February 2008

Supply Side

How will 2008 treat mining suppliers?

By J. Baird

Currently, there are many factors at play in global economics and mining that may affect the Canadian mining industry and its suppliers in 2008.

The strength of the Canadian dollar, rising 25 per cent against the US dollar in 2007, is much in the news, and most observers see it staying at par or above throughout next year. This weakening of the American dollar raises the value of gold and other mined commodities in that currency, thus offsetting, to some degree, the fact that Canadian mining companies receive less Canadian dollars in exchange. Mining suppliers that export will have to offer even more productive solutions in order to justify higher prices. On the other hand, their foreign purchases will be less costly than before.

For the past five decades or so, our industry has followed “boom and bust” cycles with periods of about ten years. Typically, in the early years of a decade commodity prices are low, exploration shrinks and miners lack capital to build new mines or invest in new equipment. Then, things pick up midway through the decade only to recede by the end of the ten-year period.

Many analysts feel that commodity prices peaked for this cycle early in 2007, which would fit the normal cyclical pattern. Most predictions, however, indicate that commodity prices will remain high, partly because of the weakness of the US dollar, and partly because the cost of finding, extracting and processing ore has been rising substantially.

Against the ten-year cycle theory, some analysts say that we are in a supercycle fuelled by China and India, and that demand for mined commodities will, for a long time, continue strong. Whatever the length of the cycle, the mining industry should continue to give its suppliers good business during 2008.

Climate change and the need to reduce greenhouse gas emissions is also an issue that could affect mining. The uranium price is very high in anticipation of development of “clean” nuclear power. Over the long run, coal and oil sands-derived oil may suffer unless a means of sequestering greenhouse gas emissions is adopted. Emissions from the whole Canadian mining industry could be capped and taxed, possibly leaving us in a poor position to compete with producers in other countries.

Another factor already in play that will become worse in 2008 is the shortage of managers, professionals and skilled trades people. The industry has sized up the problem and positive action is underway, but a quick-fix that will alleviate the situation in 2008 is not possible. Such shortage is, of course, an advantage for suppliers that have the manpower, but bad for those that do not.

Another question concerns how Canada’s ranking in the world of mining will fare over the next year. Given our large land mass and prospectivity, Canada should be able to maintain its position, attracting some 19 per cent of world exploration expenditures. This will depend partly on whether the federal government makes enhanced flow-through tax provisions permanent.

Canadian reserves of base metals have been declining steadily to 25 per cent of what they were 25 years ago. With the high level of exploration underway for the past two or three years, 2008 will hopefully be the year that we turn this around. In the longer run, more government support for geoscience is needed to provide the basic information leading to new discoveries. Development of new mines will be good business for mining suppliers.

As far as Canadian major mining companies are concerned, billions in market capitalization moved to other markets in 2007 and consolidation among big companies carries on. However, of 83 companies in the world with a market capitalization of over $1 billion, 33 are Canadian.

Overall, 2008 should be a good year for Canada’s mining industry and its suppliers. However, economic cyclicity, exchange rates, global warming, insufficiency of human resources and government policy are all factors that, sooner or later, will put us on a down trend. Mining suppliers should use the present strong market conditions to fund innovation and diversification of their client base.

Jon Baird
Jon Baird is the managing director for CAMESE.

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