By: Alisha Hiyate
2014-01-10
For the past year, the Canadian dollar has been weakening – falling from above parity with the greenback at the beginning of 2013 to its current price of US91.5¢.
The loonie has lost 2.4% of its value this week alone, and Goldman Sachs predicted last year that it would reach US88¢ within a year.
For Canadian miners with operations in Canada, there’s an upside and a downside to a weaker loonie, says Jürgen Beier, national mining leader at professional services firm Deloitte Canada.
On the upside, because all commodities are priced in U.S. dollars, they will get more Canadian dollars for every ounce of gold or pound of copper they sell, Beier says. (For example if they sell an ounce of gold for US$1,240 they will get C$1,355 per oz. at the current exchange rate)
“So there will be a revenue increase from a Canadian dollar perspective — if they report in Canadian dollars,” Beier says.
At the same time, the cost of imported commodities, equipment, or anything else priced in U.S. dollars that miners need to operate is going to rise.
“Let’s say they’ve got to purchase Caterpillar equipment or something like that – a lot of that stuff is made in the U.S., so they’re going to have to pay more because the Canadian dollar is weaker.”
The effects will be similar, but less noticeable, on Canadian miners that have operations at home, but report in U.S. dollars.
Meanwhile, Canadian companies that have operations outside of Canada could see their purchasing power improve.
“Their costs tend to be in U.S. dollars so if the dollar is getting stronger, they could arguably see a positive impact because they’re going to be able to buy more for their dollar in the local economy they’re working in,” Beier says.
Labour costs for a company with operations in Mexico, for example, would also decline on a dollar basis, Beier adds.
“All the local expenses which they pay in terms of labour and perhaps utilities and energy, those costs would go down as the U.S. dollar gets stronger.”
Again, the effect will be more pronounced on miners reporting in Canadian dollars, such as Teck Resources (TSX: TCK.B), and less on companies reporting in U.S. dollars, such as Kinross Gold (TSX: K).
As the Canadian dollar strengthened starting in the early 2000s and up to parity in 2010, the negative impacts on Canadian mining companies were mitigated by climbing commodity prices, Beier notes.
“In that period from 2003 to 2011, commodity prices were going up, so it tended to mask a lot of that because the margins were improving as a result of price improvements,” he says.
Now that commodity prices have decreased, a high loonie is more problematic for Canadian miners.
While the roughly 8% deflation in the loonie over the past year might ease the pain for some companies, Beier says he hasn’t run the models to determine whether the currency move will have a net zero effect, positive or negative effect.
“If we think back to the early 2000s, the dollar was at US65¢, US66¢ – that’s a significant impact and that could make a huge difference,” Beier says. “The 8% is a difference, but it’s not as significant at this point.”