Long-term growth

The 4-year drought in mining commodity prices has been long enough that many people now have difficulty believing in the cyclical nature of the mining industry. However, I reckon what goes down must come up, and metal prices are doing that, led by gold at roughly US$425 per oz., a price not seen since 1988.

China is the big newsmaker in terms of demand, and its gross domestic product (GDP) is projected to grow at a rate of 8% in 2004. In the early 1990s, China represented between 4% and 5% of global metals demand; these days it’s between 16% and 20%. From October 2002 to October 2003, China increased its total imports by 40%, with particularly strong growth in commodities.

While there was widespread gloom about the global economic outlook a year ago, most major countries, led by the U.S., are now expecting healthy growth.

The U.S. economy is expected to grow at the rate of 4% in 2004, with Japan and countries representing the European Union registering at 2.5%. After leading the Americans in GDP growth between 1999 and 2002, Canada is expected to trail its southern counterpart by a percentage point in 2004. Lower interest rates and limited inflation are foreseen globally.

The strength of the Canadian dollar relative to U.S. currency is a concern to some exporters; however, mining companies are sheltered to some degree by rising commodity prices quoted in U.S. dollars (reflecting the effective devaluation of the U.S. dollar) and real price increases, owing to greater demand. It is worth noting that the gold price last year rose in only two currencies: the U.S. dollar and the yen. It fell in Australian and Canadian dollars and in the South African rand, while staying flat in euros. Our mining suppliers exporting beyond the U.S. will likely find local currencies strong, just like the Canadian dollar, and so should not be at a great disadvantage. With luck, the pain for those having to adjust to the new exchange rates will be short.

In the longer term, the productivity of our mines will be increased by the lower cost of imported machinery, due to the strong Canadian dollar. The difficult economic climate and increased international competition over the past few years have already encouraged Canadian miners to reduce costs and adopt innovative strategies. Evidence of this is the mining sector’s total productivity growth, which has improved by an annual average of 2.8% over the period 1989-2001 — double the 1.4% growth in the manufacturing sector and four times Canada’s overall productivity growth of 0.63%. The results are similar for labour productivity in the mining sector, which improved by 75% compared to 20% for Canadian industry.

Thus, our mining operations should be well-positioned to profit from increased commodity prices. This will create cash flow that can be channeled to purchases from suppliers for exploration, consumables, maintenance and capital projects. On the exploration side, our consultants and drillers can expect a good year, benefiting from increases in exploration spending coming from pretax profits and an improved investment climate driven by higher metal prices.

— The preceding is an excerpt from a bulletin published by the Canadian Association of Mining Equipment & Services for Export, of which the author is managing director.