A multiyear rally in prices for base metals has put the mining industry on solid footing as the sector’s biggest annual convention rolls into Toronto.MICHAEL DALDER/Reuters
A multiyear rally in prices for base metals has put the mining industry on solid footing as the sector's biggest annual convention rolls into Toronto. But unlike the fervour that surrounded the industry during its previous upswing, investor enthusiasm for Canadian mining stocks this time around is decidedly muted.
The annual Prospectors & Developers Association of Canada (PDAC) convention kicks off on Sunday and runs through Wednesday, as the industry enjoys a healthy tailwind from firm metal prices.
Driven by brisk global demand, copper prices are trading around 3 1/2-year highs. Zinc is at levels not seen since 2007. Meantime, battery metals like cobalt and lithium are rocketing higher due to the increasing demand for electric cars and smartphones. And while some are worried that interest-rate hikes will eventually put a damper on global economic growth, others are optimistic.
"We are still in a stage of the commodities cycle which is demand-led, with supply lagging," BMO Nesbitt Burns Inc.'s global metals and mining research team wrote in a report earlier this week.
"Global industrial growth continues at a steady pace."
Against this backdrop one might expect to see renewed interest from Canadian fund managers in mining stocks. But demand has been lacklustre.
Sales of secondary stock issues from Canadian mining companies, a key measure of institutional demand, fell 44 per cent last year to $3.3-billion, according to data from Thomson Reuters.
While base metals prices have recovered in recent years, much of the critical gold sector has largely stagnated. The overall mining sector is still well below peak levels reached during the last great commodities supercycle seven years ago, when all the buzz centred on China's voracious appetite for industrial metals. The S&P/TSX Metals and Mining Index is roughly 55 per cent below 2011 levels.
"The problem for Canada, especially the mining sector," says Matt Barasch, portfolio manager with RBC Dominion Securities Inc., "is it's almost too small for investors to have to care about any more."
Just over a decade ago, the base-metals sector was dominated by giants like Inco Ltd., Falconbridge Ltd. and Alcan Inc., companies that have since been taken over by foreign rivals Vale SA (Inco), Xstrata (Falconbridge) and Rio Tinto PLC (Alcan).
"If you were a portfolio manager, you had to own something there," he said.
"It's a whole different world now, since everything got hollowed out with the big foreign buying spree."
Meantime, many of the Canadian large-capitalization metals and mining companies that remain are considerably smaller, compared with their peak valuations. Barrick Gold Corp., a $53-billion company in 2011, is now worth $17.2-billion. Teck Resources Ltd., currently worth $21-billion, was valued at $38-billion about seven years ago.
The trend is even more pronounced among the intermediate gold and base-metals producers.
"Most of these names now are just rounding errors in the index, said Mr. Barasch.
"It's a real challenge for this group to get noticed."
And with investors increasingly investing their risk capital into the burgeoning marijuana sector, the picture is orders of magnitude worse for juniors.
"The appetite from investors for being long small-cap mining companies is close to zero," he says.
One possible way out of the deadlock is for companies to start doing mergers and acquisitions again. If you're bigger, you have a better chance of getting noticed, says Mr. Barasch.
Investors can expect the M&A theme to pop up during PDAC. The convention itself, now in its 86th year, is also known for deal-making among companies.
A lot of presentations will centre around old faithfuls like how juniors can raise capital, access to property rights, and Indigenous affairs, but there will be added focus this year on mining innovation, as well as the need for the industry to improve its performance around gender and diversity issues.
PDAC 2018 will also feature networking events, technical information sessions, a big awards show (for prospector of the year) and, of course, parties galore.
Last year, a little over 24,000 people showed up, down from the peak years of 2012 and 2013 when 30,000 attended. While PDAC president Glenn Mullan wouldn't speculate on this year's attendance numbers, he's confident of a strong turnout. He's also increasingly upbeat on the overall mood of the industry, citing in particular the recent revival in the initial public offering market. Late last year, Brazilian mining company Nexa Resources SA, raised US$570-million in what was the third-biggest mining IPO ever on the Toronto Stock Exchange.
"We're not just cautiously optimistic. We're very optimistic," he says.
Niall McGee