TORONTO (miningweekly.com) – With metals prices expected to firm significantly over the next year, mining companies will see their cash balances rise, which could lead to increased spending on expansions and merger and acquisition (M&A) activity, HSBC Securities analyst Andrew Keen said on Sunday.

“Although we realise that markets have recovered, I don't think we have thought through the implications,” he told delegates at the Prospectors and Developers Association of Canada (PDAC) convention in Toronto.

“If you put a revival in commodity prices alongside a structural reduction in costs and a repaired industry balance sheet, you get a wall of cash coming through.”

HSBC is “pretty bullish” about the fundamentals for commodities and expects metals demand will increase by an average of 6,6% this year.

Keen said that it would be reasonable to assume that markets are about halfway through the downturn, which suggests the possibility of seeing “radically” better fundamentals at some point to 2011.

The medium- to long-term outlook is “undebatably good”, he added.

The industry as a whole is entering 2010 with significantly improved balance sheets, and firms responded to the economic downturn with aggressive cost cutting measures.

HSBC sees a resumption of M&A activity as highly likely, particularly at the junior end of the industry, Keen said.

In a report published to coincide with the PDAC convention, PricewaterhouseCoopers (PwC) said that it also expects a "blockbuster year" for M&A in the mining sector, as capital from recent financings is deployed ahead of expectations of rising prices.

PwC is expecting a steep uptick in deal volumes, with a "tepid" resurgence of deals worth more than $500-million.

The PDAC conference is expected to draw more than 20 000 people before it wraps on Wednesday.

A key theme in conversations and presentations on Sunday was, unsurprisingly, how sharply different the outlook for the industry and commodity markets are compared with the gloom evident this time last year.