‘I don’t remember times anything like this’: Miners navigate uncertainty of currency crises, trade war
Vancouver-based First Quantum Minerals Ltd. entered the summer with copper prices on the rise, and investors enthusiastic about its stock.
But the summer has not been kind to Canadian miners, and the company is now contending with plummeting copper prices — which have fallen 19 per cent since June to about US$5,820 per metric ton.
As the U.S. dollar rises in value, and fears of a U.S.-China trade war take root, many Canadian mining executives are seeing ripple effects, as the commodities they produce, from copper to gold, and currencies in some of the markets where they operate, get pummelled. It’s all creating a difficult environment for mining companies.
“I don’t remember times anything like this,” said Clive Newhall, president of First Quantum for more than two decades. “These are one-offs.”
“Our view of the future copper price is still a very positive one,” he added, “but in the short term, there’s obviously a lot of noise.”
The company’s stock is down nearly 25 per cent since early June to $17.24.
His company is not alone in predicting a positive copper outlook. In February, Goldman Sachs analysts had predicted copper prices could exceed US$8,000 per ton within 12 months.
As recently as May, BMO Capital Market analysts predicted a “large deficit” would emerge for copper supply-demand picture by 2019-20, and yet the price has since dipped to around US$6,000.
Newhall largely attributed the dip to the strength of the U.S. dollar, a development that has also had positive economic consequences for his company.
First instance, First Quantum sells much of its copper and other metals on the international market, and receives its revenue in U.S. dollars. That means that as the U.S. dollar became more valuable — and the Turkish lira fell — First Quantum will actually lessen some of its costs, including for labour, Newhall said.
The Turkish lira has lost nearly 40 per cent of its value, amid a growing rift with the U.S. over the detention of a U.S. pastor, that could lead to new sanctions against the country; and there are also concerns that Turkish President Tayyip Erdogan, who opposes raising interest rates, will exert influence on monetary policy.
“You don’t want to see the economy being trashed,” Newhall said, “but it has no significant impact.”
That’s also true for companies such as Toronto-based Alamos Gold Inc., which is building a mine in Turkey; according to its chief executive John McCluskey, more than 65 per cent of its costs are denominated in Turkish lira.
But even though the lira is falling, McClusky said some of those gains are offset by higher inflation.
More importantly, the price of gold, which it produces, is dropping off. Since rising above US$1,350 per ounce this spring, gold prices have continually edged down all summer to US$1,187 on Monday.
“Right now, we’re sort of bouncing along the bottom of a cycle of gold,” said McCluskey, “and it’s been down along that bottom there for years, but it eventually turns.”
His stock, like many of his peers has also been suffering, trading down 25 per cent since early June to $5.72.
John Ing, president of Toronto-based Maison Placements Inc., who writes a newsletter about gold, said that while the metal has fallen when measured in U.S. dollars, it is up against several emerging market currencies.
“In the emerging market gold is performing as it should… a hedge,” Ing said via email to the Financial Post.
The drop in commodity prices comes after a period in which many metal prices had been rising, inspiring companies to increase exploration budgets. In 2018, Canadian companies focused on gold, copper, zinc and cobalt are set to increase exploration by 15 to 20 per cent this year, according to a report by Ernst & Young released last week.
But Almos Gold’s McCluskey brushed aside concerns about any change in momentum in commodity prices, since the beginning of the year, saying prices are still better than a decade ago.
“You have to build projects that make sense even under your worst case assumptions,” said McCluskey, “And it’s necessary for us to take a really long term perspective.”