The Likely Rise Of Electric Vehicles And The Impact On Metals

I have published an article on Seeking Alpha on the growth in Electric Vehicle demand and technology and the likely effect on metals.  I am not permitted to publish it in full here but a synopsis and the opening few sentences follow:

Summary

We expect the growth in the electric vehicle (EV) element of the automobile sector to be more rapid than most projections suggest.

Battery technology is improving very rapidly and will shortly overcome range anxiety and charging time worries.

A number of metals will benefit strongly from the growth in EV uptake, while some others will suffer, but this is a longer term viewpoint.

The take-up of electric vehicles (EVs) may well be in a growth pattern which could rival that of the price of bitcoin, but is unlikely, like the latter to push sales into bubble territory. As range anxiety and long charging times recede into obscurity with the enormous developments in battery technology, the environmental, and ultimately the cost, benefits of electric drive for automobiles over internal combustion engine (ICE)-driven small vehicles is likely to become paramount………

To read full article click on: www.seekingalpha.com  

and search for my articles under Lawrence Williams in the search box.  You may find some of my other articles to be of interest too.

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Silver Takes the Gold: Commodities Halftime Report 2016

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Silver Takes the Gold: Commodities Halftime Report 2016

Here we are at the halfway point of the year, less than two months away from the Rio 2016 Olympic Games. As a group, commodities are the top performing asset class, comfortably beating domestic equities, the U.S. dollar and Treasuries.

Commodities, the Top Performer in First Half of 2016

Below is our ever-popular Periodic Table of Commodities Returns, updated to reflect the first half of 2016. Click to see an enlarged version.

The Periodic Table of Commodity Returns
click to enlarge

Commodities’ performance is quite a reversal from the weakness we’ve seen lately, particularly last year, but we shouldn’t expect another 2004 or 2005, when global trade was humming. Conditions are still not ripe for a real takeoff, with manufacturing activity in China and the eurozone struggling to gain momentum.

But there’s hope. Many of the challenges standing in the way of growth were exposed when Britain voted last month to leave the European Union (EU), which I’ve been writing about for the past few weeks. Most recently, I highlighted some of the winners to emerge from Brexit, among them gold investors, U.S. homeowners and British luxury goods makers.

Hopefully we can add global trade to the list. Brexit has brought to light some of the corruption and economic strangulation by regulation that chokes the flow of capital. Last week I had the opportunity to speak with some EU citizens. Their frustration was palpable. The cronyism among the EU’s unelected officials is nothing new, but it’s only worsened over the past decade and a half, they said. The British referendum has encouraged a balanced, intercontinental discussion on the direction Brussels must take now that the corruption and depth of discontent have been exposed for the world to see.

Precious Metals Shine Brightly on Macroeconomic and Geopolitical Concerns

Silver demand had a phenomenal 2015, with retail investment and jewelry fabrication both reaching all-time highs. Led by consumers in the U.S. and India, coin and bar investment soared 24 percent from the previous year, while jewelers gobbled up a record 226.5 million ounces. According to the Silver Institute’s World Silver Survey 2016, metal demand for photovoltaic installation climbed 23 percent in 2015, offsetting some of the losses we continue to see in photographic applications.

Global Demand for Silver Bars Surged 24% in 2015
click to enlarge

Caused by worries of a summer interest rate hike and uptick in the U.S. dollar, gold and silver both stalled in May but have since rallied on the back of Brexit and with government bond yields in freefall. For the first time ever, Switzerland’s entire stock of bonds has fallen below zero, with the 50-year yield plummeting to negative 0.03 percent on July 5.

Switzerland 50-Year Bond Yield
click to enlarge

All-time low yields can also be found in the U.S.—where the 10-year Treasury yield fell nearly 38 percent in the first half—U.K., Canada, Germany, France, Australia, Japan and elsewhere. Roughly $10 trillion worth of global government debt, in fact, now carry low to subzero yields.

This has been highly constructive for gold and silver, as yields and precious metals tend to be inversely related.

What’s more, the rally doesn’t appear to be done, with UBS analysts making the case last week that we’re in the early stages of a new bull run. Credit Suisse sees gold testing the $1,500 an ounce mark as early as the beginning of 2017. As for silver, some forecasters place it at between $25 and $32 an ounce by year’s end.

