TORONTO (miningweekly.com) – Professional services firm EY's quarterly ‘Canadian Mining Eye’ index fell 15% in the September quarter, paring a 9% gain during the previous quarter.

The firm said on Thursday that the fall in the index was in line with the S&P/TSX Composite index, which also plummeted 15% during the period, while the London Metal Exchange index (LMEX) decreased 4% during the quarter.

"In the last quarter, companies continued to focus on strengthening their core businesses by accelerating development of projects, increasing production, managing costs and adding attractively priced assets to their portfolio for strategic objectives. Still, the M&A [mergers and acquisitions] momentum we witnessed over the last few months is unlikely to die down soon, as companies will continue to look for attractively priced assets for a long-term strategic advantage,” EY's Canadian mining and metals leader Bruce Sprague said.

Canadian mining equities had suffered owing to a fall in metal prices across the board, especially gold prices, as a result of the strengthening US dollar. The growing uncertainty around the global macroeconomic situation led to investor caution and fuelled the decline in metal prices over the three-month period.

Gold prices slipped 8% in the quarter, reaching a low of $1 131.85/oz last week and continued trading below $1 200/oz this week, after increasing 9% in the first half of the year.

The steady appreciation of the US dollar since June, which hit a four-year high on October 3, also weighed heavily on gold prices that were simultaneously buffeted by sluggish demand in China and India. Following a similar trend, spot silver prices fell by 5% over the third quarter.

A stronger US dollar also hurt prices of industrial metals. Copper prices declined 5% on the LME in the quarter amid concerns regarding slowing growth in China, the world’s biggest consumer of the red metal. A financing scandal at the Chinese port city of Qingdao that had broader implications also triggered a pullback in copper prices.

Nickel prices saw the biggest plunge among base metals with a 14% drop over the quarter, after witnessing a gain of 20% over the second quarter, following Indonesia’s ban on nickel ore exports. Weaker demand from China and the Chinese financing scandal battered the metal.

Majors witnessed a fall of 10% in the third quarter compared with a 5% increase in the previous period. EY said majors continued to focus on their core assets with cost control and disciplined investments. Fund raising remained strong in this quarter as many companies took advantage of the liquidity in the economy and the low cost of capital, and investors considered valuations to be attractive.

M&A ACTIVITY

The M&A momentum that built up late in the previous quarter continued in the third quarter, with several strategic and synergistic deals. Companies looked to leverage attractive valuations of assets to strengthen their existing portfolio of properties for a stronger market presence, managing overall costs, diversification of risk and greater efficiencies.

Among the top deals announced in the period were gold miner Agnico Eagle Mines’ plan to acquire Cayden Resources, an early-stage exploration company with land concessions in Mexico, for about C$205-million; San Gold’s announcement that it had entered into a definitive agreement with Kerr Mines to merge their businesses; British Columbia copper miner Taseko Mines’ plan to acquire Curis Resources and Corsa Coal’s acquisition of PBS Coals for $60-million, which was expected to strengthen its existing operations in Pennsylvania.

A few companies announced noncore asset sales to focus on their core business and raise funds for more strategic investment opportunities. Iamgold announced that it would vend its Niobec mine, in Quebec, for $530-million to a consortium led by Magris Resources and Mandalay Resources announced its plan to sell two assets after completing the acquisition of Elgin Mining. The assets are the La Quebrada copper/silver project, in Chile and the Lupin gold mine, in Nunavut, Canada.

OUTLOOK

EY noted that gold prices might witness increased volatility amid concerns of a slowdown in emerging markets, the fluctuating US dollar and deflation in the eurozone.

Industrial metals, on the other hand, were bracing for continued weakness owing to concerns about slowing growth in China. China’s copper imports were likely to be affected as consumption slowed down, putting downward pressure on copper prices. Weakness in metal prices would not augur well for the industry, which saw some green shoots of recovery in the first half of 2014.

The downward trend in Canadian mining equities was expected to continue on the back of a negative outlook for industrial metal prices and the uncertainty about gold prices.

However, EY said the M&A momentum witnessed over the last few months was unlikely to die down soon as companies would continue to look for attractively priced assets for a long-term strategic advantage. A recent bout of fundraising by companies had provided them with a liquidity cushion to withstand price risk.

Majors were likely to consolidate their financial position by focusing on their core assets.

“Overall, we expect a sluggish fourth quarter with continued weakness in metal prices,” EY commented.