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Mining industry on the way up

I read with great interest this week that global mining mergers and acquisitions – which are down more than 50% this year – are set to recover in the first quarter of 2010 as metal prices surge on signs that the worst recession since World War II is easing.

Deloitte Corporate Finance in Australia has expressed the belief that existing majors will be conducting more transactions, and that certain mid-tier companies are in fact poised to become majors.

Looking at why this is likely, Bloomberg News tells us that metal prices have surged 68% this year, prompting Bank of America, Merrill Lynch and Standard Bank Plc to flag more mining acquisitions. It adds that takeovers are up almost a fifth this quarter from the previous three months, which lends credibility to the growing belief that by the end of first quarter of 2010 the world will be looking at a stronger overall position for mergers and acquisitions.

Bear in mind that metal prices almost halved last year, the credit crisis put the brakes on funding of basically all projects across the commodity spectrum, and the value of mergers and acquisitions across the mining and metals sectors dropped by almost half from the R1,500 billion achieved in 2007.

That trend seems to have reversed this year, with about R152 billion of proposed and completed M&A deals this quarter, compared with R128 billion in the April-to-June quarter.

Another significant indicator is that the peak net debt of global mining companies – which reached R748 billion at the height of the boom in 2007 – is forecast to drop to R532 billion this year and R200 billion in 2011, because of share and asset sales, dividend freezes and project cutbacks.

But there’s another development which pushes sentiments up a gear from encouraging to exciting, and that is the fact that the intellectual optimism of the financial fundis is being matched by the guarded yet positive mood swing emanating from the down-to-earth mining moguls.

“One gets the sense that a fiscal stimulus has happened across the world, and has had an impact on bringing commodities back,” says Terence Goodlace, CEO of mid-tier diversified mining group Metorex Limited. “You cannot argue with the fact that commodity prices have come off a low and gone up, and that we now actually have a demand for metals like copper and cobalt.”

Further endorsement comes from Clive Newall – president of First Quantum Minerals Limited – one of the biggest copper producers in the world. “We are certainly more confident now than we were at the beginning of the year that we are coming out of the recession,” he suggests. “I think that we and everybody else are somewhat surprised at where the copper price is today.”

On the opposite side of the fence from the big producers are the major minerals process engineering and project management companies – the people who create the mines and plants.

They obviously speak from a different perspective – yet they display the same sense of confidence as their clients. One such person is MDM Engineering executive director George Bennett, who has no doubts about where his company is headed: “Certainly, for the next three years we are pretty confident that we’ve got a very good order book and a very good pipeline of feasibility studies and potential projects.”

“And,” he continues “commodity prices are improving and we are starting to see copper projects coming back on line, and some good gold projects coming toward us as well.”

The managing director of another diversified exploration and development company is equally upbeat about the future: “There are signs of recovery in the market,” says Mark Parker of African Eagle Resources plc. “Gold has come back into favour very much, copper has risen well off the bottom, and copper projects – while they’re not quite flavour of the month – are certainly enjoying a revival.”

The head of a leading company in the iron ore business – ARM Ferrous chief executive Jan Steenkamp – is a little more guarded, but still positive: “We are beginning to see the bottom of the global economic downturn, although exactly what the recovery is going to look like is anybody’s guess.”

And finally, the CEO of a major player in the hard-hit diamond sector – Johan Dippenaar of Petra Diamonds – sums up the mood of confidence that seems to be spreading through most, if not all, commodity sectors. “I don’t of course have a crystal ball, but that we will come out of the current global economic downturn is certain,” he predicts.

This then is the emerging mood I have encountered in discussions over the past month with top executives representing leading companies mining a wide spread of commodities.

I don’t have to tell you that mining people are straight shooters who pull no punches. Over the past year they have been quite frank in airing their doubts and problems. But today their close to unanimous message is crystal clear: “The meltdown is easing, there’s a brightening light at the end of the tunnel, and we’re on the way up!”