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Industrial metals producers could surprise on costs

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


Industrial metals producers could surprise on costs

Investors continued to watch for signs of a resolution in the ongoing trade war between the U.S. and China as officials from both countries geared up for two days of meetings in Beijing.

"I think China wants to get it resolved," U.S. President Donald Trump reportedly said Jan. 6 ahead of the talks. "Their economy's not doing well. I think that gives them a great incentive to negotiate." The talks began Jan. 7.

Meanwhile, markets digested comments by U.S. Federal Reserve Board Chairman Jerome Powell, who signaled patience on rate hikes.

"With the muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves," Powell reportedly said in a speech he gave in Atlanta on Jan. 4.

Trump has been critical of the Fed's decisions to raise rates in 2018. Powell addressed the criticism, underscoring the Fed's independence and saying he would not resign as chairman should he be asked to do so.

Talking points

BMO analysts looked at the bigger picture for industrial metals this year in a recent note. Digging into metals and mining producers, the analysts said there was potential for producers to beat expectations on operating costs.

The producers are cash rich and may plow funds into existing operations given a dearth of growth projects, the analysts said. "This could also bring a second order surprise, ongoing operating cost beats at the producer level, particularly given the oil sell-off."

Turning to demand, the analysts said they expected growth to stay in positive territory with a boost in prices and demand for industrial metals through the first half. Demand beyond China will be key but is also something of a question mark, the analysts said.

"In an environment where it is clear what China is trying to do, it could be argued that ex-China demand is perhaps the greater unknown for 2019," the analysts said.

As for falling oil prices, the analysts see pros and cons for industrial metals. The drop in oil prices could make investing in commodities as a whole less attractive. "The current macro environment may be helping financial market appetite for gold, but not other commodities," the analysts said.

On the other hand, lower oil prices will lower costs for miners. It could also ease pressure on economies dependent on oil, allowing for more cash to flow to investment projects, which could, in turn, support the metals.

Price ring

In steelmaking materials, the price of iron ore rose 1.5% to US$71.7/t during the week that ended Jan. 4. Metallurgical coal dropped 5.2% to US$206.8/t, and steel fell 0.9% to US$537/t.

Base metals were a mixed bag. Nickel rose 3.7% to US$11,043/t, and zinc climbed 0.7% to US$2,510/t. But copper fell 1.5% to US$5,897/t, and aluminum was down 0.1% to US$1,879/t. Lead dropped 4.8% to U$1,936/t.

In precious metals, platinum made gains, up 4.1% to US$823/oz. Palladium rose 3.3% to US$1,302/t, while rhodium was flat at US$2,460/oz. Gold inched up 0.4% to US$1,286/oz, and silver gained 2% to US$15.7/oz.

Financings

To help fund its acquisition of Nevsun Resources Ltd., Zijin Mining Group Co. Ltd. plans to raise 8 billion Chinese yuan by issuing up to 3.40 billion A shares.

Yancoal Australia Ltd. said it raised HK$99.9 million through an overallotment option it extended to Morgan Stanley & Co. International PLC. It issued 4,361,900 shares at HK$23.48 apiece as part of a recent IPO.

IRC Ltd. met conditions to receive waivers related to a US$340 million project finance facility with Industrial and Commercial Bank of China Ltd.

Further paying down debt, vanadium miner Largo Resources Ltd. said it would repurchase US$47.8 million of its 9.25% senior secured notes for US$51.2 million in cash, leaving US$45 million in outstanding notes.

Strandline Resources Ltd. gave Nedbank Ltd. a mandate to arrange a US$26 million loan covering most of the anticipated development costs of the Fungoni heavy mineral sands project in Tanzania.

Central Asia Metals PLC said it consolidated borrowings related to the US$402.5 million acquisition of the Sasa zinc-lead mine in Macedonia with a facility accruing interest at 4.75% plus the one-month U.S. dollar London interbank offered rate. It had borrowed US$120 million as part of the acquisition and inherited US$67 million in debt in taking on the asset.