As the mining industry gingerly approaches what could be the start of a new, improved commodity cycle, analysts at the 85th Prospectors and Developers Association of Canada convention in Toronto warned companies to heed lessons from the last crash, lest they repeat their boom-cycle follies.

“This time isn’t different,” warned Mark Fellows, director at U.K.-based Skarn Associates, noting that the impact of the cyclical nature of the industry isn’t going away and miners are an industry of price-takers, having little direct influence over the value of the commodities they produce.

That’s why, he said, those preparing for a price upswing must be more prudent than before as global economic uncertainty persists, especially given that the last boom-bust cycle was particularly extreme.

“The cycle we’ve just been through was a real standout cycle in terms of the price rise we had and the trough we had afterwards,” he said.

Last year was a good one for the mining industry, a welcome relief from a years-long post-2008 recession trough, and 2017 is expected to be even better, according to the World Exploration Trends report from S&P Market Intelligence. Many analysts have observed the market appears to be at a turning point. 

When things were good during the last cycle, fear, greed, mania and groupthink permeated the industry, Fellows said. The building of mega-projects just before the 2008 financial crash led to bigger blowouts for miners, while a lack of quality discoveries meant that deposit sizes were maxed out at the expense of higher grades, leading to increased risk, he added.

“I think the best thing we can do as savvy investors or stakeholders in this industry is to be aware of the history and try to be amongst the smart five per cent in trying to navigate our way through that.”

Neil Adshead, an investment strategist at Sprott Asset Management told the PDAC conference that financiers and analysts share some of the blame for letting things get out of control.

At least $200 billion has been written off by the 20 largest mining companies since 2009, he said.  In order to prevent a catastrophic crash coming out of the newly emerging up cycle, Adshead called for the mineral and finance industry to price risks more accurately, conduct more in-depth and unbiased due diligence, as well as more research by buy-side analysts. 

Lawrence Smith, principal consultant at Lawrence, Devon, Smith and Associates added that miners need to think beyond the current cycle and toward an expected drop off in global resource supply due to a lack of exploration activity, if they want to get ahead of a mad dash into projects.

While the average up/down cycle lasts three to five years, a project cycle is 21 years, Smith said. He projects that the next cycle will include increasing pressure on the social licence side —especially from people who live far from the mine site and are not directly impacted by its construction.  

As the up cycle gets into full swing, Smith said, there will be a flurry of merger and acquisition activity, but he warns that miners should learn the lessons from the last cycle and resist the inclination to buy companies, instead focusing on buying projects and entering partnerships for joint development to spread the risk more evenly.

sfreeman@postmedia.com