The risk now is that higher prices are pushing away some potential investors. Today Bloomberg reported that gold imports in India plunged a sizable 52 percent in the first half of 2016, compared to the same period in 2015.

Supply and Demand Rebalancing?

Much of the price appreciation has been driven by a global rebalance in supply and demand. Dismal prices over the last couple of years compelled explorers and producers to cut activity and other capital expenditures, while demand continues to rise.

This dynamic certainly helped  zinc, the best performing industrial metal of 2016 so far. During the first four months of the year, mine production fell 8.1 percent from the same time a year earlier due to declines in Australia, India, Peru and Ireland, according to the International Lead and Zinc Study Group. In January, London-based Vedanta Resources made its last zinc shipment from its Lisheen Mine in Ireland, which for the last 17 years had produced an average 300,000 tonnes of zinc and 38,000 tonnes of lead concentrate per year.

Meanwhile, the demand for refined zinc, used primarily to galvanize steel, is expected to increase 3.5 percent this year. What might surprise you is that a large percentage of this growth can be attributed to China, which is still investing heavily in infrastructure, even as money supply growth has slowed.

This rebalancing has also bolstered crude oil prices, up 73 percent since its 2016 low in February. Unplanned production outages in Canada, Nigeria, Iraq and elsewhere removed a collective 3.6 million barrels per day off the market in May alone. Coupled with ongoing declines in the North American rig count—U.S. crude production is now at a two-year low—this helped nudge prices up to levels not seen since July 2015.

Month-over-month change in global oil supply disruptions
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At the same time, global consumption is expected to increase by 1.5 million barrels a day both this year and next, according to the U.S. Energy Information Administration (EIA), with North America and Asia, particularly China and India, responsible for much of the growth.

Record Automobile Sales Support Commodities

Crude consumption is also being supported by robust automobile sales, which set a six-month record in the U.S. following six straight years of growth. Between January and June, sales reached an all-time high of 8.65 million units, up 1.5 percent from the same period last year. In China, the world’s number one auto market, 10.7 million vehicles were sold in the first five months, an impressive year-over-year increase of 7 percent. Sales of light vehicles, especially motorcycles, have been strong in India.

As you might expect, this has likewise benefited demand for platinum and palladium, both used in the production of autocatalysts. The CPM Group anticipates palladium demand to reach an all-time high this year, up 3 percent from last year, on tightened emissions standards and the purchase of larger cars and trucks in the U.S. on lower fuel costs. (The larger the engine, the more palladium or platinum is needed to reduce emissions.)

Autocatalyst Production Driving Palladium Demand
click to enlarge

Since January, the platinum group metals (PGMs) have increased over a third in price, marking the end of an 18-month bear cycle, according to Metals Focus’ Platinum & Palladium Focus 2016. Fundamentals have improved since last year, when EU growth concerns and Volkswagen’s emissions scandal weighed heavily on investment prospects.

Like zinc, crude and other commodities, the PGMs were supported the last six months by lower output levels, as labor disputes in South Africa—the world’s largest platinum producer and number two largest palladium producing country—disrupted operations.

Investec sees gold as best performing metal in 2016

Article first posted yesterday on sharpspixley.com

In his address to today’s Global Mining Finance Spring Conference in London, Jeremy Wrathall, Investec’s Global Head of Natural Resources, placed Gold at the top of his list as the likely best performer in global metals and minerals for the current year.  But overall he was not too optimistic for the continuation of the recent commodities recovery over the short to medium term.  May to September, he commented, tend to be weak months for commodities and he doesn’t see this year as being any different.

But, many metal commodities have outperformed this year so far with silver and gold top of the list in terms of gains to date.  It has been a commodity rally, Wrathall averred, that came out of the blue.  Almost all the metals and minerals had been drifting in price up until the end of 2015, but right from the start of the 2016 New Year things did begin to pick up – at least for the precious metals.

Wrathall put the principal drivers down to China and weakness in the US dollar.  The former’s fundamentals appear to have improved quite sharply – perhaps even akin to the 2009 recovery there which drove commodity markets to new highs.  This was a total change from 2015 which he commented was a year of maximum commodities pessimism.  However he wasn’t entirely convinced that the Chinese recovery would be sustained through the rest of the year.

