Little optimism for Canadian mining equities in Ernst & Young report

Canadian mining equities fared poorly in Ernst & Young's most recent Canadian Mining Eye report, with the index plummeting 13% in Q1 2013, and 33% in the past 12 months.

The plunge follows a 17% drop in the forth quarter last year and 22% during 2012.

The index's fall is highlighted by the concurrent rise on the S&P/TSX Composite index, which gained 3% in the first quarter.

The quarterly report, which follows 100 TSX and TSXV mid-tier and junior companies with market capitalizations, cited the global economy as the driving force behind falling commodity prices.

Despite the weak performance, the professional service firm sees opportunities in "creative financing arrangements" undertaken by some juniors, such as consolidations between cash and property holders. Likewise, capital optimization and tighter purse strings among the majors are expected to help keep them in the black.

The biggest losers this quarter, according to the report, were San Gold, Rainy River Resources, General Moly and Mirabela Nickel’s, whose share prices each dropped at least 40%.

Although gold and silver were particularly hard-hit, some upward movement came from diamonds, uranium and platinum group metals.

earnst and young mining equities

Diamonds, uranium, PGMs up in an otherwise weak market

Market troubles translate into financial difficulty as majors try to find the best ways to allocate resources, while juniors face major financing issues. The dilemmas of capital allocation and access were outlined in another Ernst & Young report, Business risks facing mining and metals 2013-2014. The firm has concluded that the ability to invest capital is the number one risk facing mining and metals companies today.

Capital allocation decisions could prove difficult for mining companies who are torn between satisfying the demands of their increased pool of short-term shareholders, and not disappointing those that are in it for the long-term. Actions taken to meet short-term goals could jeopardize future growth, according to the report.

Lack of funding has been a recurring theme this year, particularly for juniors. Financing has not been this hard to come by in 10 years as investors look for low-risk opportunities.

The second most significant risk for mining and metals companies today is weak profit margins. Rising costs coupled with falling prices have taken a toll on the industry and will require companies to optimize operating costs.

Creative Commons image by JB Dodane
Graph courtesy of Ernst & Young Canadian Mining Eye