EY - Gravel pit

Q1 2015

Canadian Mining Eye

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EY - Canadian Mining Eye index and peers, last 12 months

The Canadian Mining Eye Index fell 1% in Q1 2015, compared to a 12% decline in Q4 2014. The index underperformed the S&P/TSX Composite Index, which was up 2% in Q1 2015. The London Metal Exchange Index (LMEX) decreased 6% during the quarter, while EY’s AIM-based Mining Eye gained 5% over Q1 2015, the first quarterly gain since Q4 2013.1

Canadian equities are facing downward pressure due to an improving US dollar, which is continuing to suppress commodity prices, particularly precious metals.

The global macroeconomic backdrop remains weak with mixed global economic indicators and risk- averse investors, while lower oil prices augmented mining companies’ efforts in reducing costs. Base metals have experienced negative returns since the beginning of the year due to weak Chinese demand.

  • The price of gold increased 0.1% during Q1 2015. Although gold started strong, it came under pressure in March due to the release of robust US payroll data, which triggered speculation of an increase in the Federal Reserve rate.
  • Q1 2015 was a little bumpy for silver, which reached a low of US$15.47 per ounce (11 March 2015) and a high of US $18.31 (22 January 2015) in the same quarter.
  • Copper declined by approximately 5% in Q1 2015 due to a slump in the Chinese property market.
  • The iron ore price index was down by 28% to US$51.40 in Q1 2015, the lowest since 2005. It is unlikely to rebound in the near term because of China’s tax subsidy to domestic iron ore producers as well as the oversupplied market.

EY - Canadian Mining Eye index, gold, copper and LME index over Q1 2015

Majors witnessed an increase of 4% in Q1 2015 compared to a 9% decrease in Q4 2014. Companies are still aiming to reduce capex, lower costs and strengthen their balance sheets in order to survive amid falling commodity prices. Majors reported decreased financial performance with mixed production performance for Q4 2014 and are focusing on growing free cash flow through disciplined capital allocation and operational excellence.

Cash and MV analysis

At 31 March 2015, 42% of the 1,431 mining and metals companies listed on the TSX and TSXV had market capitalization greater than CDN$5 million. These companies on an aggregate basis, held approximately 5.8% higher cash balance year-over-year. On the other hand, companies with market cap of CDN$5 million or less, on an aggregate basis, held approximately 6.7% higher cash balance year-over-year. Overall, mining companies continue to work through the downturn in the sector and are adapting to cash preservation.

EY - Canadian Mining Eye - Cash and MV analysis - Market capitalization greater than CDN$5 million
EY - Canadian Mining Eye - Cash and MV analysis - Market capitalization of CDN$5 million or less

Mergers and acquisitions

The valuation differential between precious metal producers and developers helped to stimulate M&A activity in the first quarter of 2015, as acquirers focused on targets that complemented their existing portfolios. As well, with many organic growth projects unable to meet necessary rates of return, companies with healthy balance sheets are looking at M&A to maintain or grow their reserves and resources. Meanwhile, companies with levered balance sheets who have an opportunity to enhance their portfolios are targeting asset sales to cut debt and refocus on core operations.

Sharing infrastructure with neighboring mines to cut costs and entering into joint ventures have increased recently. Low oil and commodity prices may drive M&A activity to some extent this year. The lack of capital available to juniors could force a dramatic industry consolidation, and distressed and prudent companies will seek out “mergers of equals.”

Altius Minerals announced its plan to acquire Callinan Royalties for a total consideration of CDN$105 million. Altius will acquire each Callinan share in exchange for 0.163 Altius shares and CDN$0.203 in cash, thus paying approximately 9% of the consideration in cash. The consideration represents a 28% premium as of 4 March 2015. Existing Altius shareholders and Callinan shareholders will own approximately 81% and 19%, respectively, of the total outstanding common shares of Altius. The creation of a leading diversified royalty company was an important rationale for the combination.2

Timmins Gold entered into a definitive agreement to acquire Newstrike Capital for a total consideration of CDN$140 million. Timmins’ offer included an exchange of 0.9 of Timmins Gold common share and CDN$0.0001 in cash, which equaled a total consideration of CDN$1.15 per Newstrike share. Timmins will add Newstrike’s Ana Paula project to its gold portfolio. The combined company will be owned approximately 63% by Timmins Gold shareholders and 37% by Newstrike shareholders.3 Analysts believe that Timmins’ acquisition of Newstrike, along with its recent acquisition of the Caballo Blanco gold project, would expand Timmins’ footprint in Mexico and would virtually triple its production to 350koz by 2019.4

