Canada: The Big Picture

Seasoned by the cyclical nature of metals and energy markets, Canadian miners and suppliers are making the most of the current boom at home, while strengthening their participation and influence internationally

“Canada is the world’s miner,” said an enthusiastic Jon Baird, managing director of CAMESE (Canadian Association of Mining Equipment and Services for Export), an association that assists Canadian suppliers and providers of services to the mining industry to export their expertise worldwide. Though certainly proud, his bold claim is backed by facts. Canada’s subterranean resources underpin this country’s economic strength and the upward spiral that the global mining industry has been enjoying for the good part of the last two years has emphasized this.

Canada boasts a long history in mineral exploration and mining and has gained almost unmatched expertise in terms of skills, geological knowledge and adaptability to a wide range of climates. Long exposure to the dangers of mining’s cyclical swings has forced the industry to become extremely technologically advanced and productivity driven. As a result of successes at home, Canada is also one of the leading exporters of a broad range of mining skills and services. Canada’s mining companies and their supporting suppliers are some of the most active when it comes to investing in mineral exploration, mine development and resource production worldwide.

Despite its relatively small population of 32 million, Canada’s gigantic land mass of 9.09 million km^sup 2^ qualifies as the second largest country in the world following the break-up of the Soviet Union. The vast majority of this territory is sparsely populated. Concentrations are to be found in urban centers along a very thin strip on the 8,900-km-long southern border: 17 of Canada’s 20 largest cities are less than a 90-minute drive away from the United States. In spite of this, Canada’s economy is large enough for it to figure prominently in the G8. In this group of economic powerhouses, Canada is the only country to have run a budget surplus in 2004. It did so again in 2005 and expects to do so again in 2006. By then, it will be registering the country’s ninth consecutive budget surplus. Real GDP growth in Canada exceeded 2.7% in 2005 and is forecast to reach 3.2% for 2006 as predicted by the Royal Bank of Canada.

The contribution of the mining industry to GDP may appear small at an official 4% (2004) but other statistics and factors have to be factored in. Minerals and metals have contributed that same average of 4% to GDP consistently over the last two decades according to the Mining Association of Canada (MAC). Gary Nash, assistant deputy minister for the Minerals and Metals Sector in Natural Resources Canada, said that compilation methods for these statistics omit imports of ores, ore concentrates and recyclables and their subsequent processing. These important value-adding processes carried out in Canada would boost the overall percentage contribution. Regardless of the debate over calculation however, Nash said that “based on our latest figures, the value of production is a little over $65 billion, which includes oil sands mining.” The multiplying effects of the industry also hint at a greater role than the percentages suggest. For example, according to MAC, every $1 billion of mining, smelting or refining output creates direct demand increases worth $615 million and indirect demand increases worth $839 million.

Mining holds a similar importance in terms of its impact on employment. Roughly one of every 43 jobs in Canada is mining-related with about 370,000 people employed in the industry (2.3%). That proportion shoots up dramatically if you consider jobs exclusively within the goods-producing sector (one in 11), but what is perhaps more significant, considering Canada’s topography, is that these jobs in the mining industry are provided all over the country as opposed to exclusively within urban centers. Because one cannot choose where resources are extracted, mining is one of very few industries that provides jobs in remote locations and hence, some decentralization. “We have something like 1,200 aboriginal communities within 200 km of a mine,” explained Nash, emphasizing the importance of mining towards the economic integration of the first-nations people of Canada. Currently 5.3% of the total mining workforce are aboriginals and the proportion of workers among their ranks within the industry has increased 21.1% over the last 10 years.

Mineral investment in remote locations has also been one of the locomotives of infrastructure development to the furthest reaches of the country, together with the pulp and paper industry. To this day, it continues to contribute to the development of untapped areas such as the arctic reaches of the great North. Up there, diamond finds and their ensuing impact have generated further exploration interest and have advanced the case for better infrastructural access. Much of Canada’s transport infrastructure exists because of some historical mineral development and still relies on mining today. Whether imported or exported, mining goods account for roughly three quarters of all volume handled in the sea and river ports of Canada and provide for just less than two thirds of rail freight revenues.

It is the impact on trade, however, that best illustrates the paramount economic significance of mining on Canada. The minerals and metals industry makes up for a large portion of total Canadian exports, standing in 2005 at 14.77% with a monetary value of $64.3 billion. Given this proportion, it is easy to understand how much an increase in commodity prices as seen during recent years benefits the trade balance. Between 2004 and 2005, the balance of trade generated for mining and mineral processing products rose by 82.2% to $7.6 billion. Over the last five-year period, as shown in the the graphs on pg. 54, exports of minerals and mineral products grew from $50.3 billion to $64.2 billion thanks to the forementioned price effect and favorable supply-demand factors in most of Canada’s markets. Sales to the EU and to other markets (outside of NAFTA, the EU and Japan) almost doubled in that time frame, allowing Canada to distance itself a little bit from its heavy reliance on the vagaries of her Southern trading partner.

Substantial demand from Asia is likely to tilt that balance further. China and India are invariably mentioned as the major markets affecting worldwide demand for commodities and fuel the belief that the current price cycle is structurally different from previous peaks. Only time will tell whether this is indeed a structural shift in prices or merely a longer and higher peak in the recurrent history of commodity fluctuations. The fact remains that China and India will increasingly secure the commodities they need from an array of suppliers beyond the strategically located Australian market. This being said, free trade access to the U.S.-the largest consuming market in the world-has been one of the backbones of the development of the Canadian mining industry. America’s appetite for resources has certainly sustained the industry on the north side of the border since its inception and the transport advantages are considerable given the sophisticated networks linking the two countries, be they rail, road or waterborne.

