Miners are doomed to repeat the mistakes of the past, as commodity prices rise and optimism seeps back into sector, financiers say.
Multi-billion-dollar purchases made at the top of the cycle ravaged corporate balance sheets and forced companies to sell their best mines to survive amid a cash crunch. As confidence now grows along with share prices and profits, mining companies are cautiously exploring ways to expand.
But with scars from the most-recent metal collapse still fresh, mining investors and lenders warned Tuesday that old habits die hard.
"I don't have the hope that the industry is not going to make the same mistakes that it has because the industry always makes the same mistakes," Isser Elishis, chief investment officer at private equity firm Waterton Global Resource Management, said at a panel discussion at the annual Prospectors & Developers Association of Canada (PDAC) conference in Toronto.
Mining companies saw their fortunes improve last year when metal and mineral prices jumped. Gold, copper and zinc all made gains, while metallurgical coal more than doubled. The higher commodity prices injected life into an industry that had spent the downturn slashing expenses, firing executives, suspending projects, selling assets and begging for cash.
The higher metal and mineral prices means producers can generate funds from operations, spurring them to talk about growth.
Big companies like Goldcorp Inc. have said they are eyeing partnerships with other miners to share the risks of building and operating mines. Industry heavyweight Barrick Gold Corp. is taking small steps forward, such as studying the prospects of an underground mine at its suspended South American project.
Investors are moving back into the sector and starting to take note of the quality of the medium-sized and smaller mining companies, some of which acquired assets from the larger miners that were forced to divest in a cash crunch.
Ryan Latinovich, head of mining and metals for Royal Bank of Canada, said he's spending most of his time with asset managers talking about smaller companies that have star potential. That's a change from last year, when investors were focused mostly on the biggest players.
Alternate forms of capital from the likes of private equity are no longer popular.
"When public markets are not open to issuers that is when private capital steps in," Gareth Turner, head of natural resources with Apollo Global Management LLC, said at the conference. "We were disappointed that the downturn was so short-lived."
Still, for Apollo and a handful of private equity firms, the commodities slump was fruitful.
Apollo invested in beleaguered metallurgical coal producer Walter Enery and is taking it public under its new name Warrior Met Coal. Waterton made 30 acquisitions during the roughest parts of the downturn. CEF Holdings Ltd. helped fund Magris Resources' niobium mine purchase from Iamgold Corp., when the miner needed cash.
Other private equity firms that tried to cash in on the mining bloodbath are changing directions or closing up shop amid the lack of opportunities.
As the market strengthens, the industry is taking pains not to fall into bad habits, but how long that will last is an open question.
"The sins get to be repeated every cycle," said Egizio Bianchini, global co-head of metals and mining at Bank of Montreal.
"I hope that this time, the miners have found out that cyclicality and excess leverage don't go well together. When commodity prices go down and you're overleveraged, you wind up selling assets that you have taken a long time and a lot of risk to develop," he added.