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State of the Market: Mining and Finance Report

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State of the Market: Mining and Finance Report Edition 2, 2014 State of the Market: Mining and Finance Report Expert review of all aspects of the industry, recent performance and quarterly outlook Special reports in this edition Mining above 60ºN Cash Costs for Base Metals Mining Regional Activity Contents Hinde Sight 03 Market for Mining 04 Exploration 07 Assay Share-Price Alert 11 Metals Production Outlook 12 Mergers and Acquisitions 16 Mining Finance 18 Special Reports: Mining above 60ºN 20 Cash Costs for Base Metals Mining 39 Regional Activity 41 STATE OF THE MARKET: MINING AND FINANCE REPORT Report is published by CONTRIBUTORS PRODUCTION SNL Metals & Mining Åsa Borssén Roxanne Daniel Rovino Chaudhary Contact Masuma Farooki SNL Metals & Mining Chris Hinde Narelle Gardiner 7 Birchin Lane Director, Reports Chris Hinde London, EC3V 9BW Email: [email protected] Glen Jones Tel: +44 (0)20 7398 1825 Viktoriya Larsson Website: www.SNL.com/Metals Michelle Mowdy Janaka Ratanayake Marketing Manager Email: [email protected] This report is supplied on a confidential basis for the subscriber's use only. The contents must not be disclosed to third parties and it must not be copied in whole or in part without the prior written permission of SNL Metals & Mining. Photocopying and electronic forwarding is prohibited. Copyright 2014 SNL Metals & Mining. Edition 2, 2014 www.SNL.com/Metals 02 Hinde Sight Funding remains a problem for the mining industry, especially for explorers There is a rush of companies debuting on the world’s trading house, for US$3.5 billion. Deutsche Bank, stock exchanges. By the end of March, global initial Morgan Stanley, UBS and Royal Bank of Scotland are public offerings already exceeded US$40 billion, all scaling back their presence in commodities, and which is twice the level of the first quarter last year. Barclays recently confirmed plans to pull out of Thompson Reuters reports that European IPOs have commodity trading. tripled so far this year. The combination of investment banks falling out This IPO revival in the general market is a welcome of love with commodities, and IPOs not serving the sign of increased risk-taking and of financial markets smaller companies, is worrying for junior exploration again functioning efficiently after almost seven years and mining companies. This is reflected in the of crisis. However, as the Financial Times warned, lacklustre US$7.0 billion raised in the March most of this activity is from bigger companies, bankers quarter, with only US$1.6 billion of this earmarked and financiers, rather than from the smaller companies for explorers. that will provide the economic growth of the future. As we explain on p7 and p18, the data for the A broader worry is that the IPO market does not December quarter has been updated to reflect late serve the smallest companies. While volumes are near reporting (data for the State of the Market reports is record highs, the number of IPOs is on a long-term collected in the middle of the month following a downward trend, which means that the average calendar quarter). Even on a like-for-like basis, ie offering size is rising. taking the apparent December quarter funding when Meanwhile, investment banks’ malaise about the the previous SOTM was published at the end of mining sector is worsening amid rising political and January (US$6.2 billion, cf the restated US$9.8 regulatory pressure on the financial community to billion), there has been no real improvement in the retreat to their core businesses. In the US, the Federal amount raised by mining companies. Reserve has questioned whether banks should be The latest available data suggests that the allowed to handle physical commodities. In Europe, industry’s cash holdings at the end of December Basel III requires banks to maintain bigger capital (this information is always a quarter in arrears) was cushions, which can act as a drag on profit in volatile over US$108 billion. This compares favourably with markets, such as commodities. the US$66 billion reported in the previous SOTM The single greatest driver, however, is probably the report for the September quarter (but is down on the low, and stable, prices for many commodities. The revised total of almost US$112 billion). Coalition consultancy estimates that the revenues of The industry’s lacklustre funding position, and dull the top-ten banks in commodities fell from US$14.1 metals prices, are illustrated by the continued decline billion in 2008 to US$4.5 billion last year. in exploration drilling and new resources-reserves, as The trickle of financial houses leaving the sector has reported on p7-10. The global economy might have become a flood. JPMorgan Chase is selling its physical turned the financial corner