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.)

The decreasing importance of gold to South African economy

Readers of LawrieOnGold may be interested in thefollowing note from Statistics South Africa (the SA government statistical body) drawing further attention to the continuing decline in the once dominant South African gold mining industry.  When I worked in the South African gold mining industry in the late 1960s it was producing over 70% of the world’s gold at over 1,000 tonnes a year.  Today South Africa is moving down the table of global gold miners and was estimated by consutlancy GFMS as to only have produced 164.5 tonnes in 2014 and in danger of dropping below Canada currently lying in 7th place

Top 10 World Gold Producing Countries 2013/2014 (tonnes) 

Rank Country 2013 output 2014e output Change Y/Y
1 China 438.2 465.7 +6%
2 Russia 248.8 272.0 +9%
3 Australia 268.1 269.7 +1%
4 USA 228.2 200.4 -12%
5 Peru 187.7 169.3 -10%
6 South Africa 177.0 164.5 -7%
7 Canada 133.3 153.1 +15%
8 Mexico 119.8 115.7 -3%
9 Indonesia 109.2 109.9 +1%
10 Ghana 107.4 106.1 -1%
World 3049.5 3109.0 2%

Source: GFMS, Mineweb

The Statistics South Africa comment and accompanying chart is set out below:

Monthly gold production reached a new monthly low in January, according to data released by Stats SA. Although a number of temporary factors might have contributed to the unusually low level, general historical trends show that gold has lost the prominent place it once had in the South African economy.

Stats SA has published comparable mining production indices that go back as far as January 1980, for the industry as a whole as well as for various minerals, including gold, iron, platinum and coal. The indices provide an indication of the level of production, set against a particular base period. Currently, the index has been set to 100 for the base period of 2010.

Historical values of the gold index show the extent of how production has fallen. In January 1980, the index was 359,0, while the volume of gold produced was far lower in January 2015, resulting in the low index of 48,4. In other words, South Africa produced 87% less gold in January 2015 compared with the same month in 1980. Figure 1 shows how the monthly gold production index has fallen. What is not shown in the graph, however, is that production started on its downward trend well before January 1980.

Figure 1: Monthly gold production index, 1980-2015 (Base: 2010=100)

sagold

The fall in production has reduced gold’s contribution to the South African economy. The metal contributed 3,8% to gross domestic product in 1993, falling to 1,7% in 2013. In terms of sales, gold made up 67,0% of all mineral sales in 1980, falling to 12,5% in 2014. Coal currently leads the pack, having contributed 27,0% of total mineral sales in 2014.

South Africa has also fallen in global gold production rankings. Prior to 2007, the country held the number one spot as the top gold producer in the world, according to the U.S. Geological Survey Mineral Resources Program. By 2014, South Africa had dropped to sixth place, according to Thomson Reuters GFMS, falling behind other countries such as Peru, USA, Australia, and Russia. China is currently the world’s top gold producer.

So with the waning importance of gold to South Africa, does the future hold any promise for the industry? One estimate suggests that the country will soon need to look beyond the precious metal as a major resource. Stats SA’s 2014 Environmental Economic Accounts Compendium provides 2011 estimates on depletion rates for various minerals. At current production levels, South Africa will exhaust its coal resources in 119 years, and platinum in 218 years. For gold, resources will be exhausted in only 33 years. An update to theCompendium is due for release before the end of this month, containing new depletion estimates, but if this estimate holds true, many South Africans alive today will see the country taking on a much reduced role on the global gold mining stage.

Given the fall in the gold price over the past three years, this will also have impacted adversely South Africa’s income from this source as well.  Indeed current metals and minerals pricing across the board will be having a damaging effect on the country’s exports and economy.  With even bigger falls in coal and iron ore, both of which are significant for the South African economy, and a comparative fall in platinum , South Africa’s other principal metal export by value, the government is surely wrestling with a significant change in its balance of payments, whichis thus a contributor to the large falls in the South African Rand against the rampant U.S. dollar.  Indeed, were it not for the fall in the Rand, which has applied something of a cushion in terms of Rand earnings, the production figures for the county’s metals and minerals might well have fallen further.  The fall in the Rand has enabled some marginal operations to stay afloat which otherwise would probably have closed down.

