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Canada’s pick-and-shovel crew find a silver lining or two

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The world's largest mining convention was not a mother lode of pessimism, as some might have expected considering the majority of participants were junior and intermediate mining companies, many on life-support.

Undoubtedly, this year's Prospectors and Developers Association of Canada (PDAC) four-day conference in Toronto in early March was a more subdued affair than in recent years, when commodity prices were charging to all-time highs and financing options were plentiful.

About 18,000 people attended this year's conference, not too far from last year's record 20,100, and most convention booths were full, albeit perhaps with bargain hunters seeking the ultimate "buy low" opportunities. And while the many face-to-face meetings might be a prelude to a wave of merger and acquisition activity that's been predicted for the sector, it was gold that lifted spirits in the short term. The shiny metal reached $1,000 an ounce just before the conference and had many juniors talking up the precious metals components of their holdings. Although some juniors were predicting prices of up to $2,000 an ounce later this year, the outlook presented by conference speakers was less bright.

Long-time metals analyst Jim Steel with HSBC Securities in New York said gold was in jeopardy of losing some of its recent luster. Steel said that jewelry demand is easing around the world, with Indian consumption in particular nose-diving whenever prices creep above $900 an ounce. Steel said that bullion has been rallying in a disinflationary environment as investors seek a safe haven, a condition unlikely to persist much longer, given that investors usually buy gold as a hedge against rising inflation. "Our view is we're going to continue to see a steady but modest decline in the gold price," he said.

The outlook presented for nonferrous metals wasn't much rosier. Alan Williamson, chief economist with Trafigura Group unit Galena Asset Management based in London, told delegates that consensus metal consumption forecasts are too optimistic, given the fall in industrial production in major economies. Although he saw limited downside going forward, he believed any fundamental improvement in prices would have to wait until 2011.

If those predictions didn't seem sobering enough, delegates heard Marc Faber—author of the monthly investment newsletter "The Gloom Boom & Doom Report" and infamously known as Dr. Doom—conclude the conference with a luncheon presentation speculating that the financial crisis will spark war-like actions between the United States and China and that the Dow Jones Industrial Average may end up lower than the (current) gold price. But even Dr. Doom ended on a positive note, predicting that prices for commodities would eventually recover with growth in the Chinese economy and a lack of investment in new resources.

Other veins of optimism were evident throughout the conference. Executives with producers such as FNX Mining Co. Inc. and HudBay Minerals Inc. were more bullish than the analysts. Both the Toronto-based diversified miners believe a recovery in base metals is in store, probably in late 2010.

That type of rebound wouldn't surprise PDAC president John Baird, who has spent more than three decades in the mining business and said the current downturn is just part of its typical cycle. "The strength of this industry is that this is normal and we know how to carry on," Baird said in an interview with AMM. "When you go around the convention and you meet people who are veterans, no one is concerned."

That's not to say these aren't rough times, Baird said. But the industry will get through it. "We'll lose some of the juniors, others will merge and others will do very well, thank you very much."

Baird pointed out that due to the recent commodity boom, many mining companies are not as heavily indebted to the banks. In the past, banks insisted on keeping mining operations running because they wanted their interest payments. Now, producers can curtail output in a constructive fashion, benefiting the market by reducing oversupply.

Baird also noted that mining financings are starting to show some life. Indeed, according to TMX Group, which operates the Toronto Stock Exchange and the TSX Venture Exchange, about $1.5 billion in global equity was raised in the sector from the start of the year up until the March conference. It's an impressive tally, considering that during the last downturn in 2000 global miners raised only $3 billion during the full year.

"There are all kinds of private placements being made. There are so many bargains in assets in the mining industry today, and that's why investors are here," Baird said.

There are silver linings, it seems, to even the "bust" part of a boom-and-bust cycle, bit it may take much more than a mining conference to coax investors into putting money back in the sector. Darcy Keith


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