Strong mining rally continues for Q2 – Ernst & Young report

Reflecting the recent dramatic rise in the value of mining stocks, the multinational professional services firm Ernst & Young’s Canadian Mining Eye index gained 42% during Q2 2016, outperforming indexes around the world. This follows a gain of 26% in the Canadian index in Q1, which was already a significant turnaround compared to 2015. After some four years of low commodity prices and negative investor sentiment, the turnaround began in February 2016 after the TSX Venture Exchange hit a bottom on January 28.

The report noted that the S&P/TSX Composite Metals and Mining index witnessed a significant gain of 40% in Q2 2016, following gain of 34% in Q1 2016. The index’s gains were predominately due to increase in gold and base metal prices. Majors witnessed a robust gain of 29% in Q2 2016 compared to a gain of 21% in Q1 2016.

“Mining companies are seeing significant improvements in their earnings, and their results are better than expected,” says Bruce Sprague, EY’s Canadian Mining & Metals Leader. “The index’s gains were due in large part to an increase in gold and base metals prices, but the growth also comes from the debt and operational restructuring we’ve seen in the sector, including deleveraging, cost optimization and capex suspension.”

The Canadian Mining Eye: Q2 2016 report suggested gold prices may get a further boost by the continuing market uncertainty. Some of the key commodity changes in Q2 include:

• Gold increased by 7% in Q1, a modest gain after a 16% gain in Q1
• Zinc continues to be the best performing of the metal group with 16% gain in Q2 following a 14% gain in Q1
• Nickel prices increased by 11% in Q2, compared to a 4% decline in the previous quarter
• Both copper and nickel continue to operate in over-supply markets

“The mining sector is already seeing the benefits of reduced interest costs, reduced cash costs and operating efficiencies,” says Jay Patel, EY’s Mining & Metals Transactions Leader. “Looking ahead to the rest of the year, supply reductions and commodity price improvements are indicating a positive outlook for the sector.”

Many Canadian miners such as Barrick, Northern Star, Newcrest, Agnico Eagle and Detour Gold Corporation have reduced their all-in sustaining costs (AISC) and have provided guidance of further reduced levels for 2016, the report stated. The majority of the mining companies reported lower capital expenditures in Q1 2016 compared to the same period last year, further enhancing the cash flows of the companies.

Dr. Mark O’Dea, President and Founder of Oxygen Capital Corp., told EY: “With the wave of M&A activity that has taken place recently, investors are definitely looking at recycling some of their money into exploration companies.  My advice is to not be afraid to step out of your comfort zone.”

Looking ahead, EY’s Canadian Mining Eye forecast: In the face of an anticipated ongoing uncertainty in the major equities markets triggered by Brexit, metal prices are expected to remain volatile in near term while gold will benefit as a safe-haven investment instrument. In addition, lowered US economy growth expectations from 2.4% in April to 2.2% in 2016 are expected to drive gold prices higher as investors look to shift investment from equities to gold. Concerning base metals, zinc is expected to gain as the sector continues to balance its demand-supply deficit in the near term, following plant closures in 2015. Copper and nickel will remain under supply pressure, but nickel prices are expected to improve in the second half of 2016 and 2017, underscored by rising stainless steel consumption in China.

The Canadian Mining Eye tracks Canadian mining sector performance of 100 TSX and TSXV mid-tier and junior companies with market capitalizations at the end, broadly falling between CDN $1.6b and CDN $47m.