The collaboration between Centro Studi Italia Canada and Dekker Hewett Group for Canaccord Genuity continues. Today we present an in-depth analysis, edited by the Canadian company leader in the financial services industry, in the sector of raw materials and metals in Canada and opportunities for investors.
Dekker Hewett Group at Canaccord Genuity has identified 6 indicators revealing that it is the ideal time to invest in Canada, with some short-term economic predictions

 

Our readers hopefully now have a clear picture of Canada as a country from our May article. But why is Canada a good place to invest? Our first investment thesis will look at resources, specifically metals and materials.  Why should we invest in Canadian metals and materials and why is the time right now?  

Canada is abundant in many mineral resources and a world leader in the production of potash, aluminum, nickel, salt, sulphur, uranium and diamonds among others.  How did we get to this point?  Let’s start with an overview of Canadian geography.

Canada’s land mass covers nearly 10 million kmq encompassing six main geological regions.  Five of these regions and their respective mineral resources are important from a mineral standpoint, with the sixth, Canada’s continental shelf, being a source of oil and natural gas (for future discussion).

Today the regions of key importance in terms of materials are:

1. The Canadian Shield - Made up of Precambrian rock and underlying about half the total area of Canada, this vast expanse of ancient Precambrian igneous, metamorphic and sedimentary rocks, glacial overburden, forest and muskeg has been Canada's leading source of precious and base metals. The area has large amounts of base metals, gold, iron ore and uranium. Because of its large size and favourable geological features, the Canadian Shield has ongoing potential for the discovery of many additional mineral deposits.

2. The Interior Platform - Between the Canadian Shield and the Cordilleran mountain region of western Canada and stretching from the US border to the Arctic Ocean lies the Interior Platform, which includes the Arctic Platform, the Interior Plains, the Hudson Bay Lowlands and the St. Lawrence Platform.  Under the farmland of the southern portion of the western Interior Plains are substantial mineral resources such as potash and salt, as well as oil, natural gas and coal.

3. The Canadian Cordillera - West of the Interior Plains is the Canadian Cordillera, a mountainous region with plateaus and valleys that is underlain by various igneous and sedimentary rocks. This region covers most of British Columbia, the Yukon and the western part of the Northwest Territories, and has extensive and varied mineral resources. The western and central parts of the Cordillera contain a variety of metals including gold, copper, iron, silver, lead and zinc, while the eastern region is noted chiefly for its deposits of fossil fuels, namely coal, oil and natural gas.

4. The Appalachian Orogen - Southeast of the Shield, the Appalachian region of eastern Canada consists of a broad belt of mountains, hills and plains. It underlies all of New Brunswick, Nova Scotia and Prince Edward Island, western Newfoundland, and part of Québec.  A great variety of minerals can be found there, particularly asbestos, zinc and lead. New Brunswick and Nova Scotia, respectively, are home to potashand gypsum formations, and salt deposits are scattered throughout the region.

5. The Innuitian Orogen - This region, which lies primarily in the Arctic Archipelago, is underlain mainly by folded and gently dipping sedimentary rocks. The older limestonecontains zinc and lead.

 

 

WHAT IS CANADA’S HISTORY AND EXPERTISE ON RESOURCE EXTRACTION?

As far back as 1737 iron ore was being mined and smelted in Québec, Canada’s largest province.  In 1770 copper was found on the north shore of Lake Superior and the earliest recorded gypsum mining in Canada was by settlers in Nova Scotia in 1779.

By the early 19th century, the beginnings of an industrial economy spurred demand for durable metals with the earliest extractive projects focused on iron. The first Canadian base metal production was of copper, beginning in 1848.  In addition to iron, gold was equally influential with extraction of the metal beginning in 1823 and then 35 years later in British Columbia’s (BC’s) Fraser River, which drew thousands of prospectors to Canada’s west coast where mines in Central BC ultimately yielded 110 tonnes of gold.

In the years following Canadian Confederation through to the 1890s, increasing exploration in southern BC led to a considerable number of additional gold, silver and base-metal discoveries.

The mineral potential of Canada became even more evident with the discovery of asbestos in Eastern Québec in 1877 and the first nickel-copper discoveries in Sudbury, Ontario, in the early 1880s. During the 1870s, Canada also emerged as a major phosphate producer, with the development of deposits in eastern Ontario and Québec.

In 1896, gold was discovered in the Klondike District of what became the Yukon Territory, giving rise to one of the world's most spectacular gold rushes. From 1897 to 1899 over $1.8billion (today’s dollars) in gold was recovered in the region.

During the First World War, Canada's industrial capacity almost doubled. Following the War, with the help of the new railways, large-scale mining operations began to be establishedincluding the copper-nickel industry in Sudbury, Ontario, the Britannia copper mine north of Vancouver, BC, and the Trail zinc-lead smelter in south-eastern BC.