As for South Africa’s gold mines, the major Witwatersrand operations are getting ever deeper (which substantially increases mining costs and dangers, and grades are declining and there is little prospect of significant new discoveries to replace the output falls.  One can see little chance of anything but a continuing drop in output year on year unless there is a very significant rise in the gold price in the offing.

The beginning of the end for gold and industrial metals price falls?

Lawrence Williams

Or the end of the beginning? … Looking at mixed fortunes ahead for gold, iron ore and base metals – positive, flat to negative and slightly upbeat respectively.

Latest article by Lawrie published on Mineweb.com.  Go to Mineweb.com to read this and other articles on precious metals, base metals, industrial metals and minerals and mining of all types.

The title of this article could be taken two ways, but our meaning in using it – courtesy of London metals and mining commentator David Hargreaves’ Week in Mining newsletter, which used aspects of the famous Winston Churchill wartime quote in its title and conclusions this week – is that are we perhaps actually nearing the bottom of the prices downturn virtually across the board in resources?

As the newsletter points out –  the Brent crude oil price has fallen through $50/bbl, iron ore is staring down the abyss, copper has a look of testing $6,000 per tonne on the downside, while gold has picked up to $1,200 plus etc.

In currencies, the US dollar continues its rise against all, or at least most, others, with the Euro testing nine-year lows. The Eurozone has moved into deflation as the forthcoming Greek elections could put in power a political party which could well implement a default on the country’s debts and lead to Grexit – the possible Greek exit from the European Union.

Further on the geopolitical front, Islamic fundamentalist-inspired terrorism has hit the headlines again with the Paris shootings at the Charlie Hebdo offices, the totally unprovoked murder of a policewoman attending a traffic accident and subsequent hostage taking leading to more deaths.  Rhetoric from leaders of ISIL, which now dominates large swathes of Syria and Iraq, preaches extending Paris-type events to other Western nations and calls for new attacks on airlines.  All very disturbing for a mostly rather less volatile and less religiously committed Western World.

These French terror attacks are probably partly aimed at stirring up anti-Islamic feeling within the majority populations in Europe in particular as a way of polarising potential civil strife to the ultimate advantage of the extremist elements involved.   It is estimated that around 5% of the European population follows Islam, and in France, with its strong former colonial connections in mostly Muslim North and West Africa, the Islamic faith may account for as much as 10% of the population – a very sizeable minority indeed.  Political parties with an anti-foreigner agenda are springing up across Europe and this could escalate as the ‘faith’ polarisation becomes stronger and stronger.  Virtually all the Islamic faith followers in Europe abhor the French killings, but if these result in anti-Muslim retaliation (which they are beginning to) the prospect of alienating this very big minority of the European population, leading to ever more blood on the streets, is very real indeed.

While the Russia/Ukraine situation has stayed out of the headlines since the beginning of the year, recently completely overshadowed by the Paris events, it has not gone away.  There remains the prospect of new European sanctions against Russia, ostensibly over its annexation of Crimea, but as we pointed out in a recent article these sanctions are damaging to Europe too, and could become more so should Russia raise the retaliation stakes.  Also the Russia/Ukraine situation may be much more complex than most observers have been prepared to recognise.

See: 2015 Black Swans – or another BRIC in the wall

This plethora of problematical geopolitical events has the potential to further destabilise the European economy, which is already in recession and entering a prospective period of deflation.  The events represent an almost unprecedentedly disturbing start to the year and we have to hope against hope that they do not continue throughout 2015 or the consequences for global economic recovery could be dire.

To all this we have to add China.  While the forthcoming year of the sheep suggests a period of calm and prosperity in the Chinese Zodiac, the slowdown in the country’s economy suggests otherwise, although GDP is still said to be growing at a rate of around 7% per annum.  Because of its huge impact on global metals demand, the Chinese slowdown from double digit GDP growth, with the major mining companies gearing up to meet the kind of demand growth those figures suggested, has had a dramatic impact on demand for raw materials – particularly for iron ore and copper.  There is the suggestion that inventories have been run down and demand could pick up as the year progresses.  However there is no doubt that the Chinese building and construction sector is slowing which doesn’t hold out great hope for an iron and steel pickup, although for copper the expansion of the country’s high speed rail network could provide some much-needed stimulus.

