Pedersen & Partners note that “the past four years have been unpredictable, to say the least for the global economy, and particularly so for the mining sector.” The outlook for 2017 is still very subject to change, given current geopolitical complexities in resource-rich countries such as the US, South Africa, Brazil, Venezuela, Vietnam and Indonesia, to name a few. In spite of this, or perhaps even because of it, the general climate seems to be one of increasing optimism in the wake of PDAC 2017, the company notes. Base metal prices improved steadily towards the end of 2016, as a result of a more constricted supply and robust demand. Prices for most industrial minerals continued to rise early this year, although at a more moderate pace. Precious metal prices were under pressure until mid-March, following a modest recovery late last year. Political uncertainty at the beginning of the year led to increased optimism in the market for gold and silver; whether or not this trend will continue remains to be seen.

There is clear indication that there will be an increase in M&A activity for smaller players in the sector, and that the major players will increase divestitures to focus on core commodities, in turn benefiting some of the mid-tiers, which are in a position to make acquisitions. This is supported by the recent survey conducted by Pedersen & Partners, in which nearly 80% of the mining companies surveyed suggested that M&A activity will likely be part of their 2017 strategy. Internationally, 2016 transactions were mostly on the divestment side as companies sought to reduce debt. Looking ahead to 2017, it appears that the sector will build slowly and begin to improve more rapidly toward the end of the year.

Looking back over the last few years, it is logical that we have seen continued hesitation on the market, as the global recession which began in 2008 sent commodity prices, stock prices, and market caps in the mining sector into a tailspin, continuing through the first half of 2009. The sector responded with restructurings and production cuts as well as expenditure reduction, and by the second half of 2009, the sector as a whole was rallying and continued to rebound through 2010. Market caps returned to almost the same levels as 2007 and there was increased optimism that the sector would continue its upward momentum due to the growing demand for commodities from emerging markets.

However, 2011 proved that the expectations of continued growth had been overly optimistic. Although commodity prices were again rising and there was considerable merger and acquisition activity, market caps began to drop considerably toward the end of 2011. Shareholders were not seeing their expected return on investment, particularly among the juniors, and confidence in the mining sector began to flag due to reduced ROI for investors in the sector.

Increasing optimism that the market would rally marked the first half of 2012, with some predicting a banner year for mining M&A, driven by large companies with a surplus of capital and opportunistic mid-tier companies. However, the US fiscal cliff and the European economic crisis, coupled with increased capital costs, resulted in fewer financings and less capital raised, and during the outlook for the market became much bleaker the second half of 2012. To exacerbate matters, the demand for resources and capital coming in from the BRIC economies began to flag as their economies began to decelerate.

Returning to 2017, increased M&A may facilitate some growth in the industry, particularly among the mid-tier players and cash flow positive juniors. Many of the small mining firms with market caps of less than 10 million USD will not survive the next year, while those with proven projects and strong management reputations may be subject to acquisitions or find more fluid funding through private equity, streaming, flow through shares, and eventually, some institutional financing. There also appears to be more activity in terms of smaller acquisitions.

Pedersen & Partners surveyed 114 executives across the sector regarding issues of concern in predicting the economic outlook for the mining sector in 2017. Here is a summary of this year’s survey:

• Increasing number of companies with market caps rising above 50 million for junior players in 2016, after several years of declining market caps and de-listings for juniors. This follows several years of seeing large numbers of juniors with market caps under 15 million.
• The overall perspective appears to be one of cautious optimism, with most respondents predicting that 2017 will be an improvement over 2016, with only 6% expecting further economic contraction and 57% expecting to see growth in the sector.
• The perception is that this is an auspicious time in the market cycle to make acquisitions, but a difficult time to secure the necessary capital. However, we have recently seen an increase in M&A, with 45% of respondents expecting M&A to be a part of their growth strategy this year, 35% saying it would be a possibility if the right opportunity arose and only 19% ruling it out.
• Securing resources, nationalisation, skills shortages, infrastructure access and cost inflation are the highest concerns moving forward in 2017.
• Respondents fear that the weakened growth in emerging markets will cause pressure on commodity values and margins, and result in less access to new sources of financing. However, many feel that this will create more opportunities to acquire assets during the low price cycle.
• Although regulatory requirements are increasing globally in the exploration and mining sectors, 54% of respondents do not expect it to affect their operational strategy, while 26% do, and 20% are unsure.
• Despite the fact that market caps and share prices are down across the board, 28% indicate they will be hiring new employees, 5% indicate they will be bringing back staff that were laid off, 50% will maintain their current staffing levels, and only 15% suggest they will be restructuring.
• Many of the junior companies with the lowest market caps will disappear or seek mergers in order to increase capital. As a result, the number of publically traded companies in the sector will be greatly reduced over the next year, which should in turn benefit some of the larger juniors with strong projects and healthy market caps.
• As far as environmental sustainability and risk mitigation are concerned, most respondents (42.9%) considered the matter best handled at the executive team level, while almost a third (30.1%) would designate a special Board Committee to deal with these issues. One-fifth of respondents (21.9%) preferred to retain external consultants to examine these issues.
• Almost two-thirds of the executives surveyed (62.3%), see the continuation of current exploration programmes as the best way to access new deposits over the next year, while only 21.9% would rely on acquisitions. 15.8% would consider restarting dormant exploration projects, or bringing mines that are currently in care and maintenance back into production.