During the Second World War, Canada was an important source of metals and other strategic materials needed for the Allied war effort. Expansion of production was substantial in the steel and nonferrous-metal industries. By 1939 and the peak period of war materials output, Canadian steel production doubled and aluminium output increased five-fold.

After 1945 interest in mineral resource development renewed and new discoveries of minerals, such as iron ore, potash, copper, zinc and uranium launched Canada's mining industry into its greatest period of expansion.

The postwar era was marked by many major mineral discoveries: deposits of nickel in Manitoba, of zinc-lead, copper and molybdenum in BC, and of base metals and asbestos in Québec, Ontario, Manitoba, Newfoundland, the Yukon and BC. In the late 1940s and early 1950s uranium was also discovered in Saskatchewan and Ontario, giving Canada the world's largest known reserves of this metal in ore.  Currently Canada accounts for 22 per cent of global uranium production.

Iron ore also became important when huge deposits were mined in Québec and Labrador.  Major base-metal mines were brought into production in New Brunswick, resulting in the development of a smelting industry. Large deposits of potash were discovered in Saskatchewan, and North America's first tantalum mine was opened in Manitoba. One of the world's largest zinc-copper-silver ore bodies was discovered in late 1963 in Ontario and began production in 1965.

A resurgence in the gold price in the late 1970s resulted in a major increase in gold exploration and production in Canada, leading to reserves of gold in ore at Canadian mines increasing more than four-fold.  From 1858 to 1997 Canada's cumulative production of gold totalled 8,675 tonnes; approximately seven per cent of the world's all-time cumulative gold production.

Diamonds have also more recently become an important part of the Canadian resource picture with 13.8 million carats produced between 1998 and 2002 worth $2.8 billion.  In 2008, De Beers began production at two mines in Canada and Canada is now among the top five diamond producers in the world.  More importantly, Canada's diamonds have a global reputation for being of high quality and "clean" in that they do not finance terror, war or weapons.

As of 2016, Canada’s 10 provinces and 3 territories produced minerals and metals worth nearly $41 billion.  Canada’s minerals sector today is a mainstay of the national economy and supports jobs and economic activity in every region, accounting for 403,000 direct jobs and 193,000 indirect jobs in 2016.  With a value of $89 billion in 2016, this sector accounted for 19% of Canada’s total domestic exports and contributed $87 billion or 3% to Canada’s Gross Domestic Product.

Canadians are also well known for having world renowned mining and exploration expertise,with Canadian exploration and mining companies having mining and exploration assets worth $259 billion as of 2015 with about two-thirds of that or $171 billion located outside of Canada. Canadian headquartered companies account for 31% of global nonferrous exploration budgets.

 

WHY IS THIS THE IDEAL TIME FOR INVESTORS TO BE LOOKING AT THE RESOURCE MARKET AND MORE PARTICULARLY THE CANADIAN MATERIALS MARKET? 

Some key facts as to why Canada’s resource market is poised to move up: 

1. US dollar weakness (see chart below) - A bull market in the US dollar is unlikely as long as economic growth and labour market tightness outside the US strengthens while the US budget and current account deficit worsens.

2. Commodity price strength - With improving supply and demand fundamentals, metal inventories remain in a downtrend and global miners are cutting capex. Commodities have become as cheap as they were at the peak of the tech bubble in March 2000.  

3. Healthy global drill activity

4. Robust share trading and equity capital funding

5. Global economic synchronicity - We are in the middle to late cycle phase of an economic expansion which normally benefits materials and energy.  The global economic outlook is strong considering global growth momentum and the expected impact of US tax reform.  Despite the spectre of faster than expected increases in advanced economy core inflation and interest rates, inflationary metrics do not warrant aggressive tightening policies globally.

6. Clean Energy demand - This point is of particular interest to many investors around the world.  With the advent of clean energy applications, Canada is primed to respond to the growing demands for commodities required in these technologies.  Canada is a key global producer of copper, nickel and cobalt and hosts advanced mineral projects for rare earth elements, lithium and graphite.  These commodities are crucial in the production of solar cells, high density batteries and wind turbines.

 

 

For all the above reasons, Dekker Hewett Group at Canaccord Genuity feels that metals and materials in Canada are one of the best places to invest right now.  As the business cycle matures, commodities will be favoured over stocks.  Rising bond yields will begin to crimp market multiples, while commodities will march higher with the global economy growing above potential.  Above average world Gross Domestic Product (GDP) growth forecasts by the International Monetary Fund (IMF) for the next two years suggest we will continue to see further commodity outperformance in the coming years.  

It is a great time to invest in Canadian metals and materials.