So what has changed?  Mining companies across the board have proved remarkably successful in substantially cutting operating, management and capital costs, reducing debt and in taking impairments on projects whose values had been slashed by commodity price weakness due, in many cases, to substantial oversupply brought on by weakness in the manufacturing sector worldwide, and notably in China.  They have been helped in their efforts by the strength of the US dollar against local currencies and lower oil prices.  This is something of a two-edged sword though.  It has helped operations which might otherwise have closed stay open, thus continuing to keep supply surpluses in place.  For example Wrathall showed charts suggesting about 90% of world iron ore and copper production as being viable at current prices despite the big price declines for both metals.  Currency parities and oil prices could also reverse which could put mining operations which had been enjoying corresponding benefits back into difficulties again.

On gold, Wrathall admitted that he’s been trying to work out a rationale for gold price performance for the past 30 years – and failed!  But what he has seen is an increased allocation by fund managers into resource assets – and precious metals have probably been the major beneficiaries here – after they had been ignored through times of rising prices.  Now funds are flowing back, but into what is effectively a small sector in global financial terms, which has led to some well above average price increases as a result.

Wrathall’s most preferred order of positivity on metals and minerals is as follows:  Gold (silver wasn’t mentioned but presumably falls into this category), diamonds, copper, oil and gas, alumina, rhodium, manganese, platinum, zinc, aluminium, lead, nickel, palladium, iron ore, chrome and coal – the worse the prospects the further down the list one goes.  Part of the uncertainty is the possibility that China, which is key to a sustained recovery in the industrials sector, could possibly be exhibiting parallels with Japan of the 1970s, and which has been suffering virtually zero growth most of the time since!  That palladium falls so far down his list will surprise many who feel that fundamentals are very supportive (but again much of this is predicated on substantial growth in the global market for petrol (gasoline)-powered vehicles and China is very much the key market here so any faltering in growth could put a substantial dent in market expectations, while allowing alternative drive units (electrical and fuel cell) to take an ever growing share of this market as technology improves.)

China – still the heavy metal, gold and silver rock star

By Frank Holmes, CEO and Chief Investment Officer, US Global Investors

FH1

I want to begin with a quote from a recent Cornerstone Macro report that succinctly summarizes the research firm’s view on growth prospects in emerging markets, China specifically. Emphasis is my own:

Our most out-of-consensus call this year is the belief that China, and by extension many emerging markets, will see a cyclical recovery in 2016. We understand the bearish case for emerging markets on a multiyear basis quite well, but we also recognize that in a given year, any stock, sector or region can have a cyclical rebound if the conditions are right. In fact, we’ve already seen leading indicators of economic activity and earnings perk up in 2016 as PMIs have rebounded in many areas of the world. That is all it takes for markets, from equities to CDS, to respond more favorably as overly pessimistic views get rerated. And like in most cyclical recoveries that take place in a regime of structural headwinds, we don’t expect it to last beyond a few quarters.

There’s a lot to unpack here, but I’ll say upfront that Cornerstone’s analysis is directly in line with our own, especially where the purchasing managers’ index (PMI) is concerned. China’s March PMI reading, at 49.7, was not only at its highest since February 2015 but it also crossed above its three-month moving average—a clear bullish signal, as I explained in-depth in January.

I spend a lot of time talking about the PMI as a forward-looking indicator of commodity prices and economic activity. As money managers, we find it to be far superior to GDP in forecasting market conditions three and six months out. In the past I’ve likened it to the high beams on your car.

FH2

We were one of the earliest shops to make the connection between PMIs and future conditions, and we continue to be validated. Just last week, J.P.Morgan admitted in its morning note that “stocks are taking their cues from the monthly PMIs,” the manufacturing surveys in particular, as opposed to GDP.

We eagerly await China’s April PMI reading and are optimistic that this cyclical recovery has legs.

Cornerstone’s outlook is supported by a recent study conducted by CLSA, which found that 73 percent of “Mr. and Mrs. China” expect to be better off three years from now, while only 3 percent expect to be worse off:

Optimism is strongest among those in higher-tier cities, reflecting the disparity in economic vibrancy across tiers: as many as 80 percent of families in first-tier cities have optimistic outlook. The figure is lower, albeit still strong, at 68 percent among families in the third tier.

More than half of those surveyed said they expected to be driving a nicer car and living in a bigger home in the next few years, which is a boon for materials and metals such as platinum and palladium, used in catalytic converters.

