“There are approximately 1,200 public mining companies in Canada, so each segment is facing different challenges,” said EY Canada’s Jeff Swinoga.
It’s safe to say COVID-19 has had a major impact on the mining industry globally, with jurisdictions around the world slowing or halting operations to stop the virus from spreading.
Mining is a crucial part of Canada’s economy, accounting for 5 percent of the country’s total nominal GDP and 19 percent of its total domestic exports. Now, as companies in the country respond to the coronavirus, questions are being raised about the long-term consequences for the market.
To find out how the nation’s resource sector is being affected, the Investing News Network (INN) reached out to experts with questions on companies and the country as a whole. Read on to learn their thoughts on how the COVID-19 situation may play out for mining in Canada.
Canada’s provinces and territories setting COVID-19 rules
Canada has not taken a blanket approach to addressing COVID-19, with provinces and territories using their own individual measures to curb the spread of the virus. In the mining space, that means companies are facing different requirements depending on where in the country they operate.
For example, while both Ontario and Quebec ordered non-essential businesses to close on March 24, Ontario designated mining as essential while Quebec did not. The move forced closures and slowdowns at a variety of mining operations in Quebec, including the massive Canadian Malartic gold mine, which is jointly owned by Agnico Eagle Mines (TSX:AEM,NYSE:AEM) and Yamana Gold (TSX:YRI,NYSE:AUY).
Quebec has changed course since then, declaring mining essential and allowing companies to start back up, albeit with restrictions in place to prevent the spread of the virus.
But the situation remains complicated, with some companies choosing to slow or shut down operations even when they are allowed to keep operating. Agnico Eagle is just one miner that has done so — it suspended all Canadian exploration at the end of March when Canadian Malartic went offline.
In an email to INN, Jeff Swinoga, EY Canada’s national mining and metals co-leader, said while it makes sense for the country’s provinces and territories to make their own coronavirus rules, he’d like to see a more consolidated effort to help companies in the resource space.
“Each province has particular needs and interests and I believe that should be maintained; however, a unified approach to assist mining companies in Canada would be welcomed by the sector,” he said.
To date, help has not been offered specifically to Canadian mining companies, although at the end of March the federal government did expand a wage subsidy program — at the time, the Mining Association of Canada said the country’s resource industry would benefit from the new approach.
Global COVID-19 problems affecting Canadian miners
Despite the varied approaches to COVID-19 seen across Canada, Swinoga said that on the whole miners in the country are dealing with similar problems — and for the most part their issues are similar to the challenges that mining companies in other parts of the world are encountering.
“In general, the main impacts or significant disruptions have been on supply chain, workforce continuity, reduced or complete shutdown of mine sites (and) companies’ liquidity, as well as their suppliers.”
Honing in on workforce continuity, Swinoga explained that the complex nature of mining operations means that slowing or halting work is a difficult process. That’s because even when limitations are in place, typically a small number of specialized personnel need to be on site performing critical roles.
“Shutdown labor is largely comprised of maintenance contractors that work across multiple sites (and often, regions) and are not directly managed by mining operators,” he explained, adding that these staff members also work in close proximity. For those reasons, he believes shutdown periods “carry increased risk of site of multi-site COVID-19 infection and spread.”
Staffing complications were also highlighted by PDAC President Felix Lee, who told INN via email that Canada’s mineral exploration and mining industry is experiencing widespread impacts due to the virus.
“The most notable are similar to those being experienced by virtually all industries as workforce health and safety measures are currently paramount, which means staffing and management of operations is extremely difficult in the current environment,” he commented.
Lee added, “For PDAC members, the ability to access projects and conduct work is difficult, if not impossible, across most of Canada at this point.”
Speaking further on supply chain issues, Swinoga said there are a huge number of ways that delays, cancelations and shortages can impact mining operations, even without COVID-19 in the mix. One key factor, he said, is that the mining sector imports a “substantial percentage” of its input materials because many items are manufactured and assembled abroad.
While large miners tend to have about 12 to 20 weeks of critical items in their inventory and available to use, they are unlikely to have everything they need available, and their stockpiles have limits.
“With required inputs being sourced from China, Japan and the US, delays of production or shipments from these markets represent a substantial supply chain disruption risk. If shortages exist, the ability to source and finance purchases of inputs could give rise to business continuity issues,” he said.
Juniors working in Canada facing unique problems
While Canada’s mid-tier and major miners may have problems similar to those seen by large mining companies in other parts of the world, Swinoga said he thinks Canadian juniors are probably having a harder time than explorers working elsewhere.
“They are not likely to receive any government assistance due to the sheer number of them in Canada,” he said. “Flow-through funding remains their main source of inflow to continue developing and exploring, and Canadian investors are seeking sheltered investments at this time.”
According to PDAC, flow-through share financings account for over 65 percent of funds raised for exploration on Canadian stock exchanges. These financings allow initial purchasers to claim a tax deduction equal to the amount they invested.
“As a result (of difficulties conducting work), we have heard clear concerns from PDAC members operating in Canada regarding the ability to meet planned objectives and spend the funds generated by flow-through share issuances as they are required to do within a specified timeframe,” said Lee.
“We have recommended that the Government of Canada consider deferring timelines related to the flow-through share mechanism in recognition of the current operational impediments.”
It’s worth noting that access to capital is not solely an issue that exploration companies could face. Speaking more generally about the mining space, Swinoga said that poor equity market conditions “may expose companies as being over-leveraged.”
“Without access to capital in the short term, companies run the risk of being starved of capital and this may have a material impact on their businesses,” he explained.
“Exposure to adverse commodity price movements, reduced demand and possible supply interruptions place inherent uncertainty on the cash flow of Canadian mining companies and their ability to meet operational expenditure and service debt commitments.”
COVID-19’s long-term impact on Canadian mining
Canada’s battle against COVID-19 is far from over, and as a result it’s difficult to project the long-term impact of the virus on the country and its mining industry.
“There are approximately 1,200 public mining companies in Canada, so each segment is facing different challenges,” said Swinoga. However, he did offer some ideas on which companies may come out ahead.
“Companies that sensitize cash flow forecasts and plan to mitigate downside risk will be best placed to succeed,” he said. He suggested that gold companies that can keep operating “will generate multiples of free cash flow than they have historically.”
Other miners will suffer more negative impacts. “I believe the most severe impact will be on small to mid-tier producing miners with exposure to base metals and bulk commodities, and mining services companies. In particular, our view is that those companies which are more exposed to base metals will experience the most severe impacts to revenue (and cash inflows),” Swinoga continued.
Explaining the reasoning behind that prediction for base metals miners, Swinoga noted that copper and zinc prices have been hit due to concerns about the economic impact of COVID-19. “Lower fuel and favorable local currency will help to keep costs in check; however, base metal companies will continue to operate with thin margins until the recovery has taken hold.”
And what about Canada as a whole? Lee emphasized that the country is bound to feel the effects of the mining sector’s coronavirus-induced slowdown.
“Given that the mineral industry is the source of roughly 5 percent of Canada’s GDP and nearly 20 percent of domestic exports, any negative impact on the mineral industry will have broader implications for the Canadian economy,” he said.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.