Active Week for Mining

Last week was an encouraging one for the extractive industries, with coal, oil and gold center stage. In the corporate world, Barrick Gold confirmed that it is reviewing a merger with Newmont Mining.

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Barrick Gold remains in the news. Fresh from its amalgamation with Randgold Resources, the Toronto-based company has confirmed rumours that it has "reviewed the opportunity" to merge with Newmont Mining, in what would be a US$19 billion deal to create the world's largest gold producer.

Barrick Gold only completed its acquisition of Randgold at the start of January, and said no decision had yet been taken on an amalgamation with the US company. A Barrick-Newmont combination would threaten Newmont's own proposed US$10 billion deal for Goldcorp that was announced last month — but might be more popular with investors because of significant synergies for the two companies' gold operations in Nevada.

Barrick Gold has also made a formal proposal to settle the long-running dispute between its 64%-owned subsidiary Acacia Mining and the Tanzanian government. The arrangement is said to include the payment of US$300 million to resolve outstanding tax claims, and the creation of a new local operating company.

The latest precious-metals activity comes as gold reached its highest level in 10 months, rising 1.5% last week to close on Friday in London at US$1,331/oz. Most major metals did well last week, with nickel up 4.8% at US$12,980/t, aluminium rising 2.8% at US$1,911/t and zinc improving 2.1% to US$2,715/t.

Copper also performed well last week, up 4.5% to close on Friday at US$6,475/t. The red metal's improvement came as S&P Global Market Intelligence announced that the annual total copper contained in initial resources reached an all-time high of 20.8 Mt in 2018. This was despite only a minor increase year over year in the number of initial copper resources announced.

The contained copper announced last year was 23 times the 900,000 t announced in 2017, and 16% more than the previous annual best of 17.9 Mt in 2012. S&P Global said that this surge in new copper is "heartening" but warned that "the small increase in the number of announcements is a point of concern".

Energy Matters

Coal prices rose sharply this week on news that China is restricting port access to Australian coal. Beijing said the curb is part of measures being introduced to cut pollution but there are concerns in Canberra that it is actually linked to political tension between the two countries (including a recent ban on Huawei from operating 5G networks in Australia).

Coal prices might also have benefitted from Glencore's announcement that it will cap its coal production at about 150 Mt/y. This is close to this year's anticipated output for the world's largest coal exporter, and is part of Glencore's plans to align with the Paris climate-change accord.

On the negative side for coal, an executive at Lansdowne Partners, Per Lekander, is quoted in the Financial Times as predicting that coal demand in Europe will have collapsed within three years. His forecast is based on an assumption that carbon emission allowances will soar to levels that force coal-fired power stations to close across the continent.

Oil exports from OPEC-member countries are on course to fall in February to the lowest level since 2015. This falling consumption, coupled with news that Saudi Arabia was cutting production more aggressively than expected, saw oil prices jump to a three-year high of over US$66/bbl (Brent Crude). The market was also buoyed by optimism over a positive resolution in the US-China trade negotiations. The bench-mark price was barely US$55/bbl at the start of this year.

South Africa has taken measures to resolve its energy crisis by announcing the largest bailout in the country's history. The government is to inject US$4.8 billion, over three years, into Eskom, to stabilize the struggling state-owned power monopoly's US$30 billion debt. President Cyril Ramaphosa recently announced plans to split the company's power stations, distribution network and grid into three separate units. Eskom had threatened to implement a huge hike in energy charges, which the mining industry described as unacceptable.

Market News

Further evidence of lacklustre global economies came last week from Japan and the European Union. Japanese exports fell 8.4% in January compared with the year-earlier figure, which is the steepest decline since October 2016 — with China being identified as the biggest culprit. 

Meanwhile, the plight of factories in the eurozone is worsening. With Brexit only a month away, the latest purchasing managers' index for manufacturers in the eurozone fell below 50, which signals contraction — the first time since 2013. In Germany, factory output has fallen to its lowest level since the height of the eurozone crisis six years ago. 

Conventional wisdom holds that all this economic uncertainty should be generating swings in currencies. These markets have been surprising calm, however, with volatility near the historic lows of 2014 — even the euro has been trading within a narrow range. Analysts attribute the inaction to investors' belief that liquidity will continue to be plentiful.

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.