Canadian mining industry outperforms 2nd quarter expectations

The Canadian Mining Eye index gained 9% during Q2 2014 compared to a 13% gain during Q1 2014. The Canadian Mining Eye index outperformed the S&P/TSX Composite index, which gained only 6% during the second quarter. The London Metal Exchange (LME) index gained 7% during the quarter.

Canadian mining equities continued to show improvement during Q2 2014, underpinned by an increase in metals prices. Canadian mining equities remained volatile and continued to react to the movement in gold prices. Base metal companies, which constitute 13% of the Canadian Mining Eye index constituents, witnessed just a 1% gain over Q2 2014.

• Gold prices gained 9% in the first half of 2014, but made only a 2% gain in Q2 2014 given geopolitical concerns in Iraq and Ukraine, and the European Central Bank’s stimulus. Gold increased 5.8% in June as the Federal Reserve indicated it would keep interest rates low. Prices continued to react to speculation on interest rates and inflation. In the precious metals category, spot silver prices gained 5% over Q2 2014.
• Copper prices gained 6% over the quarter on the LME. However, copper prices are expected to be lower over the next 6 to 12 months as more supply comes onto the market.
• Nickel witnessed a substantial 20% gain over Q2 2014 and gained 37% in the first half of 2014 as Indonesia banned shipments of unrefined ores in January 2014.
• Majors witnessed a gain of 5% in Q2 2014 compared to a 10% increase in Q1 2014. Majors with a clear focus on margin protection continue to manage costs effectively while looking to improve productivity. Companies that opted for inorganic growth were focusing on low-cost projects with strong cash flows to withstand price risk.

Outlook

Despite the positive movement in gold prices, analysts hold divergent views on the commodity. This volatility is expected to keep investor uncertainty high. Copper prices are expected to decline due to lower consumption driven by the slowdown in China’s real estate sector, which accounts for 50% of the country’s copper demand.7 However, when the market begins to focus on medium-term copper shortfalls, we expect the level of investment to increase.

Majors appear cautious and are unlikely to go for significant acquisitions in the near future as they remain focused on their core assets. Mid-tier companies are expected to leverage on the attractive market valuation of companies after the drop in commodity prices but are likely to be more disciplined in terms of price and quality of assets. Overall, we anticipate the third quarter to continue to show positive trends with mixed expectation on metal prices.

Read the entire report here.

Source: Ernest Young Canadian Mining Eye Report