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EY’s Canadian Mining Eye index falls 12% in Q4, lower oil prices provide some respite

24th February 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Global professional services firm EY’s Canadian Mining Eye index fell 12% in the quarter ended December 31, compared with a 15% decline in the prior period.

The index underperformed against the S&P/TSX Composite index, which fell 2% in the last quarter of 2014, while the London Metal Exchange index decreased 6% in the quarter.

The latest update of the Canadian Mining Eye index, released on Monday, found that mining equities had faced downward pressure owing to continued weakness in metal prices. The global macroeconomic situation remained uncertain, triggering a further slide in commodity prices, with investors remaining cautious.

Crude oil prices slipped below $50/bl, on the back of weakening global demand and no cut in Saudi Arabian output. Base metals prices, which started declining in the third quarter, slumped further as a result of a slowdown in Chinese demand.

The major miners witnessed a fall of 9% in the fourth quarter, compared with a 10% decline in the prior quarter. With persistent weakness in metal prices, companies were more focused on productivity on the cost, labour and capital fronts.

M&A ACTIVITY
EY reported that the mergers and acquisitions (M&A) space had sustained steady activity in 2014, despite lower metal prices, weaker financial performance by companies and slowing investment.

Companies remained cautious about new investment, but looked for attractive opportunities to strengthen their core businesses, the firm said.

Miners with strong balance sheets and access to capital sought strategic acquisitions and attractive properties. On the other hand, companies facing financing and operational challenges were forced to dispose of their troubled assets.

Despite the index’s negative performance, several significant deals were announced in the period.

These included Lundin Mining acquiring Freeport-McMoRan’s 80% stake in the Candelaria and Ojos del Salado copper mining operations and supporting infrastructure, in Chile, for about $1.9-billion; Kinross Gold’s sale of its interest in Aurelian Resources and the Fruta del Norte project, in Ecuador, for $240-million in cash and equity to Fortress Minerals, which changed its name to Lundin Gold upon closing of the acquisition; and Osisko Gold Royalties and Virginia Mines’ announcement that they had entered into a definitive agreement to combine their businesses.

Further, Eastern Platinum would sell its entire South African platinum group metal business and all loan agreements to China-based Hebei Zhongbo Platinum for $225-million; Semafo was planning to acquire all of the issued shares in Australia-based Orbis Gold in an all-cash deal at a price of AS$0.65 a share; Chile-based Antofagasta would acquire Duluth Metals for C$96-million; and Chaparral Gold had agreed to a takeover by Goldrock Mines and Waterton Precious Metals Fund II Cayman for about C$73.4-million.

CAPITAL RAISING
EY said capital raising had continued to remain lacklustre during the fourth quarter of the year, owing to the cautious outlook for the sector and metal price weakness.

Companies were seen chasing funds mainly through private placement and debt financing, as many small-value financing deals were announced.

However, large fundraising deals were scarce, reflecting the risk-averse market sentiment, EY said.

“Miners were extremely cautious in committing funds for new investments and even trimmed planned capital expenditure to preserve liquidity in a highly uncertain economy. And, despite liquidity in the economy, cautious investors and lenders stayed aloof from investing into or lending to the sector.

“However, a few companies, backed by their attractive portfolio of projects or synergistic acquisition opportunities, successfully raised a large amount of capital to finance their ambitious plans,” the firm said.

Looking forward, EY expected miners to benefit from lower input and freight costs amid metal price weakness, helping them to protect margins.

The firm expected gold prices to stabilise and trend upward, with increased volatility on the back of safe-haven buying by investors and central banks. On the other hand, base metals were likely to witness continued weakness, which was likely to lead to subdued M&A activity.

The major miners were expected to strengthen their core businesses, balance sheets and liquidity through cost rationalisation, consolidation of core assets, improved operational efficiencies and disciplined investment and were likely to fund new projects and attractive acquisitions through operating cash flows and by disposing of noncore assets instead of high-cost debt and equity dilution.

Edited by Creamer Media Reporter

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