Weak metal prices, murky markets keep miners' earnings, expectations in check

TORONTO – Low metal prices and murky markets are keeping the expectations and expenses of Canadian mining companies in check as they try to boost profitability.

Several major mining companies reported decreased profits Thursday and, while well-known miners such as Goldcorp Inc. (TSX:G) and Teck Resources Ltd. (TSX:TCK.B) both beat analyst expectations, they pledged a continued watch on spending and a paring down of projects.

It’s a strategy Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc., expects will continue for the rest of the year and into 2014, and one he said miners are wise to adopt.

“When the outlook is so cloudy, why would (shareholders) want companies to expand and spend a lot of money on projects that may or may not become profitable?” Nakamoto said.

“You want to see them be cautious.”

John Gravelle, global and Canadian mining leader at PwC, said that while cost-containment has been the clear focus for all miners, those companies may start seeing some cost relief heading into the new year.

“There seems to be some bottom side of gold — it seems not to be going below certain levels, which means that hopefully most gold companies will be able to operate profitably at gold prices in the 1300s,” Gravelle said.

“They spent 2013 focusing on cost containment and I think we’re going to start seeing the benefits of that by the end of the year (on the cost side).”

Goldcorp chief executive Charles Jeannes told analysts and investors Thursday that his company’s production was on track to meet 2013 guidance, with continued cost reduction a “key priority for the balance of the year and beyond.”

“This higher production, in combination with operating cost moving lower toward the portfolio, means we’re looking forward to a very strong finish into 2013,” Jeannes said during a conference call.

Goldcorp’s net earnings fell to US$5 million from US$498 million in the same period last year, while revenue dropped to US$929 million from US$1.3 billion, on an average realized gold price for the quarter of $1,339 per ounce compared with $1,685 an ounce in the year-ago quarter.

Adjusted net earnings for the quarter were 23 cents per share, down from 54 cents per share, in the third quarter of 2012. According to Nakamoto, analysts had expected Goldcorp’s adjusted earnings to come in at 16 cents per share.

The Vancouver-based company also said it was revising the initial cost and schedule at its Cerro Negro project in Argentina, which will affect the outlook for the project next year.

Teck reported a third-quarter adjusted profit of $252 million, or 44 cents per share, down sharply from $425 million, or 73 cents, in the same period last year, as prices for all of its principal products fell. The results, however, were six cents per share above analyst estimates compiled by Thomson Reuters.

Agnico Eagle Mines Limited (TSX:AEM), which reported results Wednesday afternoon, said net income for the three months ended Sept. 30 was US$47.3 million, down from US$106.3 million the same 2012 period, because of lower metal prices. It reported strong operational performance from its mines, however, which led to record quarterly gold production.

Mining stocks began a decline in the first four months of year and, when price recovery finally begins, it will vary by commodity, Nakamoto said.

Metallurgical coal seems to have bottomed and is slowing moving up, for example, while copper could come still come down a little more.

The path gold prices, which have remained around the $1,300 mark and well below the $1,900 an ounce reached a couple of years ago, is more difficult to call.

“It all depends on what the (U.S.) Federal Reserve does,” Nakamoto said.

“If they delay tapering more than expectations, gold prices should react positively; if they don’t, they’ll react negatively.”

Saskatoon-based Potash Corp. (TSX:POT) also reported lower third-quarter earnings of 41 cents per share on $356 million in net earnings Thursday, down from 74 cents per share, or $645 million, in the same period last year as a result of weaker prices and lower potash sales volumes.

That company’s biggest challenge, however, is a change in strategy by Russian-based Uralkali last summer which stalled global demand.

Uralkali, one of the world’s largest potash producers, sent the stock of potash-producing companies plummeting in July when it threatened to pull out of a marketing consortium in a move that threatened to undercut prices on the world market.

As a result, key buyer delayed purchases or were reluctant to accept major shipments against existing contracts as they waited for more direction on how the system will work going forward.

On the Toronto Stock Exchange, Goldcorp shares were trading up more than four per cent at $27.80 on Thursday, Teck was also up four per cent to $30.68, and Agnico-Eagle jumped 17 per cent to $31.44. PotashCorp., meanwhile, fell nearly three per cent to $31.97.