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"The best place to be is in commodities"

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January 28, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. Your gold stocks should have spent last week revelling in the sharply higher bullion price.

Oz. You would think so, but that’s not quite what happened in a reasonably good four-day week on the ASX, during which a day was lost for a public holiday on Thursday. Interest among share traders certainly switched back to gold from iron ore, base metals and coal, but as fast as they did the gloss was being rubbed off on the currency markets, as the Australian dollar rose by US2 cents to US$1.06.

The net result was that a 4.8 per cent rise in the US dollar gold price became only a 1.1 per cent rise in Australian dollar terms, reducing the overall gold sector performance to the level of the all ordinaries, which was up one per cent, and the metals and mining index, up 1.2 per cent.

Minews. Those are interesting calculations, and seem to show how important currencies are in the global economy.

Oz. Never a truer comment was made, especially at a time when the rich and powerful are indulging in their annual frolic in the snow at the World Economic Forum in Switzerland. But what really caught the attention of investors down this way was the forecast from the International Monetary Fund that commodity prices should weaken further this year, and the unveiling of a plan by BHP Billiton to build a monster iron ore port on the north coast of Western Australia.

Minews. Your point being that the IMF is looking 12 months ahead, and BHP Billiton is looking 20 years ahead?

Oz. Precisely. The difference in outlook is quite important for investors, and when you wrap the BHP Billiton long-view around those strong December quarter economic growth figures from the US it might go part way to explain the burst of optimism we’ve seen since the start of 2012 on commodity and equity markets. BHP Billiton’s plan for what is called the Outer Harbour development involves a US$40 billion investment to build a facility that will eventually be capable of handling a whopping 240 million tonnes of ore a year, double the company’s existing capacity at the port. And it’s not about to undertake that sort of investment based on a Euro-style economy. Rather, what it’s doing is all about the Asian industrial revolution, and the US revival.
...

Source >> www.minesite.com
 
January 30, 2012
Tom Albanese Strikes An Optimistic Note At An Otherwise Gloomy Davos
By Rob Davies

Tom Albanese, the chief executive of Rio Tinto[RIO], struck a discordantly upbeat tone at the annual gloomfest at Davos. He declared that his company is selling everything it can produce. It does help that its major market is China, now the second largest economy in the world and an economy that grew at a handsome 8.9 per cent over the last quarter.
...
Source >> www.minesite.com
 
February 04, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. It looks like you had another week when prices took one step forward and one step back.

Oz. That’s not a bad description. All of the major indices on the ASX slipped, but only marginally - just one-tenth of a percentage point in the case of the metals and mining index, and three-tenths of a percentage point in the case of the gold index. The all-ordinaries also ended down by the merest sliver, perhaps because the big news for investors down this way not the movement in the market, it was movement on the political stage.
Deep divisions have again opened at the top level of the Labor Party, which leads Australia’s minority government. There is widespread speculation that the Prime Minister, Julia Gillard, is about to be dumped, an event which would almost certainly trigger a fresh election. This is important for mining because the conservative Opposition is rated a certainty to win whenever the next election is called, and it is opposed to both new super-tax on iron ore and coal profits, and the carbon tax, both of which are scheduled to start this year.

Minews. Removing the threat of those taxes will interest the market, but the instability ahead of an election will sideline investors.

Oz. You’re right, but it would be a smart idea to keep an eye on Australian politics over the next few weeks because a change of government would be very positive for business, especially mining. ...

Source >> www.minesite.com
*****
 
February 06, 2012
Size Matters, Now More Than Ever, According To Xstrata And Glencore
By Rob Davies

Capital markets have had a rollicking good start to the year, even if bonds and commodities did fail to keep pace with equities last week. Base metals, as measured by the LME index, dropped 3.3 per cent to 3,651, while major equity markets went up by a similar amount.

Rising dividends underpinned equities, but the London market was also given a boost by the news of the proposed amalgamation of Glencore and Xstrata.

Arguments about relative valuation were less relevant to the share price rises put in by both companies than the heavy-duty index weighting the new entity will likely have, a weighting which will allow the true economic weight of Glencore to be reflected for the first time. At the moment Glencore’s weighting is curtailed by 50 per cent to reflect the limited free float. This will ultimately mean that mining stocks will have an even larger representation in the UK index.