As a reflection of growing demand for new homes, house prices in China are climbing right now in first-tier and, to a lesser extent, lower-tier cities, a sign that more and more citizens are seeking the “Chinese dream.”

FH3

China’s Insatiable Appetite for Metals

China’s appetite for metals—gold, silver, copper, iron ore and more—is growing, another sign that the Asian giant is in turnaround mode.

China is the world’s largest importer, consumer and producer of gold. Last year, physical delivery from the Shanghai Gold Exchange (SGE) reached a record number of tonnes, more than 90 percent of total global output for 2015. Meanwhile, the People’s Bank of China continues to add to its reserves nearly every month and is now the sixth largest holder of gold—the fifth largest if we don’t include the International Monetary Fund (IMF). As of this month, the bank holds 1,788 tonnes (63 million ounces) of the yellow metal, which amounts to only 2.2 percent of its total foreign reserves, according to calculations by the World Gold Council.

Now, in a move that’s sure to boost China’s financial clout in global financial markets even more, the country just introduced a new fix price for gold, one that is denominated in Chinese renminbi (also known as the yuan).

Gold is currently priced in U.S. dollars. That’s been the case for a century. But since gold demand has been shifting from West to East, China has desired a larger role in pricing the metal. The Shanghai fix price is designed with that goal in mind.

It’s unlikely that Shanghai will usurp New York and London prices any time soon, but over time it will allow China to exert greater control over the price of the commodity it consumes in vaster quantities than any other country.

China’s gold consumption isn’t the only thing turning heads. I shared with you last week that the country imported 39 percent more copper in March than in the same month last year. (Shipments also rose 18.7 percent in renminbi terms in March year-over-year.)

The heightened copper demand has fueled renewed optimisim in the red metal. Prices are up 6 percent month-to-date.

FH4

Caixin reports that China’s iron ore imports are surging on lower prices. In the first two months of 2016, the country purchased 86 percent more iron than it needs. What’s more, total imports were up 84 percent from the same time last year.

Steel production, which requires iron ore, is likewise ramping up.  Output is currently at 70.65 million tonnes, an increase of nearly 3 percent year-over-year.

FH5

For reasons unknown, China has also been growing its silver inventories pretty substantially for the past six months, according to an article shared on Zero Hedge. This month, as of April 19, the Shanghai Futures Exchange added a massive 1,706 tonnes, which is a 452 percent increase from the amount it added in April 2015. Shanghai silver inventories are now at their highest level ever.

FH6

Though unconfirmed, it’s possible this silver will eventually be used in the production of solar panels, every one of which uses between 15 and 20 grams of the white metal. China is already the world’s largest market for solar energy—it surpassed Germany at the end of last year—with 43.2 gigawatts (GW) of capacity. (By comparison, the U.S. currently has 27.8 GW.) But get this: It plans on adding an additional 143 GW by 2020, which will require a biblical amount of silver.

Not to be outdone, India also plans significant expansion to its solar capacity, with a goal of 100 GW by 2022, according to the Indian government.

Metals Still Have Room to Rock

We know that money supply growth can lead to a rise in commodity prices. Note that Chinese money supply peaked in 2010 and has since fallen, along with commodity prices.

FH7

New bank loans in China have spiked dramatically this year while money supply has grown more than 13 percent year-over-year, which is good for metals and manufacturing.

The increase in metals demand, not to mention the weakening of the U.S. dollar, has allowed silver to become the top performing commodity of 2016 after overtaking gold.

FH8

Despite the rally, gold doesn’t appear to be overbought at this point, based on an oscillator of the last 10 years. We use the 20-day oscillator to gauge an asset’s short-term sentiment. When the reading crosses above two standard deviations, it’s usually considered time to sell. Conversely, when it crosses below negative two standard deviations, it might be a good idea to buy.

Silver is currently sitting at 1.2 standard deviations, suggesting a minor correction at this point would be normal.

FH9

Time to Take Profits in Oil?

The same could be said about Brent oil, which has returned 61 percent since hitting a recent low of $27.88 per barrel in January. This has driven up the Russian ruble and energy stocks. (We’ve recently shown the correlation between world currenices and commodities.)

The rally has been so strong over the past three months that it’s signaling an opportunity to take profits or wait for a correction. Based on the 20-day oscillator, Brent’s up 1.3 standard deviations, which suggests a correction over the next three months.

