Mining Eye Q1 2016

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The start of a recovery in mining equity prices?

A rebound in commodity prices helps mining equities bounce back from Q4 2015 lows

  • The Mining Eye gained 9% during Q1 2016, despite a difficult January period, reflecting an improvement in sentiment from stabilizing commodity prices.
  • The Mining Eye, however, underperformed more than both the Canadian Mining Eye and FTSE Miners Index, which rose by 26% and 23%, respectively, during Q1, partly owing to the differences in price movements relative to equity value weightings.
  • Iron ore, gold and copper increased by 21%, 16% and 3%, respectively, during 1Q, albeit from low levels, reflecting short-term positioning (iron ore) or in response to increased market volatility during Q1 (gold).
  • Within our Mining top 20 list, Pan African Resources recorded a 74% price gain in Q1, following a y-o-y increase in gold production in conjunction with a rally in gold equities.

Mining Eye performance relative to peers (last 12 months)

EY - Mining Eye performance relative to peers (last 12 months)

Source: EY, Thomson Datastream

Net performance of key commodities and equities over Q1 2016

EY - Net performance of key commodities and equities over Q1 2016

Source: EY, Thomson Datastream

Fundraising on AIM continues to remain subdued

  • Q1 represented a slightly better quarter than Q4, with £54m raised through a series of small equity placements, representing 7% of total funds raised from AIM.
  • Funds raised were typically less than £2m, with Metals Exploration and Rare Earth Minerals raising the largest amounts (£4.3m and £3.6m, respectively) in March.
  • No new mining companies were listed on AIM during Q1, though two companies were de-listed, having earlier been suspended during H2 2015.

Q1 represented a quarter of two halves

  • The quarter started with equities continuing to deteriorate, in conjunction with credit rating agencies downgrading or placing companies on a negative watch.
  • Confidence returned to commodity prices and equities as concerns surrounding growth in the Chinese economy and US interest rates started abating.
  • This led to stabilizing of commodity prices and an uplift in equity values, albeit from a low base, with tentative signs of M&A activity returning.

Difficulties continue to remain with preserving liquidity paramount

  • Despite an improving Q1, companies continue to struggle at current price levels, where reducing cash outflows and optimizing working capital remain important.
  • Excess supply and significant inventories are also problematic for most commodities, which may limit any continued short-term improvement in prices.
  • Bond yields and credit default swap (CDS) spreads have fallen among large diversified miners; however, companies should continue to expect the access to capital to remain limited and expensive.
  • The recovery in equities, however, may represent an opportunity to boost liquidity through share issuance, should shareholders be supportive.
  • These circumstances may encourage further consolidation among companies to safeguard operating viability and potentially position for a future recovery.