A Look Over the Mining Horizon
Tis the season to be jolly and many are prone to reviewing the year that was… however we can’t think of anything less jolly than doing that. Of 2015 we would state it started out not good and was downhill from there on. So then we might up periscope and look to the year to come as we have done in many years past.
However we, like many other analysts, have been made to look like monkeys so many times in recent years when undertaking the “Year to Come” predictions, with metals prices firmly refusing to respond to our positive musings, and instead going down. Analysts have just made a rod for our own backs when we wandered into the game of “market timing”.
More useful than trying to time the ever-elusive “turn” is to look at what things might be like when the “turn” comes. This we shall attempt to do here.
What Happens First
Applying the basic principles of supply and demand might help. This makes us sure that when a mining recovery happens it will be in those metals that have been significantly underinvested for a long time. The profile would include metals requiring big cap investments that have not seen their “day in the sun” for a long while and thus nothing major has been added to their pipeline. Two obvious candidates are Zinc/Lead and Nickel. These last had a price rush back in 2006/7. Even if recovery happens in 2016, it will be ten years since they were last attractive for major investments. The problem nickel has is that uneconomic forces were at work in this metal with Vale plowing ahead with Goro, and Sherritt with Ambartovy so that there is NOT the shortage that one would have otherwise thought there should be. These mines would NOT have been built if post-2007 prices had been the deciding consideration, however the “Go” button was pushed in the golden days, and with an overlay of wishful thinking, billions has been poured into these mines when common sense would have said “hold off”.
Zinc/Lead though are the classic examples of supply/demand at work. To a degree the good silver price staved off the evil day, but this year’s crises have resulted in a number of key mines going into shutdown while the last three years have seen a number of important mines arrive at the end of their minelife. Most juniors have been squashed like bugs and whatever they hoped to bring to market is now years away from seeing production. Thus there is a massive supply deficit coming bearing down upon industrial users.
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Copper is not so dire from the supply front and the metal has seen some major mines put into a holding pattern which would see them revive pretty smartly should prices near $3 per lb again. The Moly supply scenario is joined at the hip with copper to some degree but the dire situation in this metal has effectively killed off any projected primary Moly mine development since 2008. This means that Moly and Copper must be even more closely linked going forward.
In specialty metals Tungsten is coming off its bottom but it is too early to be setting off fireworks. All specialty metals, which are left mainly to juniors to bring to production, have been underinvested since 2008 and thus are ripe for a supply squeeze and this may already be at hand. Antimony and Tin should also be regarded as potential beneficiaries. The farther we move away in time from the FANYA debacle the more these metals will be able to regain their footing without suffering from the destabilizing effect of this enormous “own-goal” that the Chinese perpetrated against themselves.
Uranium has for so long been proposed as the next best thing that eventually something must come to pass. It is tempting to claim that it marches to the beat of the energy industry, more than any industrial stimulus, but lower (or higher) oil/gas prices are neither here nor there for Uranium demand. This is another classic underinvested mineral with a supply crunch coming down the pike. There is no reason why the “turn” here should coincide with any broader metals upturn, so it’s more likely uranium will have its next day in the sun irrespective of wider trends. Uranium juniors are very thinned out in numbers these days and thus there are not that many names that could be seen as potential wannabes when the situation does move for the better.
What May Not Bounce
If the story of the last ten years was the insatiable demand of the Chinese economy for steel then it must be a corollary that the end of that surge means an extended period of malaise for the iron ore industry and its associated alloy metals. We shall be daring here and posit that we can see a mining and metals recovery that leaves iron ore and coal wallowing in the dust. There is a massive oversupply situation in both minerals and some very deep pocketed desperadoes amongst the biggest players which means that commercial considerations can be eschewed through anything but the deepest of depressions.
The market for iron ore is fundamentally oversupplied and we doubt that demand will recover to pre-2014 levels for a long period. This means that miners need to trim their cloth to suit the new style of coat rather than hope the Chinese are going to return to mindless building splurges again.
This casts somewhat of a pall over alloy metals, like Vanadium, Chrome and Manganese. The one thing these latter metals have going for them is that the production profile is not as out of kilter as that for iron ore. Thus steel demand could recover slightly and tighten up prices for these alloy metals, whereas it may do nothing for the most important component (volume-wise) in the steel equation.
Ugh… is there any reason to feel good about gold in the foreseeable OR unforeseeable future. The yellow metal just lies there like a patient that the emergency room nurses have given up on after having applied the paddles so many times the hospital is blowing its fuse board. Inflation didn’t work on it, deflation didn’t work, QE didn’t move it and political risk and wars couldn’t get a flicker of recognition. Gold just ain’t working! Should there be a reason to like it one year or more out? We can’t see it. Some gold bugs are even positing that interest rate hikes are good for gold because they “prove there is inflation”. Sigh…
Silver should outperform gold and indeed already seems to be doing so. It is an industrial metal after all. The travails of lead/zinc mines from which silver appears as a by-product only strengthen the case.
Platinum and Palladium have a had a bad year or two but in a troubled production scenario with the largest producer nation being the deeply- troubled South Africa, the accumulation of bad news actually is good news further down the track.
With developer/exploration companies succumbing by the day, it is tempting to bandy around terms like “apocalypse”, “massacre”, “bloodbath” and “zombies”. If a recovery comes in 2016 or 2017 it will bring benefits to a much diminished group of players and that is probably not a bad thing. Just surviving to the moment of the “turn” is not enough, the surviving entity needs to be in a fit state to take advantage of any improvement. A lot of managements and projects are burned. What may have been seen as promising in 2012, may now just appear too isolated, too economically feeble, too expensive or too complicated. In addition there is a big mismatch between what the market might want in a turn (i.e. producers of industrial metals) and what predominates in the mining space (i.e. too many precious metals plays and fad stories).
There may be over 1,500 listed miners in Canada and over 800 in Australia but how many of them are actually oriented towards industrial minerals that the global economy wants and needs? A few hundred are either fit for purpose or fit for repurposing.
So a mining investor or executive awaking, Rip van Winkle-like, in mid-2017 might very well find a better scenario if he is interested in base or specialty metals, a less despondent precious metals scene and a chronically depressed iron ore and met-coal picture. When the awakened individual then queries why the recovery is not moving in lockstep the answer would be “ever was it thus”. The Commodity Supercycle of 2001 onwards gave the impression that all boats rose on the same tide but that was never necessarily the case and thus not all metals move in the same direction at the same time. The Supercycle, linked as it was to China’s opening, was the aberration and is unlikely to be repeated. Observers need to get used to this new (in reality, old) paradigm.
It is in fact difficult to get depressed about the longer term outlook unless one is foreseeing a global economic depression and if one is, then it’s not just mining but all economic sectors that should be feeling off-colour. Indeed extreme bears would sustain that mining might be the canary in the coalmine (to use a very apt metaphor) for such an evolution of events.
Still that is not our view. Physics relies upon action and reaction, whereas mining shall return to its eternal truth of inaction leading to action. Lack of investment produces a series of shortages that then spurs a frenzied response (usually over-response). When the “turn” comes, money to throw at the rebound will still be scarce and now that lead times in mining projects have gone from a couple of years to nearly a decade for larger projects there could be a scenario of rising prices for a long while before the mining industry is even vaguely able to “catch up”.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>