Headwinds felt in the first quarter of the year continued in the second quarter and challenged Canadian mining and metals companies. Losses captured on the TSX and TSXV in the first six months of the year show Canadian mining equities are continuing to significantly underperform as concerns around global economic growth expectations and commodity prices take their toll.
EY’s Canadian Mining Eye index — which tracks the performance of 100 TSX and TSXV mid-tier and junior mining companies — fell 13% in Q1 2013 and a further 34% in Q2 2013. This stands in stark contrast to the 3% gain in the S&P/TSX Composite Index in Q1 2013, and the much smaller 5% loss in Q2. And while juniors have felt recent global mining and metals challenges, including the ongoing capital strike, more severely than their larger competitors, majors started to experience a similar downward movement, declining 11% in Q1 2013 and 25% in Q2 2013.
Forces at play
A number of factors have impacted the severity of the decline over the last few months. Gold prices witnessed a historic fall in April with concerns that the Cyprus Government and a few other European countries might sell their gold reserves to raise cash. In June, gold prices dipped further with talks of quantitative easing tapering as early as fall of this year and inflation nowhere on the horizon.
Since then, US Federal Reserve Chairman Ben Bernanke has stated that highly accommodative monetary policy will be needed to support the US economy. This has stabilized gold prices, albeit at levels much lower than at the end of 2012. Uncertainty remains, with some predicting further price declines. These growing concerns are translating into a challenging market for capital access as investors become more risk averse.
Persistent challenges around financing conditions on the global equity markets, slowing deal execution due to valuation gap, and resource nationalism are also having a distinct impact on companies’ ability to do deals and meet their growth agendas.
Weathering the storm
Constrained access to capital markets and cost escalations aren’t making it easy for Canadian mining and metals companies to stay on track. But opportunities continue to 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.
Canadian companies took the following measures over the course of the first half of the year and are set to continue over the next two quarters:
Cost containment and streamlining operations: Many of the majors have explicitly curtailed or cut costs and streamlined operations to meet their near-term organizational needs.
Non-core asset disposal: Some companies announced disposal of non-core assets to raise cash and focus strategically on their core business.
Strategic acquisitions: A number of companies are doing strategic deals to sustain growth and expand inorganically.
Non-traditional financing: Innovative forms of financing are one way many companies are avoiding equity dilution, especially juniors actively seeking new sources of financing to raise capital, including equipment financing, streaming and private equity investments. Those who are able to access debt markets are capitalizing on available liquidity to refinance debt and access relatively cheaper capital.
Capital recycling: Many companies are considering divestments of non-core or non-strategic assets to raise cash and focus more strategically on their core business.
While the sector will continue to face headwinds, Canadian companies will continue to seek opportunities to focus on shareholder expectations by focusing on costs and profitable growth opportunities. As the sector continues to face volatility in equity prices, it will remain critical for companies to align the long-term nature of mining projects with shareholder expectations.