Dec '11/Jan '12

Outlook 2012

By R. Andrews

Developing new markets

Economist Pedro Antunes, from the Conference Board of Canada, says a boost in prices for resources in general contributed to a turnaround in 2010–2011. “Increased commodity prices have helped generate income in Canada that has trickled down to all levels,” he says. “The terms of trade over the past decade have steadily improved because we’re getting paid more for what we’ve always produced.”

As director of the Conference Board’s National and Provincial Forecast, Antunes believes commodity prices will continue to rise above inflation and maintain Canada’s terms of trade and income. He anticipates the 2011 raw material price index will show an overall increase of 12 to 15 per cent, but this will vary for individual sectors.

China, along with India, will contribute significantly to world economic growth in 2012, predicts Antunes. “In 2000, they were five per cent of the global economy, and this doubled to 10 per cent by 2010,” he notes. “The growth and size of those economies relative to everything else is getting bigger and creating a critical mass. This is generating strong demand for products that will continue to boost raw material prices and increase profits for the mining industry.”

 Antunes cautions, however, that a financial meltdown in Europe could cause serious damage to this rosy outlook. “The risks are real for another crisis with dire short-term impacts on commodity prices and the U.S. economy, which in turn would affect hiring and investment in Canada,” he explains.

According to Antunes, private-sector forecasters agree the EU will be able to backstop the problems to avoid a financial crisis. Nevertheless, prospects for economic growth in Europe and the United States are now reduced by about half. “Contributions to world economic growth by the developing world and the developed world are now running around 50/50,” he estimates. Canada has opportunities to expand and diversify markets in the emerging economies, but we need to be more aggressive in our trade, especially with Asia.

The revenue and regulation dance

Kevin Loughrey, CEO of molybdenum miner Thompson Creek Metals Company, is not so sure about China. He’s disappointed with the 2011 economy and says his company, which produces molybdenum at operations in British Columbia and Idaho, did not meet its potential.

Loughrey says sales of Thompson Creek’s primary commodity were affected by uncertainty in some quarters about China’s ability to maintain its recent economic growth. This uncertainty was also fuelled by concerns about the possible domino effects of problems in the Eurozone.

“Molybdenum trades on the sentiment of the day,” Loughrey adds, “and uncertainty provides negative sentiment in the market. No long-term view is built into molybdenum’s pricing mechanism. A lot of our customers who are not doing too badly are still unwilling to commit beyond today’s needs because they lack the confidence in the future that they would have in other times.”

Loughrey says Thompson Creek Metals will not spend as much in 2012 on exploration, development or acquisition as it would in a “normal” year. Nevertheless, he believes metal prices are on a “good path” and the company is following through on its significant commitment to a mill expansion project at its Endako operation and the Mt. Milligan copper and gold development, both in BC.

However, the challenge for next year and beyond is one Loughrey has in common with many other Canadian mining companies – regulatory hurdles. “They all cost money and add time and complication to our efforts,” he says.

Loughrey stresses that the mining industry acknowledges the necessity of environmental controls, community protection, disclosure and compliance regulations. He argues, however, that government bureaucracies are not particularly good at cost-benefit analysis. “Every hour of every day sees tension in government between regulatory control and the desire to raise revenue, create jobs, increase exports and national development,” he says. “But at what point does the cost go beyond the bounds of reason?”

 Enduring scrutiny

International corporate lawyer Richard Lachcik, from Macleod Dixon, says miners and other companies that want to prosper in 2012 will need to adapt to tighter regulations around the world. “Corporate social responsibility and anticorruption legislation are now on everyone’s mind,” he says. “And 2011 was a watershed year. That’s when the UK anti-bribery legislation came into effect and forced companies to take the issue more seriously.”

Lachcik says the legislation indicates governments’ stricter attitudes towards bribery because the act not only increases penalties but is extra-territorial in its reach. “It applies not only if a company has performed illegal acts,” he explains, “but also if the organization is associated with a person or supplier who has broken the law.”

According to Lachcik, another regulatory trend towards corporate social responsibility was the recent ISO 26000 initiative. “It was the first attempt at a common framework to regulate various areas covering the environment, safety, human rights and fair dealings,” he says.

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