Market Volatility Sparks M&A Among Canadian Resource Companies

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VANCOUVER -(Dow Jones)- Global markets are turning into a fight between haves
and have nots, given the complex uncertainties revolving around available
credit, ready private placements and the continuous need to oil operations with
cash, bankers and analysts say.


Companies and financial instruments have been heavily sold down in recent
weeks as investors and companies look for liquidity. Only oil and gold look like
relative safe havens as the world watches the U.S. churn out more greenbacks to
stave off financial meltdown.


At a time like this, fence-sitting might seem like the obvious reaction to a
confusing and volatile landscape.


Not so, when it comes to senior resource companies looking for assets and
future inventory at fire sale prices.


"In the past four weeks, as valuations have started to come down even more,
the merger and acquisition business has been rampant - the number of calls from
senior and mid-tier resource companies has spiked," said one senior capital-
markets executive at a Canadian bank.


The bull run on commodity prices these past few years has bloated coffers of
producing companies. Much of that cash is still sitting there, waiting to be
employed.


Conversely, exploration and development companies that have raised easy
capital in recent years are now sitting on a precipice - what cash is left in
the coffers is running out and ready avenues for additional funds are all but
closed.


In many ways, the coming onslaught of deals has already started. Some weeks
ago, Goldcorp Inc. (GG) took out Gold Eagle Mines Ltd. (GEA.T) for C$1.5
billion, to consolidate the lucrative Red Lake mining district.


Kinross Gold Corp. (KGC) decided in July it had the resources and risk
appetite to go for Aurelian Resources Inc. (ARU.T). It upped its holding to 91%
last week by buying an additional 15.2 million shares in an exploration company
sitting on a potential world-class mine but in politically volatile and
uncertain Ecuador.


"Kinross has a diverse portfolio and decided it could take on something risky
and potentially lucrative," one analyst said.


The contagion has spread beyond simple exploration plays.



Financing Hard To Come By



Anvil Mining Ltd. (AVM.T), a leading copper producer in the Democratic
Republic of Congo, recently watched an investor walk away from a large private
placement. It's now turned to BMO Capital Markets to look at other financing
options.


Rockwell Diamonds Inc. (RDI.V) is busy rejecting a hostile overture by Pala
Investment Holdings. The offer - at 36 Canadian cents a share - is about half
what Rockwell was trading at a year ago. The lower share price is much in line
with the fortunes of the TSX Venture Exchange, which is down 50% or so year-to-
date.


Senior bankers say this is only the beginning of deals of all shapes and sizes
as the need for financing - in whatever form - now tops the lists of many
company executives


"Simply put, valuations for development-stage and smaller operation companies
have gotten to the stage where larger companies find them attractive; the recent
lack of liquidity...has hit the smaller companies far harder than the larger
ones - the outcome is obvious," another M&A specialist said. "Companies with
significant amounts of capital spending ahead of them are facing big challenges,
to the point where they have to reduce spending. At the same time, there are an
unprecedented number of calls coming into my office about possible deals."


One recent deal - Teck Cominco Ltd.(TCK) US$14.1 billion deal for Fording
Canadian Coal Trust (FDG) - is something of a model in the marketplace, in that
strategic stakes are being converted into controlling stakes or complete
takeovers, he said. Teck Cominco controlled 20% of Fording before it announced a
full takeover.


Another example: Glencore International AG (GNC.YY) could use its large stake
in Katanga Mining Ltd. (KAT.T) to take it out, although the betting is that it
simply prefers to decide who runs Katanga, given Glencore's core business -
commodity trading, not mining operations.


First Quantum Minerals Ltd. (FM.T) has a 17% stake in Equinox Minerals Ltd. (
EQN.T), a copper play in Zambia that's run into some operational troubles.


"Potential consolidators in the market have been carefully aligning themselves
with targets - it gives them options," one sector analyst said. "First Quantum
could take out Equinox which is looking incredibly cheap at the moment."


Other companies on the hump, so to speak, in terms of financing or being
potential targets?


Etruscan Resources Inc. (EET.T), a gold and diamond explorer in Africa, gold-
play Orezone Resources Inc. (OXN.T) and Hecla Mining Co. (HL), which recently
closed a US$147 million offering to pay down debt, are all said to be on the
lookout for options - and likely to be in the crosshairs, in terms of being
taken out, bankers said.


"Plus, the financings that are being seen at the moment aren't what the
companies have wanted; they're generally 50%-75% of what was needed and the
discounts are in the 20% to 25% range," one banker said.


The companies are turning to banks to find answers - quickly. For example,
Canadian Imperial Bank of Commerce (CM) and Cormark Securities Inc. have
recently been hired by High River Gold Mines Ltd. (HRG.T) to look at ways to
maximize value via a special committee set up by the company to look at the
pressing problem.


"The bottom line here is that a takeover or, say, a combination of two small
companies, will be the only option for some companies to continue operations or
remain viable plays in the resource sector; and those that have cash are going
to be cautious going forward and try to conserve as much cash as possible in the
hope that the markets will stabilize sometime in 2009," the banker said.


- By Brian Truscott, Dow Jones Newswires; 604-669-1595; brian.truscott@
dowjones.com


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(END) Dow Jones Newswires
09-23-08 1400ET
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