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Market uncertainty pulls EY’s Canadian Mining Eye index down in Q3

15th December 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Professional services firm EY’s Canadian Mining Eye index declined 17% during the third quarter 2015, in stark contrast to the second quarter’s 4% gain.

This latest drop was even more substantial than the first quarter, which saw only a 1% decline.

During the three months ended September 30, the Canadian Mining Eye index underperformed the S&P/TSX Composite index, which slipped 9%. The London Metal Exchange index also declined 9% over the quarter.

“Canadian mining equities continue to face downward pressure due to a fall in metal prices, weak macro-economic backdrop and weak Chinese demand. But, with the US dollar strengthening [7% in the third quarter] against the Canadian dollar, Canadian miners are expected to benefit as commodities are traded in US dollars, whereas production costs are incurred in Canadian dollars,” EY’s Canadian mining and metals leader Bruce Sprague commented.

According to EY’s latest index report, the S&P/TSX Composite Metals and Mining index witnessed a significant plunge of 26%, owing to extremely bearish sentiment during the quarter. Stock prices remained volatile, mirroring the movement in gold prices.

Canadian mining equities continued to face downward pressure owing to a fall in metal prices, a weak macro-economic backdrop and weak Chinese demand. Canadian companies in this sector continued to focus on their core businesses by disposing of non-core assets and managing costs, EY said, noting that in contrast, some companies showed steady progress developing their planned projects.

EY advised that companies remained cautious about their capital spending and focused on rigorous cost control measures and productivity improvements.

The UK Mining Eye performed marginally better than the Canadian Mining Eye, losing 15% during the quarter, and the FTSE Miners Index which fell 32% during the same period.

COMMODITIES SLIDE
Gold prices decreased further by 5% in the third quarter, after a 2% decline in the preceding period. Gold started weak in the beginning of the quarter and, although it recovered slightly in the middle, it continued to decline at the end of the quarter. Gold prices remained volatile during the quarter, impacted by the uncertainty in the market, EY said.

Gold was hit by lower imports by India, dropping 52% in September after a surge to meet festival demand in August. Between the price surge in anticipation of further stimulus in Europe, the US Federal Reserve decision to defer increase in borrowing rates and China’s yuan devaluation, the bearish sentiment continued to put pressure on the yellow metal over the quarter.

Despite the current slight uplift, gold prices were be expected to remain volatile on the back of speculation that the Federal Reserve would increase interest rates sometime in the future.

The slide in base metals continued in the third quarter as a result of an economic slowdown and a decline in the manufacturing activities in China. In response to China’s slowing demand and concerns over metal financing inventories, copper tumbled 10% during the quarter on the London Metal Exchange (LME), the largest drop since the first quarter of 2014.

Nickel and lead were down 13% and 5%, respectively, on the LME over the third quarter, while zinc slipped 16%. In the face of lower prices, some companies suspended operations and focused on cost cutting. Glencore, the world’s largest miner and trader of zinc, suspended its zinc mine production in Australia and Peru, while also reducing production across its various operations.

M&A ACTIVITY
EY said that the momentum in mergers and acquisitions (M&A) had increased significantly in the third quarter, as a result of several high-value M&A and financing deals. A number of companies accessed financing through asset disposals, equity or stream financing arrangements, as evident in such cases as Barrick, North American Palladium and New Gold. In contrast to earlier quarters, there were many high value deals announced, including Barrick’s agreement to sell a 50% stake in its Chile-based Zaldivar copper mine to Antofagasta for $1-billion; OceanaGold’s announced acquisition of Romarco Minerals for C$856-million; and New Gold selling its 30% interest in Chile-based El Morro to Gold Corp for $90-million in cash and a 4% royalty stream on gold output from El Morro.

According to EY, despite most of the players making efforts to control costs, declining metal prices would put further pressure on profitability. Gold prices was being expected to remain volatile owing to uncertainty over the interest rate hike by the US Federal Reserve.

Some investors were using this recent upturn to book profits and move their investments in other asset classes. In addition, metal prices were expected to be affected by a macro-economic slowdown in China.

Mining companies were vulnerable to global economic uncertainty and changing investor sentiment. Some Canadian mining companies were likely to sell their assets to manage debt but would face limited interest from the various investors for these assets.

“While the current pricing suggests bargains may be available, the volatility and demand concerns make pricing very difficult and it takes a brave management team to make a decision to invest much needed capital in an acquisition. Despite the level of interest from private capital acquirers growing, the market remains tight and asset sales difficult to execute,” EY stated.

Edited by Creamer Media Reporter

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