Trade Deal Encouragement

The end of last week saw encouraging developments in the US-China trade talks, and metals prices benefitted, but analysts are worried about falling exploration trends and a return of negative forward yield curves.

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There was a strong end to last week for metals markets following a statement from President Donald Trump that trade talks with China were "going very well" — although he did caution that he would not accept anything less than a "great deal". The statement followed two days of negotiations in Beijing between top US and Chinese trade officials. Both sides reported progress in the talks, which resume this week in Washington with the Chinese delegation being led by Vice Premier Liu He.

The announcement was a boost for metals prices, with the exception of gold, which slipped 1.1% over the week to close at US$1,295/oz on Friday in London. The big winners last week were zinc, up 3.6% at US$2,915/t, and copper, up 2.4% at US$6,475/t. Aluminium improved 0.6% to US$1,914/t and iron ore (62% Fe) strengthen 0.3% to US$87.1/t. There was little change in nickel, closing at US$12,990/t.

The price of palladium has risen more than 60% to over US$1,350/oz during the past seven months as mined supply has been unable to keep pace with demand for catalytic converters. In a presentation last week, the chief executive of Anglo American, Mark Cutifani, admitted that the rapid rise in the palladium price had created a 'bubble'. He stressed, however, that he thought the price "will stick around these levels for a while" because he didn't think substitution by the now cheaper platinum (currently US$840/oz) will be significant.

Chinese equities have enjoyed their best quarter in more than four years. Driven by record inflows of foreign investment, the nation's shares have soared in the three months to end-March, and domestic equities topped the world rankings, with a March quarter equity return of 29%. Industrial profits, on the other hand, have fallen at their fastest pace for almost a decade in January and February. Much of the blame was attributed to uncertainty over the US-China trade war, and Beijing's crack down on the high levels of corporate debt.

Inflation across the emerging markets has tumbled to its lowest level in a decade, prompting central banks to cut interest rates. This sharp reversal from last year follows decisions by the central banks of the US and European Union to suspend plans to raise interest rates. Central Bank News reports that, so far this year, only four emerging market countries have raised rates while 11 have reduced them.

With interest rates remaining low, and investors moving into safe havens, negative-yielding bonds have made a return. The German Finance Agency last week issued a 10-year bond that had a negative return after heavy demand at auction. Worryingly, negative forward yield curves have also returned. Higher borrowing costs for shorter- than longer-term debt is seen as a powerful indicator of a looming recession. The yield on three-month debt in the US is now higher than on a 10-year bond for the first time since 2007.

In contrast, a flurry of megadeals in the US has made the past three months the second strongest start to the year for deal-making since the turn of the century, according to the Financial Times. Deals worth US$927 billion have been agreed in the US so far, which illustrates that there is optimism in boardrooms (with the help of low interest rates) despite the uncertain market conditions.

In terms of mining deals, Newmont Mining Corp. has offered a special dividend to its current shareholders to win their approval for the US$10 billion takeover of Vancouver-based Goldcorp Inc. Newmont fended off a hostile takeover attempt by Barrick Gold Corp. in March by agreeing a joint venture for the two companies' assets in Nevada.

Newmont's special dividend follows decisions by British Columbia Investment Management Corp. and Paulson & Co. to oppose its deal for Goldcorp. BCIM's decision was mainly due to the "egregious payout" of US$12 million to Goldcorp chairman Ian Telfer. VanEck, one of Newmont's largest investors with a 6% stake, wants the deal to be renegotiated.

S&P Global Market Intelligence has reported that its Pipeline Activity Index (PAI), a measure of exploration and development activity, fell in January to its lowest level for almost three years. PAI measures the level and direction of overall activity in the commodity supply pipeline by incorporating significant drill results, initial resource announcements, significant financings and positive project development milestones into a single comparable index.

A Brazilian court has required Vale SA to suspend 13 dams in a decision that delayed the restart of its Brucutu iron ore mine, the company's biggest mine in the state of Minas Gerais. Vale has reported a five-fold rise in fourth-quarter 2018 net income to US$3.79 billion but the company has made a series of write-downs and provisions related to the Feijao tailings dam disaster. These include US$124 million at Feijao (as well as the company's other upstream dams), and the emergency indemnification deals agreed with local authorities will lead to provisions of between US$260 million and US$520 million.

The South African mining industry has turned to the courts to ask for a review of a government mining charter that does not recognise deals already in place, saying it will discourage new investment in the industry. The mining sector has objected to clauses in the charter gazetted in September 2018, particularly one that requires companies to increase black ownership from 26% to 30% on the renewal of leases.

In Australia, Rio Tinto, BHP and Fortescue Metals Group reported that their operations had suffered some impact after cyclones Trevor and Veronica battered the country. Meanwhile, Australia's miners have issued a scathing report suggesting the country's lack of any major tax reform in nearly 20 years has seen it fall behind in competitiveness with competing mining countries. 

The World Gold Council has opened the consultation process on a draft of its Responsible Gold Mining Principles, a new framework for investors and consumers that would define what constitutes responsible gold mining. 

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.