This symbiotic relationship is equally important when one considers the financial aspects of mining in Canada. Capital markets and the Toronto Stock Exchange in particular form an essential pillar on which the Canadian mining industry rests. With regards to mineral exploration and mining, the TSX is the most sophisticated exchange in the world and provides the most equity financing. This is true for Canada of course, but also for the rest of the world. Kevan Cowan, senior vice-president in charge of business development at the TSX, said that “although we’re proud of our role in Canada in supporting the mining industry, we are positioning ourselves as the international mining exchange.”

The statistics show that this is more than a mere declaration of intent. Worldwide, the TSX and the TSX Venture together raised more than 50% of global mine equity financing, with the closest competitor, the Australian ASX, standing at 17.9%. And though Cowan insists that “in terms of the mining sector we can confirm to you that there are much more funds available in Canada than in the United States,” it is also true that proximity to such a huge pool of capital has facilitated the development of the mining niche that gives the TSX its strength. In a sense, because mining is so insignificant in relation to the rest of its national economy, the U.S. has gladly relinquished this focus to Toronto where mineral resources are better understood, analyzed and, ultimately, dealt with because of their economic importance. Nevertheless, Americans are active investors on the Canadian mining stock market and this symbiotic relationship gives the Toronto stock exchange even more muscle.

The enabling role of Canada as a source for mining finance takes on full meaning when considering the entrepreneurial spirit that permeates the junior sector in Canada. Gordon Peeling, president and CEO of MAC, explained what sets Canada apart from other countries with resource-based economies. Emphatically, he said, “no other jurisdiction has the same vibrancy and scale of activity in their exploration industry as Canada has.” It is thus not surprising that Canadians are at the forefront of mineral exploration not only in their domestic turf but all over the world, where they are increasingly exporting their skills. Peeling illustrates the process: “The Canadian industry, over the last 10 or 15 years, has become a global industry. The industry has gone from being by and large an exclusively domestic-focused industry in the late 1980s to something that is active in over 100 countries and has upwards of 8,000 properties, with more than half of those located outside of Canada.”

This has opened the door for the globalization of Canadian mining supply, equipment and services companies as well. Baird admits that “it is true that it is good strategy for Canadian mining suppliers to follow the mines. If you are selling to a Canadian company here, why not sell to them when they open a mine in another country? No doubt there is a correlation between what our mining companies are doing and what our suppliers are doing. Having said that, there are plenty of companies who want to grow beyond that stage; particularly the ones that occupy niches, who have very specialized technologies, products or services.” Canada offers deep pools of such companies.

A look at the range of skills and services offered within the annual compendium published by CAMESE should have mining professionals worldwide convinced that it would be wise to consider sourcing from Canada. After all, a mining industry of this size can only be developed if the entire pyramid of supporting industries exists as well. By the same token, a dynamic industry is bound to continue to drive innovation, creativity and technology forward in the years to come. In fact, according to Gordon Peeling, “to maintain the industry’s prominent competitive position, companies have been investing a total of about $330 million per year in new technologies to make operations more efficient, from exploration to mining to mineral processing and metal production.” A brochure published by Natural Resources Canada actually places R&D expenditure for 2004 at $505 million within the mining and mineral-processing sector, with spending intentions identical for 2005.

All in all, Canada mines more than 60 different commodities and/or minerals in over 200 different producing mines and more than 3,000 quarries and pits. In several of these, it produces enough volume to secure itself world leadership or a ranking within the top five providers. Because it is relatively new, says Nash, “a big story is currently diamonds. Our understanding is that we have moved Canada from no production at all a few years ago to being the third largest producer in the world, very close behind Russia in second position.” Canada ranks as the first provider of uranium and potash with 29.2% and 32.4% of global production, respectively. It ranks third in titanium oxide (15.6%), nickel (12%), gypsum (8.7%) and primary aluminum (10%), even though that refers to refining imported bauxite ore, as none is mined in Canada. It ranks fourth in zinc (8.5%), asbestos (11.2%), cadmium (9.6%) and molybdenum (7.4%) and fifth in cobalt (9.7%). However, Canada also holds abundant reserves of coal, copper, iron ore, gold and a host of other minerals.

Bitumen extraction from oil-bearing sands has a lot in common with mining but touches upon the energy sector too closely to include it in this review. It is relevant, however, as a compiling factor to the huge human resources deficit that the industry faces now and in the future.

“If you have a no-growth scenario in the industry for the next 10 years, we would be around 70,000 people short. If you then project what would be a typical growth rate for the industry over the last few years or match it to the growth of the Canadian economy of about 3% per year, we are sure to be short of up to 84,000 workers by 2016,” said Peeling- before adding that if you factored in the magnet labor effect of oil sands it would mean “maybe 47,000 more.” The needs of exponentially expanding oil sands projects in earth-moving equipment and professions of all categories, from engineers to electricians and mechanics, are having a big toll on other mining sectors within Canada who are struggling to find efficient ways to address these issues.

Perhaps in fact, this is the threat that looms largest over an otherwise bright and brazen mining industry that is happily surfing the rising wave of commodity prices. Yet Canadians will continue to be the world’s miners-and explorers-for many years to come and Canadian companies can be expected to increase their forays overseas.

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