Q4 2015

Canadian Mining Eye

Moderate gain in Canadian Mining Eye in Q4 2015

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The Canadian Mining Eye index gained 2% during Q4 2015, as compared with a 17% decline in Q3 2015. The Canadian Mining Eye index outperformed the S&P/TSX Composite index, which slipped 2% during the quarter. The London Metal Exchange index (LMEX) declined 7% over the quarter while EY’s AIM-based Mining Eye declined 14% during Q4 2015.

EY - Canadian Mining Eye index and peers, last 12 months The S&P/TSX Composite Metals and Mining index witnessed a gain of 4% after a significant decline of 26% in Q3 2015, due to slightly improved macroeconomic conditions in Canada triggered by improved exports, customer spending and decreased inflation. Majors witnessed a moderate gain of 1% in Q4 2015, compared with a 26% decline in Q3 2015, lagging overall metal and mining stocks.

EY - Canadian Mining Eye index, gold, copper and LME Index over Q4 2015 In 2015, Canadian mining equities faced significant pressure due to declining metal prices, an increase in US Fed rates, growth deceleration in the Chinese economy and weak Chinese and Indian demand. The mining industry’s profitability is under pressure globally and, in response, miners such as Glencore, Anglo American, Barrick, Kinross and Newmont restructured their portfolio to reduce their debt burden through non-core asset sales, streaming transactions, cost cutting and capex reduction. The restructuring benefits are expected to impact cash flows and profitability positively in 2016. Other companies such as Teck Resources, HudBay and Lundin are expected to initiate restructuring programmes in 2016.1

On the production side, analysts estimate that mine supply will reduce in 2016, increase marginally in 2017, followed by a decline through the end of the decade. The marginal increase in 2017 is expected to be driven by the last round of new mines, sanctioned at higher gold prices. On the other hand, production cuts and mine closures in the second half of 2015 will reduce supply in 2016. The major production cuts announced in 2015 include zinc production cuts by Glencore, Nyrstar (100kt) and Lisheen/Century mines; nickel production cuts by Chinese smelters (15kt in 2015 and 120kt in 2016); copper production cuts by Chinese producers (200kt–300kt in 2016), Glencore, Freeport (160kt) and Asarco (30kt). The production declines in 2016 are expected to provide some support to metal prices.2 Also, continued weakness of the Canadian dollar against US dollar (3.4% in Q4 2015) is expected to benefit Canadian mining assets as commodities are traded in US dollars, whereas production costs are incurred in Canadian dollars.

  • Gold prices decreased further by 5% in Q4 2015, after a 5% decline in Q3 2015. Gold had a strong start in 2015, hitting a high of US$1,305 per oz in January, triggered by the Swiss National Bank’s decision to unpeg the Swiss Franc vs. the Euro. Gold prices were also boosted by uncertainty over Greece’s future in the Eurozone, but declined shortly following Greece’s bailout agreement. In June, China declared its official gold holdings at 1,658 tons, which was half of market expectations. This triggered heavy selling in the Asian markets and gold prices crashed to their lowest point of US$1,080 per oz in five years. In December, the US Fed rate hike of 25bps pressured gold prices further down to US$1,046 per oz. Overall, gold fell by 10% in 2015, facing a third consecutive annual decline. But, being more of a financial commodity, gold might find some fundamental support by rising Central Bank and investment demand, declining ETF selling and production in 2016. However, further US Fed rate hike anticipation and weak demand from China and India, may cap any momentum and even cause short-term negative spikes in gold prices in 2016.3 On the other hand lack of confidence in the global economy will lend support to gold prices.
  • The slide in base metals continued in Q4 2015 as a result of the economic slowdown and decline in manufacturing activities in China. Copper tumbled 9% during the quarter on the London Metal Exchange (LME). Nickel and zinc were down 15% and 16% respectively, while lead gained 8% on the LME over Q4 2015. Recent production cuts may provide some support to base metal prices, but overall there remains a downside risk.

