With the disappearance of two of Canada’s largest mining companies to foreign ownership this past summer, investors could be forgiven for believing Canadian miners are losing their grip on the sector. But the evidence shows otherwise.

Those takeovers happened quickly. As recently as October 2005, Inco Ltd. was making a friendly offer to buy Falconbridge Ltd. for more than $12 billion to create the world’s largest nickel producer. That announcement came as no surprise to the stock market, which had been predicting this merger for years.

But as the deal became bogged down in concerns over nickel market dominance in Europe, the door was left wide open for Anglo-Swiss miner Xstrata PLC — which already held a 20% stake in Falconbridge — to develop a competing bid. Before Inco could say “world dominance,” Falconbridge shareholders had chosen a richer takeover offer from Xstrata valued at $23 billion for the 80% of the company Xstrata didn’t already own.

That left Inco vulnerable as well. Throughout the second quarter of 2006, it fended off advances from Vancouver-based rival Teck-Cominco Ltd. , then agreed to a friendly merger with U.S.-based Phelps Dodge Corp. through a share swap valued at $20.1 billion, even though Brazil’s Companhia Vale do Rio Doce had offered almost the same amount in cash.

Ultimately, Inco’s shareholders chose CVRD’s cash offer, valued at $86 a share, over Phelps Dodge’s paper. Left at the altar, Phelps Dodge found another partner in New Orleans-based Freeport-McMoran Copper & Gold Inc. The two have agreed to a $30.5-billion deal to create the world’s largest publicly traded copper company.

Meanwhile, CVRD has purchased 86.6% of Inco shares and is taking steps to acquire the rest. The combined company, based in Rio de Janeiro, will be the third-largest diversified miner in the world.

The frenzy of deal-making helped propel Canada to a new record for M&A activity in the second quarter, eclipsing a previous high set during the dot-com frenzy in 2000, according to Toronto-based investment banker Crosbie & Co. Inc. Mining and minerals was the most active sector, with 50 transactions or proposed transactions valued at $39.5 billion.

The result is Toronto is left with just three major mining head offices: Barrick Gold Corp. , the world’s largest gold producer; Goldcorp Inc. , which takes third spot for gold production by a North American firm; and Kinross Gold Corp.

Vancouver has only Teck-Cominco, a world leader in zinc and metallurgical coal production.

But patriotic investors shouldn’t despair that Canada is losing its place as a premier mining nation. More than 60% of the world’s public mining companies are listed on the TSX Group Inc. ’s equity exchanges; 40% of global equity capital for mining is raised here. In the first half of 2006, Toronto Stock Exchange and TSX Venture Exchange mining issuers raised US$6.6 billion.

Granted, some of those issuers are grassroots explorers that have little chance of developing into top-tier producers. But there is a growing list of mid-tier companies plotting to become dominant players on the world mining scene from their head offices in Toronto and Vancouver, and their mines in Europe, the Americas and Africa.

Already flush with cash from record-high metals prices, they now have even more access to capital generated by the mergers at senior levels. That kind of financial strength will help Canadian mid-tier firms fill the vacuum left by disappearing heavyweights such as Noranda Income Fund, Inco and Placer Dome Inc.

“The game is now with the ‘new’ mid-tier companies that have generated fat bottom lines,” say Phoenix, Ariz.-based mining analysts David Coffin and Eric Coffin in the November issue of their monthly newsletter, the Hard Rock Analyst Journal. “Grouping up companies at this level will either create enough mass to attract top- tier interest or leave them ready to jump on the next strong discovery that comes along.”

In the base metals sector, the group includes Toronto-based Aur Resources Inc., Breakwater Resources Ltd., FNX Mining Co. Inc., Inmet Mining Corp. and LionOre Mining International Ltd.

In Vancouver, First Quantum Minerals Ltd. and Lundin Mining Corp. dominate the sector, while Winnipeg is home to nickel miner HudBay Minerals Inc.

In the gold sector, the ranks of the mid-tier firms — which produce between 200,000 and one million ounces of gold — include Toronto-based Agnico Eagle Mines Ltd., Centerra Gold Inc., Iamgold Corp. , Meridian Gold Inc. and Yamana Gold Inc. As well, there is Bema Gold Corp. of Vancouver and Cambior Inc. of Longueuil, Que.

@page_break@A mid-tier is beginning to emerge in the diamond sector, a group that until recently has been entirely dominated by top-tier producers such as DeBeers Canada Inc., Rio Tinto PLC and BHP Billiton Ltd.

Toronto-based Aber Diamond Corp. , once a grassroots explorer, has grown into a diamond producer and retailer with a $2.5-billion market capitalization.

Smaller players include Saskatoon-based Shore Gold Inc. , currently in the midst of a $60-million pre-feasibility study of the Star diamond project it shares with Denver-based Newmont Mining Corp. in northern Saskatchewan.

In Vancouver, Stornoway Diamond Corp. has aggressive plans to be a consolidator in the diamond industry. The company recently purchased 75.6% of Ashton Mining of Canada Inc. , owner of the Foxtrot diamond property in north-central Quebec, and 93% of Toronto-based Contact Diamond Corp. Foxtrot is expected to become Canada’s next diamond producer and is undergoing a pre-feasibility study.

Some mid-tier firms are growing faster than others. Lundin is a new intermediate producer with a strong focus on zinc that was created out of the Lundin/Eurozinc Mining Corp. merger. The combined company has four mines in Europe and a fifth scheduled to open in Portugal next year.

“This initiative is part of our long-term strategy to create the world’s leading mining company,” Lundin president and CEO Karl-Axel Waplan boasted as the company was merging in October.

And, in early November, Cambior shareholders voted overwhelmingly to approve a takeover by Iamgold — a $1.04-billion transaction that will create the world’s tenth-largest gold-mining company.

Canada’s large gold producers are also growing by acquisition. Barrick is trying — so far, unsuccessfully — to wrest control of Vancouver-based NovaGold Resources Inc. , one of the fastest-growing juniors with its advanced gold-copper projects in British Columbia and Alaska.

Goldcorp has just merged with Glamis Gold Ltd. despite a court challenge by Robert McEwen, one of Goldcorp’s major shareholders. The $24.2-billion deal makes Goldcorp the world’s third-largest player in the gold industry, in terms of market cap.

And Kinross, the fourth-largest gold producer in North America, will swallow Bema. The $3.6-billion merger will boost Kinross’s reserves and resources to more than 50 million ounces.

A decade ago, half the intermediate base metals producers didn’t exist, Goldcorp was a junior with a few hundred ounces of production and Kinross was producing less than a million ounces a year.

They are examples of how small miners, through acquisition, can become top-tier producers. Canada continues to be the world’s best incubator for that kind of growth. IE