By Chad Fraser - Exclusive to Resource Investing News
Last week, the Mining Association of Canada (MAC) released its Facts & Figures 2012 report, which takes an in-depth look at the industry’s fortunes. Among its findings: exploration spending soared 585 percent — hitting a record $3.9 billion last year — in Canada from 2002 to 2011.
The country also accounted for the largest slice of global exploration spending — 18 percent — with 22 percent of all spending on exploration and deposit appraisal in Canada going to the country’s three northern territories.
More strikingly, the slow economic recovery doesn’t seem to be denting these investments. The 2011 figure was up 41 percent from 2010, and nearly doubled from 2009, the report states.
The stand-out commodity? Iron ore, which saw exploration investment skyrocket 20,000 percent from 2002 to 2011, largely due to rising activity in the Labrador Trough, which spans Northern Quebec and Newfoundland and Labrador. This region’s potential remains strong, despite recent wild fluctuations in iron ore prices: projects in the Trough could catapult the country from its current also-ran status to the third-biggest producer, behind Australia and Brazil.
Big exploration outlays fuel production jump
Skyrocketing exploration spending has also been translating into a steady rise in production. The number of mining establishments in the country has risen 24.4 percent, from 859 in 2005 to 1,068 in 2011. In the same period, the value of all minerals pulled from the ground surged from $27.4 billion to $50.3 billion.
These gains match a steady rise in commodity prices before the recession. Many resources have also regained ground since that time due to a recovery in China and rising demand in other emerging markets — something that MAC president and CEO Pierre Gratton expects to continue in the years ahead.
“Regardless of concerns over the growth rates of China and other emerging markets, it is widely held that growth, even if at a moderately reduced pace, is likely to remain strong over the long term,” he said in the press release announcing the report.
Surging spending seems out of sync with today’s tight financing market
Still, to many in the industry, this rising tide of exploration spending seems at odds with the current difficult financing market, which has been particularly tough on junior mining companies. Indeed, the report shows that prior to the recession, juniors provided 50 to 65 percent of exploration spending in the country, but that amount has been falling over the past three years, with juniors accounting for just 49 percent, or $1.9 billion, in 2011. And the outlook remains cloudy, at least in the near term, according to MAC.
“This post-recession trend, although projected to reflect a modest recovery in 2012 to 52% of overall spending, is likely related to issues in raising capital to finance operations,” the report states. “Linked to uncertainty in global economic strength, the current risk-averse sentiment among investors is likely to endure until the global economy stabilizes.”
Uranium, potash among sectors primed for gains
The MAC report also highlights a number of areas where the country has strong prospects in the coming years. Here’s a look at three:
- Uranium: Despite the Fukushima disaster, demand should continue to rise in the coming years as more nuclear power plants come onstream, particularly in the developing world. As the report points out, Canada is the number-two producer, and the McArthur River mine in Saskatchewan, owned by Cameco (TSX:CCO,NYSE:CCJ), is the largest, highest-grade deposit in the world.
- Potash: With the world’s population soaring and rising wealth in the developing world increasing demand for more and better food, demand for potash-based fertilizer looks set to rise, the report points out. Canada is the number-one potash producer, mostly due to the province of Saskatchewan, which is home to operations run by Potash Corporation of Saskatchewan (TSX:POT,NYSE:POT) and diversified major BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT).
- Oil sands: Oil sands production will rise to 5 million barrels a day by 2030, or 210 percent above 2011 levels, according to the report. The sector has been attracting a lot of attention from international companies as well, including Chinese state-oil firm CNOOC (HKEX:0883,NYSE:CEO), whose $15-billion purchase of Nexen was recently approved by the Canadian government.
But even with these potential gains, the oil sands face challenges, including concerns about greenhouse gas emissions and a shortage of pipeline capacity, which has been forcing producers to ship their oil by rail — a more expensive option.
Canada’s outlook remains bright — but government policy will be crucial
Investment in Canada’s resource sector looks to continue growing. The Canadian industry plans to invest $140 billion in new projects over the next decade, according to MAC’s research.
“No doubt some of these projects may face obstacles and delays, but the figure does suggest the scale of mining-related jobs, supply contracts and tax revenues that lie ahead for Canada,” the report notes.
A key variable that will affect how much of this investment results in shovels in the ground is, of course, the global economy, particularly the prospects of US, the Eurozone and — most importantly — China.
Other risks facing the industry are rising resource nationalism in foreign countries where Canadian companies operate, as well as regulations within Canada itself, particularly with regard to climate change policy and environmental assessments of new projects, which, as the report points out, continue to evolve.
The report also stresses the need for government to play a strong role in helping ensure that the proper infrastructure is in place to support resource development in the coming years, particularly in the country’s remote north. In the Labrador Trough, for example, the Quebec government has initiated its Plan Nord, which includes using $80 billion of public and private investment to develop the province’s north over the next 25 years.
However, the province’s recently elected Parti Quebecois government has said that it now plans to review Plan Nord, though massive changes to the scheme are not expected.
“As exploration activity and mineral production are intrinsically linked, the Canadian mining industry could see a dramatic expansion in the years to come,” said Gratton. “While some volatility is anticipated, the larger determinant in capitalizing on the opportunities before us is to ensure the industry has access to the right investment and regulatory environments it needs to support development.”
Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.
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