Mining shares suffer brunt of TSX decline

China may not have been in the global economic news headlines on Tuesday, but somehow the giant Asian economy was dragged into the picture as Canadian mining stocks were bludgeoned for another day in Toronto.

On a day when mounting global risk-aversion surrounding Europe's debt woes drove investors away from equities and shaved 155.92 points off the Toronto Stock Exchange's benchmark S&P/TSX composite index , the materials index suffered the worst of the damage, falling more than 3 per cent on the day, as investors bailed out of stock in 66 of the 73 companies on the index that hosts much of the world's mining equity.

The materials index is down 21 per cent over the past three months, as Europe's debt problems and fears of a slowing Chinese economy have fuelled a selloff in the economically sensitive sector.

Tuesday's fallout came as the world mulled headline news about Greece, France and Spain and how political events there might impact the global economy. At the same time, investors were anticipating what China might say in reports due out this week on industrial production and consumer prices.

"The way I would characterize it is the difficulties with Greece and Spain are undermining the cyclical prospects for recovery, and obviously the mining stocks are most cyclically exposed and, therefore, they are the ones getting hit the hardest," said George Vasic, chief economist and strategist with UBS Securities Canada Inc.

Europe's economic outlook looked increasingly murky as political impasse in Greece led to predictions the country could exit the euro currency as early as this year. Investors are also still mulling the significance of an election victory in France by socialist François Hollande, who criticized German emphasis on austerity as a road to economic recovery.

"I think that this will be the new landscape," Mr. Vasic said. "It will be some time before we can shake off European concerns."

In Toronto, gold stocks led the mining sector lower, as Kinross Gold Corp. sank more than 6 per cent and Goldcorp Inc. fell more than 4 per cent. Base-metal producers also slumped, including Teck Resources Ltd. , down 2.4 per cent, and Lundin Mining Corp. , off 4.5 per cent.

Miners of base metals used for industry are especially sensitive to economic cycles, because they are major component in economic growth activities such as construction. Nowhere is that more evident than in China, which has been undergoing large-scale urbanization involving giant infrastructure projects.

China's massive growth has shown signs of slowing in recent months, and that has driven down the value of many of the commodities it so voraciously consumes.

The price of copper fell 2.2 per cent on the day, as fears grew about demand for industrial metals. Gold and silver prices were also off about 2 per cent. Crude oil , another key commodity for Canada's resource-heavy stock market, was off 0.5 per cent.

"There may be some uncertainty over the China data to come," said Patricia Mohr, vice-president of economics and commodity market specialist at Bank of Nova Scotia.

She also said those concerns were likely unwarranted, pointing out that China's industrial activity actually edged up 11.9 per cent year-over-year in March.

"You get bouts of risk aversion and bouts of worry over the global economic outlook, and we appear to be going through one of those now," she said.

Even as valuations plummet for Canadian miners, investors said they will wait for the global economic climate to settle before they take new stakes.

"I would only play the resource sector in companies that have strong balance sheets, and I believe the micro-caps and small-caps that are in need of funding are going to have an extremely difficult 2012," said Tim Logan, a portfolio manager at Cockfield Porretti Cunningham in Toronto, who also predicted further turbulence from Greece.