Preparing for growth: Capitalizing on a period of progress and stability www.pwc.com/ca/canadianmine A year of stability Contents 2 A year of stability 3 Highlights and analysis 7 Agnico Eagle: Perfecting a successful 60 year-old strategy 9 Osisko Gold Royalties: Disrupting the cycle An interview with John Matheson, Partner, PwC Canada 11 Savvy investments in stable times Call it breathing room. Over the last year, into Eastern and Central Europe with its Canada’s major mining companies have Belt and Road Initiative (formerly One Belt entered a period of relative stability after and One Road) is increasing demand for weathering a frenzied period of boom, industrial products. bust and recovery. Globally, the geopolitical situation will About this report The sector has been paying down debt, likely remain volatile through 2018 and Preparing for growth is one of improving balance sheets and judiciously beyond. While bullion largely shrugged four publications in our annual investing in capital projects, on trend with off 2017’s world events, international Canadian mine series looking at the wider global mining industry in 2017. uncertainties could yet become an the realities and priorities of public Maintaining flexibility and increasing upward force on gold prices. The success mining companies headquartered efficiency are key goals for many executive of stock markets around the globe last in Canada. It offers a summary of financial analysis of the top 25 teams as they try to position themselves to year dampened general investor interest listings by market capitalization on capitalize on the next stages of the cycle. in gold equities, with the precious metal the TSX and complements our Junior Some companies have sought to enhance traditionally serving as a hedge against mine 2017 report, which analyzes the operations through acquisitions, but on market downturns, said David Smith, top 100 listings on the TSX Venture the whole, 2017 saw few eye-popping Senior Vice President of Finance and Chief Exchange (TSX-V). deals and only limited financing activity. Financial Officer at Agnico Eagle Mines Other large players are opting to make Limited. The market’s relative disinterest All figures used in the financial investments in new technologies, such as in gold makes it all the more important analysis are in Canadian dollars automation and big data analysis, to boost that gold miners find ways to differentiate unless otherwise noted. The results profitability over the long term. themselves to investors, he added. of companies that report in other currencies have been translated This overriding mood of patience coincides “There’s a bit of apathy towards gold at the closing Canadian dollar with relatively stable prices for most equities at the moment, and as a result it’s exchange rate on the respective commodities—particularly gold, which really important to grow important metrics period end date. The financial results is at the core of many miners listed on like cash flow per share, for example, and market data reported here the Toronto Stock Exchange (TSX). And or production per share, or margin per cover the 12-month period ended as commodity prices have stabilized at ounce,” he said. September 30, 2017. a moderate level, an attitude of cautious So while last year’s activity may pale in confidence has emerged globally for comparison to the dramatic movement in growth prospects in 2018. recent years, the lull in activity has actually Sentiment is also growing more bullish proved to be a healthy development. With as prices for copper, zinc, cobalt and company balance sheets and cash flow lithium have gained momentum. New growing stronger, the sector is positioning end-user technologies to produce and itself well for future growth. store electricity promise to drive long- term demand for these commodities. At the same time, China’s plan to accelerate economic development across Asia and Preparing for growth: | Capitalizing on a period of progress and stability 2 Highlights and analysis TSX-listed miners: A modest decline Market capitalization by industry group of the total TSX Mining stocks lagged behind the broader market (as of Sept. 2017) last year, weighed down by stagnant gold prices that dipped 3% in the 12 months ended September 30, Clean technology & renewable energy 2017. Driven largely by the performance of senior 1% Closed-end funds 1% miners, the aggregate value of the 225 mining Utilities & pipelines 9% Communication & Media companies listed on the TSX slipped 4% during that 7% Technology period, compared with a 10% gain for the overall 3% Consumer products & market. As a result, the mining sector’s share of the Real estate services and CPC/SPAC 3% 10% value of the entire TSX market declined to 9%, down from 11% a year earlier. The industry ranked as the Oil & gas 10% ninth largest sector on the exchange, just below ETFs utilities and pipelines. 