CANADIAN MINING PERSPECTIVES: What investors are looking for, M&A activity, and the reshaping of global mining capital markets

March must be the month of financial advice, because management and financial consultants have recently released se...
March must be the month of financial advice, because management and financial consultants have recently released several publications of interest to mining types.

A major new report on the investment industry by PRICEWATERHOUSECOOPERS (PwC) concludes that transparency and risk management are considered by investors to be just as important as performance when deciding whether to retain their managers of alternative investments.

A global survey of 226 institutional investors and alternative investment providers, conducted by the Economist Intelligence Unit on behalf of PwC, found that flattening returns have contributed to investor pressure for more and better governance. The quality of compliance and risk management process (41% of investors) and transparency (41% of investors) were rated slightly higher than performance (40% of investors) among the criteria for deselecting investment providers.

"Our findings back up the belief that when returns start to moderate, investors focus more intently on operational infrastructure," says Raj Kothari, PwC partner and leader of the Canadian investment management practice. "Indeed the survey shows that this is a key ingredient and not just an element in keeping alternatives in their portfolios in a subdued environment."

The study, which covers hedge funds, private equity, real estate and infrastructure funds, also reveals a gap in perceptions between investors and providers. Investment firms largely believe they are good at managing risk. They rate themselves 'effective' in the accounting and reporting of transactions (67%) and policies to protect against fraud (65%). Investors largely disagree. For instance, just 18% of hedge fund investors think valuation policies are effective, and only 16% think IT security is good.

Learn about other key findings of this report at www.pwc.com/ca. PwC and its related entities have more than 5,200 partners and staff in offices across Canada.

Another recent report from PwC says that mergers and acquisitions (M&A) levels in the global mining market have reached unprecedented levels, and a new era of super-consolidation has begun. According to "Mining Deals", the huge surge in mining company M&A is particularly noticeable among Canadian companies, although the total value of these deals is down.

The volume of mining deals around the globe rose a tremendous 69% from 2006 to 1,732 in 2007. Total transaction value was US$158.9 billion, up by 18% on the previous year. Of the 2007 deals, Canadian companies were targets more of the time (32%), versus 2006 where Canadian companies were the targets 23% of the time. In 2007 Canada was followed by Australia (22%) and China (9%). Canadian companies were also the acquirers more of the time (41%), up from 34% in 2006. As acquirers in 2007, Canadian companies were again followed by Australia (22%) but then the U.S.A. (8%).

In 2007 Canadians led the total value of deals when they were targets with 47% of the total deal value or US$74 billion. When Canadians were acquirers, the deals represented 16% of total deal value or US$25.9 billion. This is up from 2006, when the total value of Canadian companies as targets was US$50.6 billion, or 38% of the total global deals. In 2006, Canadian companies as aquirers accounted for 15% of total global deal values (US$19.9 billion).

Three of the top ten 2007 deals had Canadians as acquirers and a total value of US$10.2 billion. Five of the top ten deals had Canadians as targets for a value of US$57.5 billion. When Canadian companies were targets the majority were diversified (60%). For lots more information on the nitty-gritty of the mining M&As in 2007, visit www.pwc.com/miningdeals

A new report from ERNST & YOUNG says that global mining capital markets are being reshaped, thanks to the rapid pace of industry consolidation. In 2005, for example, the London Stock Exchange (LSE) and the Toronto Stock Exchange (TSX) had roughly the same market capitalization. Since then, however, the mining market cap of the LSE has benefited from more than US$70 billion of acquired market capitalization, while the TSX has lost US$129.3 billion in market cap due to takeovers.

Despite the wave of consolidation that has carted off some of Canada's mining and metals giants, nearly 60% of the world's public mining companies are listed with TSX Group. And during the past three years, TSX Group has remained the pre-eminent place to raise new equity capital for mining ventures - that's close to 34% of global mining capital raised in 2007. What's more, the TSX is home to 48 "billion dollar plus" mining companies with an average market capitalization of
US$5.7 billion.

The report does note that though the United Kingdom has hardly any domestic mining activity at all, it still hosts the world's largest mining companies. Four of the six largest mining companies are listed on the LSE. One of the reasons for this is that it offers the world's deepest and most efficient debt capital markets.

The report also reveals growing evidence that investors are using capital markets as regional investment centres. TSX investors prefer the Americas and Africa. LSE investors prefer Africa, Eastern Europe and the Middle East. Johannesburg Stock Exchange (JSE) investors prefer Africa, and Australian Securities Exchange (ASX) investors prefer the Asia-Pacific region. Superior valuations generally follow these preferences.

For the full report, find "Where have all the miners gone? The most attractive mining capital markets." at http://www.ey.com/global/content.nsf/Canada/Home.

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