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Q2 2014

Canadian Mining Eye

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Canadian Mining Eye down in Q2 but outperforms global indices

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

The Canadian Mining Eye index gained 9% during Q2 2014 compared to a 13% gain during Q1 2014. The Canadian Mining Eye index outperformed the S&P/TSX Composite index, which gained only 6% during the second quarter. The London Metal Exchange (LME) index gained 7% during the quarter.

Canadian mining equities continued to show improvement during Q2 2014, underpinned by an increase in metals prices. Canadian mining equities remained volatile and continued to react to the movement in gold prices. Base metal companies, which constitute 13% of the Canadian Mining Eye index constituents, witnessed just a 1% gain over Q2 2014.

  • Gold prices gained 9% in the first half of 2014, but made only a 2% gain in Q2 2014 given geopolitical concerns in Iraq and Ukraine, and the European Central Bank’s stimulus. Gold increased 5.8% in June as the Federal Reserve indicated it would keep interest rates low. Prices continued to react to speculation on interest rates and inflation. In the precious metals category, spot silver prices gained 5% over Q2 2014.
  • Copper prices gained 6% over the quarter on the LME. However, copper prices are expected to be lower over the next 6 to 12 months as more supply comes onto the market.
  • Nickel witnessed a substantial 20% gain over Q2 2014 and gained 37% in the first half of 2014 as Indonesia banned shipments of unrefined ores in January 2014.
  • Majors witnessed a gain of 5% in Q2 2014 compared to a 10% increase in Q1 2014. Majors with a clear focus on margin protection continue to manage costs effectively while looking to improve productivity. Companies that opted for inorganic growth were focusing on low-cost projects with strong cash flows to withstand price risk.

EY - Canadian Mining Eye index, gold, copper and LME index over Q1 2014

Mergers and acquisitions

On the M&A front, although appetite to do deals appeared subdued early in the quarter, we saw a few deals in the last month of the quarter among companies that managed to secure sufficient funding.

B2Gold announced its merger with Australia’s Papillon, eyeing access to Papillon’s high-grade Fekola gold project located in Mali. The deal was valued at approximately US$570m, a merger consideration of AUS$1.72 per Papillon share. This represented a premium of 21% to Papillon’s closing price one day prior to the announcement of the offer on 3 June 2014. The transaction is expected to create potential value for B2Gold shareholders through the addition of high- margin ounces.1

First Quantum Minerals announced its plan to acquire Lumina Copper for approximately CDN$470m in June 2014. Both companies view the acquisition as adding value to their shareholders. Some analysts view the transaction to be accretive for First Quantum, with the addition of Lumina Copper’s early-stage Taca Taca copper project located in Argentina.2 Share price of Lumina Copper appreciated 23% after the deal announcement whereas First Quantum Minerals’ share price declined 1.6%.

Mandalay Resources announced its plan to acquire Elgin Mining to leverage on Elgin’s positive cash-flow-generating asset, the Björkdal gold mine in Sweden. The transaction is valued at approximately CDN$70m, and the implied value of CDN$0.37 per share represents an 85% premium to Elgin’s closing share price one day prior to the offer on 3 June 2014.

A number of mining companies continued to shed their non-core assets in order to maximize value for their shareholders. Agnico Eagle Mines announced the sale of its 8.6% stake in Sulliden Gold to Rio Alto Mining for cash consideration of CDN$1.10 per purchased share. Agnico Eagle purchased Sulliden Gold shares last year for investment purposes and the company sold the shares as they were a non-core asset.3

Mining companies continued to view asset disposal both as a means of raising funds and prioritizing limited resources to core projects. Sabina Gold & Silver Corp sold its non-core asset, Newman-Madsen, an early-stage exploration project located in the Red Lake Mining Division of Ontario, to Laurentian Goldfields.

Spotlight on diamonds

EY - Polished Diamond prices

Diamond prices bore the brunt of negative price movements among the asset classes during the global financial crisis. Risk aversion was the primary trigger behind the largest decline in polished diamond prices, which declined 8.5% in 2008. The diamond market rebounded strongly after the global recovery and polished diamond prices witnessed a 15.8% increase in 2011. Due to negative investor sentiments, prices declined in 2012 by 11%. Diamond prices started to increase in early 2013 as a result of growing demand in China and India and the economic recovery in the US. More recently, polished diamond prices increased 4.5% in the first half of 2014 with further upside expected in the second half of the year.4

We saw a range of financing sources come to the fore in the diamond sector, including a mix of equity, debt, equipment financing and resource streaming in the sector. Stornoway Diamond announced a large financing deal of CDN$946m to build its Renard diamond mine in north-central Quebec. The company received funding commitments of US$360m from Orion Co-Investments, CDN$220m from Resources Quebec and CDN$105m from Caisse de dépôt et placement du Québec, an equity offering and an equipment financing facility with Caterpillar Financial. While some analysts view the fund-raising structure as dilutive, the financing has significantly de-risked the Renard Diamond Project, which is expected to accelerate project development and potentially increase shareholder returns.5

Dominion Diamond entered into an agreement to buy an additional 10% interest in the Ekati Diamond Mine for US$67m in July 2014, increasing its stake to 90%. In 2013, Dominion Diamond acquired BHP Billiton Canada’s stake in the Ekati Diamond Mine for US$553m.

De Beers’ CEO Philippe Mellier expects that the global diamond output will peak in 2017 and will start to decline steadily thereafter. Demand growth is expected to continue while diamond supply remains limited and is set to decrease in the medium to long term.6 The attractive price momentum going forward could be encouraging to emerging Canadian diamond miners.

Overall, increasing diamond prices, potential growth in demand, recent transactions and availability of financing point to the diamond sector being a bright spot in the mining space.


Despite the positive movement in gold prices, analysts hold divergent views on the commodity. This volatility is expected to keep investor uncertainty high. Copper prices are expected to decline due to lower consumption driven by the slowdown in China’s real estate sector, which accounts for 50% of the country’s copper demand.7 However, when the market begins to focus on medium-term copper shortfalls, we expect the level of investment to increase.

Majors appear cautious and are unlikely to go for significant acquisitions in the near future as they remain focused on their core assets. Mid-tier companies are expected to leverage on the attractive market valuation of companies after the drop in commodity prices but are likely to be more disciplined in terms of price and quality of assets. Overall, we anticipate the third quarter to continue to show positive trends with mixed expectation on metal prices.

1. “B2Gold Corp: Potential to Create Value Through Papillon Transaction”, RBC Capital Markets, 4 June 2014.

2. “First Quantum To Acquire Lumina Copper”, CIBC research, 17 June 2014.

3. “Agnico Eagle Announces Sale of Sulliden Shares”, Agnico Eagle Press Release, 28 May 2014.

4. “Polished Diamond Overall Index”, Bloomberg, 9 July 2014.

5. “Stornoway Diamond: C$374M Equity Offering Completed”, BMO Capital Markets, 23 May 2014.

6. “Canadian Diamond Developers & Explorers”, Dundee Capital Markets, 27 May 2014.

7. “Copper Seen by Goldman Grinding Lower as Demand in China Wanes”, Bloomberg, 9 July 2014.

EY - Canadian Mining Eye index and peers, last 12 months×
EY - Canadian Mining Eye index, gold, copper and LME index over Q1 2014×
EY - Polished Diamond prices×