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While Chile may be sitting on a nice surplus thanks to its saving of copper revenues, allowing it to pursue more aggressive fiscal measures in the current downtown, that’s not to suggest that the economy as a whole is in the clear. On the contrary, Chile’s National Statistics Institute (INE) reported late last week that industrial production fell a bigger-than-expected 3.7% in December from a year earlier, after a 5.7% fall in November, sending the peso down 1.16% soon after the data was released in late-week trading, touching 619.00/619.50 per dollar before paring losses somewhat. Copper mining also fell more than expected. Chile’s mining sector alone, which produces more than a third of the world’s copper, was down 8.9% in December and 4.2% in all of 2008. Concurrently, exports of molybdenum, a metal used to harden steel and another of Chile’s top exports, decreased as well.

Per Reuters:

The INE said the result was due to a lower pace of economic activity and of both domestic and external demand that hit output of base metals, wood products and non-metallic minerals. “The economic data shows a downward trend which affects sectors from mining to business. This is because the dependence on the external sector makes them vulnerable to variations seen on international markets,” INE added.

Analysts predict that the data will likely put pressure on the central bank to again cut interest rates aggressively at a policy meeting in February.


Two weeks ago reports from Lusaka warned of a “copper crisis” in Zambia, one of the world’s largest copper producers.  Since the beginning of the global credit crunch, prices for the metal, which is vital to both the electronics and buildings industries, have tumbled from record highs of nearly $9000/metric ton between 2005 and 2007, to roughly $3000/ton given both perceived and actual demand destruction.  The Mail & Guardian, a South African newspaper, reported that copper accounts for 80% of Zambia’s foreign earnings.  Earlier this year, in fact, the Zambian government projected more than $415-million in revenue from copper exports after revising mineral royalty taxes from a paltry 0.6% to the global standard of 3% and introducing a windfall tax triggered by the higher prices of copper.  That tax, however, now looks suspect, as a number of mines are cutting their workforces as revenues from foreign demand dip.  Luanshya Copper Mine (LCM) shut down its Chambishi Metals Plc unit, the country’s largest cobalt producer, and its Baluba copper mine soon after suspending a $354 million Mulyashi copper project, which had been due to start producing 60,000 tonnes of copper in 2010.  According to Reuters, the firm cited “operational difficulties arising from the global credit crunch” as reasons for the decision.

In spite of the dour headlines, some officials remains cautiously optimistic. Following the LCM shutdown, the government asked foreign mining firms to use profits that they made when copper prices were high to keep working in the downturn.  And according to Reuters, Bank of Zambia (BoZ) governor Caleb Fundanga “expressed optimism that copper prices would soon rebound,” though he admitted that” developments at LCM were a threat to the country’s copper industry.”  Moreover, in October Australia’s Equinox Minerals Ltd. announced that it signed a $80 million loan facility with Standard Chartered Bank Plc and Standard Bank to complete its Lumwana copper mine in Zambia, which recently started production.  The Lumwana mine is Africa’s largest open-pit copper mine.

Industry analysts posit that most copper mines have also slowed down expansions and upgrades following the global financial crisis.  This “supply destruction” will also lead to stagnant surpluses around the world that, once they wind down, will ultimately help right the price shift.  However, renewed growth in the industry will be dependent on a turnaround in demand (i.e., in China, the world’s largest user, where, according to Paul Harper’s excellent piece on this issue, demand for copper slowed to an estimated 9.8 percent in 2008 from 26 percent in 2007), and to that extent Fundanga said that Zambia remains optimistic that the global economy will stabilize soon and that demand for copper will begin to increase.  However, he also stressed that the government would seek to mitigate the effects of falling copper demand and prices by diversifying the economy to other sectors, such as agriculture and manufacturing of copper products.  Botswana, long dependent on diamonds, has been embracing this approach as well.