At the end of the third consecutive year of declining gold prices, which deteriorated further with the US Fed rate hike and weak demand from Asian markets, miners may have hit rock bottom on profitability and cash flows. In 2015, miners have undergone significant portfolio and operational restructuring to reduce their costs and debt to improve their profitability. Production cuts and mine closures were announced in the second half of 2015, leading to expected production decline in 2016. Although gold prices might benefit from these production cuts, Central bank investment demand, declining ETF selling and global growth pessimism; anticipation of further rate hike by the US Fed might keep gold prices under pressure in 2016, albeit lack of confidence in the global economy will lend support to gold prices.

Although the operational and financing benefits from leaner balance sheets and expected improvement in equation will affect mining industry positively, further declines in metal prices are a risk the sector is focused on.

Mergers and acquisitions (M&A)

The Canadian Mining industry has been quite active in M&A and financing activities in 2015. The debt-laden mining industry underwent significant portfolio restructuring through asset sales, financings and streaming arrangements. But as the restructuring phase is nearing its end, M&A activities may be subdued near-term. Access to capital for the sector is expected to remain limited and will be more challenging for juniors. However, juniors with short timelines to production may present opportunities as M&A targets.

Kinross Gold announced acquisition of a 100% stake in the Bald Mountain gold mine and a 50% stake in the Round Mountain gold mine, Nevada from Barrick Gold for a total consideration of US$610 million in cash, on 12 November 2015. Kinross already owned 50% of Round Mountain and will consolidate its stake with this deal. Under the deal, Barrick will also receive a 2% net smelter return royalty, contingent upon production exceeding 10moz from Bald Mountain. Following the completion of the deal, Barrick will form a 50:50 exploration partnership with Kinross on land package at Bald Mountain. The deal adds approximately 2.1moz 2P reserves and 4.6moz M&I and Kinross expects to produce 175koz-300koz per yr through Bald Mountain at AISC of US$700-1,130 and 340koz-430koz per yr through Round Mountain at AISC of US$850-1000/oz between 2016 and 2018.4 Analysts expect the deal to be accretive on NAV, production and cash flow per share by 2017, as it offers operational synergies with Kinross’ open-pit heap leach skillset.  According to analysts, the transaction was at an NAV multiple of 0.86, which is justified by the immediate production in safe jurisdiction, with significant mine life extension potential. The transaction was completed on 11 January 2016.5, 6

Barrick Gold also announced disposal of a 70% interest in the Spring Valley project and a 100% interest in the Ruby Hill mine to Waterton Global Resource Management for a total consideration of US$110 million in cash, on 12 November 2015. Spring Valley is an early stage open-pit, oxide heap leach gold project and the Ruby Hill mine is an open pit heap leach gold mine, which has produced over 1.4moz gold since 2006. The deal is in-line with Waterton’s strategy to acquire high-quality advanced stage development and production assets in Nevada, to complement its portfolio. The transaction was completed on 17 December 2015. Combined with non-core asset sales, streaming agreements in 2015 and transactions with Kinross and Waterton, Barrick has raised US$3.2 billion, meeting its debt reduction target of US$3 billion. Following the transactions, Barrick closed a debt tender offer to buy its US$1.15 billion debt notes.7, 8, 9

Tata Steel acquired a 14% stake in Tata Steel Minerals Canada (TSMC) from its JV partner New Millennium Iron, on 22 October 2015. Under the agreement, as New Millennium was not able to invest in the JV project, Tata Steel’s stake would increase to 94% from the current 80%. New Millennium will be able to maintain its 6% interest until the expenditure on the project reaches CDN$1 billion, after which it will be required to pay its pro rata share of any future cash calls over CDN$1 billion. Under the deal, Tata Steel will immediately invest CDN$524.5 million in the JV and also New Millennium’s loan of CDN$5.3 million to TSMC will be converted into equity.10

Kirkland Lake Gold announced the acquisition of all outstanding common shares of St Andrew Goldfields for approximately CDN$ 178 million in stock on 16 November 2015. Under the agreement, St Andrew shareholders will receive 0.0906 common share of Kirkland Lake for each common share held. The exchange ratio represents a price of CDN$0.47 per share, implying a 46% premium based on both companies’ 20-day VWAP and a 25% premium to St Andrew’s closing price. The acquisition consolidates two companies in an underexplored and safe jurisdiction - the Abitibi region with exploration potential on the 120km of strike length situated along the Porcupine-Destor Fault Zone. Analysts expect the acquisition to be 5% and 21% cash flow accretive by 2016 and 2017, respectively. Also the deal presents diversification and deleveraging benefits to Kirkland along with significant operational synergies.11, 12  

