VANCOUVER (miningweekly.com) – Professional services firm EY’s Canadian Mining Eye index surged 42% during the three months ended June 30, as major miners gained 29% on the back of rising gold and base metal prices.

Gold prices increased by 7% in the second quarter, compared with 16% gains in the prior period, while the major base metals performed sluggishly until May, with the exception of zinc. The majority of base metals prices rebounded in June, but zinc continued to outperform among the metal group with a 16% gain in the second quarter, compared with a 14% gain in the first quarter, thanks to the positive supply-demand gap working in its favour.

EY noted that the Canadian Mining Eye index significantly outperformed the S&P/TSX Composite Index, which gained 4% during the period, as well as the London Metal Exchange index, which gained 4% over the quarter, and EY's Aim-based Mining Eye, which increased by only 19% during period.

EY noted that the S&P/TSX Composite Metals and Mining index witnessed a significant gain of 40% in the second quarter, following a 34% gain in the first quarter of the year.

In the aftermath of debt and operational restructuring in the mining industry, including deleveraging, cost optimisation efforts and capital expenditures suspension, mining companies had already started to see improvements in their earnings, stated the firm’s mining and metals research team in the latest report.

According to EY, most of the global mining companies' first-quarter results were better than expected on the back of the surge in gold prices, reduced interest costs, reduced cash costs and lower exploration costs.

“Many Canadian miners, such as Barrick, Northern Star, Newcrest, Agnico Eagle and Detour Gold Corporation, have reduced their all-in sustaining costs (AISC) and have provided guidance of further reduced levels for 2016. The majority of the mining companies reported lower capital expenditure in the first quarter, compared to the same period last year, further enhancing the cash flows of the companies,” EY advised.

The analysts noted that Goldman Sachs and Blackrock had predicted that the Canadian mining sector was to be the least affected by the UK's announcement to exit the European Union (Brexit) owing to the mining sector's international exposure and a weak correlation with UK earnings.

Despite base metal prices being expected to remain volatile in the near term, EY believed that gold prices might get a further boost by the continuing market uncertainty. “We are still in the early stages of the Brexit aftermath but, while there are looming uncertainties around mining capital shifting from the UK to Tokyo, Shanghai and Toronto, these will take time to unfold,” analysts said.

In the face of this expected ongoing uncertainty in the major equities markets, triggered by Brexit, EY advised that metal prices were expected to remain volatile in the near term, while gold would benefit as a safe-haven investment instrument.

Lowered US economic growth expectations for 2016, from 2.4% in April, to 2.2%, were expected to drive gold prices higher as investors sought to shift investment from equities to gold.

Regarding base metals, zinc was expected to gain as the sector continued to balance its demand-supply deficit in the near term, following plant closures in 2015, EY stated. Copper and nickel would remain under supply pressure, but nickel prices were expected to improve in the second half of 2016 and 2017, underscored by rising stainless steel consumption in China.

According to EY, the mining industry was already harnessing the benefits of reduced interest costs, reduced cash costs and operating cost efficiencies stemming from its debt and operational restructuring phase in the last few quarters. Many Canadian miners had successfully lowered their AISC and were targeting further reductions for 2016. Going forward, the supply reductions, commodity price improvements and enhanced margins would be instrumental for a positive outlook for the Canadian mining industry, the firm said.