Canada’s currency has fallen 6.7 percent to C$1.0583 per U.S. dollar from parity at the beginning of the year in the steepest first half slide since 1984. Today it weakened past C$1.06 per U.S. dollar for the first time since October 2011. Miners with costs in Canadian dollars and sales in the U.S. stand to benefit if the slide continues and they repatriate revenue.
A further 5 percent drop would translate into a 25 percent jump in cash flow per share this year for Vancouver-based Teck and a 38 percent gain for Toronto-based HudBay, according to National Bank of Canada. (NA)
“It’s a silver lining,” Paolo Lostritto, a mining analyst at National Bank said in a phone interview from Toronto on June 27. “If the Canadian dollar weakens, the costs of doing business in Canada falls relative to the U.S., and therefore on a relative basis they should outperform.”
The foreign exchange boost, which may also benefit oil companies and other exporters, comes as commodity prices have plunged and growth in China, the world’s biggest commodity consumer, is forecast to slow. Gross domestic product in China will grow 7.7 percent this year, according to the average estimate of economists surveyed by Bloomberg, down from a five-year average of 9.3 percent from 2008 to 2012.
Goldman Sachs Group Inc. forecast in a May report precious metals including gold and silver will drop 4 percent in 12 months, joining Citigroup Inc. in pronouncing the decade-long commodity bull market over. The Standard & Poor’s GSCI Index of 24 commodities has fallen 3 percent this year, with spot gold down 25 percent and copper 13 percent.
Analysts have cut their year-end forecasts for the Canadian currency 5 percent in the last three months, according to data compiled by Bloomberg, as strengthening U.S. growth looks set to leave Canada behind. The U.S. dollar has also gained as the Federal Reserve unveiled a time line for ending monetary stimulus which had been a weight on the currency.
Canada’s annual growth last year was 1.7 percent, trailing the U.S.’s 2.2 percent rate for the first time in five years, according to Bloomberg data. U.S. out performance is forecast to continue until 2015, Bloomberg surveys show.
As the economies diverge, some forecasters are calling for the loonie, as the Canadian dollar is known, to continue its slide, with Toronto-Dominion Bank, HSBC Holding Plc. and Morgan Stanley all predicting it will fall to about C$1.10 per U.S. dollar next year.
That’s the level where companies like Teck, which has 76 percent of its operations in Canada but generates 95 percent of sales outside the country, would start to see a boost, Lostritto said.
“Your money coming in is U.S. and the money you have to pay out to your employees and hopefully some supply chain stuff, you’re paying it in Canadian dollars,” said Stefan Ioannou, a mining analyst at Haywood Securities Inc., by phone from Toronto. “So the U.S. dollars you’re bringing in go a lot further,”
Teck Resources, a miner of zinc, copper, and metallurgical coal, has slumped 38 percent this year while HudBay, which generates almost 50 percent of its revenue from copper, has tumbled 30 percent.
Teck Resources declined to comment on how a weaker Canadian dollar affects the mining industry, Chris Stannell, a spokesman, said in an e-mail. Bonnie Little, a spokeswoman for HudBay, didn’t return a voicemail message requesting comment.
A similar dynamic is at play for Canadian oil producers, many of which have the majority of their production in Alberta’s oil sands yet export to the U.S., Kyle Preston, an analyst at National Bank Financial, said in a telephone interview on June 27.
Suncor Energy Inc. (SU), the country’s largest oil producer, derives almost 80 percent of its revenue from Canada, while fourth-biggest Cenovus Inc. generates 100 percent from domestic sales, according to Bloomberg data.
“I’m expecting some pretty good earnings out of the oil and gas sector if this continues,” said David Cockfield, managing director and portfolio manager at Northland Wealth Management. Northland manages about C$225 million ($213 million).
A lower dollar, higher oil price and new rail transport capacity are coming together to make a profitable environment for Canadian oil producers, said Cockfield.
“Canadian heavy oil’s getting all the way down to the Gulf right now, which a few months ago seemed like it wasn’t likely to happen,” he said.
To be sure, the risk of further declines in the currency may spook international investors, said Greg Dean, an analyst at CI Investments Inc. A weaker loonie erodes the value of investments in foreign currency terms.
“We’ll see a ton of money flow out of Canada because a lot of U.S. and international managers have said, ’I have to invest domestically because I’m worried about the Canadian currency,’” he said.
The benefits of a falling loonie for both mining and energy companies could also be offset if commodity prices fall in step. In the last decade crude oil futures have had an average 50 percent correlation with the Canadian dollar’s movements against its U.S. counterpart, while the GSCI index has had a 56 percent correlation.
This hasn’t been true of oil recently as West Texas Intermediate crude has surged 15 percent over the past 12 months to hover around $100. Meanwhile, the discount Canadian producers receive for their crude against the U.S. benchmark has narrowed to $15.75 from a record $42.50 in December.