FH10

Oil has historically bottomed in January/February. The rally this year has not disappointed. Further, it has helped many domestic banks that have been big lenders to the energy sector. High(er) oil prices translate into stronger cash flows for loans.

A diversion into base metals

While my primary focus for my thoughts in LawrieOnGold.com and on the other sites on which I publish articles is Precious Metals, as someone who has written about all aspects of metals and minerals in the past, I will occasionally publish articles on other aspects of the industry.  In this context, and in particular if you have an interest in base metals, do have a read of  my latest article on www.SeekingAlpha.com entitled GFMS tips nickel as best 2016 base metals performer, then copper.

GFMS is perhaps best known, and sometimes criticised, for its precious metals forecasting expertise and for the most part we’d consider its figures pretty reliable, although may quibble about particular aspects.  But it also devotes much of its activity on analysis of other aspects of the resource sector and thus this article is my comment on its latest forecasting for base metals prices in 2016 and beyond.  As the Seeking Alpha article suggests it is looking to nickel as being the likely best performer next year, followed by copper, whereas it sees a continuing poor performance for aluminium and lead, while zinc may just about see better things after being hotly tipped as the most likely high flyer a year ago.

Obviously the GFMS report was published ahead of the VW emissions scandal (the report contains a section on pgms too) and the latest Glencore move to cut a significant part of its zinc output, which has given the latter metal a substantial short term price boost, but overall the report is well worth reading.  Indeed those interested may apply to download a copy of the full report – and other GFMS reports – from https://forms.thomsonreuters.com/gfms/ .

UPDATE: A piece of mining history revived – original Rio Tinto mine back in production

While the following article is not specifically on precious metals, but on the revival of one of the world’s oldest known mines, it relates to a mine which has in its time produced silver and gold – indeed the Romans mined it primarily for its silver – and the orebody still contains both precious metals.  While silver is still a byproduct, albeit a small one, the gold content is probably too low to be profitably extracted.  Nevertheless as a piece of mining history – and a potentially decently profitable copper mining operation – even at current copper prices, readers may find it an interesting article.

Additionally the operating company – EMED Mining – has announced today (Sept 11th) that it is convening an Extraordinary General Meeting in order to consolidate the Existing Ordinary Shares, amend the Articles of Association and to change the name of the Company to Atalaya Mining plc.

Alberto Lavandeira, CEO, commented: “With the focus now firmly on production and further developing the historic mine the company is very much a different entity to the one that came to the market. With all licences and financing in place to produce 7.5 million tonnes of ore a year we are excited by the prospects and ability to grow our operations. As such we are now establishing a structure that reflects our current standing as we focus on maximising returns for shareholders.”

Lavandeira also commented, at a meeting this week in London, that the company was considering dropping its Toronto quotation as it had relatively few Canadian registered shareholders and he did not consider it was getting much value out of its TSX quote.

In what has to be a mining engineer’s dream, the old Rio Tinto copper mine in Spain – which in its heyday was the foundation stone for the mega mining company which still bears its name – is being brought back to life. Indeed it is well on the way to becoming a major producer again – and the economics in comparison with low grade copper porphyries which provide the bulk of global copper production, are impressive.

The Rio Tinto mine in southwestern Spain has one of the world’s longest known mining histories with copper having been mined there even before Roman times, but it was in the late 19th Century, and the development of the operation into what at the time was one of the world’s largest copper mines as its first operation by the UK’s Rio Tinto company which made it into a mining classic – and as the mining world knows Rio Tinto has subsequently gone on to become one of the world’s biggest diversified mining companies.

But the resurrection of the old Rio Tinto mine has nothing to do with the company which now proudly bears that name. Rio Tinto ceased to mine there back in the 1950s and the mining was subsequently taken over by a number of successive Spanish enterprises and eventually ceased operations at a time of weak base metals prices in 2001. It was since kept on a limited care and maintenance basis until being acquired by the current owner and operator, EMED Tartessus – a subsidiary of LSE AIM quoted (EMED) and TSX quoted (EMD) EMED Mining which recognised the potential and which for several years now has pursued permitting and conducted studies leading to the mine’s re-opening this year, although it is not scheduled to reach full commercial production until early next year.