Per The Economist, “the fastest growing of the larger economies in Latin America [in 2009] will once again be Peru, not least because the government will keep faith in free trade, rather than the socialism fashionable elsewhere.”  To that extent, Peru and the U.S. have implemented a free-trade agreement, one of several promoted by the U.S. to counter rival proposals by Venezuela’s President Hugo Chavez.  Nonetheless, Peru’s President Alan Garcia is suffering from a ratings slump (though he just announced a $3 billion economic stimulus plan) that some pundits attribute to such liberalized economic policies.  From The Council on Hemispheric Affairs this past October:

Despite Peru’s impressive recent economic development – 83 months of consecutive growth as of May 2008 – its civil society is becoming increasingly discontent with the leadership of Alan García. Reuters news service reported that while the country’s GDP growth rate hit 9.37 percent this year, the president’s personal approval ratings sunk to 19 percent. These ratings reflected a 16 point drop in the last four months alone, as protests and strikes over the FTA’s provisions have attracted a significant following.  On October 7th labor groups across Peru organized a nationwide strike protesting the government’s economic policies, specifically accusing them of failing to alleviate poverty. According to the BBC, thousands of protesters marched in the nation’s capital and called for García’s entire cabinet to resign. As the President continues to lose legitimacy and popular unrest surges, fewer and fewer Peruvians are accepting the notion that the global free market will increase their odds of gaining prosperity.

That said, with expected (albeit slowing) growth of 6.4%, and inflation a (relatively) low 5%, a frontier investor could do worse than parking a portion of his or her money in Peru.  Like that of Chile, Peru’s government has room to spare vis a vis public spending (i.e. credit lines and sector bailouts) given its savings of mineral revenues.  The government is also continuing with its plans to sell its first foreign bonds in almost two years to “demonstrate the economy’s strength” after receiving investment-grade ratings.  In doing so Peru would follow Mexico, which recently became the first developing nation to tap international debt markets since the global credit crisis deepened.  Peru is also seeking to establish benchmark bond yields that would help its companies sell debt abroad.  

Peru’s Lima General Index has not been spared by any means (see chart below), but the point here is that it represents a relatively attractive entry point (along with Chile) vis a vis Brazil, for example, where growth will be 2.7% in the coming year as tighter fiscal and monetary policy will squash consumer spending and curb growth.

The backbone of Peru’s economy is mining–it is the world’s largest silver miner and third-biggest copper producer (though textile, agriculture and energy related exports are also certainly vital to its continued growth).  On that front, Canada announced last week that it will spend 4 million more U.S. dollars in the next three years to help promote its mining industry’s contribution to Peru’s sustainable growth.  According to a bilateral memorandum of understanding, Canada agreed to extend the Peruvian-Canadian Cooperation Program (PERCAN) for another three years, to end on Dec. 31, 2011.  Through its Agency for International Development, Canada will increase financial support to Peru’s mining industry to 13.6 million U.S. dollars from the 9.6 million dollars originally agreed under PERCAN.  The extension of the program will strengthen Peru’s efforts to make its mining industry environment-friendly, thus contributing to the country’s sustainable growth.  “As for environmental issues, we have brought the regulations closer to meeting international standards,” said Felipe Isasi, Peru’s vice minister of mining.

Peruvian miner Buenaventura (Compania De Minas Buenaventura S.A.A.) (NYSE: BVN), with a market cap of USD 3.96 billion, is Peru’s largest publicly traded precious metals company.

While there are certainly a lot of Gold bulls screaming “Inflation” at the moment, it could in fact be the mining stocks rather than the commodity per se that are in for a positive adjustment heading into 2009. As one commentator on Seeking Alpha noted yesterday:

The XAU/Gold ratio is a measure of index of leading gold mining companies (XAU – Philly Gold and Silver Sector Index) relative to gold price. Over the past 25 years, the XAU/Gold ratio has been 0.25. That means the XAU index would be about ¼ the price of an ounce of gold.

On Monday (Dec. 8), the XAU closed at 94 while gold closed at $760 an ounce. This makes the XAU/Gold 0.124. That’s less than half the ratio’s long-run average and just off the 25-year lows.

