We could see a trend of miner mergers this year as stronger players pick off small miner rivals, looking at a long-term industry upturn that would also strengthen companies in the heavy equipment for sale business as Tricia Wright of Reuters reportedFor used heavy equipment for sale, visit MSloane Consulting.
Shares in the sector fell nearly 75% in 2008, and for many small companies stuck with scarce credit, high exploration costs and few products to sell, merging is a route to survival. Equity financing, once the junior miners' main source of funds, is no longer available after risk-averse investors fled the sector entirely or opted for the relative safety of beaten down blue-chip mining stocks according to Ernst & Young director of global mining Tim Williams.
"The logic of merging different companies together makes a lot of sense -- you put one company that's got money together with another that's got a good project but no money, and you might end up with an organisation that's more attractive to investors," Williams says.
An example of the trend came on 25 March 2009 when zinc company Griffin Mining, which has over $60m in cash, said it planned to make an all cash offer for Canadian lead miner, Ivernia Inc. Research by Ernst & Young shows miners on London's Alternative Investment Market (AIM) at end-2008 were worth just a quarter of their £16bn value six months before.
AIM saw its last mining IPO in June 2008 and many companies are being forced to pull in their horns. Since a lifetime peak in March 2008, the AIM Basic Resources index has crashed 70%, underperforming a fall of almost 60% in the broader AIM index.
Smaller mining companies are vulnerable because they are often explorers, or early-stage mine developers. They lack products to sell and their assets tend to be lower-grade and higher-cost compared with those of big miners like Rio Tinto Plc.
While base metal prices have ticked up this year, they are still a long way off 2008 highs. Copper for instance is 56% off its all-time high hit in July 2008; nickel has plunged almost three quarters in the past year.
These tough conditions have created opportunities for the relatively strong according to Seymour Pierce mining and metals analyst Asa Bridle. "There are one or two companies with substantial cash positions who are now in a very strong position and could begin buying up assets at relatively cheap levels ," Bridle says.
Williams says not only does the joining of operations have its obvious benefits, but it can also open up funding possibilities. "The point about companies getting bigger is that there are economies of scale. They are likely to get more efficient, meaning that they would get on the radar screen of the larger institutional investors."
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