The managingdirector of the International Monetary Fund, Christine Lagarde, has called on policymakersto pass a range of economic reforms to avoid "the trap of years of lacklustergrowth." The IMF is this week expected to lower its growth forecasts for theglobal economy. In January, the IMF forecast this year's global growth at 3.4% butthe organization's economists are increasingly pessimistic about growth, particularlyin the emerging economies.
In March,Lagarde secured a second five-year term at the helm of the IMF, and at a meetingin Frankfurt last week she warned of the increased threat of a "new mediocre"in economic progress. This, Lagarde said, is leading people "to question establishedinstitutions and international norms."
The turbulentmarkets are causing a seismic shift in investment patterns. The IMF's warnings camethe day after Morningstar confirmed that U.S. mutual funds had underperformed theequity market in the March quarter by the greatest margin for almost two decades.Just 19% of U.S. mutual funds that invest in larger capitalization companies managedto outperform the S&P 500 in the three months to end-March. This deteriorationin the ability of professional asset managers to predict market direction is leadinginvestors to prefer low-fee alternatives, such as exchange traded and index-trackingfunds.
The fragilemarket conditions have seen increased investment in "haven" assets, andthe yield on the German benchmark 10-year bond fell last week to 0.08%, near itsrecord low of a year ago. The lessened appetite for risk put pressure on emerging-marketcurrencies and "peripheral" European sovereign debt.
In theU.S., the threat of tightening credit conditions has led to soaring expectationof defaults on junk-rated credit. According to a survey by rating agency Fitch,the vast majority of investors believe the U.S. credit cycle has turned, and thattightening lending standards will lead to a spate of defaults from riskier borrowers.
Meanwhile,there has been a bounce in the popularity of risk-parity funds. These funds, whichinvest in a variety of asset classes and markets depending upon their mathematicalvolatility, have benefited from the rally in bond markets and commodity prices.
The yenhas also been a significant beneficiary of the recent market conditions, with theJapanese currency at a 17-month high against the U.S. dollar (having appreciated15% above its level of mid-2015). The yen's momentum has come despite Herculeanmonetary policies from the Bank of Japan to stimulate local growth. The governmentof Shinzo Abe has criticized the negative effect of the exchange rate movementsbut investors question Tokyo's ability to influence the currency.
The valueof the renminbi is also rising, and China's foreign exchange reserves rose in Marchfor the first time in five months. The People's Bank of China revealed last weekthat foreign reserves rose by over US$10 billion in March to US$3,200 billion. Therenminbi has been strengthening against the dollar since hitting a five-year lowin January.
On Tuesday,India's central bank reduced interest rates from 6.75% to 6.50%, which is the lowestlevel for five years. The economy is benefitting from moderate inflation and stronggrowth, and India has just overtaken China as the world's fastest growing largeeconomy. The Reserve Bank of India is predicting growth of 7.6% in the year to end-March2017, with inflation expected to decelerate slightly to about 5%.
METALS MEDLEY
The impressiverun-up in commodity prices this year has many investors asking if the rally is sustainable.A Differentiated Idea Generation, or DIG, research note from S&P Global MarketIntelligence last Monday concluded that "the upside is limited for most metals,and we see a risk that prices retrace some of their gains."
The DIGnote of April 4 described a "mixed bag" of divergent fundamentals. Indeed,steel is the only industrial metal in which DIG research sees as having benefitedfrom a fundament change in market conditions. The note observes that recent successfultrade cases have resulted in punitive tariffs on international steel producers thathave been flooding U.S. markets with unfairly priced steel.
The fundamentalsfor iron ore, however, remain bleak, with increasing supply and a declining Chinesesteel industry. There are also short-term headwinds for copper, with prices expectedto be range-bound this year. There is, however, an improving outlook for copperin 2017, with proprietary data from SNL Metals & Mining highlighting a morebalanced market for the red metal next year.
A researchnote by Robin Bhar of Société Générale highlights "encouraging signs of a reboundin activity from the metals-intensive manufacturing sectors." Bhar notes theU.S. purchasing managers index for manufacturing rose above 50 for the first timesince last summer, with positive news also from the Chinese PMI. However, the pictureis mixed in Europe, and caution is warranted in Japan and Korea, where activityremains weak.
Indeed,the price of most industrial metals fell again last week, with only gold and nickelimproving amongst the major metals. Zinc and copper fell heavily, with iron ore,aluminum and thermal coal also lower.
Ironore slipped 1.3% last week to close at US$53.3 per dry metric tonne but is stillup 22.3% overall on the year-to-date. The price reduction was despite an encouragingannouncement last week from Vale SA,which cut its iron ore supply forecast for the global market from 1,650 Mt to 1,590to 1,620 Mt.
The three-monthrally in copper prices fizzled out a few weeks ago, and the London Metal Exchange'sthree-month contract for copper fell on Friday to its lowest level in a month, US$4,655/t,down 3.7% on the week-earlier price. The depressing news coincided with the WorldCopper Conference in Santiago, Chile. There was better news from Jerry Jiao, vicepresident of China Minmetals Corp.,China's largest metal trader, who told delegates in Chile that the country is still"very short" of copper resources, and will continue to acquire overseascopper-mining assets.
The three-monthzinc price slumped 4.4% last week to close at US$1,766/t, and the price of aluminumslipped 0.8% to US$1,523/t. However, nickel strengthened 1.9% to US$8,565/t.
Gold,despite the uncertain direction of the dollar, strengthened 2.1% to US$1,240/ounce,and is now up almost 17% so far this year. Nevertheless, Société Générale's Bharwarns that a strengthening dollar and a return of risk appetite will put renewedpressure on gold's "safe haven" appeal, and hence the gold price. He expectsgold to drop below US$1,200/ounce in the coming months.