Sunridge Gold announced disposal of substantially all of its operating assets with the sale of 60% interest in the Asmara Mining Share Company (AMSC) to Sichuan Road & Bridge Mining Investment Development (SRBM) for a consideration of US$65 million in cash on 6 November 2015. In addition, SRBM has also assumed US$13.3 million deferred payment obligation owed by Eritrean National Mining Corporation (ENAMCO). On the completion of both the transactions, Sunridge Gold is planning to return the cash to its shareholders. Management considers this transaction at a significant premium to the present market value, considering the challenging market conditions for junior resource companies. Sunridge shareholders will decide on the transaction at a meeting on 22 January 2016.13

Klondex Mines acquired a 100% stake in Rice Lake Mine, a 50% stake in Tully Gold project and 43 million common shares in SGX Resources representing a 32% stake; for a consideration of US$32 million on 17 December 2015. The consideration includes a payment of US$20 million in cash and US$12 million in deferred payments in the form of a 4%, three-year promissory note secured against Rice Lake and other purchased assets. Rice Lake’s 2P gold reserves are estimated at 455koz and M&I of 1.8moz with annual production of 450koz. The transaction gives Klondex access to a production-ready asset with operational synergies to be realized from its technical expertise of narrow vein underground mining expertise as demonstrated in Midas. Analysts view the transaction as fairly priced, considering the small amount paid for a sizeable resource base for a challenging asset. Klondex plans to enhance margins by reducing tonnage and focusing on higher margin production. The acquisition is expected to close by the end of the first quarter of 2016.14, 15


Teck Resources and Franco-Nevada announced that they had entered into a long-term streaming arrangement linked to silver production in Teck’s 22.5% stake in Antamina mine, on 7 October 2015. Under the agreement, Franco-Nevada offered US$610 million and 5% of the spot price at the time of delivery for Teck’s full share of silver from Antamina up to 86moz, after which the stream will reduce to one third. The arrangement is similar to Teck’s earlier deal in July to sell its gold stream in Andacollo mine to Royal Gold for US$525 million. Other shareholders in Antamina are BHP Billiton (33.75%), Glencore (33.75%) and Mitsubishi (10%). Analysts estimate that the deal may open opportunities for Glencore to unlock approximately US$915 million from a similar deal, in the wake of its debt reduction efforts.16, 17

Fission Uranium announced a private placement of 96.7 million shares at CDN$0.85 per share, raising approximately CDN$82.3 million gross proceeds on 21 December 2015. The private placement is subscribed by CGN Mining and in addition to the offering, CGN Mining will own an additional 20% stake in Fission Uranium pursuant to exercise of convertible securities. The companies have also entered into an offtake agreement under which CGN Mining will buy uranium production from the Fission’s PLS Property. CGN Mining’s controlling shareholder is China Uranium Development Company and this deal indicates China’s increasing interest in Canadian uranium industry. Analysts estimate that as China is on road to becoming the largest consumer of uranium by 2025, the deal represents its desire to invest in a stable jurisdiction with meaningful uranium production rate.18, 19

Banro Corp announced a financing agreement of US$98.8 million in a private placement, term-loan facility and a gold streaming arrangement with Resource Finance Works (RFW) and Gramercy Funds Management (Gramercy) on 31 December 2015. The private placement and gold streaming will be solely with RFW, while the term-loan facility will be funded by RFW and Gramercy funds. The streaming transaction of US$67.5 million provide RFW an entitlement on 9.0%-12.5% stream at US$150 per oz from the Twanziga mine over its life, which will be reduced to half once production exceeds 1.14moz gold. The stream can be bought back after three years of closing of the transaction. The private placement is of 50 million common shares and 2.5 million warrants, raising gross proceeds of US$8.8 million with RFW. RFW will hold a 16.6% of ownership in Banro after completion of the private placement. The term loan is an 8.5%, US$22.5 million loan, maturing in 2016 (extendable to 2019), which will be convertible into 10 million warrants payable to RFW and Gramercy equally. Contingent on this transaction, Banro has also entered in an agreement with Gramercy to purchase its outstanding US$40 million senior secured notes and US$20 million preferred shares. The transaction is expected to close in February 2016.20

