BMI View: Canada's mining sector faces significant short-term headwinds that stand to curtail growth in output of key commodities such as gold and iron ore over 2015. At the top of the list is a strengthening US dollar which, combined with other factors, will see prices of several major commodities continue to depreciate over the coming months. Longer term, we expect Canada's diversified metals based and well developed capital markets to ensure it remains a top source of metals and financing, respectively.
Falling global commodity prices will present the main challenge to Canada's mining sector over 2015 with junior miners in particular struggling against narrowing margins. As such, output in many core mining segments, including gold and iron ore, will be sustained increasingly by larger multinationals with greater economies of scale. We expect gold prices in particular to trend lower over 2015 on the back of stronger dollar while iron ore and copper prices will also fall year-on-year in 2015 due to weaker Chinese demand growth and ample global supply. Subdued prices will set a higher threshold for ensuring projects remain economical, thereby limiting available funding for firms. Therefore, we expect mining firms to continue limiting capital expenditure (capex) to existing assets and scaling back exploration and development plans for greenfield projects. Indeed, the country's largest firms have seen capex spending fall in recent quarters, reflecting continued market headwinds.
We also expect to see further developments in M&A activity over the coming months as smaller miners look to combine resources and boost economies of scale amid narrowing margins. Q215 saw the completion of a merger between Alamos Gold and AuRico Gold to create a new gold producer, which will have a combined market capitalisation of about USD1.5bn and key producing projects in Canada and Mexico. The merged firm will own AuRico's El Chanate mine in Mexico and Young-Davidson mine in Ontario and Alamos's Mulatos mine in Mexico. The merger will also lead to the creation of a spinoff company, named AuRico Metals, which will own AuRico's Kemess Property in northern British Columbia and three royalty assets. Additionally, we expect private equity (PE) investment in the mining sector to become increasingly prominent, as PE firms seek investments in mining companies deemed undervalued. Canadian tax and royalty policies are set to remain favourable for mining firms, but Canada's dual-tiered regulatory system, comprising both provincial and federal stakeholders, can become problematic. Project approval can sometimes take upwards of several years, and different provinces can propose their own tax and royalty schemes on local investment.
|Potash & Gold Remain On Top|
|Canada - Minerals By Value Of Total Sector Output, 2013 (%)|
While we expect the outlook for the industry to remain challenging through 2015, we maintain that Canada has clear advantages that will see it continue to be a leading global metals producer and enabling solid, if modest, industry growth to 2019. Moreover, Canada's political leadership is likely to maintain favourable tax and regulatory policies for the sector, though policies may vary across the provincial level. Meanwhile, exploration and development activity will continue on account of the country's untapped resources. While Canada is less cost competitive on a per-unit-of-output basis compared to some developing-world exporters, its technological, infrastructure, and governance advantages makes it an attractive investment destination.
|Positive But Modest Outlook|
|Canada - Mining Industry Value & Growth|