but this is not yet true for commodities business to Mercuria, the Geneva-based the mining sector. GOLD PRICES (US$/oz) COPPER PRICES (US$/t) 1,700 8,500 1,600 8,000 1,500 7,500 1,400 7,000 1,300 6,500 1,200 6,000 JanFeb MarApr MayJun JulAug SepOct NovDec JanFeb Mar JanFeb MarApr MayJun JulAug SepOct NovDec JanFeb Mar 2013 2014 2013 2014 IRON-ORE PRICES* (US$/t) COAL PRICES* (US$/t) 170 * 62% Fe, Fines, CFR Tianjin 105 * Australian thermal coal, 160 100 (12,000btu/lb, under 1% sulphur, 14% ash, 150 95 FOB Newcastle/Port Kembla) 140 90 130 85 120 80 110 75 100 70 JanFeb MarApr MayJun JulAug SepOct NovDec JanFeb Mar JanFeb MarApr MayJun JulAug SepOct NovDec JanFeb Mar 2013 2014 20132014 Edition 2, 2014 www.SNL.com/Metals 03 Market for Mining Metals markets remain dull, but stable, in the face of a sluggish world economy The International Monetary Fund predicted recently It seems likely that the biggest downside risk for that the cost of borrowing in the global economy is growth will come from property, and analysts warn that likely to remain low long after the recovery gathers the fate of China’s overheated real estate market is pace. Research by the IMF showed that there were absolutely critical to the health of the overall economy. “no compelling reasons to expect real interest rates Real estate construction directly accounted for 16% will quickly return to the average level of 2% observed of GDP in 2013, according to estimates from Nomura. during the mid-2000s”. At that level, China is approaching a dependence on The forecast that money will remain cheap should property last seen in Ireland and Spain before the encourage borrowers, including governments, to bursting of their financial bubbles. increase their levels of debt, and boost business and The Financial Times noted that many of the infrastructure development. This is encouraging for industries already suffering from severe overcapacity longer-term metals consumption but the short-term in China, such as steel, cement and glass, are heavily outlook for the mining industry is gloomy. indebted and reliant on continued rapid growth in Metals price forecasts remain centred on the property construction for their survival. Chinese economy. Unfortunately, data for March Land sales and property-related taxes accounted showed that first quarter growth declined, although for 38% of total government revenue in 2013, the rate was slightly ahead of expectations. Year-on- and heavily indebted local governments have year GDP growth in China eased from 7.7% in the used highly priced land as collateral for the vast December quarter last year to 7.4% in the quarter majority of their loans. A property crash would just ended. not only lead to collapsing growth in the world’s In a recent Market Report, independent analyst Ted second-largest economy, and largest commodity Arnold noted that the country’s quarter-on-quarter consumer, but would also have a huge impact on growth was only 1.4%, the slowest level since the first Chinese households, which have an estimated quarter two years ago. However, March industrial two-thirds of their assets tied up in real estate. production growth improved from 8.6% year-on-year Nevertheless, there is widespread expectation to 8.8% (although 9.0% had been expected). that Chinese growth will pick up during the The Financial Times reported in April that the main current quarter thanks to the recovery in exports, reason for the Chinese slowdown during the first accelerated investment approvals and improved quarter was a slump in fixed asset investment, which fund disbursements. This has already led to has been the biggest driver of the Chinese economy. a rebound in infrastructure investment. In the first three months of the year, investment grew at the slowest pace since late 2002. However, Premier OTHER ECONOMIES Li Keqiang reiterated that his government will not US monetary policy remains ‘accommodative’ but is resort to short-term stimulus measures in the face becoming less so. This trend is buoyed by economic of what he described as temporary fluctuations data for March that has indicated a moderate rebound in growth. from the weather-impacted data in January and The relative slide was attributed largely to declining February. Nevertheless, growth in the first quarter was real estate investment, and this situation is certain to weak, and GDP seems likely to have grown by only get worse in the coming months as new housing floor about 1% (the country’s preliminary first quarter GDP space under construction contracted 27% in the estimate is scheduled to be released on April 30). first quarter. Second-quarter GDP growth estimates in the US FIVE-YEAR PRICES Left scale: Coal (US$/t) Iron ore (62% Fe, Fines, CFR Tianjin; US$/t) Left scale: Nickel (US$/t) Right scale: Copper (US$/t) Right scale: Gold (US$/oz) Aluminium (US$/t)
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