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Sepsis over iron ore outlook adds to pressure in Australia

The U.K.'svote to leave the EuropeanUnion continued to weigh on the global economy in the week to July 8. Uncertaintyover the exact implications and the timing of Brexit prompted investors and publicbodies alike to adapt a risk-off strategy until more information feeds through.

Thisalso included the U.S. Federal Reserve which last week signaled that it has adapted a "wait and see" attitudeand will postpone any decision on rising interest rates until the impact of Brexitcan be assessed. Promising U.S. job data had initially fueled expectations thatanother interest rate hike could be on the horizon, with stock futures, bond yieldshigher and the dollar strengthening after June U.S. payrolls grew at the fastestpace since October 2015.

Price Ring

Metalswidely gained ground on the better-than-expected job data, which projected growthin the economy and metals demand.

Copperin particular surged on the news. Three-month copper contracts on the LME recoveredfrom a two-week low to close at US$4,711 per tonne on July 8, while LME nickel climbedto US$9,890 per tonne, after temporarily hitting a low of US$9,525 per tonne. Bythe end of trading on July 8, aluminum had surged to US$1,662 per tonne, zinc roseto US$2,142 per tonne, lead grew to US$1,817 per tonne and tin was up to US$17,840per tonne.

The encouragingU.S. jobs data and strengthening dollar temporarily ended the gold and silver rallyboth metals had seen in the aftermath of the U.K. referendum. Gold eventually settledat US$1,358.87 an ounce and silver at US$20.09 an ounce.

Ironore 62% China Imp CFR finished the week at US$55.20 per tonne, up from US$52.73per tonne the week earlier.

Australia digests economic outlook,elections

Despitethe recent price recovery, volatile long-term projections for iron ore are increasinglybecoming a burden for its largest shipper of the ore, Australia.

Australia'sDepartment of Industry, Innovation and Science revisedits outlook for iron ore to an average of US$44.20 a tonne in 2016 and to US$44.00per tonne in 2017 from previouslyUS$45.00 per tonne and US$55.00 per tonne, respectively.

The cutwas the sharpest correction the department made in its June report on resourcesand energy and was largely based on the assumption that loss-making operations maycontinue production for longer than previously expected. It also factored in highersupply from India and additional cost reductions reported by iron ore producers.

"Theoutlook for iron ore prices is sensitive to the length of time that companies canoperate at a cash loss. As financial losses accumulate there will be greater pressureto close high-cost capacity," the department said.

Brexithas been perceived as an additional headwind. 

NationalAustralia Bank said in its July 8 CommodityUpdate that uncertainty around the outlook for commodity prices has ramped upfurther in the wake of the Brexit decision.

The bankexpected the vote to result in the U.S. Fed taking a more cautious stance in itscurrent monetary tightening cycle but also saw it as a counterweight to the "encouraging"emerging signs of a strengthening construction sector in China.

"Onbalance, market fundamentals suggest that the recent rally in NAB's commodity priceindex will prove short-lived, and a gradual decline will recommence going forward— albeit at a slower pace than in recent years."

"TheNAB USD non-rural commodity price index is expected to fall by around 13% in 2016,and a further 8% in 2017, led by iron ore prices," the bank noted.

NAB suggestedthat the appreciation of the U.S. dollar will help to partially offset price declinesin Australian dollar terms, which it expected to bottom at 69 U.S. cents by early2017 and to stabilize in the mid-70 cents by late 2018. However, it said these trendssuggest overall indicated that the Australian terms of trade will continue a gradualdescent, following a brief rise in the second quarter of 2016.

Ironore will see additional pressure resulting from what NAB said is an unsustainableconstruction boom in China. Taking into account overcapacity in China's steel sectorand excess property supply in many locations, the bank expected demand to slow anda subdued outlook for iron ore as a result.

"Overthe first four months of 2016, Australian exports rose by 5.9% [year-over-year],considerably weaker than rates recorded across much of 2015. Almost 82% of thisvolume was exported to China, meaning that prospects for further growth are limited."

"Whilewe argue that the rebound in China's steel production is unsustainable, the durationof this period of higher output is uncertain. We expect iron ore spot prices tofall as production slows," the report read.

The bankforecast an average iron ore spot price of US$47 a tonne this year — US$42.50 pertonne in second half of the year — and a price of US$40 a tonne in the medium term.

Meanwhile,S&P Global Ratings also slashed the outlook for iron ore prices as outlinedby the Australian government.

"S&PGlobal Ratings projects iron ore prices to be close to US$20 per metric [tonne]lower than the level assumed in the government's budget in the remainder of calendar2016 and in 2017, although the impact on the mining sector's profits may be partlyoffset by a weaker currency," the firm said as part of a ratings for the country.

The ratingagency cut its outlook on Australia's ratings to negative from stable and affirmedAustralia's AAA long-term and A-1+ short-term sovereign credit ratings, citing concernsthat the government's budget deficits may see little improvement for several yearsunless more forceful fiscal policies are implemented. Alongside vulnerability toweak commodity export demand, S&P believes that high indebtedness could endangerthe country's overall economic strength and, hence, its AAA rating.

The statementcame shortly after Australia went to the polls for national elections.

Australia'sPrime Minister Malcolm Turnbull, the leader of the conservative coalition, laterclaimed victory but faced increased internal and external pressure after it becameclear that the win was secured in a very tight race. The outcome means that thegoverning coalition will have to deal with a Senate made up by a diverse mix ofminority parties and left- and right-wing independents. There are concerns thatit will face difficulties passing legislation in the House, further adding to themounting pressure to repair budgets and avoid a ratings downgrade.

Financings

Amongthe major financings last week were 'sprivate placement plans to raiseup to 4.1 billion Chinese yuan, or US$612.5 million, by issuing up to 660,225,442shares. The company seeks to use the funds to build a lithium battery plant in Jilinprovince, China, while also investing money to increase the capacity of a lithiumcarbonate project in Quebec.

progressedwith the restructuringof US$600.0 million worth of debt and received green light by noteholders. The firmhas been working on a restructuring since the beginning of the year, after its subsidiaryMongolian Coal Corp. Ltd.failed to make a payment on its 8.875% senior notes and became subject to receivership.

US$616.7 million of its5.5% guaranteed convertible bonds due this year and now has some US$514.8 millionof bonds outstanding.

in securing US$275 millionin funding commitments needed for a capital restructuring exercise. The raised fundscomprised of a US$100 million cornerstone placing, US$145.7 million firm placingand US$29.3 million lender underwriting, at US$3.13 per share.

Executive Exchange

Majorexecutive exchanges in the week to July 8 included the appointment of Tim McManus as CEO and David Round as CFOof Bass Metals Ltd.. Furthermore,Latitude Consolidated Ltd.named Michael Edwardsas acting CEO and Kin Mining NLannounced that Don Harperwill become its CEO in early August.

Meanwhile,a number of CEOs handed over the helm.

CEO Tim McManus from the company in a bidto preserve cash, while Tom Obradovich resignedas CEO of Barkerville Gold Mines Ltd.with immediate effect and will be replaced by Chris Lodder.

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