Mining: still down, but no longer out

The good news? The sector’s brutal, four-year decline is history. The bad? The hole’s still mighty deep
By Ken Mark

Spread it around: The metals and mining rally is edging beyond gold

“A small ray of light.”

Ask David Poynton, president and CEO of Toronto-based Daycon Minerals Corp., a tiny, privately held junior copper-silver explorer, for his take on the mining sector’s apparent rebound in 2016, and you’d be hard-pressed to call his response optimistic.

“The change has centred on golds,” Poynton explains, adding that the “nice bump” in the price of gold has led to some deals and even the creation of a few new plays. As for commodities, beyond a few “welcome indicators,” Poynton says, “they have not seen the same push.”

“We have finally heard about a couple of  financings and a couple of deals—but very, very limited,” he says. “For Daycon, it remains extremely challenging.”

View the scene from a more distant perspective, however, and you could be forgiven for thinking the long-awaited recovery—after a four-year slide into the abyss—has well and truly arrived. The S&P/TSX Composite Metals and Mining Index gained 40% in the second quarter, on top of a 34% jump in Q1. Meanwhile, the mining-heavy S&P/TSX Venture Composite Index, in decline since 2011, was up 50% this year through the end of August.

Globally, it’s been much the same story. Gold, as Poynton notes, has been rolling for some time. But investments have poured into commodities, too—through July, the most money in any year since 2009, according to Barclays. Iron ore prices have led the parade. In early September, that essential raw material for manufacturing and construction was up more than 40% from the end of 2015. But even metallurgical coal which, like iron ore, is used in steelmaking, has rallied from dreadful end-of-year lows and helped put a charge into share prices of a number of mining majors. In Canada, the most eye-popping gains belong to Teck Resources Ltd. (TSX:TCK.B), which produces metallurgical coal, copper, zinc and lead. In early September, its shares topped $22 after bottoming out in January at $3.80.

So which view of the recovery is accurate? The short answer: both. Despite the big index and share-price gains, the 2016 rally remains selective and potentially short-lived, according to most insiders. There’s little doubt the markets were oversold and due to bounce back, but persistently sluggish global economies, doubts about the strength of China’s recovery, and ample existing or projected supplies of most commodities (including iron ore) don’t inspire long-term confidence.

Nor, thus far, have they inspired retail or traditional institutional investors. Instead, most of the money pushing up stocks has been speculative, short-term funds. The way Poyton sees things, “the retail space has been decimated, and it will take major time and effort to bring ordinary investors back into the space.”

Sander Grieve, Toronto-based partner and head of Bennett Jones LLP’s mining group, is only slightly more positive. He sees “green shoots” in current market activity, but cautions against over-optimism.

The selective nature of the recovery is also evident in the types of companies that are attracting capital. Back in March, for example, Noront Resources Ltd. (TSX-V:NOT), which operates in the Ring of Fire region of Northern Ontario—targeting nickel and copper as well as platinum, palladium and chromite—completed a prospectus offering of units and flow-through units that raised $6.3 million. Several other juniors that are either producing or looking for similar exotic, in-demand substances, like vanadium and lithium, are also well-represented on the list of firms attracting significant money this year.

As the results come in from the end of Q3, we may already see some strong indicators as to how the rest of the year will play out, as well as what can be expected in 2017. Surveying recent research on the topic, the safe conclusion seems to be that the worst of the latest cycle is indeed in the past. But has there been enough rationalization to rescale expectations and weed out the excesses of debt and over-extension that burned so many companies and their backers on the way down?

According to Ernst & Young Canada’s most recent “Mining Eye” report, written in late summer, the answer is yes. “Most Canadian miners have successfully lowered their AISC [all-in sustaining costs] and are targeting further reductions,” the report states. “Going forward, the supply reductions, commodity price improvements along with enhanced margins will be instrumental for a positive outlook for the Canadian mining industry.”

That statement is conspicuously light on firm dates or expected milestones, however. Meanwhile, equity researchers at Canaccord Genuity are only willing to forecast “a mild improvement over the next 18 months” in the commodities markets. Recent upticks in the price of zinc and metallurgical coal are expected to lift a few more boats, with copper and nickel eventually joining the procession.

And so the last word, for now, might still rightly belong to Poynton, who continues to be motivated more by “belief, perseverance and patience” than any premature declaration that the good times are back.

Photography: Shutterstock

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