On top of that the combined company will be more efficient and generate even more cash flow and, hopefully, dividends. In the end that is what drives equity returns.

Equities were also buoyed by a good jobs report from the US, although the metals markets were unfazed by this news because the US has a lower metal intensity than emerging markets. The service sector, which now predominates in the US economy, doesn’t use much metal.

Be that as it may, the strong growth that a 243,000 rise in employment signifies is in stark contrast to the weakness being experienced in Europe and other major economies, with the exception of China.

The reason the US is still expanding is that it is one of the few countries that has yet to introduce an austerity programmes to reign in its ballooning state expenditure. Consequently government spending is adding to growth and not subtracting from it as in Europe where debt reduction is shrinking economies. Few people think the US stance is sustainable, but no one is going to tell the voters that in an election year.

Fortunately, the strength of commodity markets does not rely solely on rising demand. The supply side is still a major factor in keeping markets tight, and an example of this was provided last week by Norilsk, the Russian miner. Norilsk said it was going to be spending US$1.1 billion by 2016 to add 62,000 tonnes of copper production in eastern Siberia.

At the equivalent of US$17,740 for each tonne of annual capacity it is clearly an expensive business to add to output. And it is that cost that is one of the reasons curtailing production growth.

It is perhaps odd that capital costs are constraining expansion at a time when interest rates have never been lower. But the pursuit of supposedly risk-free returns in sovereign debt has driven down interest costs at the same time that banks are struggling to rebuild their balance sheets by shrinking their loan books. Right now it is not the cost of debt that is a constraint, but its availability and volume.

Glencore and Xstrata both know that the bigger you are the easier it is to raise finance for large projects. That underlying driver is the logic of this deal, and will benefit shareholders as well.

Source: www.minesite.com
*****
 
February 11, 2012
That Was The Week That Was … In Australia
By Our Man in Oz
...
Minews. Let’s finish the copper sector and other base metals before moving along.

Oz. Good decision. Copper was certainly on investor radar screens last week, perhaps in the hope of more good economic news from China and the US. Other copper companies to rise included: Talisman (TLM), up A5 cents to A45.5 cents, PanAust (PNA), up A19 cents to A$3.77, Hot Chili (HCH), up A3.5 cents to A72 cents, Ventnor (VRX), up A3.5 cents to A65.5 cents, Avanco (AVB), up A0.4 of a cent to A9.9 cents, and Discovery Metals (DML), up A4 cents to A$1.65. Copper companies that weakened included Marengo (MGO), down A2 cents to A21 cents, Metminco (MNC), down half-a-cent to A17.5 cents, and Ivanhoe (IVA), down A1 cent to A$1.89.

Nickel companies barely moved, bar one. Emu Nickel (EMU), which we rarely hear from, jumped by A3.5 cents to A11.5 cents, but not because of nickel news. It caught the eye of investors because it plans to buy the Hillgrove antimony mine in New South Wales from Straits Resources. Mirabela (MBN) did best of the genuine nickel companies, rising A5 cents to A98 cents. Western Areas (WSA) added A14 cents to A$5.74. Mincor (MCR) lost A3.5 cents to A72 cents, and Panoramic (PAN) rose by A1 cent to A$1.27.

Zinc companies were also flat. Perilya (PEM) did best with a rise of A3.5 cents to A45 cents. Ironbark (IBG) slipped A1 cent lower to A25 cents, and Kagara (KZL) was half-a-cent weaker at A33 cents.
...

Source >> www.minesite.com
 
February 13, 2012
More Acquisitions And Less Organic Growth: The Majors Up Their Dividends And Start To Plan Ahead
By Rob Davies

You wouldn’t know it from the general tone of the press at the moment, but capital markets are enjoying a raucous start to the year. Base metals, as measured by the LME Index, gained another 4.6 per cent last week, taking it to 3,820.

You wouldn’t know it from the general tone of the press at the moment, but capital markets are enjoying a raucous start to the year. Base metals, as measured by the LME Index, gained another 4.6 per cent last week, taking it to 3,820.