COAL CORNER
The priceof thermal coal (6,000 kcal/kg, f.o.b. Richards Bay) dropped 1.5% last week to closeon Friday at US$52.0/t. Nevertheless, the price is still 6.6% higher for the year-to-date.
A majorityof creditors last week approved GlencorePlc's 2.15 billion rand (US$144 million) sale of the loss-making coal minein South Africa to Tegeta Explorationand Resources Pty Ltd. Investec Plc, FirstRand Ltd.'s Rand MerchantBank unit and Nedbank Ltd. collectively hold about 2.7 billion rand of the Optimumdebt.
The Zimbabweangovernment is reported to be conducting an investigation into Rio Tinto's sale of its two holdings in the country in June2015. The mining giant sold a 78% stake in the Murowa diamond mine and a 50% interest in the coal mine to RZ MurowaHoldings Ltd. The government is apparently seeking to verify "the manner inwhich the shares changed hands."
FINANCIAL FOCUS
Financingin the past week included an announcement by SEMAFO Inc. that it had increased the size of its previouslyannounced bought-deal offering to C$100.0 million from C$75.0 million. The underwritersstill have an option to purchase up to an additional 15% of the offering. SEMAFOplans to use the proceeds for exploration at the Mana and Natougou gold properties in Burkina Faso.
enteredan agreement with Haywood Securities Inc., on behalf of a syndicate of underwriters,to raise C$13.5 million in a bought-deal private placement of 19.29 million flow-throughshares. The proceeds are for exploration at Barkerville's British Columbia properties.
raisedC$2.6 million from a nonbrokered private placement, which was slightly higher thanits initial target. Northern Vertex will use the proceeds for its gold-silver earn-in propertyin Arizona.
closed a nonbrokeredprivate placement to raise C$3.5 million by issuing 35.2 million units. Proceedsare for exploration at Algold's permitted properties, including the gold-copper project, theKneivissat goldproject and the Legouessigold project, all located in Mauritania.
is undertaking aprivate placement of flow-through units to raise C$4 million and common units toraise C$3.5 million. The proceeds are earmarked to advance the Red Mountain gold project in British Columbia.A portion of the offering will be brokered through a syndicate led by Red CloudKlondike Strike Inc., including Haywood Securities Inc. and Medalist Capital Ltd.
In Australia,Pilbara Minerals Ltd.is raising about A$100 million to accelerate development of its lithium-tantalum projectin Western Australia. The company's initial A$85 million share placement, comprising223.68 million shares, was heavily oversubscribed. Pilbara will also undertake ashare purchase plan, to be fully underwritten by Blue Ocean Equities Pty., to raisea further A$15 million.
closed a 1-for-3rights issue with almost 93% of the offered shares subscribed for, raising A$3.4million. The shortfall of 18.6 million shares may be placed (at not less than theissue price of 1.5 cents) before end-June. The funds will be used for future investmentopportunities, repaying shareholder loans and for general working capital.
In otherfinancings last week, Centerra GoldInc. said its Öksüt Madencilik Sanayive Ticaret AS unit signed a projectfinancing term loan facility of up to US$150 million for the Oksut gold project in Turkey. The six-year facilitybears an interest rate of LIBOR plus 2.65% to 2.95%, depending on the project'scompletion status, with no hedging requirements. The loan is fully underwrittenby UniCredit Bank AG.
is to raise US$11.2million in a nonbrokered private placement of 265.3 million shares. Following theplacement, Zaff LP will own an aggregate of 51.6% of GB's share capital. The proceedswill be used for the Farimphosphate property in Guinea-Bissau, and to fund litigation involving GBM MineralsEngineering Consultants Ltd.
secured an eight-yearcredit facility of up to US$800 million to finance construction of the copper-gold-ironproject in Russia. The facility was arranged by Sberbank CIB in the form of projectfinancing without recourse to Norilsk Nickel. In December 2015, the company solda 13.33% stake in the Bystrinsky project for US$100 million to Highland Fund (aconsortium of Chinese investors).
unit GobiMin SilverLtd. entered into a US$4 million revolving term loan facility with China PrecisionMaterial Ltd. The six-month facility bears an interest rate of 3.5% per annum, andmay be extended by mutual consent. GobiMin Silver owns a 38.3% indirect equity interestin China Precision Material, which engages in the trading of metals, predominatelysilver, in Hong Kong.
EXECUTIVE EXCHANGE
Changesin senior management announced during the past week included news that Gary Lethridgehad stepped down as the managing director of Talisman Mining Ltd. Lethridge said it was "the righttime," given the company's strong financial position, the significant recentprogress at the Montycopper-gold discovery in Western Australia and his desire to spend more time withhis family. Talisman CFO Dan Madden was named acting CEO.
appointed MichaelGriffiths as CEO and managing director, effective immediately. Griffiths has beenthe company's interim CEO since August 2015 and an independent nonexecutive directorsince December 2012.
GerardAnderson resigned as managing director of ArcherExploration Ltd. and will leave when his contract expires on June 30.He has held the position since October 2010.
EhsanDana resigned as president and CEO of ComstockMetals Ltd. Dana had only joined the company in February. The companyappointed chairman Rasool Mohammad as interim president and CEO.
IvánArriagada is to succeed Diego Hernández as CEO of Antofagasta Plc, effective immediately. Hernández will stayon as an adviser to the board. Arriagada has been CEO of Antofagasta Minerals SAsince February 2015, having previously been vice president of administration andfinance at Codelco.
named RoryMoore president and CEO, effective May 1. Moore will replace Patrick Evans, whohas held the roles since the company's incorporation in 2012.