A rush and a reckoning: Why writedowns are plaguing mining companies – by Pav Jordan, Tim Kiladze, Sean Silcoff (Globe and Mail – February 16, 2013)

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Speaking at a mining conference in Florida nearly two years ago, David Garofalo said the words nobody wanted to hear, and most simply chose not to say.

In the midst of a wave of mergers and takeovers, the chief executive officer of HudBay Minerals Inc. fired a warning shot for the whole industry. Taking the microphone in front of his peers, he reminded them that growth for growth’s sake was “very value destructive.” And he took aim at the popular notion that commodity prices were in a “supercycle,” less vulnerable to slowing economic growth.

“We are not in a supercycle. This is a cycle and when the central banks find religion on inflation again, the cycle will be over,” the 23-year industry veteran told peers, including top brass at the world’s largest mining firms.

Mr. Garofalo may as well have been the prophet of doom, his words heralding the start of a downturn in the global mining sector that has seen a litany of multibillion-dollar losses at top companies.

In the ensuing fallout, chief executives have been fired and project financing has dried up. Acquisitions that were hailed as game-changers are now derided as dumb mistakes. A once-robust pipeline of new projects is all of a sudden looking emaciated, one mining company after another puts its ambitious growth plans on hold.

The implications for Canada, home to more mining dollars than anywhere else in the world, are profound. The resource sector faces the threat of a culling of junior companies, the lifeblood of the industry and a key source of financial activity in Toronto, Vancouver and elsewhere.

The sudden turn of fortune is particularly shocking for mining, an industry where resources are constantly depleted. Typically, large mining companies scoop up smaller ones to replenish their reserves and enhance the growth story they tell investors. But recent takeover mistakes have made traditional buyers gun-shy.

This week two of Canada’s largest gold companies, Barrick Gold Corp. and Kinross Gold Corp. , announced a combined $7-billion worth of writedowns related to takeovers of gold and copper companies since the start of the decade.

That’s just the tip of the iceberg. In the past year, global mining companies have erased billions of dollars from the value of acquisitions they once announced to shareholders as “transformational” deals, certain to create new wealth for investors. Most striking was Rio Tinto PLC’s decision to slash $14-billion of value, mostly from aluminum assets acquired with the takeover of Montreal-based Alcan in 2007 in this country’s largest-ever takeover deal. And the list goes on.

“I’ve never seen anything like this,” Mr. Garofalo, said in an interview that revisited his comments this week.

WHAT WENT WRONG

For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/globe-investor/why-the-bad-big-bets-in-mining-are-bad-news-for-canadas-economy/article8767887/?ord=1