By Brad Schruder, Director, Foreign Exchange Sales, BMO Capital Markets

The bullish start to 2012 has done little to assuage investor concerns that dominated the latter half of 2011.  The violent shifts from ebullient optimism to pervasive pessimism have forced even the most experienced management teams down paths fraught with sub-optimal solutions that can end in outright paralysis.  In a society dominated by an insatiable demand for immediate gratification, the most successful firms maintain their focus on the big picture without sacrificing attention to detail.

Perhaps no other industry exemplifies this idiom better than the metals and mining sector.  The quest for success in this global industry should not be pursued by the faint of heart; or those that view business through a short-term lens.  Profitable exploration endeavours can remain in the embryonic stage for years before they bear fruit, but that doesn’t mean mining professionals remain idle ahead of production.  On the contrary, projects with the greatest scope require the most comprehensive foundations.  Partnering with an experienced banking team is essential in this regard.

While BMO Capital Markets is a recognized leader for investment-banking expertise in the mining industry, few outside the market know that BMO Financial Group supports mining firms through all stages of a company’s life cycle: from feasibility studies to full-fledged production.

Based in Vancouver, BMO’s Public Companies group has entrenched itself with junior mining firms by offering a full suite of commercial banking products with a focus on treasury management.  BMO Capital Markets Foreign Exchange has supported client’s M&A activity, working capital needs, and converted Canadian-dollar denominated debt and equity capital for projects in Asia, Africa, and throughout South America.  The strong partnership between the Public Companies group and BMO Capital MarketsFX has facilitated over a billion dollars in FX transactions on behalf of this niche market within the last 24 months.

Navigating the myriad of pitfalls that threaten to scuttle even soundest M&A deal is a challenge best-met with an experienced leadership team.  Yet despite their best efforts, many firms fail to accurately identify currency exposure as a significant variant to their cross-border proposal.  BMO Capital Markets FX has mitigated currency risk through various option structures that provide firms with 100% price-protection without sacrificing flexibility.  One product that has garnered strong interest is the Deal Contingent Forward.

A Deal Contingent Forward is a contractual agreement to enter into a foreign exchange forward contract (the “forward contract”) that is contingent upon an underlying event occurring: specifically, an M&A transaction.  If the contingent event occurs (ie: the deal closes), the forward contract is active.  If the event does not occur, then the forward contract is not active and the client can walk away from the transaction at no cost.

The utility value of such a structure to the client cannot be understated.  The Deal Contingent Forward is typically less-expensive than the break-even of a plain vanilla option.  This hedging product can provide clients with a competitive advantage when embattled in a bidding situation, and perhaps most importantly, the client secures a hedge for an unknown and potentially volatile cost during the closing process.

BMO Capital Markets FX support extends beyond firms that secure hedging facilities with the Bank.

Junior mining firms face a marathon of feasibility studies, investor roadshows, and resource allocation decisions.  But in many cases, before hard-fought capital can be put to productive use, it must be converted into the appropriate operating currency.  When placed in the wrong hands, nine-figure foreign exchange trades can wreak havoc in the spot market.

The conversion of debt and equity capital is most successful when the trade remains beneath the market’s collective radar.  In other words, when it comes to large-volume transactions, stealth is of the essence.

BMO Capital MarketsFX specializes in the execution of large-volume trades with minimal market impact.  BMO maintains strategic relationships with an extensive counterparty network.  The primary benefit of the BMO relationship depth with global financial institutions is the access to deep pools of liquidity that can operate outside the scope of the competition.  This strategic advantage is one of the reasons BMO Capital Markets FX was recently named Best Bank for the Canadian dollar by FX Week for the second time in three years.

Although prices for the commodities they produce experience bouts of volatility, firms in the mining industry succeed when they hold a steady strategy that differentiates the forest from the trees.  The pulse of the global economy may have slowed in the last six months, but the change of pace is part of a natural ebb and flow exhibited by a market-based economy.

The economic and social development of huge markets in Brazil, China, and India are just one of the reasons the long-term demand for base and precious metals will not abate in the coming decades.  Canada is a leader in the mining industry thanks to a knowledgeable labour force, a domestic market that supports product and process innovation, and firms in the financial industry such as BMO Financial Group that understand the business challenges facing junior and established miners.

Clients of BMO Capital MarketsFX count on us to manage the details of their currency needs so they can remain focused on the big picture.
To learn how BMO Capital Markets can help you achieve your ambitions, email us at [email protected], or visit www.bmocm.com/fx for a list of contacts in your area.

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