With commodity prices still weak, major Canadian mining companies are looking for ways to tighten their purse strings, and in some cases are delaying costly projects.
Teck Resources has pushed back production plans at a coal mine in British Columbia until demand for metallurgical coal recovers. It also announced a copper mine in Chile has been slowed by environmental permits so construction won’t begin until 2016 at the earliest.
“Teck is adapting to current market conditions,” president and chief executive Donald Lindsay told analysts during a conference call Thursday. “We are prudently deferring projects and capital expenditures.”
Patricia Mohr, vice-president and commodity market specialist at Scotiabank, said long-planned copper production is starting to come on stream, after years of no growth, so the move is affecting prices.
“You’re beginning to see a much more disciplined approach to capital spending, with some mining companies beginning to defer some new mine projects,” Mohr said.
Also Thursday, Goldcorp Inc., a Vancouver-based mining company, took a whopping $1.96 billion (U.S.) write-down of its assets as it reported second-quarter earnings.
It joins other gold mining companies that have announced at least $13 billion of write-downs in the past two months, as gold prices had their biggest quarterly slide in more than nine decades. Miners are trying to pare down costs and defer mine development as gold prices fall.
Mohr noted gold prices had soared in recent years because of various central bank policies like quantitative easing in the U.S., where the government buys $85 billion (U.S.) each month in long-term bonds and mortgage-backed securities as a way to kick-start the economy.
“In recent weeks, gold has picked up again,” Mohr said, noting U.S. Federal Reserve chairman Ben Bernanke has tried to calm markets about when it will reduce those purchases.
“It could very well move down again, when the Fed does start to taper its bond asset program. I wouldn’t be surprised to see gold move down again,” she said.
Goldcorp said it would have been profitable in the second quarter without the one-time charge. It added that market factors forced a reassessment of the book value of Goldcorp’s portfolio, primarily related to its Penasquito mine in Mexico.
Last month, Barrick Gold Corp. said first production from its Pascua-Lama gold and silver venture in the Andes would be delayed by more than 18 months, with production slated for mid-2016 instead of the original 2014 target. As well, it forecast taking a write-down of up to $5.5-billion (U.S.) on the South American project.
These announcements reflect the highly cyclical nature of the mining business, where prices can directly influence production.
“We have been buoyed over the last five years by China,” said University of Toronto business professor Laurence Booth. “Normally, you would expect that a recession this deep in the United States and Europe would reduce the demand for commodities, particularly copper,” he said.
Yet Canada quickly bounced back from the 2008 financial crisis, though recent concerns about weaker growth in China are prompting some companies to reassess whether certain projects should go ahead.
Booth said companies are asking themselves: “Does it make sense to expand and extract at the moment, at current prices today?”
As companies pull back, the ripple effect will be felt in Toronto, where more than half of the world’s public mining stocks trade on either the Toronto Stock Exchange or the venture exchange.
That means the army of lawyers, investment bankers and accountants may not be needed if deals are being done, Booth said.
“If they are the pre-eminent mining exchange, and commodity prices collapse, there’s a huge downdraft,” he said.
Mohr added that merger and acquisitions activity could very well heat up next year. But for now, she said prices are low.
“For retail investors, now is not the time to be selling base metal stocks,” she said. “The next 12 months would be the time to start building positions because it is going to come back.”
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