EY’s Canadian Mining Eye Index falls in Q1

VANCOUVER (miningweekly.com) – The EY Canadian Mining Eye Index has shown a decline in first-quarter performance, falling 8% from the fourth quarter of 2017, the professional services firm reported on Thursday.

Based on the 2018 operating guidance released by the majority of Canadian gold mining companies, average production is expected to be flat to slightly lower due to reducing grade, mine closures and suspensions.

The all-in sustaining cost is expected to track higher this year on account of a weaker US dollar and rising input costs. This, coupled with higher capital expenditure expectations, is anticipated to put downward pressure on free cash flow generation.

According to EY, the gold price continued to increase following growth witnessed in the most recent fourth quarter – up 2% in the period ended March. The firm pointed out that price improvements were owing to rising geopolitical risks and dollar weakness, offset partially by the recent US Federal Reserve rate hike of 0.25%.

“Gold prices continue to grow, but production declines may be looming in the near future. Reducing grades, mine closures and suspensions are all factors expected to lower average gold production in the near to medium term. Despite the decline, companies appear optimistic of gold prices going forward,” EY Canada mining and metals leader Jim MacLean said in a statement sent to Mining Weekly Online.

Meanwhile, nickel prices continued to increase, up 4% quarter-on-quarter, whereas zinc and copper prices decreased by 2% and 7%, respectively. This follows a 12% gain in copper prices last quarter that was largely driven by supply disruption concerns, EY advised.

Further, the EY ‘Mergers, acquisitions and capital raising in mining and metals – 2018 outlook’ report indicated that the buzz around new world critical minerals and battery technology, will put deals in lithium, copper and cobalt high on the agenda of management teams across the industry.

“The long-term outlook for copper and nickel remains positive, with prices slated to benefit from the growing adoption of electric vehicles and battery technology. But it is likely that significant price increases won’t come into play in the immediate future, as both markets currently face surplus conditions. In the meantime, companies should be actively reviewing their portfolios – keeping a keen eye on minerals and new technologies fit for future growth,” EY Canada mining and metals transactions leader Jay Patel added.

According to the Mining Eye Index, Barrick Gold and Newmont Mining’s total output is expected to trend lower in the near to medium term. Barrick expects production to hover within the range of 4.2-million to 4.6-million ounces of gold during the period 2020 to 2022, representing a 16% decline from 2017 levels. Newmont expects production to decline about 8% during the same period to a range between 4.6-million and 5.1-million ounces of yellow metal.

PRICE OUTLOOK
EY said gold prices have held up above the $1 300/oz level in the first quarter, but further US rate hikes could challenge any further price gains this year, mainly owing to the strong US dollar.

At the recent Federal Open Market Committee meeting, the Federal Reserve also increased its expectations for 2018 US gross domestic product growth from 2.5% announced in December, to 2.7%, and from 2.1% to 2.4% in 2019. However, continued strong demand trends from both China and India, coupled with ongoing geopolitical risks, are expected to provide support to gold prices, EY noted.

In base metals, copper prices are slated to benefit from the growing adoption of electric vehicles (EVs). EV-driven copper demand is expected to increase from 185 000 t in 2017 to 1.74-million tonnes in 2027. However, in the near to medium term, copper prices may soften, but this is mainly dependent on the extent to which supply is disrupted. The copper price rallied in December over concerns that labour negotiations may disrupt more than seven-million tonnes of copper production in 2018, the firm stated.

Zinc prices are still expected to trend higher this year, with favourable market conditions providing wind in the metal’s sails. Market research suggests zinc prices will peak this year, with the industry remaining in considerable supply deficit, particularly in the first half of 2018. However, global supply is expected to increase in 2019 on the back of new supply from Lady Loretta mine (expected to restart in the first half of 2018), MMG’s Dugald River project, in Australia, and Vedanta’s Gamsberg mine, in South Africa.

The long-term outlook for nickel remains positive, underscored by increased demand for batteries used in EVs. However, nickel prices are expected to be under slight pressure in 2018 on account of surplus market conditions, given higher supply from Indonesia and a sluggish demand outlook in China. Indonesia is expected to account for 25% of the world’s nickel ore production in 2018, according to EY.