TORONTO (miningweekly.com) – Canadian mining equities continued to face headwinds during the first quarter of the year and significantly underperformed, given concerns about global economic growth and owing to falling commodity prices, auditing firm Ernst & Young’s (E&Y’s) quarterly Canadian Mining Eye idex has found.
The index plunged deeper and closed down 13% in the first quarter, and down 33% in the past 12 months.
Gold prices witnessed a historic fall to a 26-month low of $1 321.50/oz on April 16, with concerns that the Cyprus government and a few other European countries could sell their gold reserves to raise cash.
With close to two-thirds of the constituents of the Canadian Mining Eye index owning gold and/or silver assets, the direction of precious metals prices remained important. While significant banks predicted a further decline in gold prices, some observers argued that the fundamentals for well-supported gold prices remained unchanged.
This uncertainty over the direction of metals prices had turned investors risk averse, leading to a challenging market for capital access, the report had found.
Canadian companies were, therefore, focused on capital management practices such as seeking to dispose noncore assets and delay or defer projects to withstand this turbulence.
Some did see buying opportunities where their own share prices have declined less than those of their competitors. However, the flight to low-cost assets remained the focus of many Canadian miners.
A number of companies entered into mergers and acquisitions to sustain growth and expand inorganically, including B2Gold completing its merger with CGA Mining to leverage production capacity and expand its business by gaining access to CGA’s Masbate mine, in the Philippines. Coeur d’Alene Mines also announced the acquisition of Orko Silver to diversify its portfolio and gain control of Orko’s undeveloped silver deposits, in Mexico.
E&Y said Canadian mining and metals companies – and their global counterparts – faced a variety of challenges in 2013.
Economic growth in demand centres such as the US, Europe and Japan were expected to remain weak, with high unemployment throughout the year. Growth centres within the emerging national economies comprising Brazil, Russia, India, China and South Africa, and other emerging countries, are also witnessing a growth slowdown.
The sharp decline in equity fundraising witnessed in the first quarter is also likely to continue in the near term.
“So far this year, we have seen weakening of metals prices largely due to an uncertain global economic outlook. The plunge in the gold price in April not only shocked investors globally, but also made the situation more uncertain for the mining sector,” the report stated.
But, E&Y said, opportunities would always exist for those willing to take a long-term view of the sector.
“It’s about balancing cost reduction and operational efficiency efforts with strategic transactions. Exploration-stage companies exposed to current capital constraints are pursuing unique, creative financing arrangements and thinking about how they can advance to the next stage in their growth agenda including consolidation between juniors with cash and those with property, mergers of equals, and streaming deals that sell off a royalty interest from a nonstrategic asset for up-front financing,” E&Y report authors Jay Patel and Bruce Sprague wrote.
They added that the market was all about diversifying sources and types of funding to spread risk, drive efficiency, and limit exposure or loss of control to any one party.
“Capital optimisation is at the top of the boardroom agenda for the majors on the other end of the spectrum. These companies’ shareholders have become increasingly frustrated by weakening share prices and lower profitability in the face of huge planned capital spending.
“Majors are now facing increased pressure to rethink capital allocation decisions and reduce capital expenditures. Majors are expected to focus on cost rationalisation, consolidation of core assets and capital management to fund the ongoing projects, remain cash flow positive and maintain profitability,” Patel and Sprague said.
Companies at this stage “were well on their way” to a new chapter of price-moderated margin growth as they tried to balance the desire to build and maximise shareholder returns.
The Canadian Mining Eye tracks Canadian mining-sector performance of 100 TSX and TSX-V midtier and junior companies with market capitalisations, in the first quarter of 2013, that fell between $250-million and $2.5-billion.