Canadian mining equities improve in Q1, but companies remain cautious

Canadian mining equities showed modest signs of improvement during the first quarter underpinned by commodity prices and continued cost focus of miners, according to Ernst & Young's recent Canadian Mining Eye report.

The index — which tracks Canadian mining sector performance of 100 TSX and TSXV mid-tier and junior companies with market capitalizations between $2 billion and $100 million – gained 13% during the first quarter compared to an 8% loss the previous quarter. It also outperformed the S&P/TSX Composite index, which gained only 5% during the first quarter. In comparison, the London Metal Exchange index (LMEX) lost 6% during the quarter.

While gold prices have experienced a modest recovery this year, hitting a six-month high mid-March, E&Y believes they will resume a declining trend. Prices for the precious metal are down 19% over a year and ongoing uncertainty over prices are likely to continue driving some companies to opt for hedging their future gold production.

Major players continue to focus on rigorous cost control measures and disciplined M&A activities and juniors still seek the right opportunities, adds the study. The first group gained 10% this quarter compared to a fall of 2% the previous quarter. The world's number one gold producer, Barrick Gold (TSE: ABX), reported a 14% decline in all-in sustaining costs to $899 an ounce for the last quarter compared to the same period in the previous year. Fellow Canadian Goldcorp (TSE:G) reported an 11% decline in all-in sustaining costs to $810 an ounce during the same period.

The report concludes that weak share and asset prices in the mining and metals sector provides companies with an opportunity to acquire assets at relatively lower prices. Some analysts are sounding caution that buyers need to maintain a disciplined view to acquisitions so that they avoid overpaying.

While some mid-tier companies were able to tap equity capital, fund raising still remains challenging for juniors. Juniors must continue to be creative in their approach to raise money in the market.

Overall, the report views the first quarter as a positive start for the year with modest strengthening of investor confidence levels for the sector.