Industry's Recovery is Losing Steam

While giving thanks for the cash harvest from higher metals prices since the start of 2016, investors will be concerned that commodities and mining equities are starting to lose ground.

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There will be very few Americans reading this column, at least not on the day it was published, as today is Thanksgiving in the US. Quite apart from celebrating the annual harvest, this national holiday traditionally marks the start of the Christmas shopping season. Retail sales soar in the US over the next few days ('Black Friday' on November 23, and 'Cyber Monday' on November 26) — as they do in countries, such as the UK, that have borrowed the events from the US.

Thanksgiving Day has been fixed on the fourth Thursday in November since a proclamation by President Abraham Lincoln in 1863 (part of his attempt to foster a sense of unity between the northern and southern states). Other countries observe similar celebrations, including Canada, whose own Thanksgiving holiday is on the second Monday in October.

Thanksgiving in the US can be traced to a 1621 celebration of a good harvest at Plymouth in present-day Massachusetts. Although the celebration has its roots in religious and cultural traditions, it has also long been celebrated in a secular manner (George Washington proclaimed a Thanksgiving in December 1777 following defeat of the British at Saratoga).

The day following Thanksgiving is 'Black Friday', which reflects the mood of the mining industry after a difficult past few months. The prices of most major metals have fallen overall since the end of the March quarter, and the September quarter saw a 7% fall in the number of exploration drill holes announced according to the Metals & Mining database of S&P Global Market Intelligence (SPGMI). This shortfall was led by a decline in gold drilling.

SPGMI also announced last week that there were only 95 'significant' financings those of over US$2 million) announced in the three months to end-September, which is the lowest number since the March quarter 2016. To compound the concern, there were only eight positive 'milestones' (mine start-ups etc) announced during the quarter. This is the lowest total since SPGMI started measuring these things in 2008.

The number of projects reporting drilling activity remains relatively high, however, at 539 separate projects (the same as in the June quarter), with gold again accounting for the lion's share. The eight positive milestones monitored by SPGMI comprised six new mines (four of which were for gold) an expansion and a reopening. Offsetting this were announcements of disrupted production at three mines.

SPGMI's Pipeline Activity Index (PAI) measures the level and direction of overall activity in the supply pipeline. It incorporates significant drill results, initial resource announcements, significant financings and project development milestones into a single comparable index, as well as component indices for gold and base/other metals.

The PAI fell by 7% to 78 in the September quarter, from 84 in the June quarter, and the company's Exploration Price Index fell 9% to 115 from 126 — the second successive decline from the five-year high of 129 in the March quarter. This is an indication that prices for gold and the other major metals have largely reversed their gains since the beginning of 2017.

This has all been reflected in equity prices, and SPGMI's aggregate market value of the industry's listed companies (based on some 2,400 firms) slipped by 5% quarter over quarter to US$1.39 trillion, the third consecutive fall from a 14-quarter high of US$1.56 trillion in the December 2017 quarter.

After an impressive recovery for the mining industry in 2016 and 2017, the second half of this year has been a disappointment. It is to be hoped that all those shoppers over the next few days slip a few mining equities into their Christmas stockings.

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.