Despite the deposit being mined on and off for well over 1,000 years – there’s a fascinating history of Rio Tinto published on theAndalucia.com website – there remains still a major ore deposit ready to be mined again. Nowadays it is classified as a low grade Volcanogenic Massive Sulfide (VMS) deposit with the latest resource estimate of Measured and Indicated material totaling 203 million tonnes grading 0.46% copper containing 930,000 tonnes of the metal. Within this there is a currently mineable Proven and Probable open pittable ore reserve of 123 million tonnes grading 0.49% copper for 606,000 tonnes of contained metal.

Now while the deposit is low grade, the capital cost of re-opening the mine is tiny in comparison, say with a greenfield Andean copper porphyry of similar grade which could cost billions of dollars to bring to production – probably out of the question in today’s economic environment. Because this is in effect a brownfield site with great local infrastructure and only around 65 km from Seville and 80 km away from the port of Huelva – which was originally built for the old Rio Tinto mine – the capital cost to bring the mine to initial Phase 1 production of ore throughput of 5 million tonnes/year has been reduced to only $82 million. Indeed EMED will be expanding this virtually immediately to 7.5 million tonnes/year at an additional capital cost of $58 million. This has been achievable as much of the old concentrator infrastructure was already in place and while some equipment needed totally replacing, other parts and the concentrator buildings only needed refurbishing.

EMED Mining’s CEO, Alberto Lavandeira, who has an impressive mine development cv both in mines in Spain and the DRC, has brought together an impressive team to bring the project through its final production stages and so far it is progressing far under the original capital budget and ahead of schedule. It is fully financed up to the end of its Phase 1 expansion construction programme for the production of 37,500 tonnes of copper a year, and there is potential to expand to 45,000 tonnes/year copper by processing 9-10 million ore tonnes a year (Phase 2). Most of the output is covered by offtake agreements. Cash costs are estimated at US$1.90/lb of copper (compared with the current copper price of around $2.45/lb).

Longer term the company sees excellent potential for expanding the reserves and is upping its infill and exploration drilling programs. It reckons there is still some excellent high grade potential around the historical underground workings, although at the moment is concentrating on its open pittable resource. It also sees exploration potential in the surrounding area where there have been other significant past mining operations.

On the face of things the economics look impressive as are the huge strides the current operations team has made in keeping capital costs way below initial estimates and already coming up with initial copper concentrate production in the plant commissioning phase. While copper prices have been very depressed of late, to bring a large low grade new mine into production – potentially economically at current price levels – is an impressive achievement and is rewriting yet again the mining history of an area which is believed to have supported the world’s oldest known mining operations.

 

Copper and gold – parallels in massive supply deficit scenarios

Looking at parallels between looming supply shortages for copper and gold, and the likely different patterns the two metals will follow given copper is very much an industrial metal whereas gold largely revolves around financial and investment factors.  But China is perhaps the single key element in both scenarios

Lawrie Williams

I have just written an article for Mineweb covering a prediction that global copper supply is heading for a very large deficit – perhaps as much as 1.5 million tonnes by 2018.  See: Copper heading for 1.5 million tonne deficit by 2018  .  I have also penned an article on what I see as a looming gold supply deficit (indeed it may actually be with us already) on these pages (See: 2015 global gold supply deficit could be substantial).

There are some interesting parallels between the two articles with one particular factor standing out – notably Chinese demand.  In terms of copper the current weak copper price is largely because there has been something of a hiatus in Chinese copper purchases in line with something of a downturn in the Chinese economic growth.  Note this is not a recession in the economy, but a downturn in the levels of growth seen in the recent past.  The Chinese economy still seems to be growing, but at a slower rate.  The analyst bandwagon has seized on the slowdown as showing that the supercycle, primarily generated by Chinese demand for industrial metals of all kinds, has thus ended.  The copper article stems from analysis by senior Bernstein analyst, Paul Gait, that in fact the Chinese generated supercycle is only around one-third into its course and the Asian dragon still has a huge amount of  ground to make up on  all other industrialised nations in terms of per capita metal consumption.

In turn the recent slowdown in Chinese economic growth has seen metal prices fall to production costs only now being just about covered by income from sales, whereas traditionally the copper mining sector operates on the basis of a 50% premium of sales to costs.  As a consequence the big copper miners are cutting back heavily on costs, leading to a drastic fall in exploration expenditures, curtailment and cancellation of big new capital projects and expansions and some closures of now uneconomic existing mining operations to satisfy shareholder and institutional demands for profit maintenance, or at least recovery.

