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Stronger dollar shaves off metals values in week of devastating losses

While Hurricane Matthew plowed through Haiti and Florida, most major metals also saw a week of devastating losses in the week to Oct. 7.

In particular precious metals had a tough ride on the back of a strengthening U.S. dollar, which was lifted by firming expectations of a near-term rise in U.S. interest rates.

Gold closed the week nearly 5% in the red at US$1,252 an ounce, after temporarily reaching a four-month low. Platinum, palladium and silver had even worse performances over the week, falling by 6.5%, 7.6% and 9.2%, respectively. Silver crashed to US$17.4 an ounce, its biggest plunge in 20 months.

With the exception of aluminum, base metals also plummeted, with copper losing 1.9% to US$4,742 per tonne, and nickel down 3.1% to US$10,205 a tonne despite further pressure amid the ongoing mining crackdown in the Philippines. Zinc and lead dropped 2.7% and 2.9%, respectively, closing at US$2,313 per tonne and US$2,045 per tonne, while iron ore remained flat at US$55.9 per tonne.

Talking points

The bad run for metals coincided with new price projections by the International Monetary Fund, which now expects metal prices to decline by 2% in 2017, and by 8% in 2016, according to its latest World Economic Outlook. In April, the fund projected a 1% drop in 2017 and a 14% fall in 2016.

Separately, the fund warned that the world is now a record US$152 trillion in the red, a figure which equates to more than twice the size of the global economy. In its Fiscal Monitor, the IMF flagged the apparent paradox between ultra-low interest rates to encourage borrowing to boost economic growth, and the dangers that arise from the resultant excessive level of debt, two-thirds of which is held by the private sector.

Levels of borrowing have outpaced growth in recent years, rising from 200% of global GDP in 2002 to 225% last year, and are posing a "major headwind" against global recovery, according to the IMF.

Further headwinds are also ahead for gold if the U.S. Federal Reserve hikes interest rates in December, a scenario now widely factored in by global markets.

In its Oct. 5 The Thundering World note, Bank of America Merrill Lynch said tactical trades in such scenario would be "long banks/short government bonds, long Italian equities/short gold, long EU banks/short US utilities/REITs."

In the same report, the bank flagged that markets are reaching peak liquidity and globalization, meaning that the era of excess liquidity as well as the era of free trade, capital & labor mobility are ending. "We are long stocks & commodities, short bonds; we expect slim returns from bonds & stocks in coming quarters; but double-digit upside likely for ZIRP [zero interest-rate policy] losers in 2017," the team added.

In a separate Oct. 6 publication, BofA Merrill Lynch flagged that commodities and industrials are key factors for its "long" positioning on emerging markets.

"With 4.8% [emerging markets] growth forecast in 2017, we focus our overweights to beneficiaries such as oil, basic resources & industrials," the strategists elaborated. "Commodity linked sectors are enjoying earnings revisions ratios at 8-10 year highs but our sector analysts see more upside to consensus numbers, particularly in light of supportive trends in commodity markets. Oil, basics and utilities remain heavily under-owned."

Executive exchange

Last week saw a number of CEOs resigning or being removed from their roles.

In Brazil, a regional court has annulled the appointment of Sergio Leite as CEO of Usinas Siderúrgicas de Minas Gerais SA, in line with a request by Nippon Steel & Sumitomo Metal Corp., a major shareholder in Usiminas. The Japanese firm argued that it was not consulted about Leite's appointment.

Timothy Oliver stepped down as president, CEO and director of Alset Energy Corp. as a result of "property maintenance issues." According to the company's legal advisers in Mexico, two concessions it holds under an option agreement may require significant annual work expenditures to be maintained in good standing. Initial estimates put the required annual expenses at about C$1.8 million, which Alset considers excessive. Stephen Stares, the company's previous CEO and president, has taken on Oliver's duties for now.

Sunset Cove Mining Inc.'s Lorne Woods resigned as president, CEO and a director, effective immediately.

On the hiring front, Aurum Mining Plc appointed Michael Joseph Stevens as CEO, responsible for identifying opportunities and achieving a successful change in the company's strategic direction.

Northern Vertex Mining Corp. reappointed co-founder and chairman Ken Berry as president and CEO, replacing Dick Whittington, who resigned from the company.

Financings

St Barbara Ltd. is set to buy back a further US$55 million in aggregate principal of its U.S. 144A senior secured notes, at a 3.3% premium to par value. The transaction will reduce future interest expense by about A$6.5 million per year and will take St Barbara's total repurchases of the original US$250 million of notes issued in March 2013 to US$177 million in total principal.

PJSC Mining and Metallurgical Co. Norilsk Nickel signed a five-year, US$500 million committed revolving back-stop credit facility with a syndicate of international banks. The deal will enable the company to maintain a liquidity cushion of at least US$2 billion in the medium term, according to CFO Sergey Malyshev.

Lowell Copper Ltd., Gold Mountain Mining Corp. and Anthem United Inc. completed their merger into JDL Gold Corp. after raising C$60.5 million in an increased private placement. Greg Smith has been appointed as CEO of the new company, while Kylie Dickson assumed the CFO role.

Vedanta Ltd. plans to issue nonconvertible debentures of up to 12.50 billion Indian rupees, or close to US$190 million, while Tata Steel Ltd. raised 10 billion rupees, or US$150 million, through a private placement of 8.15% unsecured, nonconvertible debentures.

Meanwhile, it emerged that the World Bank's private lending arm, International Finance Corp., is set to complete a US$2.7 billion debt refinancing for the Nacala Corridor railway project in Mozambique in the first quarter of 2017. Vale SA could also benefit from the deal as it will ease its balance sheet pressure while developing infrastructure for the Moatize coal mine in the African country.