Gold prices continue to increase on back of weak dollar and geopolitical threats

26 June 2018

Gold prices increased 2% while nickel prices increased 4%, according to the Q1 2018 edition of EY’s Canadian Mining Eye index. Meanwhile, copper and zinc prices decreased by 7% and 2% respectively.

Canada is one of the leading mining countries in the world, with mineral production worth $40.8 billion in 2016. The country is the number one global producer of potash, and a top 5 producer of cobalt, diamonds, gold, nickel, platinum, and uranium. Gold, copper, potash, iron, and coal are the top 5 mineral products by value, accounting for $24 billion (or 60%) of Canada’s mineral production.

The Canadian minerals industry accounts for about 596,000 jobs, and adds $87 billion in GDP (3% of Canada’s GDP). Minerals exports were valued at $89 billion in 2016, accounting for about 19% of Canada’s total domestic exports. The country is also the world’s most attractive region for mining investment, according to a survey of mining executives conducted by the Fraser Institute.

The mining sector has, however, seen turbulent times in the past number of years. Commodity prices – including metals – took a dive during the Financial Crisis, rebounded, and then fell again in the mid-2010s. Prices have rebounded somewhat, stabilizing at a lower mark than their pre-crisis peak. The World Bank projects commodity prices – including agricultural, energy, and metals products – to stabilize throughout the next decade after the previous ‘boom-bust’ cycle. Agriculture and metals prices are expected to weaken slightly in real terms to 2030, while energy prices could increase slightly.Composite index performance since 2008Accounting and consulting firm EY’s most recent Canadian Mining Eye index report for Q1 2018 showed a decline of 8% points from Q4 2017. Meanwhile, the S&P/TSX Composite Metals and Mining Index, as well as the Mining Majors index, declined 6% from Q4 2017.

Gold prices, however, were up 2% in Q1 2018, driven by geopolitical risks and dollar weakness. “We’re bullish on gold and believe the demand for gold as a safe haven will increase,” remarked Stephen Letwin, President and CEO of IAMGOLD. “An extremely volatile market, reflecting global trade wars, unpredictable policy changes in the US and elevated geopolitical risks, drives demand for gold as a hedge.”

EY’s report cautions that Canadian gold production of is expected to be flat to slightly lower due to reducing grade, mine closures, and suspensions. According to Barrick Gold and Newmont Mining, gold production is expected to trend lower in the near to medium term. In response senior gold companies will be looking to invest in more junior companies to replenish their reserves.

Looking to the future, rate hikes from the Federal Reserve will challenge the over US$1,300 price of gold by strengthening the US dollar. However, continued strong demand from China and India, as well as ongoing geopolitical risks, will help support gold prices in the future.Canadian Mining Eye index, LMEX index, gold, and copper over Q1 2018In the category of base metals, nickel prices increased 4%, compared to a staggering 22% gain in Q4 2017. In the long-term, nickel prices are expect to do well, supported by demand for electric vehicle (EV) batteries.  However, EY expects some pressure on prices in 2018 due to nickel surpluses, with higher supply from Indonesia (which is projected to produce a quarter of the world’s nickel), while demand from China slows.

Copper prices decreased by 7% in Q1 2018 after gaining 12% last quarter because of concern over labour disruption. Although EV battery demand is also expected to drive up copper prices, near-to-medium copper prices are projected to be soft, depending on the scale of supply disruptions.

“The long-term outlook for copper and nickel remains positive, with prices slated to benefit from the growing adoption of electric vehicles and battery technology,” commented Jay Patel, EY Canada Mining & Metals Transactions Leader. “But it is likely that significant price increases won’t come into play in the immediate future, as both markets currently face surplus conditions. In the meantime, companies should be actively reviewing their portfolios – keeping a keen eye on minerals and new technologies fit for future growth.”

Meanwhile, zinc prices declined by 2% in Q1 2018 on the EY Canadian Mining Eye index. The report expects zinc prices to trend higher in 2018 because of a considerable supply deficit. However, global supply is expected to increase in 2019 with the opening of large zinc mines in Australia (Lady Loretta, Dugald River) and South America (Gamsberg).



Canadian cannabis firms have attractive international opportunities, MNP reports

18 April 2019

Accounting and consulting firm MNP has released a report examining the comparative favourability of international cannabis markets.

As the first G7 country to legalize recreational cannabis, Canadian businesses are in an advantageous position to steer the emerging sector. However, Canada’s market is still a small one in the global scale of things. As in the case of other industries like manufacturing or natural resources, Canada’s cannabis firms need to pursue opportunities abroad in order to compete globally and unlock true growth potential.

"Canadian cannabis firms have the financial capital, intellectual capital, human capital, and a supportive policy framework to germinate the seeds of international success," Glenn Fraser, MNP's national cannabis co-leader, said. "Whether opportunities blossom depends on how effectively they leverage those advantages to get in on the ground floor of new markets. The time is now for Canadian cannabis companies to take a leadership role and replicate the Canadian model in new environments."

