Monday, June 16, 2008

Mining Replaces Financial Services as Dominant Driver of M&A Activity

16 June 2008

Every now and then I link an article which highlights key points I've been making in this web log.

Today, my link is about the emergence of mining and minerals as the new focus of corporate merger & acquisition activity on Wall Street. This is quite certainly a watershed development in the materials sector.

The link is on the National Post, courtesy of Bloomberg Financial:

Mining replaces financial services as biggest driver of M&A

It is perhaps a refreshing change to see Wall Street refocusing its interest on things that are real (as opposed to the past two decades' increasing emphasis on every imaginable variety of financial engineering).

What is this trend about?

1. Wall Street has exhausted the game-playing that is possible with purely financial investment products due to the cratering of the mortgage-repackaging business.

2. In an era of
out-of-control monetary inflation, real things increase in value while inflating currencies mark the transition to a phase of more rapidly declining values.

3. Formerly isolated nations around the world, from Russia to Tanzania to Brazil and Argentina, and most obviously to the emerging Asian and Middle Eastern superpowers, are joining the international market economy, increasing real global wealth, and creating increased demand for raw materials. (For now, such isolated countries as Venezuela, Bolivia, Zimbabwe and North Korea will be sitting this trend out. It remains to be seen how such countries as Iran and even South Africa will play the new game going forward.)

4. We don't often think of it this way, but energy production from fossil fuels is also a type of mining activity, though in this case the target is geologically-sequestered formerly biological material. While most minerals remain in plentiful supply for now (we just have to build and operate enough mines to recover them), irreplaceable fossil fuels are being rapidly depleted - placing hydrocarbon energy sources at a premium.

5. While the energy industry is currently better-funded than the mineral sector, both will see large new inflows of capital in upcoming decades (the risk being that exhaustion of energy supplies puts a lid on global wealth creation, and ultimately on mineral production as well).

6. Consider the fact that in the still-vibrant mining and mineral-exploration business, most new deposits are not as concentrated as those we exploited in the past. The upshot is that more - increasingly expensive - energy will be required to produce the same quantity of raw materials. That, my friends, is working uphill against an exponentially-increasing gradient!

7. For now, the raw materials trend is positive, but we could at some point see an energy-cost induced global depression which would refocus our activities from continuous extraction of resources to learning how to live a much more resource-constrained, subsistence-based lifestyle.

8. My prediction is that the next trend to follow increased raw materials investment - perhaps still years if not decades away - will be what Buckminster Fuller referred to as ephemeralization: learning how to do more and more with less and less! Combined with nanotechnology, ephemeralization will likely shape the course of the human future for centuries and hopefully millennia to come. Remember - you read it here first!


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