There wasn’t much stock-picking talent needed to play the mining sector in 2006. A seemingly never-ending rally in metals prices lifted all but a few names in the sector. With inventories low, nearly every related commodity price was on the rise.

The unprecedented confluence of events spurred a record wave of consolidation in the industry, including the biggest takeover battle in mining history that saw global giants CVRD, Xstrata and Phelps Dodge duke it out for control of Inco Ltd. and Falconbridge Inc.

While most industry analysts and fund managers don’t expect a repeat of the 2006 frenzied activity for the coming year, they believe the mining sector will replicate many of the same trends and remain a solid place to invest.

“I think the first half of ’07 is going to be a big dating game,” said Justin Reid, an analyst with Sprott Securities in Toronto.

More than $157-million (U.S.) worth of takeovers and merger proposals were tabled in the mining sector this year, according to data compiled by Bloomberg. Soaring metal prices have created a dearth of firms swimming in cash.

“That’s the trend — lots of cash-flow, lots of acquisitions,” said Mr. Reid.

Those who don’t buy back shares, pay out dividends or make deals themselves will be targets, he said.

Barry Allan, an analyst with Research Capital in Toronto, said 2007 “is going to continue to be a mining market.”

Even if commodity prices decline, as many expect they will, Mr. Allan believes the mining industry will continue to offer good investment opportunities.

“Where we’ll be looking is at companies where there is going to be value creation. We’re not counting on commodity prices, we’re counting on companies to unlock some value in some way, which means finding new assets or developing new assets,” he said.

Particularly vulnerable to a pullback are copper prices, according to most analysts and resource fund managers. The orange metal has been trading well above a lofty $3.00 (U.S.) a pound, but copper supplies are not as tight as some metals such as nickel or zinc.

Copper could also prove more vulnerable than others to a downturn in the housing market, given that it is a key component in building supplies such as wiring and pipes.

That doesn’t mean, however, that copper producers won’t continue to be awash in profit.

“For almost every commodity, the outlook is pretty strong. But for almost every commodity we’re at or close to historical highs for prices. If copper goes from $3 a pound to $2 it’s going to look ugly for the year, but $2 is a fantastic price and people can make a lot of money,” said David Whetham of Scotia Cassels, who manages the Scotia Resource Fund. The manager likes First Quantum Minerals Ltd. for those looking for exposure to copper.

“It has become consensus thinking now that copper is the one with potentially the most price risk. I’m not, however, worried about the fundamentals of copper,” Mr. Allan said.

A significant pullback in copper stocks will make companies that are developing projects, such as Equinox Minerals Ltd. and Chariot Resources Inc., vulnerable to a bid, said Mr. Reid.

Like many observers, Mr. Allan remains particularly bullish on nickel, citing frequent delays and cost overruns at major new mines such as BHP Billiton’s Ravensthorpe in Australia and CVRD Inco’s Goro project in New Caledonia.

But with the disappearance of stalwart nickel names such as Inco and Falconbridge, there are fewer and fewer ways to gain exposure to the metal through stocks.

Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier in Toronto says LionOre Mining International Ltd. has now become the default nickel choice for many investors.

“LionOre is the one that everyone is gravitating to,” he said.

Mr. Whetham agrees: “The best bet would be LionOre because they’re a fairly significant producer and they’re starting to show some good results and they’ve got a pretty good growth profile. That may be the only way to play it.”

There are few other actual nickel producers. Rio Narcea Gold Mines Ltd. is producing nickel at its Aquablanca mine in southern Spain and FNX Mining Co. Inc. is also in production at its McCreedy West property in Sudbury.

Companies such as Dynatec Corp., Skye Resources Inc., Ursa Major Minerals Inc., Mustang Minerals Corp. and Liberty Mines Inc. are all trying to get nickel projects into production.

Mr. Allan said small nickel companies have the potential to win significant stock price gains if they can begin producing at reasonable costs, because they will benefit from a strong nickel price without upsetting world supply of the metal used to make stainless steel. Messrs. Allan and Nakamoto both think zinc is another commodity to watch. The price of the metal used to galvanize steel has soared above $2 (U.S.) a pound on dwindling supplies.

Mr. Nakamoto says industry giant Teck Cominco Ltd. may be the best way to play zinc and other commodities. Teck’s mines produce zinc, coal, copper, gold, silver and other specialty metals and the company is sitting on about $3.8-billion (Canadian) in cash.

“I think of Teck as a well-run resource mutual fund with a strong balance sheet,” Mr. Nakamoto said.

Other companies with zinc assets include HudBay Minerals Inc. of Winnipeg and Vancouver-based Lundin Mining Corp., which recently completed a merger with Eurozinc Mining Corp.

The gold sector was ripe with consolidation in 2006 as Goldcorp Inc. took over Glamis Gold Ltd. to form the world’s third-largest gold producer; Kinross Gold Corp. bid for Bema Gold Corp.; and Iamgold bought Cambior Inc.

With gold still trading above $600 (U.S.) an ounce, Mr. Allan expects more M&A activity. But he’s also hoping for significant developments on the exploration side. Companies have been sinking cash into exploration and he is betting on a major discovery.

Aurelian Resources Inc., whose shares have surged more than 6,000 per cent in a year on the back of promising drilling results at a project in Ecuador, has been one of the few gold stocks to capture investors’ attention.

“I’m expecting to see some more of that sizzle in 2007,” Mr. Allan said.

He’s also keen on gold firms developing assets such as Cumberland Resources Ltd., Metallica Resources Inc. and Western Goldfields Inc. The shooting star of 2006 was the uranium sector, as prices for the radioactive metal used to fuel nuclear reactors more than doubled, to $63 (U.S.) a pound.

The price spike was prompted by supply squeeze concerns exacerbated by a flood and production delay at industry giant Cameco Inc.’s Cigar Lake mine. Mr. Reid, who covers the sector for Sprott, expects the deal-making that has defined other mining sectors to kick into overdrive in uranium in 2007.

Names to watch include SXR Uranium One Inc., Paladin Resources Ltd. and Denison Mines Corp., a recently bulked-up producer that just pulled the trigger on another acquisition.

The trick in playing the mining sector in 2007, Mr. Nakamoto said, will be “deciding who is going to be the hunter and who is going to be the prey.”