Canada's energy and mining sectors are riding a wave of acquisitions by Asian companies that are flush with cash and hungry for resources to fuel rapidly expanding economies, a trend not expected to let up soon.
Deals such as Korea National Oil Corp.'s $1.8-billion bid for Harvest Energy Trust last week are aided by difficulties some Canadian companies have in funding their operations because of the financial crisis.
“We've been saying that the sectors which are the most susceptible to such M&A [mergers and acquisitions]are the resource and energy sectors, and I still believe this to be the case,” said Alain Auclair, head of investment banking for UBS Securities Canada.
“You still see the Asian countries with access to capital or strong balance sheets that can deploy cash quickly to seize opportunities. I think it's a trend that we're going to keep seeing, especially for companies who might be under pressure from a balance sheet perspective.”
That is the case with debt-heavy Harvest, known for its Western Canadian oil and gas operations and a refinery on the East Coast, one it could not afford to expand by itself.
Two weeks ago, China's No. 2 nickel miner, Jilin Jien Nickel Industry, and Canada's Goldbrook Ventures offered to buy mining developer Canadian Royalties Inc. for nearly $200-million to help feed China's appetite for metals.
The number of such deals will only increase as China, Korea and other Asian nations seek to own the production of resources such as nickel or oil, instead of having to buy them on international markets.
South Korea, for example, aims to pump 300,000 barrels of oil a day by 2012 as it expands its manufacturing economy. It is currently the world's fifth-largest oil importer.
In August, state-owned PetroChina paid $1.9-billion for a 60 per cent stake in two planned oil sands projects owned by Athabasca Oil Corp. That was China's largest Canadian oil acquisition to date.
The deal helped fuel the shares of small developers such as Opti Canada Inc. and UTS Energy Corp. , as investors wagered they might be the next to be absorbed by the Asian wave. Both are minority partners in large projects in Western Canada.
At a time when publicly traded businesses are struggling under the weight of a global economic crisis, state-owned oil companies can deploy cash for multibillion-dollar projects without having to seek shareholder approval.
“They couldn't care less about the balance of this year, or next year, even the year after,” FirstEnergy Capital Corp analyst William Lacey said. “They're looking at the next 10-20 years, and the internal demands and they are going to meet those demands.”
Bob Schulz, a professor of strategy and global management at the University of Calgary's Haskayne School of Business, said big, but not blockbuster, deals will continue to be the order of the day in Canada's oil patch.
“Big, positive and probably in $1-billion to $2-billion bite-size chunks,” said Mr. Schulz.
Those transactions are large enough to give new companies a a foothold in long-term projects like oil sands developments, but not of a scale to cause alarm in the United States, Canada's largest energy and minerals export market, Mr. Schulz said.
Canada has been coveted as a storehouse for natural resources for hundreds of years, and investors in oil, gas and minerals enjoy minimal political risk.
In energy circles, it is best known for the oil sands, the largest deposits of crude outside the Middle East.
Developing the unconventional oil using mining or underground steam techniques is costly, and numerous small players have been culled to make way for major companies with deep pockets.
Harvest is not an oil sands developer, but KNOC made a foray into that part of the business in 2006 by acquiring an oil sands property from Newmont Mining Corp.
Analysts say buyers will get a boost from legal changes in Canada that force most Canadian income trusts to convert to traditional corporations by 2011, when their favored tax status terminates.
The changes will force many, sometimes highly leveraged, trusts to either become corporations, merge or get squeezed financially, making many into attractive targets.