Canadian Mining Eye
Continued rally for the Canadian Mining Eye in Q2 2016
The Canadian Mining Eye index gained 42% during Q2 2016, significantly outperforming the S&P/TSX Composite Index which gained 4% during Q2 2016. These results also exceed a 26% gain in Q1 2016. The London Metal Exchange index (LMEX) gained 4% over the quarter and EY's AIM-based Mining Eye increased by 19% during Q2 2016. The S&P/TSX Composite Metals and Mining index witnessed a significant gain of 40% in Q2 2016, following gain of 34% in Q1 2016. The index's gains were predominately due to increase in gold and base metal prices. Majors witnessed a robust gain of 29% in Q2 2016 compared to a gain of 21% in Q1 2016.
In the aftermath of debt and operational restructuring in the mining industry including deleveraging, cost optimization efforts and capex suspension, mining companies have already begun to see improvements in their earnings. A majority of the global mining companies' Q1 2016 results were better than expected on the back of the surge in gold prices, reduced interest costs, reduced cash costs and lower exploration costs. Many Canadian miners such as Barrick, Northern Star, Newcrest, Agnico Eagle and Detour Gold Corporation have reduced their all-in sustaining costs (AISC) and have provided guidance of further reduced levels for 2016. The majority of the mining companies reported lower capital expenditure in Q1 2016 compared to the same period last year, further enhancing the cash flows of the companies.
As predicted by Goldman Sachs and Blackrock, the Canadian mining sector is expected to be the least affected by the UK's announcement to exit EU (Brexit) due to the mining sector's international exposure and a weak correlation with UK earnings. Although base metal prices are expected to remain volatile in near term, gold prices might get a further boost by the continuing market uncertainty. We are still in the early stages of the Brexit aftermath but looming uncertainties around mining capital shifting from the UK to Tokyo, Shanghai and Toronto will take time to unfold.1
- Gold2,3: In response to the overhanging theme of a slowdown in China's economic growth rate, negative interest rates in the US, Europe and Japan, coupled with fears surrounding Brexit, gold prices increased by 7% in Q2 2016 compared with 16% gains in Q1 2016. Gold demand weakened in India due to rising gold prices but should recover following an above average monsoon season. China's demand for gold was sluggish on account of rising gold prices and inventory adjustments (following a new standard requiring hallmarking all jewelry at 99% purity). Demand for gold exchange traded funds remained high due to ongoing macro economic uncertainties.
- Base metals4,5: Despite China's commitment to simulate economic activity through favorable credit policies and investment in infrastructure activities, the major base metals performed sluggishly until May, with the exception of zinc. However, the majority of base metals' prices rebounded in the month of June. Zinc continues to outperform amongst the metal group with a 16% gain in Q2 2016 after 14% gains in Q1 2016, thanks to positive supply-demand gap working in its favor. Nickel prices increased by 11% in Q2 2016 compared to a 4% decline in Q1 2016. Copper prices declined 1% in Q2 2016 compared to a 4% gain in Q1 2016 as the industry continuously searches for a bottom. Both copper and nickel are still operating in over-supply markets, reaffirming a view of a challenging pricing environment for both of the metals. However, for both metals, recent trends are suggesting a gradual improvement in their pricing dynamics.
In the face of an anticipated ongoing uncertainty in the major equities markets triggered by Brexit, metal prices are expected to remain volatile in near term while gold will benefit as a safe-haven investment instrument. In addition, lowered US economy growth expectations from 2.4% in April to 2.2% in 2016 are expected to drive gold prices higher as investors look to shift investment from equities to gold.7 Concerning base metals, zinc is expected to gain as the sector continues to balance its demand-supply deficit in the near term, following plant closures in 2015. Copper and nickel will remain under supply pressure, but nickel prices are expected to improve in the second half of 2016 and 2017, underscored by rising stainless steel consumption in China.
The mining industry has undergone a debt and operational restructuring phase in the last few quarters and is already harnessing the benefits from reduced interest costs, reduced cash costs and operating cost efficiencies. Many Canadian miners have successfully lowered their AISC and are targeting further reductions for 2016. Going forward, the supply reductions, commodity price improvements along with enhanced margins will be instrumental for a positive outlook for the Canadian mining industry.
- 1. “Brexit: Implications for metals and mining,” SNL, June 23, 2016.
- 2. “Commodities Forecast,” Credit Suisse, June 30, 2016.
- 3. “Searching for safety,” Deutsche Bank, June 27, 2016.
- 4. “Commodities Forecast,” Credit Suisse, June 30, 2016.
- 5. “Metals & Mining,” Credit Suisse, June 29, 2016.
- 6. “Commodities Forecast,” Credit Suisse, June 30, 2016.
- 7. “IMF cuts US growth forecasts, urges ‘very gradual’ rate hikes,” IMF, June 22, 2016.