May 2010

Canadian mining companies on the rise in 2010

Consultants report resurgence in both major and junior sectors

By P. Caulfield

Drilling at Kiska Metals’ Tide property in northwestern BC


The mining sector has been buoyed by a renewed optimism that is being driven by increasing demand and resurgence of  interest in the commodities market, reported Ernst & Young in its review of the top 100 Canadian mining companies. The report was one of a pair from the Canadian offices of international consulting companies.

As evidence of mining’s renewed strength, report author Tom Whelan, Ernst & Young’s Vancouver-based mining and metals industry leader for Canada, highlighted some impressive figures. The aggregate market capitalization of the TSX 100 increased 74 per cent, from $187 billion in January 2009 to $325 billion in December. The capitalization requirement to be included in the top 100 was more than $430 million in 2009, an increase of 230 per cent from the 2008 threshold of $130 million. And finally, although more than two-thirds of the TSX 100 saw their stocks increase by 300 per cent, the share prices of 13 companies rose by more than 500 per cent.

According to the report, the credit crisis has fundamentally changed how Canada’s mining and metals companies and their transactions will be financed in the future. “We believe this swing in the economic cycle will be governed by companies taking a conservative approach to debt in combination with a return to equity,” wrote Whelan. “And that equity will likely come from new sources such as Chinese investors and sovereign wealth funds.”

In an interview, he noted that in the years immediately preceding the credit crisis, the mining industry had “fallen in love” with debt and many companies had taken on more than they could support when the downturn hit.  “But since then, the banks have pulled back and companies have had to look for other sources of financing,” he said.

China, especially, has become a major global player. “Canadian companies have been particularly open to foreign investment,” Whelan said. “And we’re not expecting a decrease in international appetite for Canadian mining companies, as Canada’s strong mining reputation translates to lower perceived risks for overseas investors.”

The Ernst & Young report also identified a widening gap between supply and demand: “Now that the economy is beginning to show signs of strength again, the global demand for resources is returning. But because most mining and metals companies placed their exploration and production activities on hold during the recession, supply is scarce today.”

Whelan said the shortfall of supply bodes well for the investment outlook in the mining and metals sector in 2010: “With increasing demand, optimism and enthusiasm have been renewed in the commodity market, particularly around gold, and around the outlook for the economic recovery.”

Paul Murphy, Toronto-based mining leader, western hemisphere,  PricewaterhouseCoopers LLP, said the sunny outlook extends to the junior mining sector, too. “The junior recovery in Canada has been fairly broad, especially for development projects,” Murphy said. “Liquidity has been returning and commodity prices have increased, especially in gold, copper and silver. And exploration projects have been finding it easier to raise money.”

Murphy said the difficulties the U.S. economy has been going through and the resulting uncertainty for the global economy are the main reasons for the high price of gold, while the burgeoning economies of China and India are behind the increasing prices of base metals. “The high price of gold is remarkable, considering the Indian gold economy hasn’t been there the way it was,” Murphy said.

All in all, he said, the mining industry is returning to stability after a ten-month shake-up.

www.ey.com/ca
www.pwc.com/ca

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