VANCOUVER (miningweekly.com) – The Canadian Mining Eye index declined by 13% during the quarter to December 31, as weakness in gold and nickel prices was partially offset by gains in copper and zinc prices.

Having recorded a 4% gain in the prior quarter, the index, administered by professional services firm EY, underperformed the S&P/TSX Composite index, which gained 4% during the three months to December 31. The UK Mining Eye fell 8% during the fourth quarter, marking the first quarterly decline in 2016, following gains of 35% and 19% in the third quarter and second quarters, respectively. The London Metal Exchange index (LMEX) gained 8% over the quarter.

EY noted that the S&P/TSX Composite Metals and Mining index decreased 12% in the fourth quarter, following a 3% decline in the third quarter.

For the full year 2016, the Canadian Mining Eye index rose 61%, which was better than the 18% gain in S&P/TSX Composite index and 21% increase in the LMEX. Meanwhile, the Canadian Mining Eye index was in line with the UK Mining Eye and S&P/TSX Composite Metals and Mining indexes.

Majors increased 42% in 2016 following a decline of 26% in 2015, EY found.

NEW DEMAND
The EY analysts noted the impact of an expected increase in gold demand as a result of gold now being accepted as an investment in Islamic finance.

According to the World Gold Council, this new potential demand is expected to increase by roughly $20-billion, or about 500 t, by 2020, assuming just 1% contribution to the total estimated Islamic investment in financial assets of $2-trillion, growing at an average rate of 16% a year. However, Standard and Poor’s estimates Islamic investment in financial assets to track towards $5-trillion over the same period. The new standard is expected to be positive for Canadian gold miners as four Canadian gold miners feature in the top ten gold producing miners in the world, EY said.

Following a flat trend in the third quarter and a gain of 7% in the second quarter, the gold price declined 12% in the fourth quarter of 2016. EY attributed the recent weakness to oversupply market conditions, amounting to a surplus of around 250 t, representing the highest quarterly surplus environment in the past decade, according to Thomson Reuters. Further, the US Federal Reserve increased its key interest rate by 0.25% in December, putting downward pressure on gold prices. Overall, the gold price moved up by 9% in 2016.

Copper prices increased 14% in the fourth quarter. The sizeable increase in copper prices was, in part, owing to an anticipated increase in infrastructure spending by newly elected US President Donald Trump, which is expected to boost demand for basic metals. Increased demand for copper from China, the world’s largest copper consumer, on the back of improving macroeconomic conditions, provided further impetus to copper prices. Zinc prices increased 8% in the fourth quarter, while nickel prices declined by 5%. Overall, in 2016 copper, nickel and zinc prices moved up by 17%, 13% and 61%, respectively, according to EY.

OUTLOOK
EY expects investors will continue to view gold as a safe haven investment, given the uncertainty surrounding the various policies and plans of the Trump Presidency.

Heading into 2017, gold prices are expected to increase, compared with 2016, underscored by higher geopolitical risks, given upcoming elections in Europe, improving supply deficit market conditions, and higher demand from Asian countries, primarily China and India (post demonetisation of cash currencies).

Key headwinds include rising economic confidence in the US, evidenced in part by a 0.25% hike in the interest rate in December, coupled with possible further hikes in 2017.

On the base metals front, copper prices are expected to increase on the back of encouraging infrastructure spending plans in China and Trump’s financial stimulus of $1-trillion in infrastructure spending.

However, EY noted that China's infrastructure spending plans are expected to have a greater impact on copper prices, as China’s copper consumption (45% to 55% of global consumption) is higher than that of the US (at 8% to 9%).

The underlying fundamentals for zinc continue to be healthy, underscored by favourable supply deficit market conditions, supported in part by the recent closure of Century and Lisheen mines and the shutdown of about 500 000 t/y of production by Glencore.

Encouraged by the recovery in commodity prices in the latter half of 2016 and anticipated benefits from improved productivity and enhanced profitability, the outlook for the Canadian Mining industry remains healthy, EY said.