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Metals unimpressed by Brexit; concerns grow over Chinese ore stockpiling

Last week, the U.K. officially commenced the process of exiting the European Union.

In a letter to European Council President Donald Tusk, Prime Minister Theresa May formally declared the U.K.'s intention to leave the 28-member bloc, marking the beginning of a complicated two-year negotiating process, which will see immigration and trade issues at the center of the agenda.

Differences in the two strategies were an early indication that talks might prove more difficult than anticipated as the EU quashed British plans to negotiate its exit and future trade terms at the same time.

In the wake of this move, various U.K.-based financial firms announced or reiterated plans to move parts of their businesses to other European hubs.

The event largely passed unremarked-upon in the mining sector.

Meanwhile, U.S. equity markets pulled back at the beginning of the week in light of the setback the Trump administration suffered in passing a new healthcare bill. However, there was a rebound later that week, when GDP estimates for the 2016 fourth quarter were revised upward from 1.9% to 2.1%. By comparison, 2016 third-quarter GDP stood at 3.5%.

The U.S. dollar bounced back from four-month lows against a basket of currencies, adding pressure on metals and other dollar-denominated assets as they became more expensive for buyers using other currencies.

In Central America, El Salvador has become the first country to ban all gold and metals mining. The country's Congress approved a law prohibiting all such projects in a bid to protect the environment and natural resources amid a surge in what was described as reckless mining operations.

Cyclone Debbie rattled Australia, prompting numerous mine closures.

In China, the manufacturing purchasing managers index, orPMI, for March climbed to a near five-year high of 51.8, from 51.6 in February. The index is widely seen as an indicator of the wider economic health. A PMI of more than 50 represents an expansion of the manufacturing sector, while a reading under 50 represents a contraction.

For the mining sector, there were fresh concerns that a potential reboot in Chinese iron ore production, as well as mounting stockpiles at China's ports and steel mills, could bring prices under pressure.

Inventories at about 50 Chinese ports are thought to have reached their highest level in more than a decade, while Chinese steel demand is expected to falter by about 2% this year.

A more than 15% increase in domestic production in January and February has resulted in imported ore piling up at China's ports, which are thought to have amassed enough of the raw material to build 13,000 replicas of the Eiffel Tower. Allegedly, some ports are running so low on space that they have started overhauling and expanding existing buildings or are rejecting vessels carrying lower-grade ore.

According to Sanford C. Bernstein, iron ore shipments of the mining majors in the year to March 30 totaled 282.4 million tonnes, up 7.4% year over year.

"We now estimate total Q1 shipments of 286.4 [million tonnes], up 6.5% [year over year], and this compares with the 7.2% [year-over-year] increase in volumes that we observed in Q4 2016," the team noted March 30.

Price ring

Over the week, iron ore dropped 5.5% to US$80.4 per tonne.

Base metals had a better run, with copper and nickel gaining 2.8% and 2.7% at US$5,938 a tonne and US$10,074 a tonne, respectively. Zinc and aluminum shifted higher, by 1.4% and 2.0%, respectively, while lead fell marginally by 0.3%.

Among precious metals, silver jumped 2.4% to US$18.2 an ounce, and gold remained flat at US$1,247 an ounce, up 0.3% compared to the previous week.

Talking points

Bank of America Merrill Lynch last week took a stance on the "unusually" sharp rally of London Metal Exchange aluminum prices in recent weeks, which outperformed nearly all other base metals.

While unusual, the bank said declining inventories and rising physical premia in the U.S., Europe and Japan fundamentally justified the strong run. "In addition however, expectations over another round of production cuts in China have helped prices higher, too," the team noted March 31.

Aluminum prices on the Shanghai Futures Exchange have lagged, mirroring the ongoing "extremely weak" aluminum market in China, where operating margins for smelters continue to be under pressure.

"If China's smelters delivered production guidance, we estimate the global aluminium market would be oversupplied to the tune of 1.4 [million tonnes] in 2017 and almost 6 [million tonnes] by 2020, which is not sustainable," the bank said. "Against this backdrop, the country's authorities have already announced environmentally related closures during the winter months. In addition, there is ongoing anecdotal evidence that the government may slow the pace of investment in capacity."

Amid indications that only half the planned new capacity might actually start operation this year, BofA Merrill Lynch analysts said the global market could become balanced, leading it to estimate fourth-quarter aluminum prices to average US$2,150 per tonne.

"China's aluminium industry has been consolidating, with the top-3 smelters accounting for almost 25% of global aluminium capacity this year, from less than 5% in 2002. Of course, this implies that coordinated production discipline could go a long way to putting the industry onto a more solid footing.

"Beyond that, we also note that World ex-China has shown apprehension over China's aluminium exports, suggesting the Asian nation may find it increasingly difficult to use the global market as a pressure relief valve."

Executive exchange

Brazilian mining giant Vale SA appointed Fabio Schvartsman as CEO, replacing Murilo Ferreira. Schvartsman was CEO of Telemar Participações and San Antonio International. He has been the CEO of paper producer Klabin since 2011.

Peninsula Energy Ltd. named Wayne Heili as CEO and managing director, after John Simpson stepped down from both posts with immediate effect.

Vedanta Resources Plc's CEO Tom Albanese will stay in his role until Aug. 31 as the company continues to look for a successor. Albanese was initially due to retire March 31.

Meanwhile, Sierra Metals Inc. CEO and President Mark Brennan resigned from his roles. He will stay with the company for another month to facilitate an orderly succession plan.

Nebu Resources Inc. President, CEO and Director John Eansor died. Director Paul Crath will assume the CEO position on an interim basis, effective immediately, while Rocco Liscio has been appointed as a director.

Financings

Zhaojin Mining Industry Co. Ltd. announced a placing of up to 174,869,000 shares in a bid to raise HK$1.21 billion for working capital purposes. The placing is expected to be completed by April 12.

Agnico Eagle Mines Ltd. is looking to sell 5,003,412 common shares to a new institutional investor in return for US$220 million. Agnico Eagle expects the offering to close on or around March 31 and has earmarked the proceeds for general corporate purposes.

Trevali Mining Corp. raised C$264.5 million through a bought-deal private placement of 220,455,000 subscription receipts, including the full exercise of an overallotment option of 28,755,000 subscription receipts.

Petra Diamonds Ltd. is looking to offer US$600 million in senior secured second-lien notes due 2022 in a bid to refinance its existing US$300 million 8.25% senior secured second-lien notes due 2020 as well as its bank facilities. The company will also restructure its debt facilities.

Seabridge Gold Inc. seeks to raise C$34.3 million through a bought-deal offering of 1 million common shares at C$14.30 each and 1 million flow-through shares at C$20.00 each to a syndicate of underwriters co-led by Canaccord Genuity Corp. and Cantor Fitzgerald Canada Corp. Proceeds will be used to advance the company's KSM and Iskut gold projects in northwestern British Columbia.

Indian steelmaker JSW Steel Ltd. is reportedly looking to raise up to US$750 million through an offering of nonconvertible senior unsecured fixed-rate bonds. Proceeds will be used to retire some of the company's debt and fund CapEx.