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Plunging commodity prices hurt miners, create fertile ground for acquisitions

21 hours ago

TORONTO — Mining stocks have taken a beating in recent weeks as fears of a global recession rout commodity prices, projects get delayed and workforces are slashed.

But analysts say commodity prices are still well above their historical averages, creating fertile ground for mergers and acquisitions once the economy begins to rebound.

"Right now, companies are just taking as many measures as they can to survive, but once we get some kind of clarity as to where the bottom of the market is and see some upside for the economy, I think we will see a big increase in M&A activities," said Earl Sweet, senior economist with BMO Capital Markets.

"That's probably going to be the cheapest way to get new reserves, much cheaper than actually going out and digging for them."

According to BMO's monthly commodity watch, base metals have been hit particularly hard by the financial turmoil wracking world markets. Nickel prices were down to US$8.07 per pound in September after a high of $16.89 in 2007. Zinc is selling at 79 cents US per pound, down from US$1.47 in 2007, while copper is down to US$3.17 per pound after selling at $3.94 as recently as April.

Prices had skyrocketed in recent years on optimism that growing economies like those in China and India would lead a burgeoning demand for base metals such as copper and zinc that are used in construction.

But current financial conditions have created "an awful lot of uncertainty as to the extent of the downturn in North America and the extent to which it'll impact the emerging markets like China and India that have been the major impetus behind commodity prices over the past few years," said Sweet.

This uncertainty has led to a plunge in mining stocks, many of which have lost 80 per cent or more of their value and are now "trading at the cash on their books," said Andrew Martyn, a vice-president at Toronto-based investment counsel Davis-Rea Ltd.

"Making the assumption that they don't continue to spend major portions of capital on mine expansions, they're trading at working capital levels and you get the mines for free," said Martyn.

These historically low prices will create some excellent acquisition opportunities for larger companies, including big international corporations, he added.

"Watch for a big international company taking out one of these intermediates. It'll come," said Martyn.

"Once that starts to happen you're going to see some big lifts in these prices from the bottom."

In the meantime, several mining companies are taking steps to cope with plunging commodity prices and the global financial crisis. These include:

-Belvedere Resources Ltd. (TSXV:BEL), a Vancouver-based mineral developer, said the recent fall in nickel prices has forced the company to cut operating costs and the workforce at its Hitura Nickel Mine in western Finland.

-Campbell Resources Inc. (TSX:CCH), a Montreal-based gold and copper miner, has suspended its bulk sample exploration program at its Corner Bay copper property in northwestern Quebec due to declining copper prices and current financial conditions.

-Mining giant Rio Tinto said its expansion projects in Canada could be delayed as it reviews all capital expenditures. Among its largest in Canada are the modernization of the Kitimat aluminum smelter in British Columbia and expansions at two smelters in Quebec's Saguenay region.

-Strategic Resource Acquisition Corp. (TSX:SRZ) has announced a "temporary" shutdown of its wholly owned Mid-Tennessee zinc mining complex.

-Coro Mining Corp. (TSX:COP) has halted plans to buy a copper mine in Chile, due to weaker copper prices and uncertainty in arranging a "bridge" debt facility because of credit market conditions.

-Excellon Resources Inc. (TSX:EXN) said it's going ahead with construction of a mill at its Platosa lead-zinc property in Mexico but will cut back on its drilling there in 2009 to reduce costs.

-Pacific Rim Mining Corp. (TSX:PMU) is trimming its executive ranks in response to ongoing delays in obtaining environmental and mining permits for the El Dorado gold and silver project in El Salvador, as well as difficult market conditions.

-Golden Predator Mines Inc. (TSX:GP) is cutting costs and delaying the mill startup at its Springer tungsten redevelopment in northwestern Nevada, citing "events in global financial markets over the past weeks and months."