5% As noted in our Junior mine 2017 report, gold prices also acted as a drag on mining companies listed on Mining the TSX-V. As a group, the juniors’ valuation rose 18% 9% in the year, compared with a 33% gain for the overall Life sciences market. 1% Financial services 29% The story was very different a year earlier in our Industrial products & services Canadian mine 2016 (Beyond the downturn) report, 12% when TSX mining stocks soared 44% and led all Source: TMX website and PwC analysis industries in terms of trading volumes. In 2017, investor enthusiasm was subdued. The volume of mining share trades declined by 19% and the value of mining shares traded fell by 18%. The number of TSX mining sector market capitalization ($ billion) TSX overview of the mining sector (% change from YTD Sept. 2016 to YTD Sept. 2017) Top 25 mining companies Total mining sector (16%) Number of trades 300 281.8 271.3 (18%) Value traded 250 239.8 241.1 (19%) Volume traded 213.8 203.3 (33%) Number of financings 192.9 200 186.0 170.8 (49%) Equity capital raised 150 136.5 New listings 43% (4%) Market capitalization 100 (2%) Number of issuers 50 -50 -40 -30 -20 -10 0 10 20 30 40 % change 0 2013 2014 2015 2016 2017 Source: TMX website and PwC analysis Source: S&P Global Market Intelligence, TMX website and PwC analysis Preparing for growth | Capitalizing on a period of progress and stability 3 Highlights and analysis [continued] mining financings dropped 33%, to 128, Spot price trend (% change from Sept. 2012) and equity capital raised decreased by 49%, to $3.1 billion. 250 Looking ahead, there are signs that the Copper US$281/mt sector’s heavy reliance on gold could 200 Gold Lithium eventually shift as new technologies and Zinc Nickel markets create demand for different 150 Potash minerals. Rising production of electric Silver vehicles, for example, is lifting demand for 100 lithium, cobalt, copper, nickel, aluminum and manganese—and investors are 50 US$3,217/mt responding. The valuations of the five 0 TSX-listed companies with exposure to US$2.94/lb US$1,280/toz lithium (Orocobre Ltd., Lithium Americas US$10,585/mt -50 US$16.66/toz Corp., Nemaska Lithium Inc., Avalon US$216/mt Advanced Materials Inc. and Globex -100 Mining Enterprises Inc.) increased by approximately 39% in the first nine Sept. 2012 Sept. 2013 Sept. 2014 Sept. 2015 Sept. 2016 Sept. 2017 months of 2017, to $2.2 billion. Source: S&P Global Market Intelligence, Bloomberg Finance L.P. and PwC analysis During the mining industry’s weaker performance in 2017, the total number of mining companies listed on the TSX declined to 225, down from 230 a year TSX industry group breakdown by number of listed issuers (as of Sept. 2017) earlier. But despite the net decrease, 10 new listings from the sector made it onto the exchange in the first nine months of ETFs 509 the year, three more than a year earlier. Mining 225 Seven of the companies graduated from Closed-end funds 148 the TSX-V to the main board. SolGold plc., Industrial products & services 132 headquartered in Brisbane, Australia— Financial services 84 and jointly listed on the London Stock Oil & gas 80 Exchange—stood out as the only new Consumer Products & 73 listing valued at more than $1 billion. Services and CPC/SPAC Real estate 64 Almost half of the mining issuers on the Technology 52 TSX had market capitalizations of $150 million or less, and one third were valued Life sciences 44 Clean Technology & 36 between $150 million and $1 billion. This Renewable Energy second group had the greatest expansion Comm. & media 26 during the period, with the number of Utilities & pipelines 25 companies increasing to 74, up from 59 a 0 100 200 300 400 500 year earlier. Number of listed issuers Source: TMX website and PwC analysis Preparing for growth | Capitalizing on a period of progress and stability 4 Highlights and analysis [continued] The top 25: From gold to potash Barrick Gold Corp., which held on to the top spot, As a group, the top 25 mining companies reduced debt to US$6.4 billion, down from US$8.5 on the TSX showed a greater focus on debt billion in September 2016. The company also reduction than capital expenditures last announced that it’s open to divesting stakes in non- year. This discipline brought the average core assets, such as Australia’s Kalgoorlie Super Pit debt-to-equity ratio down by 7%. mine, and is focused on maintaining a disciplined approach to capital allocation to ensure sufficient funds are available for additional debt repayments. Top 25 mining companies Top 25 mining companies: Balance sheet overview ($ billion) (As of September 30, 2017) 1 Barrick Gold Corporation 270.9 Total assets 282.5 2 Potash Corporation of Saskatchewan Inc.