TORONTO (miningweekly.com) – Despite professional services firm EY’s quarterly ‘Canadian Mining Eye’ index having gained only 9% in the three months ended June 30, the index outperformed the S&P/TSX composite index, which gained only 6% during the second quarter, and the London Metal Exchange (LME) index, which gained 7% during the period.
This compared with the Canadian Mining Eye index’s growth of 13% in the first quarter.
The report found that Canadian mining equities continued to show improvement during the period, underpinned by an increase in metals prices. Canadian mining equities remained volatile and continued to react to the movement in gold prices. Base metal companies, which constitute 13% of the Canadian Mining Eye index constituents, witnessed just a 1% gain over the second quarter.
"The second quarter proved mining equities are capable of sustainable improvement. Overall, we anticipate the third quarter to continue to show positive trends with mixed expectation on metal prices,” EY Canadian mining and metals leader Bruce Sprague said.
Gold prices gained 9% in the first half of the year, but made only a 2% gain in the second quarter, given geopolitical concerns in Iraq and Ukraine, and the European Central Bank’s stimulus.
Gold increased 5.8% in June as the US Federal Reserve indicated it would keep interest rates low. Prices continued to react to speculation on interest rates and inflation. Spot silver prices also gained 5% during the second quarter.
EY said copper prices gained 6% over the quarter on the LME. However, copper prices were expected to be lower over the next 6 to 12 months, as more supply came onto the market.
Nickel witnessed a substantial 20% gain during the period and gained 37% in the first half as Indonesia banned shipments of unrefined ores in January.
The report found that major miners witnessed a gain of 5% in the second quarter compared with a 10% increase in the previous period.
“Majors with a clear focus on margin protection continue to manage costs effectively while looking to improve productivity. Companies that opted for inorganic growth were focusing on low-cost projects with strong cash flows to withstand price risk,” the report said.
Further, EY said despite the appetite for mergers and acquisitions (M&A) appearing subdued early in the quarter, it saw a few deals in the last month of the quarter among companies that managed to secure sufficient funding.
Among these were B2Gold, which announced a $570-million merger with Australia’s Papillon to gain access to Papillon’s high-grade Fekola gold project, in Mali. The deal represented a premium of 21% to Papillon’s closing price one day before the offer was announced on June 3.
First Quantum Minerals also announced its plan to acquire Lumina Copper for about C$470-million in June, in a cash and scrip deal that would give it control of the Taca Taca copper/gold/molybdenum project, in Argentina. The proposed transaction to buy Lumina was another step in First Quantum's long-stated objective to geographically diversify through acquiring world-class, early-stage copper assets.
Mandalay Resources also announced its plan to acquire Elgin Mining to leverage on Elgin’s positive cash-flow-generating asset, the Björkdal gold mine, in Sweden. The transaction was valued at about C$70-million, which represented an 85% premium to Elgin’s closing share price one day before the announcement on June 3.
EY added that a number of mining companies continued to shed their noncore assets to increase value for their shareholders. Agnico Eagle Mines announced the sale of its 8.6% stake in Sulliden Gold to Rio Alto Mining for C$1.10 in cash a purchased share.
Meanwhile, the report paid special attention to diamonds, saying that prices for the precious gem bore the brunt of negative price movements among the asset classes during the global financial crisis. Risk aversion was the primary trigger behind the largest decline in polished diamond prices, which declined 8.5% in 2008.
The diamond market rebounded strongly after the global recovery and polished diamond prices witnessed a 15.8% increase in 2011. Owing to negative investor sentiments, prices declined in 2012 by 11%. Diamond prices started to increase in early 2013 as a result of growing demand in China and India, and the economic recovery in the US.
More recently, polished diamond prices increased 4.5% in the first half of 2014 with further upside expected in the second half of the year.
“We saw a range of financing sources come to the fore in the diamond sector, including a mix of equity, debt, equipment financing and resource streaming in the sector,” EY said, pointing to Stornoway Diamond Corp’s large C$946-million deal to build its Renard diamond mine, in north-central Quebec.
The company received funding commitments of $360-million from Orion Co-Investments, C$220-million from Resources Quebec and C$105-million from Caisse de dépôt et placement du Québec, an equity offering and an equipment financing facility with Caterpillar Financial.
“While some analysts view the fund-raising structure as dilutive, the financing has significantly derisked the Renard Diamond project, which is expected to accelerate project development and potentially increase shareholder returns,” the report said.
Dominion Diamond Corp also bought an additional 10% interest in the Ekati diamond mine for $67-million in July to increase its stake to 90%. In 2013, Dominion acquired BHP Billiton Canada’s stake in the Ekati diamond mine for $553-million.
De Beers’ CEO Philippe Mellier expected that the global diamond output would peak in 2017 and then start to decline steadily thereafter. Demand growth is expected to continue while diamond supply remained limited and was set to decrease in the medium to long term.
“The attractive price momentum going forward could be encouraging to emerging Canadian diamond miners. Overall, increasing diamond prices, potential growth in demand, recent transactions and availability of financing point to the diamond sector being a bright spot in the mining space,” EY noted.
Further, the professional services firm pointed out that despite the positive movement in gold prices, analysts held divergent views on the commodity. This volatility was expected to keep investor uncertainty high, while copper prices were expected to decline owing to lower consumption, driven by the slowdown in China’s real estate sector, which accounted for half of the country’s copper demand.
However, when the market begins to focus on medium-term copper shortfalls, EY expected the level of investments to rise.
“Majors appear cautious and are unlikely to go for significant acquisitions in the near future as they remain focused on their core assets. Mid-tier companies are expected to leverage on the attractive market valuation of companies after the drop in commodity prices but are likely to be more disciplined in terms of price and quality of assets. Overall, we anticipate the third quarter to continue to show positive trends with mixed expectation on metal prices,” EY commented.