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Wednesday, March 23, 2016

Subject

Prospects for consolidation in the mining sector.

Significance

The five-year bear market in mining equities has left a trail of casualties. Bankruptcies and distressed sales have been common in bulk commodities, especially in the North American coal sector and among iron ore juniors. Lower metal prices revealed defects in a range of complex gold mining projects, several of which had to fold for technical reasons. As the largest companies emerge from the market bottom with damaged balance sheets, industry consolidation has so far been subdued: mining merger and acquisition (M&A) activity hit a cyclical low in 2015.

Impacts

  • Nimble operators are accumulating prospective land positions and will sell them as proven development properties in the next cycle.
  • Unincorporated partnerships will flourish among like-minded companies seeking to carve out a niche in the product market.
  • Royalty businesses will prefer cash-flow-generating projects to early-stage opportunities with future optionality.
  • High-yield financing, hitherto available to mid-sized miners, will remain hostage to broader risks affecting this sector.
  • Reduction of political risk could reopen mining opportunities for partnerships in regions long closed for foreign investment, such as Iran.
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