According to an Ernst and Young report released on August 24, 2015, the Canadian Mining Eye index experienced a 4% gain in Q2 2015, as compared to a 1% loss in Q1 2015. This increase was the first quarterly gain for the index since Q2 2014. While the quarterly results in the sector reported by EY were not all positive, the gain is certainly a welcome development.
EY's Canadian Mining Eye index tracks the performance of 100 TSX and TSX Venture mid-tier and junior companies with market caps generally between CDN$100m and CDN$1.7bn. Q2 saw the Canadian Mining Eye index outperform the S&P/TSX Composite index, which instead fell 2%, and the London Metal Exchange index which lost 5% for the quarter. According to the EY report, the main source of the gain can be attributed to certain companies which saw positive financial results, higher production data, accretive acquisitions and good progress on projects. EY also reports that M&A activity in the Canadian mining sector remained steady in Q2, made up of synergy-enhancing consolidations and dispositions by junior companies feeling the cash crunch.
While the Canadian Mining Eye index saw a jump, metal prices are not seeing as much forward momentum, with gold falling 2% from Q1, copper down 5%, nickel losing 3% and lead dropping 5%. The EY report points to worries surrounding China's economy, plagued by debt and falling property prices, as well as the Greek debt crisis, as contributing to the decline in metal prices. Gold prices were also particularly affected by a strong US dollar and the possibility of a raise in interest rates from the US Federal Reserve.
Looking ahead to the second half of 2015, EY predicts that mining equities in Canada will remain quiet and metal prices are expected to continue to struggle due to sustained pressure from the fledgling Chinese market. M&A activity is likely to be made up of strategic consolidations and companies seeking investment opportunities while companies are expected to keep a tight lid on their capital expenditures. Whether these factors will allow for increased gains on the Canadian Mining Eye index will be something to watch in the second half of 2015.
Norton Rose Fulbright Canada LLP
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