Canadian Mining Eye
Canadian Mining Eye started 2017 on a positive note
The Canadian mining industry is off to a strong start in 2017. The Canadian Mining Eye index’s increase was predominantly due to strength in lead, zinc, gold and copper prices, offset partially by a weakness in coal.
The majority of Canadian mining companies finished 2016 with strong operating performance which met or exceeded their respective production guidance. In addition, all-in sustaining cost (AISC) came in lower than expected, which helped improve free cash flow. In 2017, mining companies are looking to further strengthen their balance sheet position by reducing net debt while improving cash flow. Barrick intends to reduce its total debt by US$2.9b to US$5b by 2018.1 It is widely anticipated that investment spending in both existing and new projects within the mining industry will increase in 2017.2 Companies such as Goldcorp Inc., Teck Resources, Barrick Gold Corporation, and Agnico Eagle Mines expect higher capital spending in 2017 compared to 2016.
In February 2017, EY released a report on M&A and capital raising - 2016 trends, 2017 outlook. In Canada, there was healthy growth of 16% in mining deal volume in 2016 and the transaction market is expected to remain positive in 2017. However, the total transaction market size was flat year-over-year. Smaller deals came out on top last year and we expect this trend to continue in 2017.3 A renewed optimism in the deal market stems from the positive outlook of the mining industry, improving balance sheets for mining companies, and an appetite to invest in junior exploration companies rather than direct investment in greenfield exploration initiatives. Larger companies are also looking at sharing risk through more partnerships and joint venture (JV) opportunities. Recently, Goldcorp entered into a JV with Barrick Gold in Chile’s Maricunga region to share infrastructure and lower capital and operating costs. Additionally, RNC Minerals and Waterton announced a JV to acquire and develop nickel assets.4
Digitization continues to play an important role in enhancing productivity and efficiency at mines. Additionally, digital technologies are enabling mining companies to improve their decision-making abilities and enhance safety of miners at the workplace. In our recent report Digital Disconnect: Problem or Pathway, written from the operator’s perspective, expands on the potential benefits of digital to help exploit the number one operational opportunity in mining — productivity. It also explores the common pitfalls, which include lack of practical pathways to an aligned vision, unclear accountabilities and poorly defined digital business models.
On 22 March 2017, the Canadian finance minister, Bill Morneau, tabled his second budget and confirmed that the Mineral Exploration Tax Credit (METC) will continue to be available through March 2018. The tax credit stands at 15% of specified mineral exploration expenses incurred in Canada and is seen as a positive measure to spur spending in the sector, specifically for junior mineral exploration companies and their investors.5
- Gold: Following a decline of 12% in Q4 2016, gold prices increased 8% in Q1 2017. The strength was despite the recent Fed rate hike within the range of 0.75%-1.0% in March 2017, coupled with expectations of two to three more rate hikes in 2017.6
- Base metals: Copper prices increased 5% in Q1 2017 following 14% gains in Q4 2016. The continued positive trend is on the back of increased demand from China (key drivers including housing, automotive, air-conditioner sales) and in response to an anticipated increase in infrastructure spending in the US.7 Zinc prices increased 8% while nickel prices were flat in Q1 2017.
Looking ahead for 2017, gold prices are expected to continue the upward trend mainly driven by ongoing global geopolitical risks, constraint mine supply and increased demand. Geopolitical risks include uncertainties in policies under the new administration in the US and uncertainty surrounding upcoming elections in the Eurozone. Additionally, higher ETF investment is expected to support gold prices, coupled with increased demand for jewelry in India (accounting for 16% of the world’s consumption) driven by rising income growth. Headwinds include reduced demand from China (accounting for 23% of world’s consumption) and a possibility of further Fed rate hikes in mid-2017.8
On the base metals front, copper prices are still expected to increase in 2017 primarily due to increased demand from China (largely driven by grid and consumer appliances) and anticipated infrastructure investment spending in the US. Furthermore, on the supply side, contraction is expected to be positive for copper prices, supported in part by the recent disruptions in Escondida and Grasberg mines (both accounting for about 10% of global supply).9 With respect to zinc prices, the underlying fundamentals remain positive, driven by an uplift in infrastructure spending in China and prospective infrastructure investment plans in the US, supported in part by weak mine supply. The market dynamics for nickel prices are in balance with strength in consumption driven by growing demand for stainless steel (accounting for approximately 65% of nickel consumption), offset partially by uncertainty concerning lifting of the export ban of nickel ore in Indonesia.10
- 1. “Q4 2016 earnings results report,” Barrick Gold Corporation, 15 February 2017.
- 2. “A return to optimism in mining puts Canada at a crossroads,” The Northern Miner, 16 February 2017.
- 3. “2017 looks to be a good year for mining deals,” EY’s Quarterly Report on Mineral Mergers, 6 March 2017.
- 4. “RNC Minerals Announces Joint Venture With Waterton To Acquire, Develop And Operate Nickel Assets”, RNC press release, 22 March 2017.
- 5. “PDAC welcomes support for mineral exploration and mining in Budget 2017,” The Prospectors & Developers Association of Canada, 22 March 2017.
- 6. “Fed Raises Interest Rates for Third Time Since Financial Crisis,” The New York Times, 15 March 2017.
- 7. &“Global Commodities: Copper: Grid & Appliances lifting demand,” UBS, 14 February 2017; “Commodities Report: Copper Update,” Natixis, 3 February 2017.
- 8. “Gold Outlook: Gold to get its kicks from geopolitics,” HSBC Global Research, 9 February 2017; “Gold Sector Review: Q4/16 Gold Demand Trends Update”, 3 February 2017
- 9. “Metals & Mining: Refreshing our Copper Menu as Upside Pricing Risk Grows,” Scotiabank, 6 March 2017; “Global Commodities: Copper: Grid & Appliances lifting demand,” UBS, 14 February 2017.
- 10. “Base Metals Drivers,” Société Générale, 10 February 2017; “Commodities Special: Nickel’s many twists and turns ...take 2,” Deutsche Bank, 2 February 2017.