That’s a 12.7 per cent rise since the first trading day of 2012.

Western economies are still pretty much stagnant, which was one reason the Bank of England spirited another £50 billion out of thin air to inject into the UK economy. Cheap money also prevails in the US, Europe and Japan, so if you can get finance, the returns look pretty good against the alternatives.

And anyone wondering why the stock market has been so vigorous of late doesn’t have to look much further than the big miners that reported results last week.
Rio Tinto increased its dividend by 34 per cent, BHP Billiton by 20 per cent, and Xstrata by 60 per cent. So, whatever anyone thinks of the future prospects for metals it’s clear that the current conditions are pretty favourable.

While earnings for companies, especially miners, can bob up and down as a function metal prices, dividends are paid at the discretion of the board. And one thing boards do not like doing is cutting dividends.

In many ways dividends can be regarded as a kind of smoothed earnings per share, and if that’s the case, these bumper increases suggest that the executives at the top of the industry feel confident that the good times are not about to disappear.

The results were not without hiccups. Rio took an impairment charge of US$8.9 billion over its mistimed Alcan acquisition, and attributable profits at BHP Billiton actually fell five per cent.
What’s more, the Glencore merger with Xstrata will create a formidable fourth contender in an industry that has undergone a massive consolidation in the last decade.

The good news is that a more competitive industry can be more effective at reducing capacity at times of weakness, which will help reduce price volatility.

The bad news is that organic growth is going to get much more difficult, as the sheer scale of the companies means small projects are simply not worth considering.

Instead, mergers and acquisitions are going to be the way forward. These of course carry the risk that the bidder overpays, as Rio did with Alcan. On the other hand if the terms are too mean, as many consider the terms Glencore is offering for Xstrata to be, there is a risk that they fail.

But one thing that is unlikely is a return to the producer pricing power as we had long ago in nickel and aluminium. China aside, low rates of growth will mean that producers will fight very hard for market share in any commodity.

However, shareholders will not tolerate unprofitable trading just to maintain their market share. Although Rio’s acquisition was badly timed, it was at least a valiant effort to increase the size of the business on a worthwhile scale. And fortunately, it was bailed out by the massive profits from iron ore mining.

Few other commodities offer the scale to generate so much cash. It is no wonder that Rio and BHP Billiton are going to invest more money in the Pilbara to expand their operations. Precious metals and base metals, other than copper, are just not big enough markets.

Source >> www.minesite.com
*****
 
February 18, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. It looks like you had a handful of stars in an otherwise flat week.

Oz. More like a thimbleful of stars, because this was a week when domestic politics and an outbreak of concern about soaring costs in the resources sector sent a shudder through markets. The big issue down this way is the instability that’s being caused by the possible dumping of the Prime Minister, Julia Gillard, by her own party.

That has led to the development of a policy and activity vacuum at a national level, plus an exchange of nasty comments at 10-paces which is hardly the stuff to encourage confidence. One of the sideshows last week was government criticism of major banks for putting through a modest rise in home-mortgage interest rates. That’s standard politics in any country, except this time the bank chief executives hit back, telling the government to get its leadership problems off the front pages.

Minews. Interesting, but your opening remark about costs seems of more consequence to investors in mining companies.

Oz. Undoubtedly. Even so, the political games are playing a role in creating an air of instability at a time when Australia has probably never had it so good. That, certainly, is the view of senior financial civil servant Treasury Secretary Martin Parkinson who said the gloomy mood of the country was disconnected from the underlying economic strength. But while Parkinson was having his say the cost explosion was also on display in the half-year results of the iron ore miner Fortescue Metals Group (FMG), which revealed a A$200 million blow-out in costs, an accommodation shortage for workers, and doubts about its ability to deliver a major expansion of production inside an existing US$8.4 billion budget. To cap off the cost issue, a survey revealed that five Australian cities are now in the top 20 of the world’s costliest places to live. Perth is now more expensive than London or New York.

Minews. News that seems to have shunted investors off to the sidelines.

Oz. Concern about rising costs and the continued uncertainty flowing out of Europe were the major factors behind the 3.3 per cent fall in the metals a mining index on the ASX. The gold index declined 1.5 per cent, while the all ordinaries fell 1.1 per cent.
...

