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Metals prices rally on China data, drop on stronger dollar; balance sheet flexibility key to deal with volatility, EY report says

Industry Top Trends 2021: Metals and Mining

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

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Essential Metals & Mining Insights - August 2020


Metals prices rally on China data, drop on stronger dollar; balance sheet flexibility key to deal with volatility, EY report says

Ongoingturmoil in Europe, alongside economic data from China, dominated global marketsin the week to July 15.

China'seconomy grew more than expected, namely 6.7%, in the second quarter of 2016,spurring hopes that it is stabilizing.

InEurope, Brexit remaineda key focus as Theresa May took over as the U.K.'s new prime minister andshortly afterwards named her new parliament. The Bank of England decided tokeep interest rates at a level of 0.5%.

Meanwhile,France once again became the victim of a devastating terror attack, Italy'sbanking crisis deepened, and late on July 15, news of a coup attempt in Turkeyemerged.

Europeanequity funds booked sharp losses, Germany became the first eurozone country tosell 10-year bonds with a negative yield and investors fled to the relativelysafety of the U.S.

Price ring

Commodityprices have held up well in the month to date, with all of the major metalshigher. Nickel and zinc in particular have surged to highs last seen more thana year ago, testing levels of beyond US$10,000 per tonne and US$2,200 pertonne, respectively.

On aweekly basis, China's promising economic growth data initially drove metalshigher, before being muted by a strong dollar as a result of stronger-than-expectedJune economic data in the U.S. dollar-denominated commodities become moreexpensive for buyers of other currencies if the greenback strengthens.

Inline with this, nickel ended at US$10,270 per tonne, after jumping as high asUS$10,510 per tonne. Zinc had a similar run, touching US$2,235 per tonne atsome stage before paring gains to finish the week at US$2,204 per tonne.

Aluminum,lead and tin temporarily also reached highs not seen since summer last year.

Aluminumclimbed to US$1,703 per tonne but retracted to US$1,659 per tonne by closingJuly 15; lead was up to US$1,916 per tonne before returning to US$1,873 pertonne; and tin closed at US$18,140 per tonne, after hitting US$18,255 per tonne.

Meanwhile,LME three-month copper contracts closed at US$4,918 per tonne, up 4.4% comparedto the previous week, and the price for iron ore 62% China grew 4.33% toUS$57.80 per tonne.

Goldsaw an end to its six-week rally, dropping 2.8% to US$1,328 an ounce, whilesilver was down 0.9% to US$20 an ounce.

Talking points

Miningstocks also had a strong rally last week.

, , andAntofagasta Plc allincreased by double-digit rates, lifted by the strengthening copper price. Asiron ore soared more than 4%, ValeSA gained 7%, and RioTinto and BHPBilliton Group went up some 4%.

Despitethis run, volatility continues to be an ongoing challenge for miners, as EYflagged in a new report.

"Fluctuationsin commodity prices have become more rapid and frequent as commodity demand hasbecome increasingly unpredictable," the team noted. "The longer-termeconomic outlook is also volatile, leading to the possibility of substantialrevisions to long-term metal price forecasts and making it hard for mining andmetals companies to plan for the future."

Amidlimited pricing and demand visibility, EY said managements increasingly have tocome up with flexible investment decisions and business strategies and, hence,are struggling to plan operations and capital expenditure. EY stated, "Thekey to success is agility and getting into shape to deal with volatility now.It is important to focus on six areas that will lead to more effective cashmanagement."

EYidentified balance sheet flexibility as critical during this period ofvolatility, calling on companies to "right-size" debt levels to theunderlying profitability of operations and to repay debt to lower distressassociated with leverage. It added that dividend cuts, divestments andstreaming can help releasing capital to pay down debt.

Creatingsustainable and long-term value went hand in hand with this approach. EY saidthere were still a lot of opportunities to remove costs from businesses, urgingminers to maintain a focus on building a long-term sustainable cost base whilemaking certain that cost reduction activities do not contribute to valueerosion. General expenses, low-cost country sourcing, offshoring/outsourcingand procurement were outlined as areas to review.

Goodasset management fundamentals could also contribute its share and help makingexisting assets work harder by driving productivity and managing risks.

EY'sPaul Mitchell and Lee Downham flagged, "Productivity remains the numberone operational challenge in the mining sector, with many still struggling tomake an impact. Gains to date have been realized via tactical short-termsolutions, but to really achieve sustainable gains, the focus needs to be onthe long term.

"Inour experience, most of the obvious opportunities across operations havealready been addressed — it's finding the next 10% [to] 20% of productivitysavings that can be difficult and complex. A relentless focus on theelimination of loss at all levels is needed for the next wave of sustainableproductivity improvement. […]

"Whetherthe objective is a rapid uplift in productivity, or a long-term sustainablechange, the principles remain the same. Companies need to embed sustainableloss elimination practices through employee engagement and an integratedend-to-end approach for long-term sustainable improvement in productivity."

Executive exchange

Theweek to July 18 saw a number of senior management changes, such as theappointment ofTimothy Warman as CEO of RougeResources Ltd.

FurtherCEO appointments included Cameron Parry taking the helm at Kolar Gold Ltd., Mark Brown interim CEO of , and naming companydirector Amit Gupta as chairman and CEO.

Meanwhile,Athabasca Minerals Inc.is looking for a newchief executive, after the resignation of Scott MacDougall. Director andChairman Don Paulencu has taken over the CEO role on an interim basis.

its board as ittransitions toward gold production at its Tulu Kapi project in Ethiopia. MarkWellesley-Wood was hired as nonexecutive director and chairman of a newlycreated technical review committee, while Ian Plimer will serve as chairman ofthe newly created exploration review committee. Additionally, Jeff Rayner willstep down from the company's board, while John Leach will join the seniorexecutive team as finance director.

Financings

Majorfinancings last week included Yunnan Chihong Zinc and Germanium Co. Ltd. privateplacement of 556,557,121 shares to raise4.70 billion Chinese yuan, or US$702.9 million. State-ownedparent, Yunnan Metallurgical Group Co. Ltd., will subscribe for 165,680,473shares for 1.4billion yuan. The funds will be used to repay bank loans.

Also in China, ZijinMining Group Co. Ltd. set its eyes on 4.80 billion Chinese yuan forthe development of the Kolwezi copper project in the Democratic Republic ofCongo by issuing upto 1,553,398,058 A shares.

InCanada, Endeavour Mining Corp.raised a total of C$143.8 million in its bought-deal financing with a syndicate of underwritersled by BMO Capital Markets, while DundeePrecious Metals Inc. fetchedC$54.6 million by issuing 18,216,000 common shares in a bought-deal financingwith a syndicate of underwriters led by RBC Capital Markets.

StornowayDiamond Corp. raisedC$82.7 million from exercising 91,912,732 warrants at 90 cents per share, withfunds earmarked to be used for constructing the Renard project.

In Brazil, Usinas Siderúrgicas de Minas Gerais SA attemptsto extend astandstill agreement covering 4 billion Brazilian reais in loans as it seeks tore-arrange its debt refinancing.

Meanwhile,Eramet's NewCaledonia-based unit Société LeNickel-SLN approved the conditions for a €200 million from the French governmentand is now in a position to finalize the deal.