It sits on some of the largest reserves of natural resources in the world and is regarded by many as an economic utopia. But Canada’s industry is underperforming, as Finbarr Bermingham finds when he talks to some of its companies.


The Canadian city of St John’s on the eastern coast of Newfoundland, is closer to Berlin, Caracas and Dakar than it is to Vancouver, on the country’s western seaboard. Between the two cities lies 3,854,085 square miles of expanse – with an average of just nine people living on each one – covering the world’s fifth, sixth and seventh largest reserves of lithium, crude oil and gold, respectively. Canada’s economy is so geared towards exporting its natural resources that the government recently put the former chief of Export Development Canada (EDC) – the country’s export credit agency – in charge of its central banking function.

But despite the vastness of Canada’s natural wealth, you’d have forgiven Stephen Poloz a few butterflies on his first day in the job. The country’s trade balance has yo-yoed in and out of the red for the past half decade. Increased pipeline capacity to the United States saw Q1’s GDP grow at the fastest rate since 2011 (2.5%), but even so, the IMF has forecast growth of just 1.5% for the year as a whole – the lowest of any non-European G-20 nation.

Canada finds itself confronted with a two-headed quandary: it needs to diversify both the content of its exports and their destinations. Overdependence on volatile commodities has left it extremely vulnerable to fluctuations in the market, while its reliance on the US to continue importing its produce has only served to compound the issue. In 2010, 75% of all Canada’s exports went south of the border, with the volume estimated to have grown by 15% by 2012.

“The commodities are both a boon and a bane,” EDC’s group vice-president of international business development Todd Winterhalt tells GTR. “They’re a rollercoaster ride: when pricing is up, demand is up and you’re feeling pretty good. I hope that in time, the economy will drive towards value-added merchandise trade as a buffer against those changes. When commodities provide the lion’s share of exports, it causes a certain amount of movement in the economy.”
Just as a rising tide can lift all ships, a falling one can sink them.

Batteries not included

But for all the volatility, there are clear incentives to starting out in the Canadian metals and mining sectors. The spoils can be plentiful and the relative lack of red tape means there are few barriers to entry. In its annual global Policy Potential Index, which places jurisdictions in order of their “policy attractiveness” to potential investors in the mining industry, the Fraser Institute, a conservative Canadian think-tank, ranks seven Canadian provinces in the top 20. Perhaps that’s why there’s no shortage of young mining outfits trying to hit the big-time – some more successfully than others.

As GTR went to press, the Canada Lithium Corporation was about to send its first shipment of lithium carbonate to Asia, from a mine and processing plant near Val d’Or, Québec. Lithium carbonate is mainly used in consumer batteries. You’ll find it in anything from iPads and cell phones to electric cars and bridge storage facilities at wind farms. Despite only acquiring the property in 2008, Canada Lithium Corporation is on the verge of becoming one of the biggest producers of lithium carbonate on the planet. If everything goes according to plan, it will hold over 13% of the market.

“We have contracts with two offtakers,” the company’s director of investor relations Olav Svela says. “One is Tewoo ERDC, a Chinese commodities trader. The other is Marubeni, a Japanese trading company. Tewoo is taking a minimum of 12,000 tonnes per year, with Marubeni taking between 2,000 and 5,000. We’ll be the only mine producing lithium carbonate in Canada. The total global market is 150,000 tonnes per year; we’re going to be producing 20,000.”In total, the Canada Lithium Corporation has raised C$300mn in debt and equity for its operations. They recently did a convertible debenture offering for C$27.7mn, but tapped the local market for a C$75mn project finance facility led by Scotiabank to help get the first earth dug. The Val d’Or pit is, perhaps, an anomaly on the Canadian mining landscape: something the banks would consider a no-brainer.

“We took a chance in 2008 – the lithium market was in a period of growth and we thought the price would keep rising. It has until very recently,” explains Svela. He says his lithium carbonate is “less volatile” than gold. It’s been on an upward trend since the late-1990s and hasn’t fallen to the degree that base metals have over the past few years either.

Part of the reason is that the US or Western Europe have never been major markets for lithium, at least not until it ends up encased inside a gadget. Since Sony produced the first commercial lithium-ion battery in 1991, the East Asian economies of Japan, China, South Korea and Taiwan have cornered the market. Svela is also looking at going beyond lithium carbonate to produce lithium hydroxide, a premium product with a higher price, also used in batteries. That would involve setting up another circuit at the processing plant they’ve built next to their mine and he’s confident they could secure the cash on the bank market.

“Maybe the banks would finance it,” he says. “It depends on how they’re feeling from one day to the next. If we can get our lithium carbonate plant producing and we can generate cash, I hope the banks would come and lend us money for a smaller project like that.”

But Svela is only too aware that for other parts of the mining industry, business has been tougher. “It’s gone through a lot of hiccups. In the case of mine exploration and development, over the past 18 months it’s been very difficult to attract money. Exploration companies aren’t generating any revenue: they rely on equity to continue their exploration and that’s been constricted now. You have to have some solid prospects before you can raise a lot of money.”

After the gold rush

On the face of it, it’s easy to see why people wish to enter the gold business. In the history of commerce, few products have shown its remarkable durability. “People say gold is finished,” Francois Perron, CEO of QMX Gold tells GTR with a chuckle. “But I always say: ‘Show me something else that’s lasted for 2,000 years.’”

