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Rising up

I amwriting this week's blog on an auspicious date in the calendar. Thursday, May 5,is 40 days into Easter, and so Christians are celebrating Ascension Day. The datealso marks the halfway point of spring (in the northern hemisphere) and is EuropeDay, an annual celebration of peace and unity in Europe.

In Europe,the best months of the year lie immediately ahead of us, and May 5 was the datechosen by the Council of Europe, or CoE, 67 years ago to celebrate peace acrossthe continent after the ravages of World War II.

The CoEwas founded May 5, 1949, to promote democracy, human rights and economic development,and now has 47 member states. It is distinct from the 28-nation European Union,although the two organizations are easily confused because the EU adopted the originalCoE flag and shares its anthem. Moreover, no country has ever joined the EU withoutfirst belonging to the CoE.

Despitethis close relationship, the two organizations can't agree on a Europe Day. TheEU holds its own Europe Day four days later, on May 9, to commemorate the SchumanDeclaration on that date in 1950. This declaration proposed the pooling of the Frenchand West German coal and steel industries and led to the creation of the EuropeanCoal and Steel Community.

Thisyear, May 5 also commemorates the bodily ascension of Jesus Christ into heaven (basedon the period given in Acts 1). According to traditional methods of calculatingthe dates of Easter, Ascension Day can vary between April 30 and June 3, but isalways a Thursday.

AscensionDay is one of the ecumenical feasts and ranks with the celebrations of the Passion,Easter and Pentecost. As a result, it is a public holiday in many countries, includingAustria, Belgium, France and Sweden. Germany also holds its Fathers' Day on thesame date in a tradition that dates back to the 18th century when prizes were awardedto fathers after Ascension Day parades.

On aday associated with spring and rising, it is perhaps appropriate to remind ourselvesof the mining industry's upbeat performance so far this year.

Despitea sharp correction this week, metals prices overall have performed well in 2016,albeit from a very low base. The best performers have been iron ore (with the priceof 62% Fe material up 40%), gold (22% higher) and zinc (up almost 19%). Thermalcoal has risen nearly 10%, and nickel and aluminum by over 8%. Amongst the majormetals, copper has been the laggard, up barely 4% in the year so far.

As SNLMetals & Mining notes in the soon to be published "State of the Market"report for the March quarter, these rising metals prices have been reflected inincreased takeover activity. Although the number of reported M&A deals fellto 25 during the three months to end-March, from 39 in the December 2015 quarter,the value of these deals jumped more than a third from US$2.62 billion to US$3.53billion. As usual, gold transactions dominated, accounting for 47% of the totalvalue.

The toptwo deals came from nations that do not often feature at the top of the ranking— Japan and Sweden. The largest transaction (still pending) during the first threemonths of this year was Sumitomo MetalMining Co. Ltd.'s US$1.0billion offer for Freeport-McMoRanInc.'s 13% share of the Morencicopper mine in Arizona. The second-largest transaction was Boliden AB's US$712million offer in March for FirstQuantum Minerals Ltd.'s Kevitsanickel mine in Finland.

Unfortunately,financing has not kept pace. Funds raised during the first three months were a reportedUS$9.21 billion, down from the US$10.01 billion raised in the year-ago period andthe US$12.85 billion raised in the December quarter of 2015. Most of the shortfallwas in funds earmarked for Latin America.

The combinationof acquisition activity, restrained fundraising and low corporate earnings overthe past few years has resulted in sharply higher debt for the international miningindustry. SNL estimates that total industry debt was US$669 billion at the end of2015, with some 44% of this being held by Chinese mining companies. Although 4%lower than the peak in 2014, total debt is still 3x the level prevailing in 2006.

The 2,800listed mining companies in the SNL database had net debt of almost US$464 billionat the end of 2015. With earnings under pressure, leverage has soared. SNL estimatesthat corporate net debt as a multiple of EBITDA now exceeds 3.9x for iron ore producers(for whom it was only 1.2x in 2011) and, at the other end of the commodity range,a relatively respectable 1.9x for gold producers (compared with just 0.3x in 2011).Net debt is calculated as a company's interest-bearing liabilities minus cash andcash equivalents, and EBITDA is the company's earnings before interest, tax, depreciationand amortization.

Hardlysurprising then that SNL expects the mining industry's CapEx to fall for a fourthsuccessive year in 2016, to less than US$230 billion. Although there is growingoptimism in the mining industry, don't expect CapEx to spring back until next yearat the earliest.