I'm not the only one who is beginning to believe the mining and metals sector is poised for an upturn. The latest report from Ernst & Young outlines several reasons to think the fundamentals will remain strong this year. The report notes that the combined effects of a sharp reduction in inventories and global stimulus packages aimed at infrastructure will contribute to a new rally in the sector.
"The rise and fall of the global mining and metals sector has been well documented," says E&Y partner Blake Langill. "This report highlights an outlook that is not completely bleak, and opportunities remain for those mining and metals companies with strong balance sheets."
The report does confirm that financing problems will continue to slow down the pace of consolidation in the short to medium term. But, says Langill, "While mega-deals will slow, we expect 2009 to be the year of niche deals. We'll see smaller mega-deals involving the mid-tiers. Here in Canada, these deals could provide the opportunity to create scale, increase project and commodity diversification, and dilute debt burden."
There will also likely be continued focus on streamlining operations through divestment of non-core assets, and private equity could be the buyers of those divestments, according to Langill.
The full report, 2008: The year when cash was king, is available through www.EY.com/miningmetals.
While any hint of good news for mining is welcome, our readers have yet to see the signs. In last week's Hot Topic we asked them whether or not they thought the worst was over for mineral producers. Two-thirds of them said "No." These are people most likely responsible for production and exploration activity at Canadian companies; they are not mere observers of the industry. Our readers measure the economic outlook by a simple question: Will I have a job to go to tomorrow? From that point of view, the outlook is far from rosy.
We know the mining industry is cyclical, and it will respond positively when commodity prices rise again. The hard part is remaining solvent until that happens.
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