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Canadian miners predict 2011 to be year of the deal

Barrick CEO Aaron Regent

STRINGER/CANADA/Adrien Veczan/Reuters

The frenetic pace of merger activity in the mining sector is expected to continue into next year as companies with stockpiles of cash compete for shrinking resources.

Nearly three-quarters of Canadian mining executives say they will likely pursue deals in 2011, according to a new survey by consultant KPMG LLP. Several notable deals have already been completed this year, including Goldcorp's $3.6-billion acquisition of Australia's Andean Resources Ltd., which is expected to close this month.

The miners, flush with cash from a China-driven resurgence in commodities demand, are expected to attract plenty of potential buyers. Contrary to earlier fears, the federal government's recent decision to block BHP Billiton Ltd's $39-billion (U.S.) offer for Potash Corp. of Saskatchewan Inc. does not appear to have dampened interest.

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More than half of the world's merger and acquisition deals happen in Canada, which is home to a third of the world's miners, according to Lee Hodgkinson, head of the Canadian mining practice at KPMG. He expects that trend to continue.

"I think 2011 will be a very active period for M&A activity," Mr. Hodgkinson said. "The financing will be available, the cash is available."

There has been concern that Ottawa's decision will scare off foreign investors. However, a handful of foreign takeovers have been announced since, including in the potash sector, albeit much smaller in value than BHP's offer for Potash Corp.

Another factor expected to drive global mining merger activity is the $45-billion raised by banks around the world to help finance the failed BHP deal, which is now likely to be deployed in other resource deals.

KPMG's survey shows 70 per cent of Canadian miners will pursue acquisitions next year and only 8 per cent said it was not in their plans. The remaining 22 per cent were "neutral."

The majority of respondents, 61 per cent, said they expect the next major area of mining consolidation to be in gold and precious metals, while 33 per cent identified base metals and six per cent said potash.

The survey was done in September and included responses from 61 mining executives.

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Survey respondents were split evenly on whether base metal prices will rise or remain stable in 2011, but few believe prices will fall as demand for resources remains steady in Asia, particularly China.

China is one of the world's largest consumers of commodities such as coal, copper, nickel, zinc and aluminum, which it needs to build infrastructure, industrialize and meet consumer demand for cars and household goods.

Canadian miners are "upbeat" about the upward swing continuing, the KPMG survey shows, thanks largely to countries such as China and India. What's more, they see financing for mergers and acquisitions as more easily available.

The survey comes as Goldcorp is expected to close its Andean Resources Ltd. deal, its third acquisition in the past year. The company has also shed a handful of assets over the same time period.

Goldcorp chief financial officer Lindsay Hall said the company may "slow down" its buying spree in the months ahead and will focus on growth from its existing projects.

"We don't have a lazy balance sheet," he said during a webcast of a Scotiabank mining conference in Toronto on Tuesday.

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While there is a lot of cash in the resource sector today, "what is scarce are assets," Barrick Gold Corp. chief executive Aaron Regent said at the conference.

About half of Canadian mining companies surveyed by KPMG said increasing reserves was the main driver of merger and acquisition activity in their company.

Other notable deals this year included Kinross Gold Corp.'s $7.1-billion takeover of Red Back Mining Inc. in late summer.

Since BHP walked away from its bid for Potash Corp. last month, following Ottawa's rejection, Germany's K+S AG made an offer to buy Vancouver-based Potash One Inc. for $434-million (Canadian), Florida's Walter Energy Inc. launched a $3.3-billion takeover bid for Vancouver-based Western Coal Corp. and Toronto-based CIC Energy Corp. agreed to a $422-million takeover by India's JSW Energy Ltd.

Teck Resources Ltd. chief executive Don Lindsay said Tuesday that an acquisition "would have to be pretty good" for his company to do a deal right now.

"We haven't seen anything that would make sense for us at this point," Mr. Lindsay told the Scotia Capital conference, pointing to what he sees as strong growth already expected in his company's coal, copper and zinc businesses.

"How much growth do you need?" he said.

The weight of metals and mining companies on the TSX has grown to 21 per cent from 14 per cent over the past eight years, according to Scotia Capital analyst David Christie in his opening remarks at the conference.

"This comes as some of the largest market capitalization companies have disappeared in M&A transactions," Mr. Christie said.

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