Canadian mining sector improves in early 2016

The Canadian mining sector got a much-needed boost in the first three months of 2016 thanks to higher gold and base metal prices, according to a new EY report.

EY’s Canadian Mining Eye Index, which tracks the performance of 100 TSX and TSX Venture Exchange  mid-tier and junior mining companies, climbed 26% in the first quarter. This compares to a 2% gain in the fourth quarter of 2015. (Companies on the index have a market capitalization of between $47 million and $1.6 billion.)

The Canadian Mining Eye outperformed the S&P/TSX Composite Index and the London Metal Exchange (LME), which gained 4% and 3% in the first quarter.

Over the same time, the S&P/TSX Composite Metals and Mining Index rose 34%, compared to a 4% gain in the previous quarter.

“Improved gold and base metal prices appeared to generate much-needed positive momentum in the sector,” Bruce Sprague, EY’s Canadian mining and metals leader, said in a release.

Gold had a strong start to the year, and reached a high of US$1,271 per oz. in the first quarter. Helping gold’s upward movement were signs that the U.S. Federal Reserve would cut the number of expected near-term interest rate hikes to two from four previously. This drew investors back to buying gold as a safe haven, the report states. Other factors helping bolster the gold price include slower economic growth, financial uncertainty and the adoption of negative interest rates by the central banks in Japan and Europe.

Over the first three months of the year, the yellow metal increased 16%, after a 5% decline in the fourth quarter.

On the LME over the first quarter, zinc soared 14%, erasing the loss in the previous quarter, while copper advanced 4%, versus a 9% decline in the fourth quarter. Nickel and lead retreated 4% and 6%.

“The modest improvement in base metal prices failed to offset widespread loss of confidence due to ongoing concern about growth in China and subdued demand for metals,” the report points out.

Regardless, some mining companies saw their share prices increase more than 70% in the first quarter.

Some top first-quarter performers that were not on the Canadian Mining Eye Index include Barrick Gold and Teck Resources. Their shares climbed 72% and 84%.

Kirkland Lake Gold, which is on the Canadian Mining Eye, rose 73% in the first quarter.

“The strong growth of Canadian mining equities also indicates benefits from strategic initiatives on non-core asset sales, aggressive cost control measures and a disciplined approach in reducing debt,” Sprague explained.

Gold prices dipped in the second quarter, recently trading  at US$1,212.80 per oz., before rebounding in response to speculation that interest rates would remain lower for longer. The report also forecasts “near-term price increases in many metals.”

“As markets anticipate more of the positive environment over the next few quarters, we are likely to see a turnaround of fortunes for companies,” EY’s mining and metals transactions leader Jay Patel says. “At the other end of the spectrum, challenging global market conditions remain, so some caution is warranted.”