The Canadian mining industry falls into three camps — the opportunists, the innovators and the survivors — according to a study released by Ernst & Young of Toronto.
Most of the opportunists are major mining companies. Those with strong balance sheets are looking at acquisitions that are long-life, low-cost and minimal risk. Not that mergers can be done easily; the two sides often reach a stumbling block when trying to work out a fair value for a deal.
The innovators are generally mid-tier players. Ernst & Young noted that their production costs tend to be high, and they are seeking creative solutions to survive, even if it means being a willing target for acquisition.
Juniors dominate the survivors. They are intent on conserving their cash even if it means radically slowing exploration or suspending it altogether.
“After the past few years of high-profile cash deals, we are far more likely to see future transactions that rely less on cash and more on share swaps,” said Tom Whelan, leader of Ernst & Young’s Canadian mining and metals practice.
“What we’re seeing now in these three camps is an overall unwillingness to take on additional risk,” he believes. “This makes immediate sense, of course, but there’s another side to the story, which is the predicted and inevitable scramble for scarce resources when the global economy recovers.”
Previous recessions have shown that metal supply exceeded demand for only
a short time. With the recent depletion of existing mines reflected in falling
grades, and the extended periods of time required to bring on new projects,
there is a likelihood of a severe supply constraint developing in many metals
and minerals, potentially causing prices to soar to new heights, according to Ernst & Young.
The promise of high prices is welcome by all sectors of the industry, but the benefits will pass by Canada if our juniors cannot get early financing to hunt for new resources. The groundwork for new mines will not have been laid, and our industry will be years away from taking advantage of improved prices.
If the juniors don’t survive, the industry will wither. Rather than merely survive, I would like to see juniors thrive and pass along their good fortune to the rest of the industry. The resources are hidden out there somewhere. It only takes funding and faith to find them.