AP: Gold leads upswing in roller-coaster year for Canadian mining
When the world's biggest gold miner launched a gigantic stock issue to help it profit from an upswing in the precious metal's price, it was a clear sign the Canadian mining industry's fortunes had turned the corner on a truly dismal slump.
In perhaps the most blatant expression of optimism that the worst is over, Toronto-based Barrick Gold Corp. (TSX:ABX) raised nearly US$4 billion for the express purpose of wiping out its decades-old hedging program -- set up to protect it from a drop in gold prices -- under the assumption the metal is only going higher in the foreseeable future.
Barrick president and CEO Aaron Regent has been proven right so far, as gold has risen steadily since the summer to a record high of more than US$1,200 an ounce, lifting Canada's many gold mining companies along with it.
Barrick's stock price is within spitting distance of the highs it reached before the market crashed, alongside other major Canadian gold miners such as Goldcorp Inc. (TSX:G), Kinross Gold Corp. (TSX:K) and Agnico-Eagle Mines Ltd. (TSX:AEM).
By contrast, the shares of many base metals miners have not been so quick to recover and are "lucky to be at 50%" of their former peaks, said Andrew Martyn, president and portfolio manager at Falcon Asset Management.
Gold's status as a safe-haven investment wasn't enough to protect it from the global slump in commodity prices that accompanied the recession, dropping the price of bullion below US$750 per ounce in late 2008.
As the economy improved, however, investors who fear massive government stimulus programs will eventually translate into rampant inflation have turned to gold in droves. This includes central banks such as India's, which bought 182 tonnes of gold from the International Monetary Fund in early November, boosting its bullion holdings by more than half.
"Gold is being remonetized these days and is behaving now a little more like a currency, rather than an industrial metal... and of course central banks, after being small net sellers in the first half of this year, have probably turned into net buyers," said Patricia Mohr, vice-president for economics and a commodity market specialist at Scotiabank.
Mohr added that she expects gold prices will continue to move higher for at least six months as the U. S. dollar continues to fall, which is great news for gold miners.
"People are raising their money, they're advancing their properties... it's a very good time. We have a lot more confidence," David Harquail, president and CEO of resource royalty company Franco-Nevada Corp. (TSX:FNV), said at a recent precious metals conference.
Harquail figures the best way to grow Franco-Nevada's portfolio is to ensure it consists of a minimum of 70% precious metals, indicating that investors remain more confident about the outlook for gold than that of the base metals.
Lacking the safe-haven status bestowed upon their shiny yellow cousin, base metals have to rely on the fortunes of the economy when it comes to demand. When manufacturing virtually ground to a halt in late 2008 and early 2009, the prices of all base metals plummeted sharply.
Since then, government stimulus spending has led to a general improvement in demand, as has restocking by major economies like China. A weaker U. S. dollar has also helped to push the prices of all commodities higher. As 2009 draws to a close, the TSX base metals index is up almost 300% from the lows it reached in early March.
The mining companies that survived the recession with relatively healthy balance sheets and low-cost operating assets have reaped the rewards of this improvement, although many weaker companies are still struggling to survive.
"I was modestly surprised that some of the large players survived intact without actually hitting the financial wall," Martyn said.
"Many companies, including the actual producers, were on the border of falling off a cliff. They were shuttering operations. They had too much debt."
Martyn cited Teck Resources Ltd. (TSX:TCK. B), Canada's largest publicly traded base metals miner, as one of the more impressive rebound stories of the year. Teck (formerly Teck Cominco) incurred $10 billion in debt to acquire Fording Canadian Coal Trust in October 2008, just as the economy fell apart. Teck stock, which peaked above $50 in the spring, fell as low as $3.35 in March.
But Teck managed to pull itself out of the abyss by slashing 13% of its workforce, selling assets, and eventually divesting a chunk of the company to a Chinese firm. Its stock responded by soaring back above $37 by December.
However, not all companies were as successful at turning themselves around.
Martyn said the hardest hit miners were exploration companies with no producing assets, or juniors with one asset that was profitable when commodity prices were higher but became unfeasible when the recession hit.
"There was massive blood all over the street on those exploration plays," he said, adding that their stocks are still more than 80% below their highs, on average.
Scotiabank's Mohr said some base metals prices could move even lower in the next few months as China completes its restocking, but will then rise again "at some point next year."
And Martyn predicted that because it's getting increasingly difficult to find quality mines in politically stable jurisdictions and the cost of bringing on a new mine is much higher than it used to be, supply limitations will drive base metals prices to new highs over the long run.
"Before, if you could bring on a mine in three years and $100 million, now it's going to be 10 years and $1 billion," he said.
"The supply curve is shorter, and when people have an impetus and a push in demand, the prices will go higher this cycle than in any other cycle."
And higher prices will, in turn, make Canadian mining companies more appealing to potential suitors, particularly the Chinese, said Andre Hidi, executive managing director and head of global mergers and acquisitions at BMO Capital Markets, at a recent M&A conference.
"We think the ongoing interest of particularly Chinese (state-owned enterprises) and investment funds... in some of our resource plays is going to continue, and frankly could well accelerate and focus more on larger companies as we go forward," Hidi said.
In addition, state-owned companies in countries like China and South Korea are eager to use so-called "moose pasture mines," or undeveloped projects, as a form of currency, said GMP Securities chairman Eugene McBurney.
"They'll use them quite aggressively to buy companies and to buy hard assets," said McBurney, who added that these state-owned enterprises are also interested in securing long-term supply and will be particularly attracted to Canadian coal and base metals miners as a result.
Martyn cited Gabriel Resources Ltd. (TSX:GBU), which owns a gold-silver project in Romania, and Colossus Minerals Inc. (TSX:CSI), which owns a gold-platinum-palladium project in Brazil, as examples of attractive targets.
