Dearth of mining deals rattles Bay Street – by Tim Kiladze and Jacqueline Nelson (Globe and Mail – May 26, 2012)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

 Behind closed doors, it is a scenario that bankers on Bay Street have feared for months, even years.

With the euro zone on the rocks and the U.S. economy struggling to regain top speed, the world’s two largest economic blocs are sputtering. What if China stumbled, too? Canada’s resource sector, with its reliance on rising world demand for oil, coal and metals, would look awfully precarious. That, in turn, would cause major fallout in the Canadian financial industry, which has itself become ever-more dependent on the activity that mining and energy firms generate.

This scene is now unfolding like a slow-motion train wreck. Mining, a business that has fed the Street with deal after deal for nearly a decade, suddenly accounts for barely a blip of total deal volumes. Few investors will go near junior oil and gas companies. The TSX Venture Exchange, the home of hundreds of burgeoning small-capitalization resource names, is down almost 50 per cent since peaking near the height of the commodity supercycle last March. Even big, global companies such as Teck Resources Inc. have been battered.

The downturn has been devastating for Canada’s resource-focused independent investment banks, a group of dealers that includes GMP Capital and Canaccord Financial Inc. Both firms posted $5-million losses last fall; since then, GMP has halted its dividend and Canaccord slipped back into the red. GMP, once a $28 stock, closed this week at $5.45, and is not that far above the lows it hit during the 2008 financial crisis. Their smaller peers, boutique investment banks, are said to be in worse shape, and even the resource groups of the big bank-owned investment dealers are reeling.

As one banker put it: “No one’s having any fun.”

What has transpired over the past year is a reversal from Bay Street’s boom in the decade prior. The ever-expanding commodity cycle fundamentally changed Canada’s financial industry, forcing firms in Toronto, Calgary and Vancouver to hire armies of resource-focused bankers, lawyers and analysts. The many deals these firms shepherded even gave a modest boost to Canada’s influence in global finance.

Now, not only have deal volumes plummeted, but firms are actually losing money. About 40 per cent of institutional investment banks were in the red in 2011, according to the Investment Industry Association of Canada, and the group said early indications this year suggest the situation may now be even worse.

“You could make the argument that this period we’ve been in for the independent brokers is worse than 2008,” said Sumit Malhotra, an analyst with Macquarie Securities. “As terrible and sharp as 2008 was, it really only consisted of two cataclysmic quarters. We’ve now had more than a full year of slow bleed when it comes to the profitability of these companies, especially in mining and, to a lesser extent, energy.”

To understand just how slow it has been, of the 30 biggest equity financings this year, only three have been for mining companies, despite this sector comprising about 20 per cent of the S&P/TSX composite index.

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