November 05, 2013
The northern economy depends on resource development to achieve high economic growth. Yet for the past two plus years commodities have been hammered. For northern projects it means tough slogging.
Dr. Ed Yardeni notes that “The commodity index was highly correlated with the production index from 2001-2011 during the so-called “commodity super-cycle. It was super, but it was short, lasting only 10 years. Lots of capital was invested to increase the supplies of industrial commodities. It paid off in more supplies, but weaker prices. Even the recent weakness of the dollar doesn’t seem to be lifting commodity prices as it did in the past.”
One obvious impact of lower commodities has been a lower $Cdn, now trading at $0.96 in spite of a much better fiscal position in Canada.
Looking at the commodity sectors in the north—there have been a few impacts:
- Natural gas. Huge amounts of gas have been discovered in various areas. The impetus is to build LNG facilities for export to Asian markets. Meanwhile the North American markets remain weak. Encana today announced a 20% reduction in its workforce and dividend cut.
- Oil. Tax changes in Alaska have spurred increased exploration activity on the North Slope by Conoco-Phillips. The giant Fort Hills oil sands project north of Ft.McMurray Alberta will be going ahead.
- Gold. It has been very tough for junior and mid-sized miners to raise capital. Victoria Gold’s Eagle project in Yukon was put off by at least a year, due to capital market considerations. Larger players, like Agnico-Eagle and Newmont have taken write-offs on northern gold properties to the tune of $2B in the past 2 years.
- Silver. Tiny Bellekeno silver mine in Yukon, Canada’s only pure silver mine, has shut for the winter.
- Base metals. A few large projects in Nunavut (Izok), Yukon (Selwyn) are on hold partly due to weak markets. Copper has been resilient in that the Red Chris mine is under construction in BC, albeit by a frugal company. Two mid-sized Yukon projects and one Alaska project are under active development.
- Iron ore. The giant Mary River project was scaled back from $6B to $750M. A number of Quebec and Nunavut projects are on hold pending price recovery. Rio Tinto is selling its Labrador iron ore assets to reduce its massive debt load.
- Uranium. Cameco’s ultra rich Cigar Lake mine will open next year.
- Nickel. Glencore Xstrata plc’s Raglan mine in northern Quebec is highly profitable and has expanded.
Low commodity prices have continued even though there are signs of a tepid recovery in the US. The technological revolution with fracking and horizontal drilling have driven down the price of natural gas. Metals prices have put the squeeze on equity markets making it hard for small-medium players to attract capital. The pressure on project proponents to keep costs down will remain.