Canada’s Resource Economy Is Facing An Identity Crisis

Inflated Canadian steel prices causing interprovincial unrest, iconic Canadian gold companies merging with foreign entities—now more than ever, it feels as if Canada’s resource economy is on edge.

It’s a strange feeling to have, seeing as how the TSX Venture, one of the world’s prime venues for new mining and exploration listings, has soared almost 13% since late December, a trading phenomenon that we were apt to point out just days before the upswing began. 

Just two weeks into January, the tone for Canadian businesses appears to be one of consolidation—not just for big gold mining companies looking to expand their international footprint, but for underperforming Canadian firms threatened by steel safeguards.

Steel Prices Continue To Rise In Canada

Back in October 2018, we wrote about the potential for conflict between Eastern and Western Canada over inflated steel prices due to federally imposed steel safeguards.

“. . . the combination of U.S. steel tariffs and safeguard countermeasures could potentially eliminate all channels of foreign steel competition.

“This would be a big win for Canada’s largest steel producers, as they would be free to raise their prices without fear of competition . . .”

It seems that now the Alberta and British Columbia governments are beginning to realize the full extent of such safeguards.

Via Financial Post,

“Alberta and British Columbia want Ottawa to scrap safeguards on a range of imported steel products, arguing they are undermining crucial infrastructure projects and eroding the competitiveness of local firms.”

Alberta’s energy sector, already ham-stringed by limited pipeline infrastructure, could be facing especially challenging headwinds.

Via Financial Post,

“The province currently has plans for 160 infrastructure projects — worth about $460 million — for which steel has yet to be purchased.

The cost of those projects, already estimated to have risen by $86 million due to “escalating steel actions” — including tit-for-tat tariffs exchanged by Canada and the U.S. — is expected to rise further if “more aggressive safeguard measures” are imposed.“

Our trading allies aren’t exactly impressed either.

Via Financial Post,

“Turkey, Russia, the United Arab Emirates, the European Commission and Brazil have all filed documents with the Canadian International Trade Tribunal (CITT) stating concerns about the provisional global tariffs and quotas imposed by Finance Minister Bill Morneau in October.”

While steel safeguards might be a problem for our trading partners, they pose an equally big problem—if not bigger—for Canada.

Unpurchased steel means delayed construction projects, which, if delayed long enough, can turn into cancelled projects. Cancelled projects typically translates into lost jobs, less consumer spending, and a declining consumer confidence index.

However, steel safeguards aren’t the only macroeconomic development threatening to pare back Canadian jobs.

Consolidation in Canada’s Gold Sector

Turncoats, or a turnaround for Canada’s gold mining sector? One of Canada’s most renowned industries—gold mining—is proving that the marijuana industry isn’t the only area ripe for consolidation. 

Questions, however, remain over how exactly these consolidations will affect Canada’s influence in the global gold mining industry. 

Spurring this discussion is the US $18 billion blockbuster merger between Canadian-based Barrick Gold Corp. and Randgold Resources Ltd., which created “New Barrick Group” (NYSE: GOLD)(TSX: ABX), one of world’s largest gold mining businesses. Then, hot on the heels of the New Barrick Group merger, another of Canada’s leading gold producers—Goldcorp Inc.—announced entering into a definitive agreement whereby Colorado-based Newmont Mining Corporation (NYSE: NEM) would acquire all of Goldcorp’s outstanding shares in a stock-for-stock transaction valued at US $10 billion.

Some see it as a strategically sound decision to pool assets, people, and opportunities together to create something bigger than itself; the realization of a sum that is greater than its parts.

Others describe this trend as a “hollowing out” of Canada’s resource sector, a sign of a slipping grip on the world resource economy—the death knell of one of Canada’s oldest, and most important industries.

In a recent interview with Bloomberg, New Barrick Group’s CEO, Mark Bristow, had some words to share on the future of New Barrick Group:

“While Bristow wants to be a “proud Canadian” company, “at the end of the day, business is business,” he said. If it becomes necessary to comment on geopolitics, Barrick’s board may wade in.”

Any entrepeneur will find it hard to find fault in Bristow’s words. The sentiment, however, is a bitter pill to swallow—the fact that Canada is losing ground, even symbolically, is an unwelcome sign of change for many of Canada’s mining veterans. 

With head offices for both the New Barrick Group and Goldcorp Inc. shifting towards the United States, concerns are being raised over whether or not these mergers are truly capitalizing upon the collaborative potential between Canadian and U.S. personnell.

Via Bloomberg,

“Typically, foreign takeovers of Canadian companies have bled strategic vision, high-paying jobs, management expertise and a host of ancillary services from finance and human resources to accounting. Like Falconbridge Ltd., Inco Ltd, and Alcan before, this latest deal in the mining sector will see Goldcorp’s Canadian head office disappear.”

Still, derisked portfolios created by big mergers such as Barrick Gold’s and Goldcorp’s could unlock new exploration opportunities and thus new jobs for the Canadian mining industry. In a sector that many consider stagnant, there’s certainly an attractive element to a company that not only has an investment grade balance sheet—but also the ability to develop new properties. 

Canadian Markets Continue To Attract Mining Ventures

Perhaps Bristow is right, and the concerns over eroding Canadian presence in the global resource economy really is just a case of hysteria. After all, the the TSX and TSX Venture accounted for 30% of the mining equity capital raised in the world in 2017, effectively making the Canadian capital markets the number one destination for new mining listings. That fact may provide solace enough: that despite whatever changes may come, Canada is still a place of discovery, risk-taking, and opportunity for early stage investors across the world.