But, at the same time many of the major producing mines are seeing mill head grades running substantially above reserve grades which can only lead to declining output, without major plant expansions to counterbalance the trend.  And finance for such major expansions is becoming more and more difficult to come by.  With exploration curtailed, and nowadays huge lead times in taking a major new mine from discovery to production (figures of 30 years are being quoted) the world is facing a major copper shortage in the years ahead.

Gold is running into a very similar situation on the supply side.  We may well have seen peak gold last year as low gold prices are already leading to new project cancellations and curtailments, closures of uneconomic operations and a big downturn in exploration expenditures.  Coupled with older mines running out of ore and declining grades at other older operations it is beginning to look like this is the year global new mined gold production may be about to start to fall.

In other respects, though,  gold and copper are on somewhat divergent paths.  A big copper supply deficit is at least in part dependent on an uplift in global industrial demand and, in particular a recovery in Chinese imports.  On gold though, we think the deficit is already in place and the reason it doesn’t show in analysts’ statistics is they totally ignore upwards of 1,000 tonnes of gold going into China, but not classified as ‘consumed’.  The latest World Gold Council (WGC) Gold Demand Trends report, with figures from GFMS has a very tight figure for Chinese gold consumption (814 tonnes) which seems to bear little relation either to known imports of gold into mainland China, China’s own production and even less so to the huge Shanghai Gold Exchange withdrawals figures for 2014 which came in at over 2,100 tonnes.  The WGC writes this difference off as mostly gold going into the Chinese banking system to be used in financial transactions and as collateral and thus not classified as ‘consumed’.   I speculated that maybe this was Central Bank gold being hidden from the IMF by being held in the commercial banks (See: Is China hiding its central bank gold in its commercial banks?) China gold watcher Koos Jansen disagrees both with the WGC and with my speculative thoughts and he probably studies this market more than most – See(Koos Jansen vs WGC/GFMS/CPM Update).

But wherever this gold is actually going, it is physical gold and it is being removed from the market and if you add this into the WGC statistics one is starting to see a very large supply deficit if their other figures are correct – and a deficit which has probably been in place now for the past three years or more.

Unlike copper, however, gold is much more subject to potential financial manipulation through the futures markets and thus price trends are probably more difficult to predict, although logic does suggest that at some stage a real shortage of physical gold in the West will be seen and start to have a major positive impact on prices, but it is as yet uncertain when this break point will be reached timewise.  With copper the inflection point will be reached when industrial consumers start running out of metal and that is a far more discernible factor as it can’t be hidden by enormous paper transactions (in relation to size of market) as can gold.

So China is very much the key to both markets, although India again is appearing to be a major player in future gold supply and demand.  Latest figures out of the Shanghai Gold Exchange show another 59 tonnes withdrawn in week 6 making a total of 374 tonnes withdrawn this year already.  This is substantially more than over the same period in 2013, or in 2014.  Thus where is all this gold going – or perhaps more importantly where is it all coming from?  It exceeds global new mined production on its own, and China alone only accounts for around half global gold demand.  The figures just don’t seem to add up without their leading to some kind of price breaking point.  But when?

Killing the golden goose. Barrick Gold suspends Lumwana

Barrick Gold has announced that it is to put its $1 billion Lumwana copper mine in Zambia on care and maintenance following the Zambian government’s plans to up open pit mining royalties from 6% to 20%

By: Lawrence Williams

News that Barrick Gold is to put its Lumwana copper mine in Zambia on care and maintenance due to a huge increase in royalty payments should send warning signals to governments of resource rich nations everywhere.  In this case, as in any other where over onerous taxation or royalty impositions can have an impact, the government will be the loser in loss of export revenues, and perhaps most of all in the loss of tax revenues from mine employees and the knock-on effect on employee families and local suppliers to the mine itself and others who depend on mineworkers for their livelihoods.  A major mine like Lumwana tends to support perhaps ten times the number of people actually employed on the mine itself, and the operation itself directly employs around 4,000 people!

In countries where the government supplies financial support to the unemployed, the adverse effects on government finances would be even greater.