QMX is a small gold production company with an active mine in Québec and another potential property in Manitoba which, if utilised, would triple QMX’s production from the 20,000 ounces of doré, a semi-finished gold product, it produced last year. The doré is shipped to Switzerland to be refined, after which it’s sold on the common exchanges. Unlike many exporters, Perron doesn’t know for certain where any of his produce goes, since it’s sold on by a reseller. He’s pretty sure, though, that much of it ends up on the resource-hungry shores of China and India.

Perron also says the nature of his business – namely the size – would see him struggle to convince banks to lend him money. “I’ve never once been solicited by a bank,” he says. “In any other business, I’d imagine they’d come and meet me at least once. It’s the quandary of the market we’re in. They’re printing all this money to get the banks to lend, but there’s something wrong in the markets, as the capital’s not getting to the small companies. I don’t think banks understand gold. If you don’t know how to sell gold, that’s a risk you don’t want to take. It doesn’t make sense, because banks have gold trading arms, but they don’t talk to them.”

QMX, however, is able to satisfy its working capital requirements through the agent that resells the doré. He explains: “I factor some of the gold through the same agent for working capital. They’ll factor it for a very small fee as there’s not much risk of the gold not being there. I get two weeks of working capital and right now in the resource world, finance is difficult to come by, so two weeks suit me fine.”

Between a rock and a hard place

A rung further down the ladder still, sits Miranda Gold. Miranda is a pure gold exploration company; a prospector. CEO Ken Cunningham explains that the company’s model is to sniff out sizeable reserves of gold, at which point they hope a producer will partner on a joint venture basis. He says: “We don’t have to get involved in the day-to-day mining routine – it gives our shareholders the chance to see a huge appreciation at the time of discovery.”

It currently has geologists working in the Cortez Gold Trend, Nevada (which accounts for 8% of the world’s known gold reserves) and near Medellin, Colombia, which Cunningham describes as “a frontier market”. While the company has yet to locate any multi-million ounce deposits, it has struck a three-year alliance with Agnico Eagle, a gold producer, who will bankroll 70% of its Colombian operations.

But the climate is tough for junior mining companies such as Miranda. If it took on debt, potential investors would likely be frightened off, while the equity market is at the mercy of capricious gold prices. “When prices were running strong, our share price was much stronger than it is today,” explains Cunningham. “A year ago we saw gold peak out. You had both India and China with fairly robust economies putting more and more of their wealth into gold. China was looking to replace US paper with gold and in India it’s always been fashionable for citizens to hold their wealth in gold.”

Now though, both the Chinese and Indian markets are retracting a little (in June, the Indian central bank banned the import of gold by domestic and retail consumers through bank credit and letters of credit in an attempt to strengthen the rupee). The Canadian dollar has been gaining traction and the US markets are on the rise. All of these have pushed the price of gold down.

Meet the jet-set

When EDC’s Todd Winterhalt uses the term “value-add”, he’s referring to sectors such as medical equipment, transportation equipment, air and rail and emerging technologies. “You get a better lift with a value-added product,” he tells GTR. Perhaps leading Canada’s charge on this front is Bombardier, the Montreal-based aerospace, defence and rail manufacturer. The company was founded by Joseph-Armand Bombardier, the inventor of the snowmobile, in 1941 and since then has become synonymous with Canadian industry.

But even a global giant such as Bombardier isn’t immune to some of the issues faced by small mining outfits. Marc Meloche is the vice-president of structured finance in Bombardier’s aerospace division. “The aviation sector for Canada is similar to any other sector in Canada,” he tells GTR. “The initial focus was on the US, but we’ve had to spread it out. Five to seven years ago, approximately 70% of our market was in the US. We’ve made a concerted effort to enlarge our focus and if you take out the large order jets we have with charter operators, you see a total reversal: the rest of the world now accounts for 60 to 70% of our business.”

Meloche’s job is to facilitate financing for prospective clients of Bombardier’s in order for them to make purchases. Unlike some of his smaller peers, on this front he has plenty of options. While “capital market banks” from North America have maintained a foot in the industry, the straight bank lending has traditionally come primarily from a handful of European banks, “largely because they have more aviation sector experience”. Meloche has also seen the emergence of Chinese and Japanese banks, but undoubtedly during and after the financial crisis, his funding strategy changed.

Perhaps more than any other sector, aircraft has been a great beneficiary of ECA-backed finance. In Germany, Euler Hermes supported more than 30% of aviation transactions in 2012 while in America, US Exim supported 35%. “Since 2008 there’s been more emphasis on the use of export credits and we’re no different from any of our competitors in that regard,” says Meloche. “With the credit crunch you saw the prevalence of export credits, some in the line of 30 to 35% on a combined worldwide basis. But it’s starting to ease. I think now it’s down to about 25%.”

Perhaps the biggest shift in the industry in recent years has been the influx of small, budget carriers. A drop off in demand for executive jets has been picked up by huge orders of aircraft in the 180 to 220-seat range by low-cost airlines.

In March Ryanair placed an order for 175 jets worth US$16bn with Boeing, while Airbus won a US$24bn order for more than 200 passenger jets from Lion Air in the same month. With the launch of its C-Series aircraft – scheduled for first deliveries in 2014 – Bombardier is attempting to tap the most fertile area of market demand. Investissement Québec, a regional economic development agency, has already pledged C$1bn in loans to those hoping to purchase the jet. It shows that despite the value of the resources in the ground beneath them, both local and central government are determined to ensure that Canada’s value-add economy really takes off.