Uncertainty and the volatility that followed during calendar 2011 shook the very foundations of investor confidence. Hedge fund managers witnessed one of their poorest performances on record, and financial markets gyrated when recovery plans stalled and the European debt crisis escalated into a higher stage of dysfunction. One industry that was hit particularly hard was the mining industry, where chaotic commodity prices wreaked havoc across the globe. Volatility appears to be the new form of stability.

Canada is a mineral-rich country with the world’s second largest known oil reserves, behind only Saudi Arabia, and mineral deposits that constitute a material proportion of global mineral production. It is the world’s leading producer and exporter of potash, and top-ten producer of gold, iron ore, uranium, nickel, and copper. So goes oil and minerals, so goes the “Loonie”, the familiar euphemism for the nation’s currency.

The Toronto Stock Exchange (“TSX”) lists over half of the public mining company stock offerings and is the home to many of the world’s largest mining companies. The Canadian mining industry has a broad international presence, as evidenced by the global activities undertaken by TSX-listed firms, and a majority of global mineral related projects were also located in Canada. Canada is positioned as a world leader in mining exploration, and the TSX handles nearly a third of the world’s mining equity value.

Mining company stock values tend to trail commodity price trends in the market, but, after a mild recovery in 2010, most firm valuations were beaten back in 2011. Stock returns for five of the major players in the TSX are presented below:

All five entities staged a recovery in 2010, but following the first quarter of 2011 when the global economic recovery sputtered, shares for these mining companies plummeted, some faring much worse than others. As economic activity picked up again and the European debt crisis was “papered over”, these stocks rebounded, only to come under recent pressure when China moderated import demand for basic commodities.

Is the worst over? Are these companies poised to resume their upward trends? The industry is in a consolidation mode, a condition that typically favors cash-rich companies bent on deploying a mergers and acquisitions strategy. These five firms are some of the largest market cap companies in the industry, and annual cash flows from operations as a percent of revenue equal or exceed 30% in all cases. A brief synopsis of each company follows, along with their “cash flow/revenue” ratio in parentheses:

  • Barrick Gold Corporation (“37%”) engages in the production and sale of gold and copper. The company has a portfolio of 26 operating mines, and exploration and development projects.
  • Goldcorp Inc. (“44%”) engages in the acquisition, development, exploration, and operation of precious metal properties, primarily in gold, silver, copper, lead, and zinc.
  • Potash Corporation of Saskatchewan Inc. (“42%”) produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada.
  • Teck Resources Limited (“34%”) operates as a diversified mining, mineral processing, and metallurgical company, involved in exploring, developing, smelting, refining, safety, environmental protecting, product stewardship, recycling, and researching activities.
  • Cameco Corporation (“30%”) operates as a uranium producer, supplier of conversion services, and fuel manufacturer.

Investing in mining companies can be a very risky endeavor, but for those investors that understand the various development phases of a mining operation, research can deliver significant rewards. The present market favors larger entities, and these firms all have fundamentally strong balance sheets. As central bankers print more money, mining companies should benefit in the long run

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