Canada’s top 100 mining companies are back with a vengeance

(As originally appeared in Canadian Mining Journal, April 2010)

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By Tom Whelan, Canadian Leader, Mining & Metals practice, Ernst & Young LLP

Much ink has been spilled on the impact of the global financial crisis on Canada’s mining and metals industry.

Two key factors dominated the industry in 2009. First, the crisis choked off access to debt and capital for many companies, radically changing investment patterns and reducing total transaction value around the world. Second, as Western mining and metals giants sat tight to weather the downturn, new investors emerged from Asia.

And now, according to EY’s latest mining and metals report, strength is quickly returning to the sector in Canada. Canada’s mining and metals industry on the rise looks at the top 100 mining companies (based on market capitalization as of 31 December 2009) listed on the Toronto Stock Exchange (TSX) and the TSX Venture Exchange. The report supplements EY’s global publication, 2009: the year of survival and revival.

The report reveals that Canada’s top 100 mining companies have bounced back with incredible resilience, and that the industry’s long-term outlook is promising.

The aggregate market capitalization of the TSX top 100 increased 74%, from $187b in January 2009 to $325b (as of December 2009).

The capitalization requirement to be included in the top 100 was in excess of $430m — up 230% from the previous year.

More than two-thirds of the companies saw their stocks rise by up to 300%, and 13 were rewarded with appreciation in excess of 500%.

The aggregate debt held by the top 100 decreased by over 11% (from $40.8b to $36.2b), while aggregate cash increased 97% (from $11.7b to $23.1b).

The top 100 includes 19 new entrants: four were new listings on the TSX, and the rest attained the coveted position through increased market value. Gold-focused companies dominate the list of new entrants, representing more than 40%. In fact, of the top 100, 50 are gold companies.

The increase in demand for gold has been inversely proportionate to the decline of the US dollar. As a result, gold spot prices are expected to remain strong and have been outperforming the general equity markets.

Overall, current commodity prices are surging beyond expectations, driving upward momentum in Canadian mining and metals activity, and setting a strong investment platform for 2010.

Back from the brink — with strength

The Canadian economy experienced great uncertainty between November 2008 and May 2009. But by the end of the third quarter of 2009, signs of a recovery began to appear, with operators in the sector cautiously optimistic, thanks to fiscal and monetary spending, and metals demand.

In 2009, 442 mining and metals transactions were completed in Canada or by Canadian firms abroad: 295 domestic, 64 inbound and 83 outbound. Transaction volume grew by 50% year over year as almost every Canadian mining company acknowledged it was open to M&A opportunities.

This strong growth in transaction volume reflects the consolidation of many of the junior mining companies, as limited cash flow in early 2009 drove the need to streamline operations. Of note, the total value of these transactions was down 70% from 2008, reflecting fewer megadeals and generally lower average deal values.

The changing landscape

The recession forced many Canadian mining companies to sit tight, placing their exploration and new production projects on hold. Asian investors emerged as the new buyers, cash-rich and ready to take advantage of the opportunities that abounded as valuations dropped and struggling companies became the target of bargain hunters.

China was by far the biggest foreign investor in Canadian mining and metals assets, making a number of significant investments that accounted for 34% of all activity. The US was a distant second, at just 5% of activity.

Looking ahead

The credit crisis fundamentally changed how mining companies and mining transactions will be financed in the future. Following a year of excess leverage and limited cash flow, equity is coming largely from new sources such as strategic equity investors, including cash-rich Chinese companies and sovereign wealth funds.

Canadian companies have been open to foreign investment, while some other countries have placed limits on their domestic commodities. And we’re not expecting a decrease in international appetite for Canadian mining companies, as Canada’s strong mining reputation translates to lower perceived risks for overseas investors. All this puts Canada in a unique position.

The next boom will likely be longer and higher because of short supply of a scarce resource. And because many projects were deferred or delayed, demand will return strongly.