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In This List

Silver producers gain after Brexit vote; iron ore miners flounder on supply glut

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020

Report Outlooks of Lithium and Cobalt

Essential Metals & Mining Insights July 2020


Silver producers gain after Brexit vote; iron ore miners flounder on supply glut

In the wake of the Brexit vote, investors have flocked toward and gold due to theirsafe haven appeal.

Silver, however, has outpaced gold since the June 23 vote,jumping 14.27% to US$19.70 per ounce on July 7, compared to an 8.1% gain ingold to US$1,360.40 per ounce.

The silver rally saw large silver producers such asFresnillo Plc andHochschild Mining Plctake off since the Brexit vote, analysts at Sanford C. Bernstein said in a July7 note, noting that the stocks were up 64% and 40%, respectively.

Among its covered companies, Bernstein pegged as the best optionto gain exposure on the surge in silver prices.

South32 owns the Cannington mine in Queensland, Australia. The operationhas a total underground resourceof 71 million tonnes grading 170 g/t of silver, 4.86% lead and 3.26% zinc,while the open cut resource is 21 million tonnes grading 78 g/t of silver,3.23% lead and 2.07% zinc.

Bernstein expects Cannington to be the world's third-largestsilver producer this year, with an output of 673 tonnes, just behind 's and Fresnillo'sSaucito, bothin Mexico. At 15%, Cannington is also one of the main contributors to South32'sEBITDA.

Despite the silver exposure, however, South32 has onlygained some 5% since the U.K. referendum.

"We think investors may well have overlooked theimportance of silver to South32, and South32's importance to global silverproduction," Bernstein said.

While silver has taken off recently, iron ore is expected togo the opposite way.

Australia's Department of Industry, Innovation and Science cutits forecast for iron ore prices, to an average of US$44.20 a tonne in 2016 andto US$44.00 per tonne in 2017. In its previous quarterly report, the departmenthad forecastiron ore to average US$45.00 per tonne this year and US$55.00 per tonne in 2017.

The revision to iron ore was the largest in the department'sJune edition of Resources and Energy Quarterly, and largely based on theassessment that loss-making operations may continue production for longer thanpreviously expected. It also factored in higher supply from India andadditional cost reductions reported by iron ore producers.

"The outlook for iron ore prices is sensitive to thelength of time that companies can operate at a cash loss. As financial lossesaccumulate there will be greater pressure to close high-cost capacity,"the department said.

Excess capacity, coupled with enormous costs, promptedRio Tinto toshelve its plans todevelop the US$20 billion Simandou iron ore project in Guinea.

The move sparked speculationthat Aluminum Corp. ofChina — which already owns 41% of the mine — might take over theproject, making it a sizable new player in iron ore, given Simandou's over 2billion-tonne high-grade resource.

A shift away from iron ore may also be on the cards forRio Tinto, with newly appointed CEO Jean-Sébastien Jacques thought to be morefocused on the future of copper.

This week also saw fellow iron ore miner, , to CCC from B byS&P Global Ratings on the back of weakening liquidity after the - joint venture haltedproduction at the Samarcoiron ore project in Brazil since the November 2015 .

Vale is also facing additional costs as Brazilian lawmakersare proposinggreater supervision and maintenance at existing waste storage facilities aswell as a construction ban on upstream tailings dams, which were used atSamarco.

Banning upstream dams would add 20% to 30% to operatingcosts and would become a burden for Vale, Investec said in a July 8 note.However, the firm said the move is a positive for the Australian producers, whowould then enjoy the benefit of the resultant price support.

S&P Global Ratingsand SNL Metals & Mining are owned by S&P Global Inc.