Credit crunch is taking toll on Canadian junior explorer IPOs

Ernst & Young mining analysts recently said “the credit crunch does not seem to be having a significant impact on the sector.” However, the firm’s Canadian office said Wednesday Canadian junior explorer IPOs are suffering.

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In a news release issued Wednesday, Tom Whelan, Ernst & Young Canadian mining industry leader, said "the credit crunch is hitting the mining sector's exploration-stage companies."

Although roughly the same number of mining IPOs occurred this year as in 2007, the total funds raised are significantly lower, according to E&Y's quarterly Canadian IPO report.

Even though interest in exploration-stage junior company IPOs is shrinking, Whelan does forecast continued IPO demand for mining companies at or near the production stage. "The credit crunch has really hit the grassroots exploration phase of the IPO market hard, and so many are ripe for takeovers," Whelan noted. "We're anticipating many more mining mergers and acquisitions in the second half of this year."

He added that since senior mining companies do little exploration lately, they are very willing to buy juniors who have discovered a promising mineral resource.

In their global report, "The year of the hunters and the hunted" released in May, E&Y surveyed 70% of the top 40 global mining and metals companies. Almost 90% of the world's largest mining companies expect to grow through acquisition in the next two years, according to the report.

Ernst & Young analysis forecast that globally it is possible that three US$50-billion-plus deals could occur before the end of the year. More than US$20 billion was raised by mining companies via IPOs in 2007, with the UK, US, Canada and Australia accounting for 73% of the total funds raised by the sector last year.

Despite the fact that the cash raised is declining, Canadian IPO activity continues to be dominated by mining with more than 80% of this year's Canadian IPOs in the mining sector, according to Ernst & Young. "Although the continued activity is good for mining, this finding means we are not seeing very much action in other sectors," Whelan said.

"At the end of the day, this is about supply and demand. Booming economies like China and India have infrastructure demands that far exceed resource supplies, and the mining sector will have to work hard to meet those demands," Whelan concluded.

Mineweb was unable to obtain a copy of E&Y's latest quarterly IPO report by deadline early Thursday.