Drop in gold price continues to hit Canadian miners: 34% decline in Q2 — Ernst & Young

Sinking gold prices continued to hit Canadian mining and metals companies in the second quarter of the year, with the TSX and TSXV registering a 34% decline, Ernst & Young's most recent Canadian Mining Eye report shows.

The index — which tracks Canadian mining sector performance of 100 TSX and TSXV mid-tier and junior companies with market capitalizations between $1.6b and $75m — details how growing concerns around bullion prices are translating into a challenging market.

Since the historic highs of 2011, gold has dropped more than 30%. Only in the first six months of the year, it dove 22%, the worst fall since modern trading commenced in early 1970s.

About 51% of the companies that made up E&Y’s index own gold assets, which explains why the direction of the yellow metal prices couldn’t help less. Big names such as Barrick Gold (NYSE:ABX) and GoldCorp (NYSE:GG) logged massive charges. While Agnico-Eagle Mines Ltd. (TSX: AEM) announced plans to trim expenses by $250 million over the next year and a half.

According to EY’s Canadian Mining Eye: Q2 2013, access to capital has become more difficult as investors become more risk averse. And the trend, says the firm, is likely to continue for at least another year, with junior miners and small firms exploring for mineral deposits worldwide finding themselves cash strapped.

The report also describes how these companies are addressing challenges by focusing on streamlined operations, efficient cost management and capital management practices, including the disposal of non-core assets.

Some miners are pursuing creative financing options by seeking out opportunities in debt markets and attracting private investors with a long-term perspective on the sector.

The report concludes that, given the situation in which a number of mining projects are becoming marginal or uneconomical due to declining prices and increasing costs, big companies should consider the option of sharing asset ownership. This in order to mitigate their operational risk and increase overall upside opportunities.