B.C. mining | BCBusiness

B.C. Mining | BCBusiness

Mining companies comprise the single biggest group on our Top 100 list. But will a commodities bust sink their fortunes? (Return to B.C.'s Top 100 of 2013)

Vancouver has been a hotbed for mining startups for decades, but the proliferation of companies in the past decade that has made mining the largest single sector among B.C.’s Top 100 companies has its downside, too.

Speaking to BCBusiness at this time last year, Oxygen Capital Corp. founder Mark O’Dea warned of a shakeout in the mining sector. Having successfully sold Fronteer Gold Inc. to Newmont Mining Corp. for $2.3 billion and embarked on two new ventures, O’Dea suggested that only the rich would survive as the sector worked through a season of tough financing conditions.

“It’s becoming increasingly hard for investors to be discerning and to sift through the array of opportunities to find the right ones to invest in,” he said at the time, warning that consolidation was needed in the sector if investors were to focus attention on the best opportunities.

“The companies that can demonstrate that they can move their projects forward over the next 12 to 18 months without the need to finance are going to be the 50 or so companies that investors are going to pour into when the risk trade comes back on,” he said.

A year later, the shakeout O’Dea predicted is here. There were more than 960 publicly listed mining companies based in B.C. at the end of 2012, but properties and assets have changed hands and larger competitors have acquired some of the province’s promising miners.

Eldorado Gold Corp. acquired European Goldfields Ltd., while buyers from outside the province have acquired Great Basin Gold Ltd., Quadra FNX Mining Ltd. and Scorpio Mining Corp., removing them from the Top 100 lists.

A drop in commodity prices as the global economy caught its breath contributed to the shakeout, putting pressure on cash flows and spurring acquisition activity. Teck Resources Ltd., the biggest company in the province in 2011, turned its crown over to Telus Corp. last year as its revenues dropped 10 per cent. A general decline in metal prices—notwithstanding significant revenue growth as production ramped up at Copper Mountain Mining Corp., North American Tungsten Corp. Ltd. and Sandstorm Gold Ltd.—was reflected in the sector’s diminished favour among investors.

“With China and India dialling down their needs quite dramatically, it’s put a real capper on the mining sector,” says Lee Davis, a managing director with PricewaterhouseCoopers Corporate Finance Inc. “Commodity prices are way down. We know gold’s way off, we know copper’s off, zinc’s off—everything’s off their peaks.”

While the hit to commodity prices directly impacted the revenues of the province’s biggest firms, junior mining companies took a particular beating as investors took flight.

“Companies that were expecting to go back to the public markets and get next year’s chunk of capital to develop and further delineate their properties [find] that’s just not open right now,” Davis says. “They’re a little bit dead in the water, unfortunately.”

The pause won’t last forever, but observers such as Bruce Sprague, who leads the mining and metals practice for accounting firm Ernst & Young in Canada, aren’t weighing in on when commodity prices will recover. “Top-line revenue for a mining company is a function of their commodity price, which is based on any number of factors—not least of which is the global macroeconomic environment,” he says.

Most mining and exploration companies take the fluctuations in market conditions in stride, he says, and the global nature of opportunities in the sector help keep miners optimistic.

While the province is mineral-rich, there are few significant mines in B.C.; most B.C.-based miners derive their revenues from properties in Asia, Africa and Latin America. “They’re fairly resilient,” Sprague says. “It’s a very entrepreneurial group of individuals and they’re always looking for the next great opportunity, wherever it may be located.”

Juniors may be hurting from a lack of capital, but the accounting, engineering and law firms that support the sector remain busy because the overall outlook for the sector remains bright despite declines in commodity prices.

The biggest danger Sprague sees to the sector’s fortunes is if margins become squeezed to a point where exploration and extraction don’t make financial sense for operators. This isn’t likely, and yet many B.C. gold miners remember the dark days of the late 1990s, when gold was a tough business to be in. Combined with the moratorium on new mine development in B.C. at the time, many miners looked for easier places to do business, and commodities that offered attractive margins.

A worldwide slump in commodity prices driven by the economic slowdown would leave miners with few options. “If there’s no margin, then a project doesn’t proceed. At this point, we’ve seen some fluctuation, but there seems to be ample opportunity within the sector,” Sprague says. “They’ve got existing projects at a stage of completion, so they’re looking at how to bring those along more efficiently and achieve that right level of cost containment on those projects.”