Sandstorm Gold entered in US$152 million, multi-asset streaming arrangements linked to up to five projects of Yamana Gold on 27 October 2015. Under the agreement, Sandstorm will pay US$152 million cash and 15 million Sandstorm warrants (five year term, strike price of US$3.5). Post the streaming transaction, Sandstorm Gold raised 8.8 million units of Sandstorm at a price of US$2.85 per unit raising approximately US$25 million gross proceeds in a bought deal with a syndicate co-led by National Bank Financial and BMO Capital Markets on 27 October 2015. Each unit consists of one common share of Sandstorm and one-half common share purchase warrant. In addition, underwriters have an over-allotment option to purchase up to an additional 1.3 million units grossing approximately US$3.8 million. Each warrant provides entitlement to acquire one share of Sandstorm at an exercise price of US$4.0 within the next five years. The company plans to use the net proceeds from the offering to reduce the balance of its revolving credit facility due to streaming transactions and for general working capital purposes.21

Aurcana Corporation entered in a debt to equity transaction with Orion Mine Finance Fund I LP related to its senior secured debt facility of US$38.7 million on 16 October 2015. Under the transaction, Aurcana’s US$38.7 million debt owed to Orion Mine, will be exchanged for Aurcana’s interest in its Mexican subsidiaries, which own the La Negra mine. Orion Mine also paid approximately US$4 million to Aurcana for some of its non-core assets and consulting services related to the La Negra mine for next one year. The transaction will reduce the company’s annual interest cost by US$2.3 million and will free up cash to meet the intermediate-term obligations and develop the company’s principal asset — the Shafter Silver project. The transaction closed in January 2016.22

MZI Resources announced a private placement of 106.6 million ordinary shares at A$0.40 per share and A$2 million share purchase plan, raising total A$45 million gross proceeds on 27 October 2015. The company’s major shareholder, Resource Capital Fund VI LP (RCF), committed to subscribed 51.8 million shares grossing approximately A$20.7 million. The shares will be issued in three tranches of 8.7 million, 67 million and 31.1 million shares respectively. Following the transaction, RCF’s shareholding in the company will increase to 39% from current 30.2%. The funds will be used to repay the RCF bridge loan facility and for other working capital purposes. The transaction is expected to close in January 2016.23

Looking to M&A in the upcoming quarters

In December 2015, Anglo American announced a restructuring programme to redefine its asset portfolio by i) focusing on priority assets and reducing its number of assets by approximately 60%, ii) consolidating to three business from six; and  relocating its London office in 2017. Under the asset disposal plans, the company increased its disposal targets to US$4 billion out of which US$2 billion is already confirmed including phosphates and niobium assets. Apart from asset disposal, the company is planning to drive operational efficiencies through reduction of capex by US$1 billion and US$2.5 billion in 2015-16 and 2017 respectively, cost reduction and dividend suspension under the restructuring plan.24

According to analysts, BHP Billiton might be looking for acquisitions to take advantage of distressed prices due to the commodities downturn. The company is looking for copper and deep water oil projects in either an asset or a JV stake acquisition. Analysts consider the Antamina copper mine in Peru to be a good candidate for the stake acquisition. But as the acquisition will create a stress on company’s balance sheet, BHP Billiton may announce a dividend cut in February 2016 — for more flexibility to make acquisitions while maintaining a strong credit rating.25

In January 2016, Eldorado Gold Corp announced the suspension of development activities at Skouries and the potential closure of Olympias and Stratoni in Greece, due to the Greek Government’s non-fulfillment of permit issuance requirements. Analysts expect that the company might also announce a potential spin-out or sale of its Chinese asset portfolio worth US$710 million NAV, in first half of 2016. The Chinese sale is expected to be accretive, based on current sector valuations.26

