How the Mining Sector Thrived Amid COVID: Solid Financial Foundation is Role Model for Canada

Commentary, Energy, Paz Gómez

Canadian mining companies have proved sustainable economic growth is compatible with the safe handling of a pandemic. Their financial acumen and business resilience show the rest of the country the way forward.

A PwC report released in June 2020 demonstrates Canadian miners are weathering the COVID-19 storm with enough liquidity, sound balance sheets, and solvency to be the envy of the world. Six of them are among the world’s 40 largest mining companies and have experienced steady growth for three years.

Of course, the health crisis has demanded operational adjustments in mining, as in every other industry. However, the mining sector has ploughed ahead while adapting to social-distancing times.

On the one hand, the mining industry reaffirms its crucial role for the world economy, underpinning others such as telecommunications and construction. On the other, it portrays how a small degree of financial savvy goes a long way to hit the ground running once the pandemic is over.

An Essential Canadian Industry

In 2017, mining accounted for 5 percent of Canada’s GDP, and mining exports made up 19 percent of the value of all goods exports. The sector contributed to 630,000 direct and indirect jobs across the country, including many among Indigenous peoples.

Moreover, extractive firms paid more than $10.4 billion in royalties and taxes to local, provincial, and federal governments. All this makes the mining industry a vital engine for Canada’s public sector and overall economic recovery.

According to the Frontier Centre’s Research Fellow Joseph Quesnel, Canada is a global leader in the production of minerals and responsible mining. The country ranks among the top five producers of 15 minerals and metals, many of which are crucial elements for low-carbon technology, the green energy of the future.

Canadian firms had a presence in all but one of the gold-mining mega deals carried out in 2019. Further, Canadian companies SSR Mining and Alacer Gold have performed the largest transaction in 2020 so far, a $3.2 billion merger.

The Top Six’s Secrets

The six leading Canadian mining companies reported a net profit margin of 19 percent in 2019, according to the PwC report.

They are Barrick Gold (ranked 9th), Agnico-Eagle Mines (17th), Teck Resources (25th), Kirkland Lake Gold (27th), First Quantum Minerals (34th), and Kinross Gold (40th). Together, their market capitalization reached $237.6 billion as of July 2019.

According to the PwC report, even though capital expenditure increased 11 percent from 2018 to 2019, Canadian companies have maintained healthy gearing ratios through smart financial strategies involving taking cash flows from operations and fundraising at the right time. This placed them in a strong position to withstand the pandemic when it hit in early 2020.

Canadian miners do not venture haphazardly into the wild; they are known for their thought-out plans and stable dividend yields. To improve transparency, they routinely disclose off-balance-sheet liabilities to shareholders, even though they are not required to report them.

During the pandemic, some have decided to take on extra credit lines despite their strong financial positions, such as Agnico-Eagle and Kinross. By doing so, they ensured liquidity, strengthened their reserves, and leveraged their growth strategies.

Successful mining companies are facing the pandemic’s unprecedented misfortune with a competitive edge. Given the ups and downs of commodity prices, they are wisely prepared for rainy days.

At the onset of the health crisis, mining companies scaled down to focus on small transactions, fundraising, and new investors. Companies enjoying surpluses went out to the market and bought the dip, benefitting from mergers and acquisitions. They could also afford to adapt to pandemic measures and wait to return to regular operations while investing in training and cost-saving technology such as automation and cyber-risk management programs.

Unleashing Mining’s Full Potential

Despite recent controversies with uninterrupted work at some mines, Canadian mining companies comply with some of the world’s most stringent environmental and work-safety rules. Indeed, the Mining Association of Canada’s guidelines have been the inspiration for countries such as Mexico and Brazil to adopt more balanced extractive standards.

Admittedly, some of these rules have proven too burdensome for small miners, preventing them from getting to the top. In Manitoba, for instance, firms and highly trained personnel are moving south—to the United States.

Brian Giesbrecht, a senior fellow with the Frontier Centre, explains that mining companies’ legal duty to reach a deal with Indigenous communities is often a dead end: “The Supreme Court’s well-intended courtesy . . . has instead been turned into a weapon that is driving industry away.”

Unless the federal government wants to keep inflaming separatist sentiments in provinces losing jobs and investment, it should revise the “duty to consult” requirements so that they do not lead to lose-lose situations.

Mining’s financial management sets an example for other industries as the global market recovers. Let’s keep in mind that the pandemic is just one of the most severe borderless events that can hit the global economy. This year should be a wake-up call for firms to prepare for similar risks.  

Canadian businesses must structure their budgets with this in mind to become resilient for future crises. Governments could also learn a valuable lesson: fiscal restraint and prudent finances eventually pay off.

 

 

Paz Gómez is a research associate with the Frontier Centre for Public Policy.

Photo by Artyom Korshunov on Unsplash