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.
Recent stock charts are making it tempting to declare a five-year-long bear market for mining finally over.
Since mid-January, mining stocks have rallied, key commodity prices appear to be making their way up from a bottom, a number of financing and acquisition deals have been struck and, for the first time in years, the mood at the recent Prospectors & Developers Association of Canada (PDAC) convention in Toronto was buoyant.
“We’re certainly in a rally,” said Ivan Lo, founder of Equedia.com. “Whether the rally will sustain itself is another question. There does seem to be some excitement in the market. It’s a different type of excitement than we’ve seen in previous years.”
“I think it is possible that the worst is over,” Scotiabank commodities analyst Patricia Mohr said. “It doesn’t mean that prices generally are going to move up in a straight line.”
Mid-January appears to have been the bottom for mining stocks and key commodities like gold and copper. There was a run-up in metals the first week of March.
Mickey Fulp, who writes the Mercenary Geologist newsletter, said it was likely the result of New York-based hedge funds wagering on the market hitting bottom and moving back into commodities.
Gold prices are up 17% since mid-December, and copper, which hit a low of US$1.96 per pound on January 20, has since inched up to US$2.25 – a 15% increase.
The S&P/TSX Global Mining Index is up 16% since the beginning of 2016, and the resource-dominated TSX Venture Exchange gained 15% in the last three months.
Four Vancouver mining companies offer a good snapshot:
•Teck Resources Ltd. (TSX:TCK) stock hit $3.80 on January 13 and has since recovered to $10.
•First Quantum Minerals Ltd. (TSX:FM) stock fell to $2.49 on January 25; by March 14 it had tripled to $8.
•Goldcorp Inc. (TSX:G) stock hit a low of $14.01 per share on January 21; last week it had rebounded to $21.
•New Gold Inc. (TSX:NGD) stock hit $2.61 on January 19; it was above $5 per share on March 9.
Analysts point out that the bounce in mining equities is driven in part by a “short squeeze”: short sellers who were overly pessimistic have been forced to cover their short positions, which boosts the stock they were shorting.
That’s a good sign, because it means the pessimists were wrong.
Fulp points out that the TSX Venture Exchange is up 23% since its low of 466 points on January 20.
“That’s quite encouraging. The other thing that’s encouraging to me is that we do not have the so-called post-PDAC curse, with a sell-off, which has happened the majority of years since 2003.”
Typically, mining stocks enjoy a surge leading up to the PDAC convention and then drop off. That didn’t really happen this year, at least not to the extent that it usually does.
Lo said renewed confidence in mining has resulted recently in several financing deals.
One of those recent deals, announced March 4, is the $191 million acquisition of True Gold Mining Inc. (TSX-V:TGM) by Endeavour Mining Corp. (TSX:EDV).
One smaller deal, announced during PDAC, is an $8.2 million investment by South Korea’s Daewoo Minerals Canada Corp. for a 35% stake in Vancouver’s Serengeti Resources Inc. (TSX-V:SIR), whose Kwanika copper-gold property is in the same region as the Mount Milligan mine north of Prince George.
Metallurgical (“met” or steelmaking) coal and copper are two key mining commodities for B.C. Met coal prices continue to be depressed, due to a glut and a lower demand in China for new steel.
Several B.C. met coal mines have consequently shut down in recent years.
Unlike met coal, copper prices appear to be inching up, although they have a long way to go before they are high enough to warrant the massive capital investments needed to develop new copper mines.
“Copper at US$2.25 – a lot of producers are losing money,” Fulp said. “But if prices continue to go up, we’re going to have a good market.”
B.C. has several copper mines in operation, including the new Red Chris mine.
A number of new mines have also been proposed in the province, including Seabridge Gold Inc.’s (TSX:SEA) massive KSM project.
Low copper prices have taken their toll in B.C.
In February, Imperial Metals (TSX:III) announced it would shut down its Huckleberry copper mine near Houston, B.C.
Whether copper prices will enjoy a long-term recovery will depend in part on China, which consumes nearly half of the world’s copper.
“The global economy remains very lacklustre, so there is still some risk as to whether this rebound is going to hold up,” Mohr said. “I think 2016 will be a bit of a transition year, when we move from very low commodity prices across the board in the early part of the year to a somewhat stronger outlook by 2017.”
Mike Dragosits, senior commodity strategist for TD Securities, pointed out that there is still a copper glut.
“I don’t think it’s been fixed just yet,” Dragosits said. “I think we have another couple of years before we see much higher copper prices.”
Dragosits added that low prices will discourage investment in future projects.
