Optimism for Year of the Pig

The Chinese New Year is welcomed by a spate of economic stimulus packages, and soaring iron ore prices. Exploration activity bounces back as the price of gold remains strong.

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Feb 11, 2019
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The Chinese New Year, the Year of the Pig, began last Tuesday, February 5, and coincided with President Trump's State of the Union address, in which he called for political unity. His appeal appears to have fallen on deaf ears, with analysts suggesting it was simply the opening salvo in the 2020 presidential race.

Shortly after President Trump's presentation, the governor of the Australian Reserve Bank, Philip Lowe, warned of an "accumulation of downside risks", including trade skirmishes, rising populism and Brexit. Central banks are reacting, with measures that have included lower interest rates, or reduced expectations of hikes. This includes announcements last week from the Central Banks of the US, India and the UK, and the adoption of fiscal-stimulus measures across Europe (spurred by news that the Italian economy is expected to grow at its lowest rate for five years).

The mood was not helped by the White House's nomination of David Malpass as president of the World Bank. Mr Malpass, currently an official at the US Treasury, has been widely criticised as lacking the necessary experience for the role. The Financial Times, amongst others, was scathing about the choice.

Metals Markets

The price of iron ore soared again last week to reach a near two-year high when the State of Minas Gerais in Brazil canceled Vale SA's license to operate the Laranjeiras tailings dam, which is used by the Brucutu iron ore mine. The authorities also canceled Vale's license to operate the Jangada iron ore mine, which was suspended when a dam burst at the Feijao iron ore mine — the death toll from the tailings spill has climbed to at least 150, with over 180 still missing.

Vale declared force majeure on iron ore and pellets sale contracts following the earlier suspension of Brucutu, which has an annual iron ore capacity of 30 Mt. The price of iron ore (62% Fe) closed on Friday in London at US$94.2/t, up 8.3% on the week, after the previous week's 15.4% increase after the Feijao dam tragedy.

Analysts are increasingly bullish on copper, with expectations of future market deficits for both copper concentrates and refined copper. The recent economic stimulus announcements in China has also allayed fears of a slowdown there, and the price of the red metal improved 0.8% last week to close at US$6,202/t.

There is less optimism for cobalt, and analysts' target price for this year has been falling for eight months, largely due to rising supply from the Democratic Republic of the Congo. The price of the battery metal has fallen more than 40% since mid-November, and last week touched a two-year low of US$19/lb.

Gold failed to hold onto the previous week's gains and drifted back 1.0% last week to close at US$1,310/oz. Nickel was little changed at US$12,595/t but zinc and aluminium both fell, down 1.7% at US$2,697/y and down 0.9% at US$1,883/t, respectively.

Corporate News

Barrick Gold Corp., Anglo American Platinum Ltd and Fortescue Metals Group Ltd saw significant gains in market capitalisation in January. S&P Global Market Intelligence reported that Barrick Gold, which closed its merger with Randgold Resources Ltd on January 1, saw its market cap rise almost 49% in the month to US$23.4 billion, gaining three spots to reach 8th place in the global ranking.

Australian iron ore producer Fortescue Metals gained 39% in market cap to US$12.7 billion, which lifted the company's rank by nine places to 18th. Anglo American Platinum, with a 28% increase in market cap to US$12.6 billion, improved its rank to 19th place, from 25th in December 2018. Overall, 22 of the top 25 miners had a higher market cap at the end of January compared with end-December.

The US$10 billion proposed takeover of Goldcorp Inc. by Newmont Mining Corp. will be the largest merger of primary gold miners in history. Much of the interest has been on which of its assets the new company will choose to divest. Research by S&P Global Market Intelligence suggests that Newmont Goldcorp will likely divest Red Lake, Kalgoorlie, Phoenix and Alumbrera. In addition, Eleonore, Yanacocha and Porcupine will be under review for the next two to three years to see if they fit in the portfolio.

Barrick Gold Corp. remains centre stage. The company is forming a joint venture with Reunion Gold Corp. and increasing its interest in the South America-focused explorer as it targets tier-one assets (low-cost operations that produce over 500,000 oz/y for at least 10 years). Meanwhile, CEO Mark Bristow has said the company and Tanzania are moving closer to a solution over their tax dispute that has halted operations of Barrick's 64%-owned Acacia Mining's operations in the country.

First Quantum Minerals Ltd has moved to consolidate its ownership of the Kansanshi copper mine in Zambia by offering US$700 million to buy the 20% stake of state-owned ZCCM Investments Holdings. The proposal includes US$300-400 million in cash, plus an equal amount in special royalties over more than 10 years.

SolGold Plc said it was "surprised and disappointed" over Cornerstone Capital Resources Inc.'s rejection of its takeover offer. SolGold reiterated the benefits of the takeover, including removing financing risks to equity value imposed by the current structure of Cornerstone's 15% interest in the Cascabel copper-gold project in Ecuador.

Heartening news from BHP Group, which has partnered with the US Department of Energy's National Renewable Energy Laboratory to work with local universities on a 24-month programme to find a sustainable way to clean up legacy impacts of mining on land and water. This collaboration will also study species of plants and algae that can be used to remediate the soil and water impacted by uranium mining.

Exploration Activity

Global drilling activity closed last year on a low but bounced back last month. S&P Global notes that the number of projects reporting drill assays rose 35 month-over-month to 259 in January. Of the total, 54 of January's projects had not been drilled in the past three years and early-stage projects represented 38% of January's total. This is a 10-month high, and suggests that the sector is becoming less averse to risk. 

The 163 primary gold projects reporting drilling activity matched the recent high reached in October and November. S&P Global suggest that the increased focus on gold means the recovering gold price should have a strong impact on exploration in 2019. Although the gold price failed last week to hold onto the previous week's gains, analysts expect the precious metal to remain strong this year.

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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.

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