For now, only Canada and Uruguay have legalized recreational cannabis sales on a national level. However, numerous countries have legalized medical marijuana, and more still are contemplating recreational legalization, encouraged by Canada’s example as well as the changing attitudes of citizens.

MNP, a nationwide accounting and consulting firm with a strong cannabis advisory practice, recently released an illuminating report on the comparative attractiveness of international cannabis markets. The firm analyzed 16 international markets with dynamic cannabis sectors, considering factors like available financing, taxes and fee structures, and policy maturity. Though no markets received top marks across all categories, several still showed great promise.

Financing opportunities

Accessing capital, banking, and financial services can be a challenge in some markets, but remains an important part of market viability and business success. As such, MNP’s report analyzed the relative ease of accessing capital through public or private markets, as well as the availability of banking services.

Israel, Switzerland, Australia, and Malta emerged as the markets with the best financing opportunities. Israel’s cannabis sector, which has seen strong investment from Canadian firms, has also been buoyed by the anticipated legalization of exports. The Israeli market is largely supported by private equity firm iCan, which represent firms from more than 40 countries.

Switzerland’s cannabis market has also seen heavy investment from Canada, while the SIX Swiss Exchange and Bern exchange provide ample access to further capital. Venture capital is also expanding rapidly.

Australia, meanwhile, has the Australian Stock Exchange, which is already home to more than 20 cannabis stocks, including AusCan, Bod Australia, and Atlas Pearls.

Malta has strong access to capital though the Malta Stock exchange, as well as investment from banks. The small island nation has a particularly vibrant emerging medical cannabis sector, which has largely been built from international investment. "If Canadian businesses want to build eminence in new countries, they need to involve themselves in cannabis' continued integration into healthcare," David Danziger, senior vice president, assurance, MNP, said. 

"Companies who are already active in regions with a burgeoning medical market will have a clear advantage – both in terms of brand awareness, infrastructure, and international relationships – if and when those areas transition to recreational legalization," Danziger added.

Colombia, Jamaica, Denmark, Germany, and the UK were tagged as mid-level markets for financing opportunity, while Uruguay, Mexico, Netherlands, Portugal, Italy, Africa, and Asia were on the low-end.

Taxation and fees

Another central factor is the level of taxation and fees, which determine overall profitability, but also cannabis sector viability – set taxes and fees too high, and consumers will flock to the black market instead of buying overpriced legal pot. Uruguay (corporate tax rate 25%), Portugal (21%), and Jamaica (25%) were deemed as having the most favourable tax and fee burdens. Asia also entered the top tier, with China holding a corporate tax rate of 25%, and Thailand carrying a favourable 20% rate.

The UK, Netherlands, Australia, and Mexico were in the middle range, while Colombia, Israel, Switzerland, Malta, Italy, Denmark, Germany, and Africa were in the high-taxation range. All of the countries in the mid and high tier for taxation were hampered by either higher corporate tax rates, value added taxes (usually in 20% range), or a combination of both.

Policy maturity

Colombia, Jamaica, Australia, Malta, and Germany have the most mature and open cannabis policy environments, according to the MNP report. Jamaica is setting itself up as a premier legal cannabis producer, with progressive cannabis laws and dispensaries that allow tourists to purchase medical cannabis.

Colombia is creating a strong export market, with 80 companies producing cannabis products, many with international investment. The sale of dried cannabis for medicinal purposes, is, however, still barred.

Australia has a strong amount of domestic production underway with investment from Canadian firms, and recently permitted cannabis exports. There is also the belief that the government will start reimbursing medical marijuana in the years to come.

Though it has a miniscule population, Malta’s cannabis industry has attracted heavy international investment. The country’s high cost-per-gram paid by patients, as well as its liberal medical cannabis importation policies, make the country an attractive target.

Finally, Germany has perhaps the most advanced medical cannabis market, with its own government agency and costs coverage by the national health plan. The number of insured patients and medical cannabis imports are both on the rise, and some executives believe recreational legalization is on the horizon.

Uruguay, Israel, Italy, the UK, and Mexico were deemed to have mid-level policy favourability, while the Netherlands, Switzerland, Portugal, Denmark, Africa, and Asia had low-end policies. The Netherlands, despite its image as a pot haven of sorts – especially in Amsterdam – is actually just lax on enforcement, as the drug is still federally illegal. Many of the countries on the list have decriminalized personal possession and consumption of marijuana, but its sale and production remains illegal (outside of medical parameters). 

Overall, Jamaica and Australia emerged as perhaps the most attractive cannabis markets, with Australia in the high tier for financing and policy, and mid tier for taxation. Jamaica, meanwhile, has high-tier policy, mid-level financing, and a low-tax environment.

Looking forward, MNP advises Canadian firms to double down on their competitive advantages, while building a strong brand at home as opportunities open up abroad. "It's important for local cannabis companies to consider their areas of expertise and invest heavily in owning that position in the market," Fraser said. "The most valuable international opportunities will go to those companies who have developed a sustainable (and transferable) competitive advantage in conjunction with a recognizable brand in their home market."