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Gold stands out as bright spot in Canadian mining industry

When paired with the falling loonie, rising gold prices offer an advantage for Canadian gold mine operators.

Valerian Mazataud/Bloomberg

The weak loonie is providing a powerful boost for many Canadian gold miners.

The dollar's long decline has already gone a long way to cushioning the impact of falling bullion prices on Canadian producers. In recent months, its further weakening has added to the cost advantage of domestic producers.

The buoyant effect of the low Canadian dollar has combined with a rise in the gold price over recent weeks to drive gold mining stocks listed on the Toronto Stock Exchange to a 5.8-per-cent gain so far this year.

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This has been among the few bright spots in a mining industry hammered by falling prices for more prosaic metals. In stark contrast to the gold producers, diversified miners on the Toronto exchange have lost an average of 27.4 per cent since New Year's Day.

"If you're operating a Canadian gold mine, you're doing just fine," said Jamie Porter, chief financial officer at Alamos Gold Inc., the Toronto-based owner of the Young-Davidson mine in northern Ontario. He lists the weak loonie as one reason for that good health.

Gold, like other metals, is priced in U.S. dollars, and its value has sustained grievous injury when gauged in terms of greenbacks.

By that standard, its price has plummeted from a high of $1,900 (U.S.) an ounce in 2011 to about $1,125 now.

However, when viewed through the lens of the Canadian dollar, the decline has been much milder. In loonie terms, the metal has merely glided downward from about $1,880 (Canadian) in 2011 to about $1,570 now.

That is a 17-per-cent fall for those measuring the decline in Canadian dollars as opposed to a 41-per-cent free fall when gauged in U.S. currency.

As a result of the currency shift, Canadian companies with mines in this country are benefiting from the growing gap between their costs, which are denominated in loonies, and their sales, which take place in U.S. dollars.

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Operating costs at the Young-Davidson mine, for instance, have come down 20 per cent from a year ago in U.S. dollar terms and "about half of that decline was the result of a weakening Canadian dollar," Mr. Porter said.

For base-metal mines in Canada, any similar pickup in profitability has been negated by a monumental slump in prices for copper, nickel and other industrial raw materials. In contrast, gold prices held up fairly well in the great metals rout of 2015, so much more of the beneficial effect of the currency decline has fallen to the bottom lines of domestic gold producers.

The biggest beneficiaries of the loonie's slump versus its U.S. counterpart have been those companies that primarily mine in Canada or other countries with similarly downtrodden currencies.

Alamos Gold, Yamana Gold Inc. and New Gold Inc. were among the producers that mentioned the salutary effects of the weak loonie at this week's TD Securities Mining Conference.

Detour Gold Corp., which mines the precious metal in northern Ontario, is another winner from the currency trend. Credit Suisse upgraded it to "outperform" this week based on three factors – its improved free cash flow, its long reserve life and its exposure to the weakening Canadian dollar.

Of course, the question is whether the gains those stocks are enjoying now will reverse when the loonie rises again. But given the less-than-brilliant outlook for oil and other Canadian exports, that problem does not seem likely to occur any time soon.

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