With last year’s surge in merger and acquisition activity in the market, the question arises what implications this will have for future trends in the mining sector. Other events which could be seen to have impact on change in the industry include the shift in global regulatory policies, the prospect of silver becoming an exchange traded fund (ETF) as well as unfolding prospects for diversification. Spotting the departure point for these upcoming changes could help indicate what direction things are moving, over a longer term period.

In January this year, S &P credit analysts Reginaldo Takara, Sergio Fuentes and Juan P. Becerra indicated that M&A activity should have a significant effect on mining companies this year, “as shareholders increase the pressure on the miners to share their cash windfalls.” However supply and demand growth from developing regions such as China, will continue to effect market imbalances, increased competition and pricing swings for raw materials, as well as considerable fluctuations in profitability and cash flows.

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On the topic of supply and demand, director of Global Mining Research for RBC Capital Markets, Stephen Walker stated towards the end of last year that, “since the majority of global silver production occurs as a by-product of gold, copper and lead-zinc mining, investors have limited opportunities to take advantage of this precious metal’s rising popularity. We think there are attractive opportunities for investors in this sector today, given the outlook for continued demand from industry, jewelry, flatware and photography users, declining aboveground stockpiles and the creation of Exchange Traded Funds (ETFs) backed by silver bullion.”

Taking a look at some of they key influential factors behind gold, Greg Johnson, Vice President of Corporate Communications for NovaGold Resources Inc. (AMEX:NG; TSX:NG) commented, “we see the revaluation of gold back toward more historic ratios relative to the value of the major stock indexes along with increased purchase of gold by central banks to diversify their holdings beyond the US dollar, as key drivers for gold’s continued advance over coming years.” Additionally, the Bank of China recently released reports that it will allow holders of US accounts to trade gold in the country through to May 27th, 2006.

Whether these latest transitions will have much of an impact on gold in general, remains to be seen. However, Matthew Turner, of Virtual Metals Consulting Limited commented that in his opinion, it “will naturally have some effect, which can only be positive. Furthermore the buy/sell spread is going to be cut, which will in effect make gold cheaper. So this too is positive. However, I think one can overstate both the Chinese appetite for gold and the impact it will have on world prices. China is unlikely to be another India-gold doesn’t play the same role and there’s no reason why it should.”

In light of this recent trail of mergers and acquisitions in the market last year, there is a need to understand how companies believe they are poised to benefit from this. Hugh Clarke, director of Investor Relations at Endeavour Silver Corp. (TSX: EDR) offered insight that, “last year’s trend in mergers and acquisitions was a natural phenomenon, given the market conditions. It is inevitable that this trend will continue and accelerate in the near future. The impact on the silver industry is quite dramatic because there are very few true silver companies around the world. Any time a silver company disappears through acquisition, it creates less supply for investors. The recent acquisition of Western Silver Corp. by Glamis Gold is a case in point as Western was a company that was scheduled to be in production next year.”

Taking a look at his company, Hugh stated that, “Endeavour is aggressively looking to expand its operations in Mexico as we speak. We are in advanced negotiations with three major acquisitions and by this I am referring to dealing with companies who are either in production or very near this stage.”

Last year marked a major shift as deals between Barrick Gold Corp. and Placer Dome were sealed to create one of the biggest combined gold producing companies in the world. Also, in February Nevada based Glamis Gold Ltd. (NYSE:GLG; TSX GLG) announced its intention to acquire Western Silver Corp. (TSX: WTC.TO; AMEX:WTZ) for approximately $1.2 billion. Western Silver, still a development stage company, has as its principal mine the Penasquito site in central Mexico, which also contains gold, zinc and lead opportunities. Glamis CEO Kevin McArthur recently stated that, “Western Silver’s Penasquito project is a world-class development asset that will significantly increase our gold and silver reserves and enhance our sector leading growth profile.”

Canarc Resource Corp. (TSX: CCM;OTCBB: CRCUF) Gregg Wilson, Manager of Investor Relations said, “mergers and acquisitions such as we have seen over the past year are a normal part of the commodities cycle. Companies who are wanting to grow or replace a depleting resource will acquire other companies or projects to accomplish this end. This is often more economical than the expense of exploring for new discoveries and bringing them into production.” In terms of where the Canarc positions itself amidst this recent market change, Wilson says “we are focused on making Canarc a mid-tier gold producer and we’ve begun the steps to accomplish this through our new Polaris project in Northern British Columbia. We are exploring, developing and aggressively looking for gold projects to make this happen.”

When asked where the company stands on diversifying its operations in Suriname or even further globally, Wilson responded, “We are looking at acquisitions in different jurisdictions throughout the world, with a focus on the Americas. However if the right project came along, we would have an interest to explore opportunities in any part of the world.”

As China is seen to be relaxing regulatory measures, creating a more encouraging environment for exploration companies to enter the market, the wonder is whether or not this will lead mining companies into expanding their operations. Expressing his thoughts on the matter Turner implied that, “China certainly is thought to have large gold reserves, though I imagine the big mining companies will remain reluctant to commit there and will concentrate on more established foreign countries for expansion, until they are convinced it is going to be a success.”

Commenting on the latest pattern of mergers and acquisitions in the mining sector, Michael Turner said, “the takeover of Placer Dome by Barrick is likely to lead to a new wave of mergers and acquisitions. Many companies seem happier expanding in this way than through new mining development. There is also some desire to be the, “no. 1 producer.”

Offering further insight on this side of the world, Cathy Fong, Vice President of Corporate Development for Silvercorp Metals Inc. (TSX: SVM) commented that overall, “we see that China is very progressive in their business dealings and that their policy is very pro-business. That is so inviting for foreign companies right now and we would definitely like to expand, not only in silver mines but in other mining opportunities as well.” When asked how the company views their involvement in the country, Fong replied, “our focus in China involves knowing the culture (including the business culture) and understanding the geology and how to operate in the country as a mining producer.”

Beyond the issue of mergers and acquisitions however, lies the supply demand issue, which still remains questionable as to whether the supply issue will be helped along over the coming years. As we see the market shift, companies moving to consolidate, the question remains, does this mean they are doing anything about the supply problem and how will it be improved over the long term? With so many priorities on the agenda, in solving the puzzle to remain strong amidst global competition, just how much forethought is being put into the future of precious metals reserves?

Hunter Dickinson Inc., a private company located in Vancouver, B.C. Canada manages publicly traded companies in all phases of mineral and mining exploration around the world. When their Investor Relations division says that, “sure, a large-scale merger will likely deliver cost savings at the administrative level; however, on aggregate, these transactions do not replace one ounce of the rapidly depleting Reserves. Once the waves of post merger integration have smoothed, we will see a further increase in appetite amongst majors to earn into junior mining assets that have projects close to production.”

In terms of predicting when these new waves will settle, still remains to be seen. However, understanding where the first ripple picked up, could be an important factor to consider in looking ahead.

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