Tahoe Resources, a TSX- and NYSE-listed company engaged in the production of precious metals, announced its interest to acquire Rio Alto Mining, a Vancouver-based international gold producer, for CDN$4.00 per share. The total consideration for the transaction was CDN$1.4 billion, which included an exchange of 0.227 Tahoe common shares and CDN$0.001 in cash per Rio Alto share. Post completion of the transaction, existing Tahoe and Rio Alto shareholders will own approximately 65% and 35% of the combined company, respectively. The combined company is expected to become a leading intermediate precious metal producer with significant low-cost production and high growth driven by the completion of the Escobal mine expansion from 3,500 to 4,500 tpd.5 Analysts observed that the transaction provided Tahoe with growth while maintaining its cost profile.6

Centerra Gold announced the formation of a 50-50 joint venture partnership with Premier Gold Mines for the joint ownership and development of Premier’s Trans-Canada Property including the Hardrock Gold Project located in the Geraldton-Beardmore Greenstone Belt in Ontario. This joint venture will complement Centerra’s growth potential through Trans-Canada Property, including the Gatsuurt Project in Mongolia and the Öksu╠łt Project in Turkey. Analysts believe that Centerra is in a strong liquidity position to simultaneously develop all three projects, which all have upside potential, and consider this investment as NAV accretive.7 Partnership with Centerra would help Premier realize its objective of becoming a prominent North American-focused gold producer.8

Goldcorp completed the acquisition of Probe Mines for a total consideration of approximately CDN$526 million. The transaction involved an exchange of 0.1755 shares of Goldcorp for every share of Probe Mines along with cash of CDN$0.001; and 0.3333 shares of New Probe, a newly incorporated company containing Probe’s mineral properties in the Ring of Fire in Northern Ontario. According to Goldcorp’s management, this acquisition is consistent with the company’s long-term strategy of enhancing its portfolio by providing a new source of low-cost, high-quality gold production.9 Analysts also believe that the acquisition of Probe is consistent with Goldcorp’s ongoing portfolio optimization strategy, particularly with regard to the geographic synergies which are likely to be realized with Goldcorp’s Porcupine mine.10

Goldcorp announced the sale of its 100% interest in the Wharf mine, an operational gold mine located near South Dakota, to Coeur Mining for a total consideration of CDN$105 million in cash. The company expects that the divestiture will unlock additional value for Goldcorp shareholders and help it focus on its core assets in its portfolio.11

Magris Resources, in partnership with CEF Holdings and Temasek, completed the acquisition of Niobec, an underground niobium mine, from IAMGOLD for a total cash consideration of US$530 million. National Bank of Canada and Scotiabank committed and underwrote a US$250 million amortizing term loan and a US$25 million revolving credit facility to fund the transaction.12 IAMGOLD’s current cash position, including the sale proceeds and gold bullion, is approximately US$800 million, which exceeded the company’s US$650 million unsecured notes due in October 2020.13


During the period of higher gold prices in January, there was a surge in bought-deal financing activity.

Silver Wheaton closed its previously announced bought-deal common share financing by selling 38.93 million shares at US$20.55 per share for gross proceeds of approximately US$800 million. The company will use the net proceeds to fund its acquisition of an additional 25% gold stream from Vale SA’s Salobo Mine located in Brazil. The offering was made through a syndicate of 16 underwriters led by Scotiabank.14

Mountain Province Diamonds announced a CDN$95 million rights offering to fund a US$75 million cost overrun facility, the arrangement of which is a prerequisite condition to a drawdown of the previously announced US$370m term loan facility. The offering would increase outstanding shares by approximately 17.54%.15

Yamana Gold closed its previously announced offering of 56.465 million common shares. Shares were issued at CDN$5.30 per share, for aggregate gross proceeds of approximately CDN$299 million.16

Osisko Gold Royalties entered into an agreement with a syndicate of underwriters for a private placement of 10.96 million special warrants at CDN$18.25 per warrant, for aggregate gross proceeds of CDN$200 million. Each special warrant entitles the subscriber to one common share and an 84-month warrant to purchase one-half common share at CDN$36.50 per common share. The company intends to use the net proceeds from the offering for working capital and general corporate purposes.17

