August 2009

Industry surveys report increased inequality in Canadian mining

Recession affects individual mining and exploration companies in different ways

By P. Caulfield

According to the authors of two recent business surveys that included the Canadian mining industry, the sector is down but not out. The reports, by Ernst and Young and PricewaterhouseCoopers (PwC), detail the dramatic fall in prices and market capitalization, the ways in which the industry has been affected and how it is dealing with the downturn.

Cash is king, nowadays. Those who have it are more likely to get through the tough times than those who do not. Little of that money is being spent on exploration, however, which is likely to mean tighter supplies and soaring prices when the global economy gets back on its feet. The Canadian mining industry, on the whole, is looking ahead with a mix of cautious optimism and patient acceptance.

PwC: To have and have not (cash)

The PwC survey is an annual compilation of the financial trends of the top 40 mining companies in the world. In the most recent survey, which covered the 2008 calendar year, eight of those companies were Canadian.

According to the report, the global mining industry has been in a spectacular decline. In 2008, the total net profit of the top 40 was $57 billion, a decrease of 28 per cent from 2007. The year 2008 was a bad one for investors, too. Only three of the 40 companies had a positive one-year total shareholder return (TSR), and the lowest four showed a decline of 75 percent or more. In 2007, 14 of the top 40 achieved a TSR of more than 100 per cent, and four companies reported a TSR of more than 400 percent.

The rapid fall in market capitalization and increased debt levels for some of the top 40 has created two distinct groups of “haves” and “have-nots,” said Paul Murphy, leader of PwC’s Canadian mining practice. At the moment, cash is the most valuable asset for miners and explorers. For companies with cash, opportunities abound as asset values fall.

One of the most striking findings of the survey was the magnitude and swiftness of the correction, Murphy told CIM Magazine. “But since last fall liquidity has returned to the marketplace,” he said. Murphy’s colleague Bob Bosshard, who is a mining partner in PwC’s Toronto office, is also confident about the future. “The fundamentals for base metals haven’t changed,” he said. “China and India are still hungry for them. We’re going through a temporary hiccup in pricing. After the industry has caught its breath, prices will start to go back up again.”

Ernst and Young on opportunists, innovators and survivors

Ernst and Young surveyed 337 companies around the world to examine implications of the financial crisis on different industries, including the Canadian mining sector. According to the report, mining in this country has become divided into three camps: opportunists, innovators and survivors.

Most of the opportunists are majors. Armed with strong balance sheets, they’re looking for acquisitions. But, because many buyers are looking ahead to present and future valuations, while sellers are looking to the past, many potential deals have been left unmade.

“The opportunists and the survivors aren’t connecting,” said Ernst and Young Canadian mining and metals practice leader, Tom Whelan. “The survivors are holding on, hoping they can survive, and the opportunists aren’t willing to shoulder additional risk at the prices survivors want for their assets.”

Most of the innovators are mid-tier players, many of which are high-cost producers seeking creative survival strategies, including being acquired by better-capitalized companies. Not surprisingly, the survivors are dominated by juniors that have made conserving cash their number one priority. Many of them have suspended exploration altogether, or as much as they dare without losing mineral rights.

“It’s striking how quickly expenditures on exploration have turned off, even on good projects,” Whelan said. He went on to say that there is a general unwillingness in the industry to take on additional risk. Although that makes sense in the short run, reluctance to invest in exploration today will inevitably lead to a scramble for scarce resources when the economy starts to recover. “Previous recessions have shown that metal supply exceeded demand for only a short time,” Whelan said. Looking ahead, he commented: “We’re living in uncertain times. Things are looking up, but nobody knows yet when the recovery will be on a solid footing. The turning point might be the massive fiscal stimulus packages underway, or the vast infrastructure programs that are planned.”

And now, a word from the mining industry

Like the authors of the reports, four representatives of the Canadian mining and exploration industry say the worst of the downturn is behind us.

“There have been a lot of layoffs in the Ontario mining sector and many mines have been placed on care and maintenance,” observed Chris Hodgson, president of the Ontario Mining Association. “On the other hand, gold is still in good shape and the operating mines have good cash flow. And the last three months have seen a noticeable improvement in most commodity prices. So we’re optimistic in Ontario.”

Pierre Gratton, president and CEO of the Mining Association of British Columbia, summed up the mood in his province saying: “There are about 20 producing mines in British Columbia and that number has remained stable through the downturn. We expected the downturn to be worse on the mining side than it actually turned out. The prices of some minerals and metals have stayed pretty healthy.”

Reporting the state of affairs on the exploration side, Gavin Dirom, president and CEO of the Association for Mineral Exploration BC said: “Exploration budgets are down from last year, but they’re starting to creep back up again. In 2009, we expect a total of about $300 million will be spent on exploration by juniors and majors combined. If we can hit $300 million every year, we’ll find the deposits we need to keep mining flourishing in BC. We’re cautiously optimistic.”

Doug Horswill, senior vice-president sustainability and external affairs, Teck Resources Limited, reported: “Last year, we made a substantial addition to our resource base with the purchase of Fording Canadian Coal Trust’s assets, which put Teck in a strong position to grow.”

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