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The attempted takeout of Inmet Mining Corp. by First Quantum Minerals Ltd. is the exception to the recent rule. Despite almost perfect market conditions for merger and acquisition activity, deals in the mining sector have become rarer – a sign of rising anxiety about the long-term outlook for the commodity supercycle.

That, at least, seems to be the most reasonable explanation for why more mining deals are not being done. Today's ultra-low interest rates provide strong support for M&As in the Canadian mining sector, since low rates reduce the cost of borrowing money to fund a takeover. The recent improvement in China's economic data is another positive for mining M&As since stronger Chinese demand for resources is good for commodity prices.

But despite the fertile deal conditions, takeover activity plunged in 2012. Bloomberg reports that 157 mergers and acquisitions involving Canadian companies in the materials sector were completed in the past 12 months with a total value of $28.9-billion. In comparison, 226 deals were done in 2010 with a combined value of $84.8-billion.

The success of an acquisition depends largely on the free cash flow of the company being bought. If an acquirer can borrow funds at 5 per cent and purchase assets that are already generating a free cash flow yield of 7 per cent, a deal is highly profitable – and even more so if the acquirer can generate additional savings by centralizing functions such as human resources and exploration.

There are 10 companies in the S&P/TSX Materials Index with a free cash flow yield above 4 per cent, a level that would seem to make them attractive as acquisitions at current interest rates. According to Bloomberg, the top five by this metric are Nevsun Resources Ltd., Hudbay Minerals Inc., Sherritt International Corp., Methanex Corp. and Alacer Gold Corp. They have an average free cash flow yield of 12.6 per cent.

Each of these companies would appear to be a prime candidate to be acquired. To be sure, free cash flow yield on its own is not sufficient analysis for stock selection and there are company-specific issues with some of these firms. (Some potential buyers of Sherritt International, for instance, may be put off by the company's Cuban assets, which Americans are prohibited from buying.) Still, it's surprising that takeout bids for at least some of these companies have yet to appear.

The lack of deals in the mining sector suggests that potential buyers are concerned about the outlook for commodity prices following several years in which money has poured into the sector, helping to bring new supply on stream.

Credit Suisse analyst Andrew Shaw recently predicted that after years of expanding production, the copper market will be in surplus this year for the first time in over a decade. Mr. Shaw expects copper prices to peak near current levels in early 2013 before beginning a multiyear decline. Even healthy Chinese demand may not be enough to forestall similar declines in other raw material prices.