Where the warning should strike home is that many in government will believe that a major mining company like Barrick will have invested so much in the mining operation that it could not possibly walk away.  But in today’s environment, low metals prices – particularly in the copper and gold sectors, coupled with aggressive institutional shareholder pressures will force companies to exit operations which may be making significant losses.

Indeed in Barrick’s case also one only has to look at the massive Pascua Lama gold/copper project straddling the Chilean and Argentinian borders to recognise companies are being pressured not to throw good money after bad.  Barrick has spent billions of dollars already on Pascua Lama and while it has not yet intimated it is abandoning the project altogether, there are many out there who doubt that the proposed mine, with its considerable environmental problems, will ever come into production without a very big increase in the prices of both gold and copper and further billions of dollars in capital costs.  In financial terms Lumwana is small beer in comparison.

While anti-mining activists might argue the point, there is little doubt that a significant sized long-life mining project can bring huge benefits to local communities in otherwise poor countries, often in remote area effectively off the government grid.  Mining companies nowadays are not just about digging out the dirt without caring about the environment but have developed massive social consciences (or have had them forced upon them) and provide power, clean water, schooling, medical facilities, huge infrastructure benefits and many other positive attributes to the communities around them at zero cost to the government.  There are also enormous pressures on the mining companies to develop sustainable businesses around the operation so the local population has something to fall back on when the mine runs out of ore, perhaps many years hence.

All these benefits may be nipped in the bud by shortsighted government involvement which can, not only lead to mine closures or suspension, but also discourage other companies from exploring, and hopefully ultimately developing, other new mining operations as well as prevent existing project expansions:  In Zambia Glencore and First Quantum have both put already major mine expansion projects on hold.

What the Zambian government is proposing is to raise royalties on open pit mines from 6% to 20% and drop corporation tax on these operations from January 1st.  It sees this as an easier, and fairer, way of collecting revenues from the miners, but takes no account of falling metal prices.  Barrick’s Lumwana is currently producing copper at a small loss (it is a high cost mine) so an increase in royalties of this nature would be crippling.  Zambian politicians have felt that mining companies have been managing to avoid taxes by inflating apparent costs and that a royalty-only regime would prevent this from happening.  Underground mines in Zambia are not going to be quite so badly hit with royalties being raised from 6% to 8%.

Overall the government reasoning is that the move from tax to increased royalties will enable a more “equitable distribution of the mineral wealth between government and the mining companies.” according to Zambia’s Finance Minister.

Mining companies are worried that there is an increasing move among African nations in particular to alter their resource tax regimes to generate more revenues from the industry.  There seems to be a lack of realisation that mining development costs and risks are high and if government revenue raising structures are too onerous, not only will mining companies be wary about major investments, but the bankers won’t make capital available if they also see the risks of non-repayment of loans as possible.

In Zambia’s case there is thus huge pressure on the government from the country’s key mining sector to pull back from its proposals.  The Barrick decision may bring home the fact that the industry is not bluffing in its opposition to the new revenue raising regime as putting new mining projects and expansions, and some existing operations, in jeopardy while prices remain low.  Even if there is a change of heart, though, it may be too late for Lumwana, which produces over 80,000 tonnes of copper a year.  Barrick has a policy of closing down, or selling off mining operations which no longer meet its financial criteria and Lumwana is one of these regardless of the tax regime.

Barrick co-President, Kevin Dushinsky, noted in an announcement on the suspension  “The introduction of this royalty has left us with no choice but to initiate the process of suspending operations at Lumwana. Despite the progress we have made to reduce costs and improve efficiency at the mine, the economics of an operation such as Lumwana cannot support a 20 percent gross royalty, particularly in the current copper price environment”

Barrick is expected to write down the $1 billion carried value of the company in its books, probably in total and although in a statement the company’s other co-President, Jim Gowans commented “We sincerely regret the impact this will have on our people, as well as the communities and the businesses that depend on Lumwana, and we remain hopeful that the government will consider an alternative solution that will allow the mine to continue operating”.  But as we noted above, without a significant copper price increase Lumwana’s days are probably numbered regardless, at least under Barrick control.

Barrick says it will initiate procedures to transition Lumwana to care and maintenance with major workforce reductions planned to commence in March, following the legally required notice period. The transition to care and maintenance is expected to be completed in the second quarter of 2015.