Dominion Diamond announced in December 2015 that one of their investors, K2 Principal Fund L.P., proposed changes to its board of directors to include more independent directors. Following the announcement, two of the directors resigned from the board and the company appointed Mr. Jim Gowans as Chairman in January 2016. The company also announced appointment of Rothschild as its financial advisor to assist them in considering possible initiatives to maximize shareholder value, which might include M&A and divestment opportunities.27, 28

  •  1.  “Prefer precious to base with limited options as commodity prices remain under pressure”, Barclays, 14 January 2016.
  •  2.  “Supply cuts should support prices in 2016 - the floor is near”, GMP, 18 December 2015.
  •  3.  “Prefer precious to base with limited options as commodity prices remain under pressure”, Barclays, 14 January 2016.
  •  4.  “U.S. assets acquired from ABX; portfolio diversifies”, UBS, 12 November 2015.
  •  5.  “Kinross acquires strategic Nevada assets”, Kinross press release, 12 November 2015.
  •  6.  “Strategic Investment in Nevada”, Canaccord Genuity, 12 November 2015.
  •  7.  “Waterton Global announces purchase of assets from Barrick Gold for $110 million”, Waterton press release, 12 November 2015.
  •  8.  “Barrick sells Nevada assets at fair value to Kinross and Waterton, Hits debt reduction target”, Morningstar, 12 November 2015.
  •  9.  “Barrick Announces Final Results and Settlement of Debt Tender Offer”, Barrick press release, 30 December 2015.
  • 10.  “Tata Steel to hike stake in Canadian iron ore JV to 94%”, Business Line, 23 December 2015.
  • 11.  “Kirkland Lake Gold creates an Ontario-focussed intermediate gold producer with the acquisition of St Andrew Goldfields”, Kirkland press release, 16 November 2015.
  • 12.  “Consolidating the Abitibi: Integrating SAS”, Scotiabank, 18 November 2015.
  • 13.  “Sunridge agrees to sell its 60% interest in Asmara Mining Share Company”, Sunridge press release, 6 November 2015.
  • 14.  “Klondex announces acquisition of Rice Lake Mine and Mill complex”, Klondex press release, 17 December 2015.
  • 15.  “Acquisition of Rice Lake”, Canaccord Genuity, 17 December 2015.
  • 16.  “Teck announces silver streaming agreement with Franco-Nevada”, Teck Resources press release, 7 October 2015.
  • 17.  “Royal Gold acquires gold stream on Teck's Carmen de Andacolla mine”, Royal Gold press release, 9 July 2015.
  • 18.  “CGN to invest CDN$82M at $0.85 in Fission Uranium”, Fission Uranium press release, 21 December 2015.
  • 19.  “China's CGN to Acquire 20% in C$82 mln Strategic Investment”, Raymond James, 22 December 2015.
  • 20.  “Banro Announces US$98.75 Million Financing with Resource FinanceWorks”, Banro press release, 31 December 2015.
  • 21.  “Sandstorm Gold announces bought deal financing”, Sandstorm Gold press release, 27 October 2015.
  • 22.  “Aurcana corporation announces restructuring transaction and amendment of senior secured credit facility”, Aurcana press release, 16 October 2015.
  • 23.  “Capital raising update”, MZI Resources press release, 3 November 2015.
  • 24.  “Anglo American sets out radical portfolio restructuring and further material cost savings and capex reductions”, Anglo American press release, 8 December 2015.
  • 25.  “BHP Billiton eyeing acquisitions as it considers dividend cut”, Financial Times, 20 December 2015.
  • 26.  “Hard line needed”, Canaccord Genuity, 12 January 2016.
  • 27.  “Dominion Diamond Corporation Announces Appointment of New Directors and New Chairman Designate”, Dominion Diamond press release, 13 January 2016.
  • 28.  “Dominion Diamond Corporation Comments on Media Speculation”, Dominion Diamond press release, 23 December 2015.

Canadian Mining Eye index and peers, last 12 months ×
Canadian Mining Eye index, gold, copper and LME Index over Q4 2015 ×