Canada's metals and mining industry has been on a wild ride these past three years, going from one crisis to the next, what with capacity contraints between 2006 and 2008 and a credit crunch during this past year.

But the S&P/TSX Composite index, largely on the strength of a resurgent resource sector, has climbed from 7,500 in March to 11,500 this week, a move prompted by changing sentiment, cross-border deals - a number of them Chinese-led - and investors dipping back into the market.

"The focus this year has been on cost containment, consolidation and access to capital, and what we're seeing now are significantly strong signals that sentiment is changing," said Tom Whelan, leader of Ernst & Young LLP's (EYG.XX) Canadian mining practice. "Is the buying justified? Absolutely. Is there a sentimental aspect to this? On certain, individual stocks, yes, but the lower prices have created a real buying opportunity for investors with longer-term investment horizons."

He said lower asset prices and a thirst for alternative sources of capital have paved the way for a number of strategic acquisitions. A new class of investor - largely Asian mining and metals companies - has primarily been seizing these opportunities.

M&A On Rise, Canadian Cos Cross-Border Targets

One only has to look at the recent cross-border deals struck by Consolidated Thompson Iron Ore Ltd. (CLM.T), Teck Resources Ltd. (TCK) and privately held Royal Nickel Corp. as evidence that Chinese companies are using their currency to take strategic cross-border stakes, in large part to secure access to future inventory.

Ernst & Young released a report in September outlining the risks still inherent in the resource sector. While rising commodity prices are taking the edge off the need for severe cost containment, there's still the prospect of industry consolidation, as the haves - those with healthy treasuries - go hunting for assets owned by the have-nots - companies still reeling from the credit crunch.

This M&A cycle is in large part going to be fueled by another risk that E&Y has highlighted: pipeline shrinkage or the glaring need for new inventory five or six years down the road.

While some miners, such as Barrick Gold Corp. (ABX) and Yamana Gold Inc. (AUY), have healthy pipelines of in-house projects, it's no secret that the drought in risk capital has hurt exploration and production budgets; the knock-on effect will be felt for a number of years, Whelan says.

"Again, companies with large balance sheets and cash are well-positioned to take advantage," Whelan said. "We're expecting a definite increase in mergers over the next six to nine months; deals will become a matter of what level of risk, such as geopolitical risk, companies are willing to take on."

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-Brian Truscott, Dow Jones Newswires; 604-669-1595; brian.truscott@dowjones. com

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