EDITOR: | December 17th, 2015 | 8 Comments

A Look Over the Mining Horizon

| December 17, 2015 | 8 Comments
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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.

periscopeHowever 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.

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.

Precious Metals

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.

The Survivors

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.

Conclusion

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.

2016_projections

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

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Comments

  • Robin Bromby

    Christopher — very interesting and insightful piece.

    Re gold, I note your view. But, as I have written in the past, the present situation is not too bad if you subscribe to “Bromby’s Law on Gold”: that says the metal will not collapse, nor will it soar to unbelievable heights, it will just go up and down according to various trends in the markets and do so within a not too dramatic range − and that gold as an investment is neither to be shunned nor obsessed over. Gold is a store of wealth – not a creator of it.

    I have long believed both the gold bugs and gold sceptics have got it wrong: gold is an insurance policy, so you keep it in the same perspective as the insurance premium on your house. Have a bar or two under the bed or in a vault just in case. (This relates only to physical gold, not to derivatives or gold stocks, which are quite different stories.)

    December 17, 2015 - 5:02 PM

  • Christopher Ecclestone

    I would tend to agree with Robin. Neither see a gold collapse nor it soaring..

    December 17, 2015 - 5:38 PM

  • Paul Basile

    Chris,
    Thank you for your insights. Any thoughts on Antimony. I remember your article last spring on Twinkling Star and its depleting characterstics. I know we’ve seen an abundance of supply coming out of China and who knows when that will stop? Recently I heard a rumor of Chinese producers ceasing making offers? not sure if there is validity or not?
    Thank you Paul Basile

    December 20, 2015 - 9:09 AM

  • Christopher Ecclestone

    I am still committed to my Antimony thesis as it pertains to Twinkling Star and Burma. Still no sign of a turn though. There was a large amount of Sb stock tied up in the FANYA schemozzle and that is still spilling out into market and creating a sour mood.

    Chinese producers seem to be short of cash and marking down material so as to get some end of year funds in, at least according to Argus Minor Metals. The European end users have become fat dumb recipients of this largesse during 2015 and have almost no stocks so any sort of turn should put them all into panic mode.

    December 20, 2015 - 9:27 AM

  • Jack Lifton

    Chris,

    I am pretty much in agreement on your “projections/predictions” because they are based on the law of supply and demand. I note that the religion of globalization, whose adherents are economists and their political masters, holds that globalization is good for everyone, so long as it is good for “me” (which used to be phrased as “What’s good for [me, my] General Motors is good for the [my] country.” And on that note the sharp regional differences in supply and demand ignored completely by Western politicians and “pundits” continue to drive the growth of downstream integration in the nature resources’ supply chains. The Chinese paradigm of rare earth total supply chain integration fueled by the capital of the “consumer” economy primarily of the USA and Europe is now to be repeated in Africa with Chinese infrastructure investment and manufacturing technologies replacing that of American and European before that. Note that India, having accepted now Chinese hegemony in the rare earths as a fact of life is moving to set up a competitive total rare earth supply chain delivering finished goods to India based on Indian and foreign owned mines, Indian and foreign (non Chinese) process engineering of ores and concentrates, Indian owned and foreign sited production of rare earth alloys, and both Indian and foreign sited rare earth magnet production not only from ores but also from scrap magnet materials.
    I am seeing Chinese, Japanese, Indian, and Korean entrepreneurs (ALL STATE SPONSORED IN WHOLE OR IN PART!!) buying rare earth and other technology metals deposits, mines, refineries, fabricators, and component makers all through Europe, Asia, Africa, and South America to complete “local end-use” total supply chains on a “global basis.” Each of these nations is a common economy in part or in whole, and each is focused on doing “what is good for their own people.”
    In the USA only the military has the commonsense appreciation of the real world that allows it to see what is going on with technology metals.
    American politicians are fat and happy with the globalization schemes of their paymasters, who watch the rosy dawn from their multibillion dollar perches. But, as it was revealed by Dark Helmet in the Mel Brooks version of Star Wars, when asked when will be “then,” the time that all is revealed,?” he said, “soon.”
    Rather than repeating the ungainly phrase, “Politicians and their paymasters,” let me use the modified street term, “elected” chumps.
    The untended consequence of the disconnect between technological development progress and the product selection times of the world’s car makers has now shifted from selective to committed. The world’s car makers are going to make a run at producing a significant fleet component of battery powered personal vehicles. This will dramatically increase the demand for lithium and the battery companion metals all of which have long lead times from mine to market. This will increase the need for not only batteries with lithium-ion chemistry but also auxiliary battery technologies such as lead-acid and nickel metal hydride. Large lithium ion batteries are considered hazardous to manufacture, service, decommission, and recycle. Each of these factors is a cost both in capital and time to overcome.
    Today the USA, China, Korea, Japan, and Europe have total lithium-ion, lead-acid, and nickel metal hydride supply chains all or in part. AND the recycling of each of those battery types is an integral part of the total supply chain!!!
    Chin and the USA, alone, have domestic total lithium-ion battery supply chains in place. Neither have sufficient lithium supplies domestically to support a big push by their domestic vehicle industry. Increasing the supply of lithium is a ling term capital commitment, so look to dramatic competition among China, Korea, Japan, perhaps Europe and even India to secure and develop new supplies of lithium. As for the USA look to the chumps to hold hearings as they try to determine what their paymasters wishes are. The USA’s private sector is perhaps the most advanced in lithium-ion battery recycling, but it may not be able to hold out against the capital that the command economies can place into the arena. So far the rest of the world is doing well at the age of “stump the chumps” as the rest of the world moves into the future and the US government adds bureaucrats instead of technology metals supply chains to the domestic economy.
    I predict that the lithium battery materials total supply chain is a growth area.
    globally in an increasingly regional and national themed resource world.

    Jack Lifton

    December 20, 2015 - 10:58 AM

  • Christopher Ecclestone

    Jack, after that magnum opus, I have only one word… “Yes!”

    December 20, 2015 - 12:08 PM

  • Jeff Thompson

    An excellent summary of the present state of the metals and mining commodities in the main article, and as Mr. Ecclestone alludes to, an insightful free-form commentary from Mr. Lifton on the motivations, or rather, the lack of motivation, that presently persists in the United States. About all I can add to the discussion is to mention the one small light I see of some U.S. government involvement with the recent Defense Logistics Agency contract to Texas Rare Earths. But we need more frequent and larger scale involvement on a number of fronts to break the logjam. Thank you gentlemen for your thoughts.
    Jeff Thompson

    December 20, 2015 - 5:49 PM

  • Lorry Hughes

    Agree with your comments Robin regarding gold price. This should give credit to the low cost producers and high grade deposits in Australia.

    February 2, 2016 - 10:13 PM

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