Metals Markets Trumped

Tit-for-tat increases in tariffs on trade between the US and China has caused a divergence in metals prices, with base metals declining and precious metals improving as investors reassess political risk.

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Problems in the long-running trade negotiations between the US and China has triggered a sharp decline in the value of base metals. As noted in this week's HindeSightblog, President Trump's decision to raise tariffs (to which China has retaliated) came as a surprise to investors, most of whom had thought that a trade arrangement was likely to be agreed at next month's G20 meeting.

Whilst base-metals prices have reflected heightened concern for trade and the global economy, President Trump's actions have revitalised a lacklustre gold price. With a rise in perceived political risk, the precious metal has on several occasions this week broken through US$1,300/oz, despite the dollar hitting a two-week high on Wednesday, May 15, against a basket of currencies — albeit the currency is still 0.5% below last month's two-year peak.

The performance of the US dollar against other currencies is key to understanding why gold's price performance appears different in other countries. In the UK, for example, the precious metal has this week gone strongly through the important £1,000/oz mark to a 10-week high because of the Brexit-weakened sterling. Similarly, gold is at a three-month high in Australia and a five-week high in the Eurozone.

South African gold producers have long benefitted from the weak rand. The precious metal is currently trading at circa R18,430/oz, which is not much less than the high of R20,000/oz achieved in June 2016. In local terms, gold has risen almost 8% over the past six months, is up 15% on a year ago and the precious metal was under R8,000/oz ten years ago. When measured in rand, gold has risen in an almost straight line since 2009 if you ignore the price jump (in all currencies) in August 2011 and the boom/bust local performance of the metal in 2016.

The improvement in the price of gold this month, after what was a disappointing performance in April, will come as a relief to producers. The recent political developments follow news that gold financings were down 31% month over month in April, and 25% year over year. Nevertheless, S&P Global Market Intelligence (SPGMI) reports that the US$302 million raised last month by companies exploring for and producing gold was the second-highest financing in the previous six-month period.

SPGMI notes that 82% of the gold financing in April came from TSX-Group companies. Vancouver's Equinox Gold Corp completed the largest gold financing, raising US$130 million from the issue of five-year convertible notes to strategic investor Mubadala Investment Co. (a state-owned investment vehicle of the government of Abu Dhabi). Assuming full conversion, Mubadala would own 18% of Equinox.

Total financing for the mining sector in April was US$1.20 billion, and funding by gold companies accounted for barely 25% of the total. Indeed, the largest financing last month was by lithium producer Mineral Resources Ltd, which raised US$700 million in senior unsecured eight-year notes. The funds will be used to refinance existing credit facilities as well as to fund capital expenditure at its wholly-owned Wodgina and 50%-owned Mount Marion lithium mines in Western Australia.

That last month's corporate financing list was topped by funding for a speciality metal is perhaps an early sign of changes coming in mining markets. That is unless the US President continues to intervene. 

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.