Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The first green shoots of a mining rally showed themselves in the fourth quarter, according to a new report from EY describing the performance of the Canadian Mining Eye Index.
The index tracks Canadian mining sector performance of 100 TSX and TSXV mid-tier and junior companies with market capitalizations falling between CAD$47 million and $1.6 billion.
According to EY, the Canadian Mining Eye index gained 2% during Q4 2015, a significant improvement from a 17% decline in Q3. The index outperformed the S&P/TSX Composite index, which slipped 2% during the quarter. However the 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,” according to the EY report.
The report was bullish on the supply side, noting that 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.
EY also says that the continued weakness in the Canadian dollar against the US dollar will benefit Canadian mines, because metals are priced in USD while production costs are paid in CAD.
The report dedicates its “Outlook” section to gold. It says that after three consecutive years of declining gold prices, “miners may have hit rock bottom on profitability and cash flows.” While EY expects gold prices will benefit from production cuts and mine closures announced in the second half of 2015, along with central bank investment demand, less ETF selling and global growth pessimism, the consultancy also thinks that anticipation of another US Fed rate hike could keep gold prices under pressure in 2016.
Blandly, EY concludes that “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.”
