Although commodity prices continue to see-saw on the back of gloomy global financial news, Canada's top mining advisers remain confident that 2012 will be a strong year for mergers and acquisitions (M&A).
Brian Imrie, global head of mining M&A at KPMG, isn't terribly concerned that austerity measures in Europe or a slowdown in China's growth will affect transaction activity in Canada's hard-rock sector.
"Until someone tells everyone another story, I'm a believer in the long-term strength of the global economy and the China story and the emerging market story and a believer in commodity prices," Imrie recently told Business in Vancouver.
Although Canada's resource-weighted Toronto Stock Exchange took a major hit in 2011 (dropping some 3,481 points in a seven-month period to a year low of 10,848 October 4), global mining M&A activity rose 33% to $149 billion last year compared with 2010, according to a recent PwC report.
KPMG, meantime, recently said takeover activity in Canada was up 30% year over year to $34 billion in 2011, including major local deals such as:
•Poland-based KGHM's US$3.3 billion takeover of Quadra FNX Mining (TSX:QUX);
•Eldorado Gold's (TSX:ELD) US$2.34 billion buyout of European Goldfields (TSX:EGU); and
•Rio Tinto plc's (NYSE:RIO) US$636 million white knight offer for uranium player Hathor Exploration, among others.
Still, most of the global M&A deal value and volume in the mining sector came during the first half of 2011 as the markets rode the hangover from 2010's bull market.
By the third quarter, deal value and volume dropped off significantly as miners held off on announcing major deals while the market stumbled through the fall.
"You saw the third-quarter people saying, 'Wait a minute, I'm not going to announce my billion-dollar deal, thank you very much, in a world looking as difficult as it is,'" Imrie said.
By the end of the year, however, the markets had recovered somewhat.
That's evidence, said PwC partner Michael Cinnamond, of long-term strength in the metals and mining business.
"The reasons for people getting into M&A have changed in the last couple years," said Cinnamond. "Countries want to secure supply so … they're not trying to maximize their dollars today, they're trying to lock in supply."
As Asian countries such as China and Korea scour the world for quality mineral projects to feed their economies, Canadian miners, notably junior explorers, are looking to the Far East to finance their exploration and development schemes.
Tom Whelan, Ernst & Young's (E&Y) global head of mining, said many junior companies in Vancouver still struggle to raise money to fund their ventures.
"Without that access to capital, it has forced people to become creative and really think of different ways to access some of those alternative sources of capital, whether it be private wealth [or] state-owned enterprises," said Whelan. "The airline industry has been busy flying people back and forth from Vancouver to China, Korea and Japan."
Last month, E&Y said mining companies were learning to live with today's market uncertainty and were returning to the deal table.
M&A in 2012 got off to a bang in February when mining group Xstrata and commodities trader Glencore confirmed plans for a blockbuster US$37 billion merger.
Imrie said the deal could spur other major miners such as BHP Billiton (NYSE:BHP), Rio Tinto and Vale (NYSE:VALE) to reconsider their own growth plans.
"I think that will trigger some contemplation among the larger players whether they want to or need to get larger to keep up with what is a new significant major [mining company]," said Imrie, adding that Vancouver's Teck Resources (TSX:TCK.B) has made no secret about its desire to diversify into the iron ore business.
Vancouver's cluster of 850 or so junior mining companies, meantime, will continue to fight for ground amid tight lending and rocky market conditions.
"I think for the juniors … until we see the risk diminish, that's going to make life challenging," said Whelan.
Cinnamond said stalwart commodities such as copper, iron ore, coal and gold are likely to remain popular among dealmakers this year, adding that junior companies are more often being left to find the next major source of those metals and minerals, and that means Vancouver will continue to be a player in global mining M&A.
"You can't find the next big thing by not looking for it," said Cinnamond, "so juniors are going to play a fundamental role, and Vancouver is the centre for junior activity." •