Source >> www.minesite.com
 
February 20, 2012
Markets Pause For Breath, But The Big Miners Continue To Generate Plenty Of Cash
By Rob Davies

Some capital markets paused to take a breath last week after a vigorous start to the year. Base metals, as measured by the LME index, fell back by six per cent as all the constituents of the group gave up some of the gains made this year.

Nevertheless, it is still worth recalling that base metals overall are still up by six per cent since the start of 2012. Bond markets were a bit weaker last week, although equities delivered good returns, partly driven by good results from the miners in the UK.

The cause for the pause was again Greece, where negotiations have deteriorated to name-calling. Mind you, the Greeks must have experienced some schadenfreude at the resignation of the German President, Christian Wulff, because of financial misconduct. It seems not even the Germans are perfect.

The next agreement has been pushed back again but even if reached there is now a deep level of distrust that the Greeks will be willing, or even able, to implement the additional austerity measures that are being asked of it.

Apart from the posturing, there must be a real fear in Germany that if Greece is forced out of the euro and does well from its departure, then questions will be raised in other countries as to whether the pain of staying in the euro is worth it.

But what European capital markets are worried about is where the growth is going to come from. Because there is little evidence that current policies will produce any. In the US, by contrast, there are some real signs that economic expansion is returning.

Maybe that is to be expected in an election year, but in the longer term there are real worries that Japan and the US have yet to construct believable debt reduction plans.

While China is still a reliable consumer of hard commodities it cannot be relied on as the sole engine of global industrial production growth. No, if metal demand is to be sustained, it needs to be based on consumption from Europe and the US as well as China.

And metals prices are telling us that there is no consensus that that will happen. What we do know is that the supply side remains tight. Recent evidence of that comes from Xstrata’s decision to take down one of it ferrochrome furnaces in South Africa because of continuing power shortages.

Three years ago the world faced a similar challenge, and central banks responded by a massive programme of quantitative easing which triggered a huge rally in risk assets. In recent weeks the authorities have repeated this approach, but on a smaller scale.

So far the effects have been less dramatic. In part that is because equities and metals, both base and precious, are already at elevated levels. How much higher can they go before triggering even higher inflation?

This is the key dilemma for central banks and investors. If quantitative easing works, precious metals are the place to be. If not, then quantitative easing will only partly ameliorate the decline in base metals and industrial commodities.

No wonder commodity and bond prices are consolidating. They are all looking for a signal on where to go next. In the absence of a star in the east the best bet is to follow the cash flow. And right now there are few more cash generative businesses than mining - as Anglo American proved again last week when it declared a big jump in profits.

Source >> www.minesite.com
*****
 
February 25, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. Your forecast last week of Prime Minister Julia Gillard possibly losing her job proved remarkably perceptive. But more importantly, has it helped your market?

Oz. We did enjoy a bit of a rally last week, and it is possible that some investors started buying when the politics in the ruling Labor Party turned nasty. All of the major indices gained ground. The all ordinaries added 2.7 per cent. Metals and Mining rose by 3.4 per cent, and gold gained 2.7 per cent. However, if the higher prices were driven partly by political factors it wasn’t the replacement of Gillard with former foreign minister Kevin Rudd that was the key, it was more that the Labor infighting effectively ensures a win for the conservative parties at the next election, which is scheduled to be held in about 18 months.

Minews. How will mining benefit if there is a reversion back to the conservative Liberal and National parties?

Oz. Potentially, the benefits could be substantial. The controversial mining tax will be watered down, or removed if possible. The even more controversial carbon tax will also be scaled back, or eliminated. From having a government which relies on the support of the anti-mining Green Party, Australia could find itself with a very pro-mining government by the middle of next year.

Minews. Which could see the bounce continue next week?

Oz. Possibly. First step in the process will be the Labor Party election of a leader on Monday. Gillard is expected to beat Rudd in the internal Labor beauty contest, but that is very much not what the wider electorate wants, which means Australia will be stuck, for now, with a very unpopular Prime Minister.
...

Source >> www.minesite.com
 

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