But Chinese individual wealth has still been growing over the last several years.  This is showing up in terms of automobile imports which are continuing to rise.  China, for example, is nowadays Jaguar/Land Rover’s biggest market on the luxury car front.  While an economic slowdown – but probably not a recession – is on the cards, the economy is still growing at a rate which Western nations would love to see.  While the government is no longer looking for growth at almost any cost, it does seem to be prepared to help counter any prospective serious economic decline through lowering interest rates and other measures and perhaps the hard landing which some have predicted will thus be held off.

So where does all this leave us in terms of metals prices going forwards?  Stagnation in Europe and lower growth in China, perhaps slightly alleviated by a weak recovery in the U.S., may not be auspicious for iron ore, although we suspect it won’t fall much lower.  Copper, as the main element in the base metals picture is a slightly more complex situation to forecast.  Assuming China does need to rebuild stocks and continues to invest in electrically intense infrastructure development, and, with many analysts predicting a supply deficit in the current year, then the red metal could well be at or near its bottom and due for at least a weak recovery in price.

Gold is another matter altogether.  The price is still seemingly being controlled by activity on the futures markets, but the European travails could lead to rising safe haven demand as a wealth protector should the EU start to unravel, while Chinese demand looks as though it should remain strong throughout the year ahead.  Continuing strength in the US dollar against other currencies would normally mean a decline in the dollar gold price, but recently gold has been holding up remarkably well in dollar terms, which means it has been a very good buy in other currencies – notably the euro.

So what is the overall view in our opinion?  Oil – flat to weaker as long as Saudi Arabia continues to pump it at current rates; iron ore flat to weak also with the three biggest producers all having expanded capacity heavily over the past year, but with demand, particularly from China, at best stagnant for the time being; base metals perhaps slightly positive, but not significantly so; gold’s fundamentals continue to look good, but then they have for the past couple of years and the price has still tanked.  Overall though gold, and the other precious metals, on balance, should probably continue to see positive gains ahead with the possibility of a major kick upwards should additional geopolitical problems materialise, or current ones escalate.

Top 100 mining companies: Ugly at the top, not so ugly below – Kip Keen

It wasn’t a good year to be a big miner. Ranking the top 100 mining companies by market cap near year end and tabulating their 52-week share price performance tells the ugly tale (see below). BHP Billiton, still the world’s largest company, shed an astounding $31 billion or 27% of its market cap. The next seven names at the top were all losers. Rio Tinto and Glencore’s share prices were off by about eight percent; Vale’s dropped 41%; Anglo American’s was down 10%; Norilsk’s was down seven percent; Freeport’s shareprice slumped 37%; and Southern Copper ended close to, but not quite, the even mark.

In looking back on 2014, it’s not hard to account for the share price pain of the top miners. Last year was abysmal for iron ore, oil and coal prices – chief commodities for many of the diversifieds. Meantime, investor sentiment toward the miners and their prospects seemed to reach new lows. In the past couple years, there was a great deal of shuffling in mining management reflecting shareholder unhappiness with business plans, share price returns, thin cash flow and capital expenditure blow outs.The cratering iron ore price, especially, caught many in the market off guard. Though a decline in iron ore was bound to come, BMO mining analyst Tony Robson notes in an email, “most of us were thinking late 2014 or 2015, not early/mid 2014.” And he, as others, expected a “steady decline not a savage collapse”. An unprecedented gulf between supply (growing) and demand (slowing) emerged in 2014, one that is by many accounts here to stay…..

To read part 1 of Kip’s analysis click on Top-100-mining-companies-ugly-top-pt-1

And Part 2:

If 2014 was a dismal year for many in the mining sector – especially in bulk commodities – there were bright spots and, in many cases, strong performances.

Those more heavily weighted to base metals had pretty strong showings. While the price of copper didn’t do much in 2014, it held steady at least, while zinc and lead prices climbed somewhat. This was evident in share prices. Lundin (65) was up 18%. Hudbay (86) gained 13%. And Hindustan Zinc (17) climbed 30%.

Meantime, the integrated aluminium producers/miners rebounded in 2014 after some hurtful years of plummeting aluminium prices. Notably, Alcoa (10) was up 47% and Rusal (19) 135% in the past year.

And even gold companies didn’t have that a terrible year overall. If the majors had a rough go of it (e.g. Barrick (13) down 33%) many fared quite well, posting decent rebounds and ending the year higher than they began it……..

To read Part 2 of Kip’s article in full click on Top-100-mining-companies-not-ugly-part-2