EY Canadian Mining Eye index rebounds 72% in second quarter of 2020
The EY Canadian Mining Eye index saw a dramatic 72-point rebound in Q2 2020 after dropping 29% in Q1 2020 amid the impact of the pandemic. The index, which tracks the Canadian mining sector performance of 100 TSX and TSXV mid-tier and junior companies with market capitalizations between $240 million and $3.6 billion, was buoyed by rallying base metal and gold prices.
Base metals such as copper, nickel, and zinc saw their prices rebound in June, as the Chinese government announced a massive infrastructure stimulus package. Copper prices rose 22% in Q2 after a 20% decline in Q1; nickel prices rose 12% after an 18% fall in Q1; and zinc rose 7% after a 17% drop.
Copper prices are expected to see growth in the short-term due to demand from China, as well as because of tighter inventory. Nickel prices will likely see downward pressure in the short term because of an expected surplus in 2020, while global nickel demand is projected to decrease by 8.5% in 2020. Zinc prices will also be pressured in the short term with supply exceeding demand.
Gold prices, meanwhile, continued to increase in Q2 2020, with a rise of 11% after a 6% gain in Q1. Gold reached a price of US$1,800 at the end of June, driven by large liquidity measures from central banks worldwide and fear of a steeper global economic recession.
“Increased demand from China, along with the government’s infrastructure stimulus package, are helping to stabilize commodity prices and drive transaction activity,” said Jay Patel, EY Canada mining & metals transactions leader. “The good news is that Canada remains an attractive destination for foreign capital. Recent transactions show a trend toward zero premium deals to obtain cost, operation, and corporate synergies — plus offer an opportunity to gain more diversified portfolios.”
The recent SSR/Alacer Gold merger announcement, as well as previous deals such as Barrick/Rangold and Argonaut Gold/Alio Gold illustrate the above-mentioned M&A trend – which entails a merger of equals where no premium is paid by the buyer. The trend towards zero premium deals is expected to continue as buyers focus on minimizing costs (e.g. cutting general and administrative costs), increasing liquidity, and maximizing shareholder returns.
“The mining and metals industry has fared quite well despite the challenging landscape brought on by the pandemic,” said Jeff Swinoga, EY Canada mining & metals co-leader. “This isn’t the first time this sector has had to face adversity. Having the right tools and strategies in place has helped them to weather through.”
A recent report from PwC Canada noted that miners entered the pandemic crisis in a good position, boasting strong balance sheets and improved liquidity. The consulting firm said that miners have generally weathered the pandemic quite well, with mines in Canada and other countries continuing to operate because of their essential status.
PwC related that companies will have to continue building on their efforts in cybersecurity; environmental, social, and governance (ESG); and mergers and acquisitions to position themselves for long-term growth.
