Consolidation in the mining industry
Part 2
Cliff Droke
Since writing the article titled "Will consolidation help the gold mining industry?" a few days ago I've received some excellent feedback and have been directed to new insights and information into the important issue of mergers and acquisitions in the gold mining industry. Some of this information is so important that I've decided to write a second part to the original article which hopefully will shed greater light on this issue.
In an industry study published last year by Magnus Ericsson, the Raw Materials Group in Sweden, the topic of mining consolidation was researched at length. The paper, entitled "Are Mergers & Acquisitions Really Working for the Mining Industry?" made several excellent points on this subject worth repeating.
Magnus Ericsson doesn't pull any punches when he describes the dominant trend in the industry as "merger mania," pointing out that while most merger activity in the mining sector is dwarfed by deals in other industries, the proportion of global M&A activity in mining has increased significantly in the past couple of years as consolidation in other markets has slowed. For
example, up until the final months of 2002, some U.S.$15 billion had already been spent on mining M&A and may have reached as high as $30 billion for the entire year. The year 2001 was a record year with over U.S.$40 billion recorded in the Raw Materials Group (RMG) Mining M&A Register, the highest figure noted by RMG since it started recording in 1994 and probably the highest figure ever.
Framing the question, Ericsson writes, "It is obvious that mining industry executives consider M&A to be a particularly important tool to improve performance and deliver value to shareholders. But how have these over U.S.$150 billion in expenditures really affected the mining industry?"
Ericsson emphasizes that the difficult and risky, but potentially highly rewarding initial exploration of a mining venture is the alternative to M&A to obtain additional reserves for a mining company. "In spite of the fact that mine production of most metals has gradually increased, and during the recent years of economic downturn, exploration, i.e., the search for new deposits, has slumped," writes Ericsson. "This is not feasible in the long run," he concludes.
Adding further to this discussion of consolidation in the mining industry, I'd like to share an interesting and insightful e-mail I received from a reader this week. He writes, "I used to teach downhill skiing and a part of our training was to slow down the movements for teaching purposes. We had to over-accentuate, if you will, what is involved with executing a proper parallel turn. This brought to light any sloppiness in our own technique, required great balance and precision to execute the turn. When a person skis quickly (and out of control), a sloppy technique can easily be ignored by excitement, speed and momentum. Many poor skiers can go down the hill quickly, but are they skiing or just making it down the hill? What about risks to themselves and others on the slope?
"Such is the case with some conglomerates created through mergers. Although the momentum can carry them along, a poorly run company or non-competitive company when joined with others of like qualities, makes them bigger or faster but not necessarily a profitable or well-managed company."
He adds, "Is it possible that it would be in the best interests of investment banks and influential analysts (of the mainstream variety) that the gold industry does fail or becomes controlled by a small group of large companies? I believe it would certainly play into the hands of the Administration, especially if the chosen few would play the misinformation, pressuring or supporting the industry in the direction of consolidation. Is it possible for them to do that?"
Excellent point. Ultimately, this question must be openly discussed, debated and answered by the mining industry, its investors and other participants. For the sake of the health of the industry, the sooner it is addressed the sooner the problems associated with industry consolidation can be remedied.
April 3, 2003
Clif Droke is the editor of the weekly Bear Market Report, a combined forecast and analysis of U.S. stocks and indices and international precious metals stocks, and is the author of numerous books on finance and investing, including most recently "Gold Stock Trader's Almanac 2003." Visit his web site for free samples of his analysis at www.clifdroke.com
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