​PDAC: Is Canadian mining poised for a rebound?

Close to twenty-five thousand mining industry producers and suppliers converged earlier this month at the 2015 Prospectors & Developers Association of Canada conference. Sentiment at the gathering, which PDAC bills as the “world’s largest exploration and mining event,” was cautiously optimistic.

“When the average price of mining stocks listed in the Toronto Venture Exchange’s mining component is down 85 percent – 90 percent if you include companies that were taken out of the index because they went bankrupt, you have what amounts to a huge sale,” said Rick Rule, chairman of Sprott Global Resource Investments. “That means assets and properties are 90 percent cheaper. Years from now, investors will look back on 2015 as the “good old days,” when almost everything could be had at a really good price.”

Brent Cook, a mining investor and publisher of Exploration Insights agrees. “The industry has had a terrible time during the past five years, particularly on the exploration side, where discoveries of economically feasible deposits are fewer and farther between. There will be some further washing out of unsuccessful plays in coming months. But we are beginning to see green shoots indicating that a recovery may be on the way.”

Canada hit hard

Canada, which like Australia, is blessed with a wide variety of resources, can somewhat be regarded of a proxy for global extractions industries, which have literally been clobbered across the board. A recent report by Barcley’s described 2014 as the worst for commodities since 2008. The 22-product Bloomberg Commodity Index for example fell to its lowest level in almost six years and was off 17 percent last year alone. Global non-ferrous metals exploration for its part fell by 26 percent in 2014, compared to the previous year. Capital spending budgets on machinery and equipment were also hit hard.

Much of this is the result of sluggish global economic growth, which, according to a recent report by SNL Metals & Mining, tends to move in tandem with demand for metals such as aluminum, copper and zinc. In Canada sluggish global demand for Alberta tar sands, – said to contain more oil than Saudi Arabia, – has been hit by weak oil prices, which in January fell below the US $50 per barrel level.

Canadian uranium players for their part, such as Cameco and Fission Uranium, are reeling in the wake of the Fukashima disaster, which has called into question the entire nuclear power industry. Iron ore projects such as Iron Ore Company of Canada and Tata Steel Minerals Canada are also feeling the pain, in the wake of a two thirds drop in prices, due to in part to slower sales to China, the world’s largest iron ore consumer.

A tougher geopolitical environment is also hurting Canadian mining industry companies, many of whom operate internationally. At PDAC, sector promoters often (not-so-jokingly) make few distinctions between third world dictators who are apt to seize mines, and Western politicians who act more subtly. For example British Columbia-based El Dorado Gold got notice right in the middle of the PDAC event from Greece’s Ministry of Productive Reconstruction, Energy and Environment, that approval to complete construction of its Skouries Project gold processing plant was being revoked – this after the company had invested US $450 million into two mines in the country.

Write-downs pave way for future growth

According to Adrian Day, of Adrian Day Asset Management massive investment by the mining companies in the past decade was a major contributor to the industry’s current debacles, which include huge losses at major industry players including Barrick Gold, Newmont Mining, AngloGold Ashanti, and many others. However changing dynamics suggest that the sector could be bottoming, says Day, who points out that losses tapered off almost across the board. This coupled with huge write-downs in the coal (US $19 billion), nickel (US $21 billion), steel (US $32 billion) and gold (US $45 billion) industries are cleaning the slate, and setting the stage for new initiatives as demand picks up.

Garrett Goggin a market expert with Gold Stock Analyst agrees, pointing out that global central bank purchases of the yellow metal totaled 477 tons in 2014, a fifty-year high. This coupled with rising “all in cash costs” of gold production and strong demand in emerging markets such as China and India, should create somewhat of a floor in prices in the coming years. Rising gold demand would be particularly bullish for Canada, which like Australia is one of the world’s largest producers.

Canadian gold producers have another commonality with Australian producers: both will benefit enormously from the rising US dollar,

which boosts their revenues, as gold is priced in greenbacks, but which also simultaneously lowers their relative production costs, as labor is priced in domestic currencies. Falling oil prices, while a drag on Canadian producers, have been a huge boon for mining sector actors, for whom energy is one of their largest costs.

The time to act is now

The upshot says Cook is that given the tough geopolitical realities facing mining industry players, which are such that it now takes between 10 and 20 years to bring a good size resource into production, companies that want to take advantage of the next upturn in prices, need to act now.

James Johnson, chief of the resources division at Geoscience Australia agrees. “Businesses would ideally like to have their mines at full production when prices are highest,” says Johnson. “But that implies doing the exploration, feasibility and development work, when things are slower, as they are right now. That’s hard though, because current negative psychology in the industry, is a tough thing to overcome.”

Sprott’s Rick Rule, a seasoned industry veteran who has been through at least three major commodities cycles during his long career is more philosophical. “Bear markets are the authors of bull markets,” says Rule rubbing his chin. “But at some point the industry gets beaten down so much, that there is nowhere else to go but up.”

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