Detour Gold completed its previously announced public offering of 12.65 million common shares in order to raise approximately CDN$162 million. Of the total proceeds, US$124 million will be used to repay debts under its senior secured revolving credit facility and US$94 million will be used for its mobile fleet finance lease arrangement.18

Romarco Minerals entered into an agreement with a syndicate of underwriters led by BMO Capital and Cormark Securities, for a private placement of 517.3 common shares at CDN$0.58 per share, in order to raise CDN$300 million. The company will use the net proceeds from the offering, along with the project financing facility, for working capital and general purposes.19


Although most of the players are working on controlling expenses, declining grades will put continued pressure on costs. In order to shore up capital, mining companies are putting efforts into streamlining inventory, optimizing working capital, divesting non-core assets and strengthening their focus on portfolio management. It’s likely that mining companies will cut down on their capex in order to protect dividends even at current lower prices in FY 2015.

Analysts expect the US to recover with below-trend growth, China to stabilize, Europe to downgrade and Japan to remain high risk in the first half of FY 2015. The US Federal Reserve is expected to raise rates around mid-2015, with a below-trend growth outlook and a higher US dollar. Also, the price of gold is expected to be under pressure with the strengthening US dollar and a low-inflation outlook in the US. The outlook for China, the world’s leading consumer of metals, is forecast to improve, with expected stimulus from infrastructure spending, greater capacity utilization and more favorable monetary policy.

Various factors — including falling commodity prices, substantial production increases by the big miners, stretched balance sheets and exploration shutdown — are challenging miners. Also, falling commodity prices and rising bond yields will push investors to the big miners in the short term.

1. EY Mining Eye Q1 2015 www.ey.com/GL/en/Industries/Mining---Metals/EY-mining-eye-q1-2015-overview

2.“Altius and Callinan combination to create a Diversified Mining royalty company leader,” Altius Minerals press release, 5 March 2015.

3.“Timmins Gold to combine with Newstrike Capital to create an emerging, Mexican-focused intermediate Gold producer,” Timmins Gold press release, 17 February 2015.

4.Numis, equity research note on Timmins Gold, 24 February 2015.

5.“Tahoe Resources and Rio Alto mining combine creating a leading intermediate precious metals producer,” Tahoe Resources press release, 17 February 2015.

6.Dundee Capital Markets, equity research note on Tahoe Resources, 10 February 2015.

7.HSBC, equity research note on Centerra Gold, 12 February 2015.

8.“Centerra Gold and Premier Gold to jointly advance the Trans-Canada property,” Centerra Gold press release, 5 February 2015.

9.“Goldcorp expands Porcupine district with acquisition of Probe Mines Limited,” Goldcorp press release, 19 January 2015.

10.UBS, equity note on Goldcorp, 19 January 2015.

11.“Goldcorp announces sale of Wharf mine,” Goldcorp press release, 12 January 2015.

12.“Magris Resources to Acquire Niobec from IAMGOLD,” Magris press release, 3 October 2014.

13.“IAMGOLD completes Sale Of Niobec for a total consideration of US$530 million,” IAMGOLD press release, 22 January 2015.

14.“Silver Wheaton announces closing of US$800 million bought-deal common share financing,” Silver Wheaton press release, 17 March 2015.

15.“Mountain Province Diamonds Announces C$95M Rights Offering,” Mountain Province Diamond press release, 18 February 2015.

16.“Yamana announces closing of c$299.3 million equity financing, including full over-allotment option exercise,” Yamana Gold press release, 3 February 2015.

17.“Osisko announces $200 million bought deal private placement,” Osisko Gold press release, 21 January 2015.

18.“Detour Gold Completes C$162 Million Bought Deal Offering,” Detour Gold press release, 10 February 2015.

19.“Romarco Minerals announces C$300 million bought deal financing,” Romarco press release, 21 January 2015.

EY - Canadian Mining Eye index and peers, last 12 months×
EY - Canadian Mining Eye index, gold, copper and LME index over Q1 2015×
EY - Canadian Mining Eye - Cash and MV analysis - Market capitalization greater than CDN$5 million×
EY - Canadian Mining Eye - Cash and MV analysis - Market capitalization of CDN$5 million or less×