Price right for mining deals, but timing in doubt

By Susan Taylor - Analysis

OTTAWA (Reuters) - Price tags may be perfect, but big miners are waiting for signs of market stability before bidding on beaten-down juniors that have promising deposits they can't afford to bring to fruition.

The big drop in small mining plays has prompted speculation that larger firms will rush in to snap them up at bargain prices in order to cheaply boost production.

But attractive prices are not enough to lure buyers to Canada's junior mining sector, which has been hammered by the credit crunch and sliding commodity prices.

This "wait-and-see" approach by big players means that many development projects owned by juniors will remain in limbo, while some others will wither and die. In turn, that could squeeze metal supply over the medium term and help arrest the slide in metal prices.

"It's sowing the seeds of the next commodity rally," said Blackmont Capital analyst George Topping.

"The next generation of mines can't get financed right now. So all the production growth that analysts have been forecasting over the next several years we're going to have to pare back."

The dearth of deals also chokes off a key source of funds for explorers, leaving them ill-equipped to search for the next big strike.

"The money that people make on some of these junior explorers that actually find something, a lot of that money tends to get recycled back into new junior explorers, which helps to encourage the exploration game," said Haywood Securities analyst Kerry Smith.

"The only way to find stuff is to spend money."

Big miners may have deep pockets, but they are typically unsuccessful at making big new discoveries and better at expanding existing projects, Smith said.

WEAKEST WILL BE WEEDED OUT

Large mining companies also want to see who will be left standing. If current conditions continue, the market will weed out the weakest juniors that were spawned by a bull market.

"During the run-up in metal prices it was easy for companies to get financing, regardless of the quality of the deposit or property," Topping said.

"Last year I could have raised money to drill in my back garden. It was that loose."

With credit markets now all but closed to them, many juniors have pared back or halted projects in order to save money until they can get funding.

However, with mergers and acquisitions seen by majors as a quicker and cheaper way to build reserves than exploration and development, analysts agree that takeover activity will resume. The question is when.

"Despite the market's unwillingness to assign value now, mine operators eventually need to acquire assets," said Wellington West Capital Markets analyst Catherine Gignac in a research note.

Extreme and extended market volatility and tumbling metal prices make it difficult to calculate the merits of a takeover with any confidence.

"M&A takes time and all the majors' corporate development departments are probably re-running valuations of potential targets under revised metal price and economic growth assumptions," said Dundee Securities analyst Mike Collison.

"In general, what major mining companies are looking for is large deposits that can have a material effect on their production profile and a mine life of over 10 years. Beyond that, companies look at grade and cost of development and production."

Ultimately, big miners are looking for nerves to calm, said Smith, and that may time .

"They might not be in a big hurry to do it today because the markets are volatile. Things could get cheaper."

(Reporting by Susan Taylor; editing by Rob Wilson)