Markets Recover Their Poise

A much better week on markets sees a strong start to February, with higher base-metals prices and gold moves further ahead. Iron ore prices soar as Vale announces sharp production cuts following the tailings-dam disaster.

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January closed with a shock from the Federal Reserve, which announced that US interest rates were being left unchanged in the 2.25-2.50% range. Given the country's tepid inflation and concerns over the global economy, the Fed's chairman, Jay Powell, said that the mooted higher interest rates were being put "on hold". Indeed, there was even speculation that the next change might be downward despite the strong local economy.

US stocks and treasury bonds rallied on the statement, which the Financial Times described as "one of its sharpest U-turns in recent memory". The announcement came shortly after resolution of the country's budget impasse, which had shut government activities, and coincided with the start of two days of US-China talks at the White House to resolve the acrimonious trade disputes. The two sides gave broadly optimistic summaries, and analysts expect a settlement to be reached by March 2, when the US has threatened to increase tariffs on Chinese goods.

There was also good news last month from emerging markets, whose bonds had their best month in 30 months. Equities and bonds in these markets suffered in 2018 as their economies slowed but it seems that investors are optimistic for 2019.

The eurozone remains a cause for concern, however, with a growth of just 0.2% reported for the final quarter of last year. Italy has fallen into a technical recession, and the European Central Bank has downgraded its assessment for risks to growth.

The Indian government has unveiled revised figures showing that the economy grew much faster in the financial year to end-March 2018 than previously thought. The new GDP growth for 2017-18 is 7.2% compared with the original forecast of 6.2% (growth was 8.2% in 2016-17) but there is increasing controversy over the credibility of the government's economic data.

Corporate News

With almost 100 people confirmed dead and over 200 still missing, the ramifications of the dam failure at Corrego do Feijao will be profound for Vale SA and the entire mining industry.

There have already been arrests, Vale's assets have been frozen, and lenders are expected to hold off on discussions with the company on a potential US$3 billion revolving credit facility. By the end of last week Vale's market capitalisation had fallen by almost one-quarter, representing a reduction in shareholder value of some US$18 billion.

Vale announced that it expected production to be 10% lower this year as a result of new safety checks and decommissioning some of its tailing dams (those using the less secure 'upstream' construction method). The price of iron ore (62% Fe) soared by over US$10/t as a result, closing at US$87/t on Friday, which is its highest level since mid-March 2017.

Glencore has announced that sales of cobalt may be affected after the company's 75%-owned subsidiary, Katanga Mining, became embroiled in a dispute with the government of the Democratic Republic of Congo.

There was better news for traders from Reuters, which reported (citing various investors and bankers) that the recently announced "massive mergers of gold majors are likely to see assets picked up by mid-tier companies, such as Kinross Gold Corp., IAMGOLD Corp. and Agnico Eagle Mines Ltd". Both Barrick Gold Corp. (which is merging with Randgold Resources Ltd) and Newmont Mining Corp. (which is acquiring Goldcorp Inc.) have indicated that they will focus only on their top-performing mines and shed remaining assets.

The Newmont/Goldcorp merger will target US$1.0-1.5 billion in divestitures over the next two years to optimise gold production at a sustainable, steady-state level of 6.0-7.0 Moz/y. Barrick's incoming CEO, Mark Bristow, said the company will target upcoming mid-tier companies such as Endeavour Mining Corp. and B2Gold Corp. as buyers for its unwanted gold assets, including its stake in the Kalgoorlie Super Pit in Western Australia.

There are already signs that mergers and acquisitions are starting to increase. It was reported last week that SolGold Plc is considering a conditional hostile all-share takeover bid for Cornerstone Capital Resources Inc. The aim is to secure full ownership in the Cascabel copper-gold project in Ecuador. According to S&P Global Market Intelligence data, SolGold is owned 15% by Newcrest, 11% by BHP and 9% by Cornerstone Capital.

Metals Buoyant

The buying of gold by Central Banks has reached its highest levels in almost 50 years. Driven by Russia, which purchased a record amount of the precious metal last year, the World Gold Council reports that the banks acquired a net US$27 billion worth of gold in 2018. The volume acquired jumped 74% compared with 2017 to reach 651.5 t.

The buying reflects the continued efforts of emerging-market Central Banks to diversify their large holdings of dollars. As a result, the proportion of central bank currency reserves held in the dollar is close to a five-year low, according to the International Monetary Fund.

These Central Bank purchases have helped boost the price of gold, which reached its highest level in nine months last week at US$1,323/oz. The London Bullion Market Association's 2019 Precious Metals Forecast Survey of 30 analysts suggests the gold price will rise modestly further this year. The survey concluded that "Whilst markets have factored in some of the downside risks of Brexit and US-China trade wars, other factors, such the level of US real interest rates, strength/weakness of the dollar, the likely impact of geopolitical factors and the pace of global economic growth continues to provide some uncertainty". 

In addition to the stronger gold and iron ore prices last week, up 3.1% and an astonishing 15.4%, respectively, there were also impressive performances from nickel (up 5.4% to close in London on Friday at US$12,600/t), zinc (up 2.3% to US$2,744/t) and copper (up 1.2% to US$6,152/t). Only aluminium disappointed, down 0.7% to US$1,900/t.

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.