The theory states that mining stocks got pushed down relative to bullion when the cost of oil spiked, but the market failed to readjust when the price of oil declined. Furthermore, gold stocks have tended to outperform in recessions. Finally, the artificially propped up dollar–due to quantitative easing and Asian largesse–is due to unwind. All of these factors together certainly point to gold stocks as being a tip-top stocking stuffer this season. Although coal stocks have taken a beating as well…

Kenmare Resources plc is quoted on the official lists of the Irish and London Stock Exchanges (London:KMR). Its principal activities center on the exploration for commercial deposits of natural resources and the development and operation of mines. For example, the firm’s main asset is the Moma Titanium Minerals Mine, located on the coast of Mozambique. The Moma Mine contains reserves of heavy minerals which include the titanium minerals ilmenite and rutile, as well as the high-value zircon mineral. In addition, Kenmare have acquired a Mozanbiquan uranium exploration license. Titanium is considered a valuable resource for industrial producers because it is added to paints and pigments to make the color more opaque. Currently, the titanium market is dominated by a small number of giant mining companies, such as Rio Tinto and Anglo American, who account for over two-thirds of the world’s supply of the mineral.

As to zircon, Kenmare recently announced that its first shipment of the mineral was made early last month. Zircon prices have increased substantially in recent months, it noted, adding that it expects that further increases will be forthcoming, which will benefit Kenmare as its zircon contracts are priced at market price.

Michael Carvill is the firm’s Managing Director, and his story is an interesting one.

Another piece, from Energyexec, details Carvill and Kenmare’s arduous journey:

20 years in the making, it has been a long road for the exploration group, but Kenmare is delighted that Moma, its principle asset, is finally up and running.

The project has had more than its fair share of ups and downs, including considerable problems with certain equipment supplied under the construction contract, which has had to be replaced under warranty, as well as a cyclone. But that is all in the past. This is now, and this is the future.

“We are delighted that Moma is up and running,” says Michael Carvill, Managing Director. “It is one of the world’s largest titanium-bearing mineral sands deposits and I think it contains more than 200 million tons of ilmenite plus rutile and another associated product called zircon. It is well over 100 years worth of mining.

Carvill also mentions the company’s social contract, so to speak, with the surrounding community.

“We have developed the Moma Development Association and have put a social development plan in place,” explains Carvill. “The plan focuses on maximizing the benefits of the mine to create secondary economic opportunities within the local communities. We hope to generate long-term sustainable economic opportunities in the local communities that are independent of the mine and to mitigate any possible negative impacts.”

Finally, it is interesting to note just how complex the financing was for Kenmare’s Moma mine to be realized, in part due to the fact that titanium minerals are not a hedged commodity, and also due to the location of the development (2,000 kilometers north of Johannesburg, a natural base for infrastructure and supply). The deal ended up being the largest structured finance package constructed by a non-major mining company, per Project Finance Magazine, winning it the “Mine Finance Award” back in 2004. Quite a coup for a company that had a market capitalization of only £81m at the time.

Of the $400 million total project costs, equity made up $131 million, while bank debt comprised $269 million. The debt was split into $203 million senior debt, and a $66 million Euro-denominated subordinate piece. Lenders included the African Development Bank; the European Investment Bank; ABSA, a South African commercial bank; and finally a Dutch development institution, FMO.

Analysts estimate that Moma could bring in annual revenues of $85m over a 20-year period with operating costs projected at $23m a year over the same interval. Sales contracts covering more than half the annual revenues for the first five years of operations are also in place.

From yesterday’s Financial Times:

Labour unions are braced for job losses and forecasts for future orders are bleak.  Across much of sub-Saharan Africa, the story is the same. The region’s mineral resources have fuelled its recent growth, analysts at Absa Capital wrote. They now foresee depreciating currencies, widening deficits and evaporating mining investment in at least 11 countries. Mozambique’s fortunes are inextricably linked to its bauxite seams, as are Namibia’s to its diamond fields. Each relies on commodities for two-thirds of their exports.


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