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Gold finishes up amid optimism from Australian iron ore majors

Gold was the standout amid a generally flat to negative period for commodities during the week to Oct. 5, though Rio Tinto commentary showed confidence regarding the medium-term iron ore price.

Amid falling iron ore prices, Rio Tinto iron ore boss Chris Salisbury said in a report in the Australian Financial Review that the miner was optimistic due to China's upcoming environmentally driven curbs on industrial activity, saying that "overall, in terms of the medium-term outlook, we are reasonably satisfied the Chinese economy is going well and we expect that to continue."

Other reports during the week said China would not renew significant cuts on steel production and coal use that are meant to improve air quality as the Asian giant seeks to boost its economy amid a trade war with the U.S.

New S&P Global Market Intelligence research said Oct. 6 that commodities consensus price forecasts were still generally positive, with most price projections for 2018 as of the end of September higher than in 2017, though the continuing commodity price retreat has seen many of the estimates revised down in the past month.

Price ring

Copper and lead both finished 1.5% down for another week, finishing at US$6,167/t and US$1,971/t, respectively. Nickel and zinc were flat, finishing at US$12,539/t and US$2,668/t, respectively. Gold finished 1.1% higher at US$1,204/oz, while silver was flat at US$14.60/oz.

The iron ore spot import price for China was unchanged at US$66/t, according to Bloomberg and Bernstein analysis.

Talking points

China's steel downturn was the popular concern among analysts, with GlobalData detailing its impact on steep production and iron ore imports to 2022 and RBC Capital Markets identifying risk for near-term iron ore pricing.

GlobalData said in an Oct. 4 release that it expects China's crude steel production and iron ore imports to fall by a compound annual growth rate of 1.14% and 2.52%, respectively, between 2018 and 2022 due to Chinese steel capacity eliminations and a new era of environmental restrictions.

While the trouble for the iron ore import boom started brewing in 2016 when China's government set a target to eliminate 150 million tonnes of low-quality and heavy-polluting steel capacities in its 13th five-year plan, spanning 2016 through 2021, its new "Blue Sky" environmental initiative for 2018 to 2020, which was also introduced to reduce air pollution, may add more pain for low-grade producers.

With Chinese steel profitability having fallen sharply in recent weeks, RBC believes that the fourth quarter will be this year's weakest, based on the bank's fundamental analysis of demand categories, especially as "the macro environment continues to deteriorate for China/emerging markets."

However, RBC does not think that the current negative environment will last forever as it sees strong long-term potential for the sector from the current underinvestment of CapEx for the future and scope, especially for the likes of Rio and Vale SA, to provide "meaningfully better entry points" for investors.

Financings

Stornoway Diamond Corp. on Oct. 2 entered into three transactions representing consideration and liquidity of up to C$129 million to increase its financial and operational flexibility.

U.S. Steel Corp. said Oct. 2 that its U.S. Steel Kosice unit secured a €460 million revolving five-year credit facility to further improve its capital structure, replacing an existing €200 million credit facility.

Pretium Resources Inc. announced it signed a commitment letter for a fully underwritten US$480 million debt facility with The Bank of Nova Scotia, Societe Generale and ING Capital LLC to refinance an existing construction credit facility for the Brucejack gold mine in British Columbia, which totals about US$423 million and is due Dec. 31.

Almonty Industries Inc. disclosed details of a US$73 million senior project finance loan for the Sangdong tungsten mine in South Korea.