Capitalizing on a period of progress and stability
Canada’s major mining companies have entered a period of relative stability after weathering a period of boom, bust and recovery. The sector has been paying down debt, improving balance sheets and judiciously investing in capital projects, on trend with the wider global mining industry in 2017.
Increasing efficiency and maintaining flexibility are now key goals to capitalize on the next stages of the cycle. We saw few eye-popping deals and limited financing activity in 2017—with large players opting to invest in new technologies, such as automation and big data analysis, to boost profitability over the long term.
This mood of patience coincides with relatively stable prices for most commodities—particularly gold, which is at the core of many miners listed on the Toronto Stock Exchange (TSX). Prices for copper, zinc, cobalt and lithium have also gained momentum as new end-user technologies to produce and store electricity promise to drive long-term demand for these commodities.
Last year’s activity may pale in comparison to the dramatic movement in recent years, but as commodity prices have stabilized at a moderate level, an attitude of cautious confidence has emerged for growth prospects in 2018.
Partner, PwC Canada
David Smith, Senior Vice President of Finance & CFO
Agnico Eagle Mines Limited
Last year, Agnico Eagle Mines Limited celebrated its 60th anniversary, hitting a milestone that few of its peers have reached, and once again landed among the top 10 TSX-listed mining companies for 2017. So what’s its secret to six decades of success? According to the company's CFO, it's the steady execution of a consistent strategy, strong assets and a family-like culture among employees.
Bryan Coates, President
Osisko Gold Royalties Ltd.
In less than four years, the market capitalization of Osisko Gold Royalties has soared five-fold to CA$2.5 billion. Its hybrid business model combines a traditional royalty and streaming business with an investment portfolio of publicly held resource companies, and it's this inventive strategy that's helped it become the fourth largest precious metal royalty company in the world today.
Mining stocks lagged behind the broader market last year, weighed down by stagnant gold prices that dipped 3% in the 12 months ended September 30, 2017. The aggregate value of the 225 mining companies listed on the TSX slipped 4% during that period, compared with a 10% gain for the overall market. The mining sector’s share of the value of the entire TSX market declined to 9%, down from 11% a year earlier.
Looking ahead, there are signs that the sector’s heavy reliance on gold could eventually shift as new technologies and markets create demand for different minerals. Rising production of electric vehicles, for example, is lifting demand for lithium, cobalt, copper, nickel, aluminum and manganese.
Almost half of the mining issuers on the TSX had market capitalizations of CA$150 million or less, and one third were valued between CA$150 million and CA$1 billion. This second group had the greatest expansion during the period, with the number of companies increasing to 74, up from 59 a year earlier.
As a group, the top 25 mining companies on the TSX showed a greater focus on debt reduction than capital expenditures last year. This discipline brought the average debt-to-equity ratio down by 7%.
Barrick Gold Corp., which held on to the top spot, reduced debt to US$6.4 billion, down from US$8.5 billion in September 2016. Kirkland Lake Gold Ltd. (no. 16) proved to be the strongest market performer, with its share price soaring 175% over the full year following the company’s acquisition of Newmarket Gold Inc.
Gold remained the most important commodity among the top 25, with 19 companies having exposure to the precious metal. But looking ahead, the most valuable mining company will be built on another commodity.
Nutrien Ltd., created from the merger of Potash Corporation of Saskatchewan Inc. and Agrium Inc., has a valuation of more than CA$40 billion. Pre-merger, Potash Corporation of Saskatchewan and Agrium secured second and third spots, respectively. Rounding out the top five were Franco-Nevada Corp. and Teck Resources Ltd.
Deal making slowed in 2017, as CEOs shied away from transformative mergers and acquisitions for smaller, strategic bolt-on transactions. This trend is likely to continue, and the story will be about mid-tier miners looking to increase efficiencies through consolidation.
Kirkland Lake Gold’s approximately CA$1 billion deal to acquire Newmarket Gold vaulted it up the ranks of gold producers, combining premium assets in Northeastern Ontario and Victoria, Australia. And Osisko Gold Royalties Ltd. spent CA$1.13 billion to acquire assets from US private equity firm Orion Mine Finance Group—driving up Osisko shares by 65%.
One of the most active buyers during the last two years has been Centerra Gold. The Toronto-based mining company acquired smaller rival AuRico Metals Inc. for CA$310 million and Thompson Creek Metals Company Inc. for approximately US$1.1 billion.
In terms of financing deals, mining companies on the TSX raised only half the equity capital in 2017 that they did the previous year. And for the second consecutive year, there were no mining initial public offerings on the TSX.