While it’s not a surprise to many who follow the industry closely, the past year has been a difficult one for mining companies, both across the globe, but also in the United States and Canada as well. These businesses have been having a difficult time, partially due to falling commodities prices throughout the second half of 2018.
However, this is only part of the story, as many miners have been seeing their stock values decline and underperform benchmarks to a greater degree than otherwise would be expected. One report released by Ernst & Young LLP has shown that mining companies as a whole, with a particular emphasis on Canadian businesses, have been struggling due to a slowdown from China’s economy.
According to the report, the past three months in 2018 were especially hard for Canadian miners. The EY’s Canadian Mining Eye Index – which tracks the performance of 100 mining companies – declined 12 percent over the three-month period. Overall, industrial and precious metals fell by the same amount by December.
“Although some commodities saw considerable volatility in 2018, we remain optimistic for the year ahead. Strategic transactions, refocusing on quality deposits and, of course, digital transformation are top of mind as the mining and metals industry continues to work toward reinventing itself this year,” said Jeff Swinoga, EY Canada Mining & Metals analyst and one author of the report. “The shifting stakeholder landscape is creating mounting concerns from Canadian mining and metals companies over their license to operate. Firms must commit to being sustainable and responsible if they want to strengthen positive stakeholder relationships and attract new investment for future growth.”
The report goes on clarifying the situation that mining companies have been facing, something that those familiar in the industry are likely aware of. For some major companies, such as Vale SA (NYSE: VALE), their declines have come from costly safety errors including a multiple major dam ruptures in South America and fires in Malaysian facilities. As for the rest of the industry, large mining companies have struggled to remain innovative and competitive, falling well below industry expectations.
To counter this, management teams have begun embracing M&A strategies, hoping to consolidate, streamline, and improve their operations through strategic purchases. The most dramatic of which is the consolidation of Gordcorp Inc (TSE: G) and Newmont Gold (NYSE: NEM). A deal worth around $10 billion that’s recently been approved by Canadian regulators, the arrangement would see the formation of the largest gold miner in the world.
While 2018 was a difficult year, 2019 is shaping up to be particularly interesting. Commodities prices have surged back up over the past few weeks, with gold, palladium, copper, and many other precious metals reaching multi-month if not record highs. For many junior miners, this increase in price will give them some financial breathing room, as many have been struggling with existing debt and low-profit margins for a while.
The looming threat that still remains on the horizon, however, is the prospect of an economic downturn in either the U.S. or China. While the fed has postponed hiking up interest rates for now, there are indications that the Chinese economy is beginning to slow down. These signs, however, are still relatively early indicators at best and are contested by other analysts.