EDITORIAL PAGE Earnings show cost of high rate

If there were any doubts about the effect of current monetary policy on Canada’s mining industry, second-quarter results should put an end to them. High interest rates and the resulting strong dollar are playing havoc with metal miners. A quick glance at some quarterly results of Canadian mining companies compared with some of their counterparts in the U.S. shows a variance that is directly linked to the Bank of Canada’s high interest rate policy.

Some of the sharpest declines in profit can be explained by other factors, metal price fluctuations for instance. Inco Ltd.’s 1990 first-half profit was cut almost in half from 1989, but earnings of $892 million in 1989 were an aberration. Nickel prices at one point traded at more than $10 a pound, more than quadruple the best price in 1987. Prices in 1990 are still strong but certainly more reasonable — and more sustainable — than those experienced in 1989.

Noranda’s 59% earnings decline may also be partly attributed to activities not related to mining — the big natural resources company has greater assets deployed in the forestry sector than mining.

But the sharp declines of other producers relate directly to the bank’s policy. Cominco Ltd.’s 72% decline cannot be wholly explained by labor problems. Rio Algom’s earnings were down 43% and Hudson Bay Mining & Smelting’s fell by 70%.

The performance of gold producers was more varied, but similar declines were evident: Corona’s earnings were down by 21%, Hemlo Gold was down by 47%, LAC Minerals was down 74%. Only Cambior Inc. enjoyed a true increase, and that was a 10% increase to $11 million. Placer Dome’s increase was due largely to selling oil and gas assets while American Barrick Resources’ 130% increase in earnings is the result of a 79% increase in gold production at its Goldstrike mine in Nevada.

U.S. companies have not fared well, either, compared with 1989, but the declines are far less dramatic than those in Canada. Asarco, the big base metal producer, saw earnings decline by 28% in the first half of 1990 compared with a year earlier. Freeport- McMoran Copper was down 22%. Inspiration Resources, the parent of Hudson Bay, was off 31%. At Phelps Dodge, the largest U.S. copper producer, earnings fell by 23%.

Two major U.S. gold producers, on the other hand, enjoyed gains. Homestake Mining’s earnings were up 41% and Newmont Gold’s earnings were up 85%.

There are special circumstances for each company, but the trend is clear. While companies on both sides of the border have had to contend with the same prices for their products, earnings in Canada declined much more sharply than those in the U.S.

The reason for the difference is twofold. First, Canadian companies have had to deal in a currency that is increasing in relation to commodity prices (which are designated in U.S. currency). Second, while Canadian firms are used to coping with interest rates somewhat higher than those in the U.S., the spread between the two has been significantly greater than usual so far in 1990.

The Bank of Canada’s campaign to maintain high interest rates in order to cool down the economy and keep inflation under control is understandable, but it has already accomplished its greatest effect in that fight. Any further gains on that front come at too great a cost.

In the administration of monetary policy, as in an investor’s ability to anticipate the market in order to buy low and sell high, timing is everything. The time for the Bank of Canada to ease interest rates is overdue.