Canadian Mining Eye
Canadian Mining Eye struggled in Q2 2017
Moving into the second half of 2017 Canadian mining companies continue to focus on strengthening their balance sheet by reducing debt. Lately debt repayment has shifted from selling non-core assets to financing through enhanced cash flow generation.
According to a recent EY report on debt in the mining sector, if the pace of repayments continues for the remainder of 2017 companies would reduce their debt levels by a further 20% this year. This begs the question, does reducing debt have to mean reducing your ambitions? In addition, the cost of debt is expected to decrease as companies continue to pay down high cost unsecured debt instruments.1
As an example, Barrick Gold plans to reduce its debt obligations by ~US$3b to US$5b by 2018 through higher cash flow generation, portfolio optimization and creation of new joint ventures and partnerships.2 As a part of its 2016 stated objectives to reduce net debt by US$300m, Yamana Gold remains on track to repay an additional US$140m this year, following a repayment of US$160m in 2016.3
As an emerging trend, adoption of robotics and automation in the mining industry is gaining traction. Automation refers to the use of semi-autonomous or autonomous machines for various mining activities such as drilling, tunnel boring, loading and hauling. It has enabled mining companies to use driverless mining vehicles such as haul trucks, crushers and rock breakers with the help of sensors, joysticks and positioning software. According to the University of British Columbia, automation can help miners to increase productivity by 15%-20%, reduce fuel costs by 10%-15% and lower maintenance expenses by ~8%.4 Rio Tinto, a global mining company with ~19% assets located in Canada, noted productivity gains of 14% and cost declines of 13% through the effective utilization of driverless trucks at its Hope Downs 4 mine.5 In terms of labour costs, automation is expected to be more beneficial to mines in developed economies due to higher costs of labour compared to developing economies. In addition, labour shortages and safety considerations for mines in remote areas can be addressed through adoption of automation.
In April 2017, EY released a report The Digital Disconnect: Problem or Pathway, which suggested that Canadian miners are gradually embracing these innovative technologies to improve their productivity levels. According to Michelle Ash, Chief Innovation Officer at Barrick Gold, robotics and automation have the ability to reduce mining costs by ~40% by 2030 and further enhance productivity yield.6 In addition, Vale Canada expects reduction in fuel costs to the tune of 77% by replacing traditional crushers and trucks with mobile crushers and long-conveyor belts at its S11D Eliezer Batista project.7
- Gold: gold prices were flat in Q2 2017 compared with an 8% gain in Q1 2017. Gold prices were negatively impacted by the recent Fed rate hike of 0.25% in June.8
- Base metals: nickel prices fell 6% in Q2 2017 compared with a flat trend in Q1 2017. The decline can be attributed to an elevated mine supply driven by the moderation of a ban on Indonesian ore exports and a favourable political scenario in the Philippines.9 Copper prices increased 2%, while zinc prices were flat in Q2 2017.
Gold prices are expected to stay range bound over the coming quarters as we have seen in the first six months of the year. Positives include ongoing global geopolitical risks, weakening US dollar and rising inflation rate (2.2% by 2017 as compared to 1.3% in 2016).10 Geopolitical risks include uncertainties surrounding the process of UK leaving the EU and upcoming elections in Europe (German federal elections due in September 2017). Headwinds include the possibility of a further increase in Fed rates in 2017, following a 0.25% raise in both March and June 2017.11
Concerning base metals, copper prices are expected to be positive on the back of encouraging demand trends in the medium to long term. However, near-term challenge remains centered on the anticipated slowing economic growth rate in China (accounted for ~50% of world’s copper consumption), evidenced in part by the downgrading of China’s debt rating by Moody’s.12 Zinc prices are still expected to trend higher on the back of favorable demand-supply market dynamics. According to Wood Mackenzie, a research and consultancy company, zinc consumption is expected to grow by 2.5% annually in the medium term.13 Nickel prices are expected to remain fairly constant driven by robust global demand for stainless steel (contains 8%-10% nickel) and its encouraging consumption in electric vehicles, offset by surplus mine supply.14
Learn more about debt in mining from Michelle Grant, BC Mining and Metals Transactions Leader, Ernst & Young Inc.
- 1. “Does cutting debt have to mean reducing your ambitions,” EYGM 2017.
- 2. “Q1 2017 earnings results report,” Barrick Gold Corporation, 24 April 2017.
- 3. “Q1 2017 earnings results report,” Yamana Gold, 3 May 2017.
- 4. “Mining a Mirage?,” International Institute of Sustainable Development, September 2016.
- 5. “Driving productivity in the Pilbara,” Rio Tinto website; “Mining a Mirage?”, International Institute of Sustainable Development, September 2016.
- 6. “Digital Reinvention of the Mine,” Austmine, 30 May 2017.
- 7. Company website, Vale Canada.
- 8. “Fed hikes interest rates despite declining inflation, sets plan for balance sheet reduction,” CNBC, 14 June 2017.
- 9. “Metals Quarterly Q2 2017,” HSBC Global Research, 19 April 2017.
- 10. “Country Economic Forecast: United States,” Oxford Economics, 7 June 2017; “Our 2017 Gold Price Forecast Shows More Gains Ahead”, Money Morning, 17 April 2017; “Marketing presentation on gold bullion and equities views”, Credit Suisse, 23 June 2017; “Metals Quarterly Q2 2017”, HSBC Global Research, 19 April 2017.
- 11. “Here’s what the Fed just signalled about the rest of 2017,” OCNBC, 14 June 2017.
- 12. “Metals Quarterly Q2 2017,” HSBC Global Research, 19 April 2017; “BMI Copper Report Q3 2017”, BMI Research, June 2017; “Weekly Metals Update – The Trunk Call”, iA Securities, 26 May 2017.
- 13. “Metals & Mining: Get Your Zinc On,” Eight Capital, 25 May 2017.
- 14. “Metals Quarterly Q2 2017,” HSBC Global Research, 19 April 2017; News release, AZO materials.