been doing for many years), China and India continue to grow, driving commodity prices with them. The theory is that as its labour surplus falls, China is moving from a cheap labour economy to more capital-intensive production that will increase the demand for metals. Companies like CVRD, Rio Tinto plc, and Xstrata plc are betting that the supply side will still take many years to catch up.

"Low EV/EBITDA multiples and high cash flows potentially allow for ungeared balance sheets to be leveraged, and the mining sector has decided that production can most effectively be increased through aggressive acquisition. The implications of consolidation are wide-ranging, from the arrival of private equity, to the role to be played by the new order mining companies, to the risks faced by the winners who will need to integrate significant new assets quickly and manage heavy debt burdens."

So now we have it from the experts: demand (and prices) will continue to rise bringing change to the mining industry. Change is not always a bad thing. Better that it be spurred by rising commodity prices than falling prices. We'll just have to get ourselves used to new players in our mining communities.

To learn more about what Ernst & Young has to say about our industry, visit www.EY.com/MiningMetals.

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