“No more Martini lunches”; Mining Woes Snag Financial Firms; Far from any mine shaft, the legions of bankers, consultants and lawyers who benefited from a decadelong commodities boom are now preparing to retrench as the market weakens.

Updated May 1, 2013, 8:08 p.m. ET

Mining Woes Snag Financial Firms



TORONTO—Far from any mine shaft, the legions of bankers, consultants and lawyers who benefited from a decadelong commodities boom are now preparing to retrench as the market weakens. Global mining capitals such as Toronto, Johannesburg and London all flourished amid lofty prices in recent years for everything from gold and copper to potash. Mining companies have tended to flock to a handful of cities to list their shares, set up headquarters and raise cash.

But over the past year, the sector has been hit by a triple whammy of falling prices, still-rising costs and waning investor interest. Most mined commodities have fallen sharply since their 2011 highs. Gold is 23% off its highs, and copper closed at an 18-month low Wednesday. Gold has fallen 14% since the start of this year to $1,446 a troy ounce. As a result, some of the world’s biggest miners are slashing outlays, shedding assets they bought at the top of the market just a few years ago, and shaking up management teams that spearheaded several years’ of frenetic deal making and fundraising. That is having a spillover effect on the industries servicing miners. Bankers and brokers involved in the sector are starting to see revenue dry up, and some are already shedding staff.At Royal Bank of CanadaRY.T -0.38% the largest bank in Canada by assets, capital-markets revenue fell by 16% year-on-year in the first quarter, with investment banking co-head Doug McGregor singling out the mining sector.

“It’s a little quiet in Canada,” he said on a conference call.

Bank of Montreal BMO -1.37% recently laid off four senior bankers who serviced the potash industry, amid a broader mining-sector streamlining at the bank. A host of smaller brokers in Toronto have let go of mining analysts.

Commonwealth Bank of AustraliaCBA.AU -0.67% estimates the mining slowdown will shave as much as 9% off net profit at Australia’s banks this fiscal year.

Commodities prices are volatile, and the industries that service miners are used to ups and downs. During the last big decline, in 2008 and 2009, miners cut exploration budgets by 40%. The next year they increased them by 40% as conditions improved, according to researcher Metals Economics Group.

So far, 2013 isn’t looking pretty. Year-to-date, there have been just 442 mining deals globally, valued at $20.5 billion, according to Dealogic. That compares with 641 deals worth $75 billion in the same period last year.

For the first time in a decade, Toronto this year didn’t host a single mining initial public offering in the first quarter—there were 12 IPOs in the first quarter last year, according to PricewaterhouseCoopers. There has been just one bond issue from a Canadian miner so far in 2013, compared with six in the same period last year, according to Dealogic.

Toronto is especially vulnerable to the downturn. Mining firms make up almost a fifth of the local exchange’s market capitalization, and the city has become a magnet for smaller companies, which can be more-acutely affected by the volatility of the commodities cycle.

The city weathered a reputational hit more than a decade ago after the implosion of Bre-X Minerals Ltd., a Canadian-listed mining giant plagued by fraud at its Indonesian gold mine. And most of Canada’s large mining companies have been picked off over the years by global giants.

Still, Toronto has maintained its position as a hub for fundraising by mid- and small-cap companies. That makes mining a rich vein for the city’s large banks, smaller investment boutiques and brokerages when times are good—but a liability when they aren’t.

BMO -1.37% Last week, Toronto based broker Fraser Mackenzie Holdings Inc. closed its doors, citing in part the mining slowdown. “If you are a small independent dealer and your primary focus is resources, or has been, then the prospects of making revenue are extremely limited,” Mark Polubiec, Fraser Mackenzie’s chief executive, said. Fraser Mackenzie generated about 60% of its profit from the mining sector.

At Toronto-based securities firm Loewen, Ondaatje, McCutcheon Ltd., about half the 40-year-old company’s business derives from raising cash for small miners and trading their securities. The closely held company recently stopped trading shares for the general public as one means to save costs amid the downturn. “Profits have been elusive,” said Chief Executive Garrett Herman.

Law firms also are girding for leaner times. “We’d be foolish to pretend that everything was going on as before,” said Peter Villani, a lawyer who works in the global mining group of Toronto-based Fasken Martineau. His firm hasn’t cut staff yet, but its bankruptcy specialist recently briefed Mr. Villani and his mining-focused colleagues about a potential slew of insolvencies, should commodities prices continue to sink.

Two years ago, Ray Préfontaine, chief financial officer of Toronto-listed King’s Bay Gold Corp., KBG.V -33.33% went to the Toronto’s Prospectors & Developers Association of Canada convention—one of the world’s largest mining conferences—feeling good about prospects for his company. At this year’s event last month, he was looking to sell the Ontario-based gold miner after financing dried up.

King’s Bay last year had 200 brochures printed for the conference. This year, it made do with 50. To save money, Mr. Préfontaine said he shared a hotel room with a colleague. “There is just less money out there now.”

Meanwhile, King’s Bay has cut costs. The miner typically uses two or three outside engineering or geology consultants a year. This year, it won’t hire any. It also has dropped its external investor-relations firm.

On the last Friday of every month, many of Toronto’s mining executives, bankers and lawyers gather at downtown bar The Jason George. The evenings are increasingly demur events.

“We haven’t seen champagne popped in some time,” says Lisa Kitagawa, the bar’s co-owner. “No more Martini lunches.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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