Dec '10/Jan '11

Outlook 2011

Global forces, local concerns

By Steve Stecyk

The mining sector earned its share of the headlines in 2010. Mergers and acquisitions were a hot topic, as companies sought out new exploration projects and tried to expand entrenched developments. BHP Billiton’s attempted takeover of PotashCorp raised fundamental questions about the strategic value of the country’s resources and the “net benefits” foreign operators must ensure if they want to acquire and develop them.

Environmental concerns prompted the federal government’s rejection of Taseko Mines’ provincially approved Prosperity Mine, compelling the company to possibly return with a revamped plan for the mine. It also underlined the need for better regulatory coordination among the levels of government. In short, it was a busy and interesting 12 months for an industry that has reclaimed the spotlight in this country.

“Mining used to be regarded as the old economy or belonging to yesterday’s economy,” says Paul Stothart, vice-president of economic affairs at the Mining Association of Canada. “I think that vision has changed. Over the last ten years, across the country, there has been recognition that mining, oil and gas are long-term areas of strength for Canada — areas that generate wealth and tax revenues.”

In the short term, Stothart expects the industry’s strength will be tested by global economics. He notes that the United States, our largest trading partner, will remain our biggest market for minerals and metals. “The Bank of Canada is looking for growth in the U.S. to remain fairly modest in 2011 and then start to move more strongly in 2012,” Stothart says.

Attention will still remain firmly focused on China as it continues with its internal infrastructure projects and its role as a world manufacturer — two areas which require a strong supply of raw materials. “Regardless of where Canada is selling its minerals, world prices are going to be driven primarily by Chinese demand for minerals,” Stothart adds.

However, the spectre of inflation looms. In October, inflation in China jumped to 4.4 per cent, the highest level in two years. In response, the Chinese central bank hiked the reserve rates at six of the country’s largest banks.

“They may do things with interest rates or other levers to try to moderate their growth, but they can’t slow down too much,” explains Stothart. “They need growth to be in the nine to 10 per cent range to accommodate domestic pressures and realities.”

What does this all mean for the Canadian mining sector?

“It depends on the commodity,” Stothart says. “Certainly it is positive for Teck, a major producer of metallurgical coal. They have a strong relationship in China and the Chinese want as much of that product as they can get.”

Stothart foresees that the burgeoning Chinese middle class will fuel demand, as well. “Copper, nickel, zinc, anything driven by infrastructure will be very important,” he says. “I think that copper will be the best indicator, because it goes into wiring, communications, buildings, automobiles and other basics.”

The strong price of gold continues to drive exploration in Canada as well as the reopening of previously closed mines across the country. Whether gold prices continue to rise is anyone’s guess. “Gold is driven by global economic and political uncertainty, so it is hard to predict where prices are heading,” says Stothart. “One can find analysts on both sides of this debate.”

As the global search for metals and minerals carries on, the mining sector will play a valuable role in Canada’s economic recovery. Given the fundamental drivers of mineral demand internationally, Canada is in an excellent position to capitalize on its strengths in the coming year, to become an even stronger force within the global mining industry.

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