Canadian Mining Eye
A turnaround story for the Canadian Mining Eye in Q1 2016
The Canadian Mining Eye index gained 26% during Q1 2016, as compared to a 2% gain in Q4 2015. The Canadian Mining Eye index significantly outperformed the S&P/TSX Composite index, which gained only 4% during the quarter. The London Metal Exchange index (LMEX) gained a modest 3% over the quarter, while EY’s AIM-based Mining Eye increased by 9% during Q1 2016. The S&P/TSX Composite Metals and Mining index witnessed a significant gain of 34% after a modest gain of 4% in Q4 2015. The index’s gains were mainly driven by an increase in commodity prices, largely on the back of a robust increase in gold prices.
Majors witnessed a robust gain of 21% in Q1 2016, compared with a slight gain of 1% in Q4 2015. Canadian mining equities showed strong signs of improvement during the first quarter of 2016 supported by a rebound in metal prices.
Improved gold and base metal prices appeared to generate much-needed positive momentum in the sector. Some companies witnessed more than a 70% increase in their share prices over the quarter, which is more than four times the gold price growth. Not surprisingly, the market is rewarding companies with favorable fundamentals, a strong balance sheet and operating leverage.
The strong growth of Canadian mining equities also indicates benefits from strategic initiatives carried out by the miners on non-core asset sales, aggressive cost control measures and a disciplined approach in reducing debt. We saw a mix of activities and progress among companies over the quarter boosted by strong metal prices.
While accessing capital remains a key priority, miners are looking for strategic partners and innovative financing solutions to fund growth. Furthermore, we saw some positive funding stories in the sector with longer-term investors recognizing strategic quality projects.
- Gold prices increased by 16% in Q1 2016, after a 5% decline in Q4 2015. Gold had a strong start in 2016, hitting a high of US$1,271/oz during the quarter. Gold prices surged as the Federal Reserve gave strong signals of slowing down the interest rate growth expectations for 2016. The Federal Reserve revised down the number of interest rate hikes to two as compared to four estimated previously. Gold prices witnessed an upward run largely on the back of investors buying gold as a safe haven investment. In addition, prevailing financial uncertainly and slower economic growth helped gold prices. Gold prices were also boosted by negative interest rate policies implemented by central banks in Europe and Japan. Despite the current uplift, gold prices remained volatile during the quarter impacted by uncertainty in the US dollar.
- A modest improvement in base metals prices failed to offset widespread loss of confidence due to ongoing concern about growth in China and subdued demand for metals. Copper and zinc gained 4% and 14% respectively, during the quarter on the London Metal Exchange (LME). Nickel and lead were down 4% and 6% respectively, on the LME over Q1 2016. As copper inventories remain high and a surplus is expected to continue, copper prices are expected to remain low. While we saw some disposal of base metals mines among companies, majors continue to hold their high-quality copper mines for the longer-term benefits.
While the Canadian Mining Eye’s stronger start to 2016 is a reflection of the progress that many companies are making, we believe this year will bring modest return to growth, underpinned by improved investor confidence. With government bonds expected to see limited upside, gold appears more attractive for mitigating risk and portfolio diversification in 2016. According to a World Gold Council report, negative interest rate policies may result in structurally high demand for gold. Although, some analysts view that an increase in gold prices is unsustainable, there is room for optimism in the near term, with an expectation of investment demand for gold. As the market is expecting further increase in gold prices given that policy makers are likely to keep interest rates low, some confidence prevails over the direction of the gold prices. The expectation of near- term price increases in many metals implies the likelihood of a broad-based recovery in mining share prices. As markets anticipate more of the positive environment over the next few quarters, we are likely to see a turnaround of fortunes for companies. But at the other end of the spectrum, with challenging global market conditions, some caution is warranted.