MAC/20: Mines and Communities

Diamonds may not be forever - what about coal, gold, copper and nickel?

Published by MAC on 2008-11-10

Mining companies are nothing if not optimistic: after all, they have to persuade the rest of us that the industry's conventional "boom and busts" will always occur, and consequently a bearh market will always turn bullish; they just don't know when.

Thus, in recent weeks, we have seen various "predictions" that the price of nickel - which recently suffered historic lows - is bound to rise; that copper, iron and steel will resurge.

However, if the global economy is truly on the brink of a recession (there's little to indicate it isn't) wishful thinking won't - as the saying has it - "butter any parsnips".

For the past six years, mineral demand has depended predominantly on Chinese requirements. If that demand falters, then so will the markets. It's almost as simple as that

Meanwhile, don't take anyone's word for what will happen in the coming months. The gold price hasn't behaved as many earlier predicted it would - proving a safe haven in times of fiscal uncertainty. Indeed, as the dollar has strengthened, so gold's fortunes have fluctuated.

While the "experts" may not have it hopelessly wrong, they certainly don't yet have it all right. As if to illustrate this, on November 3rd a Mineweb correspondent said that uranium stocks were "back in fashion". But, just three days later, one of his colleagues named the uranium sector was "one of the most down and out" - even though demand was increasing.

You pick your pundit according to the tune you wish them to play.

Just don't let them pick your mining stocks as well!

[Comment by Nostroo Research]


Slump takes sheen off diamond industry, 50k labourers laid off by Dilip Kumar Jha

Business Standard (India)

7th November 2008 Lay off may stretch 3 months.

The global economic slowdown has hit India's diamond processing industry in a big way. An estimated 50,000 unskilled, semi-skilled or skilled labourers have been laid off so far this year in Surat, the country's largest cutting and polishing centre for precious stones.

Most of them are daily wage workers and they have been asked to go on leave till their employers directed them to resume work. The leave of one month has been extended to three months at least. But, if the downturn continues the lay-off may stretch beyond the present three months.

In Mumbai too, the slowdown in demand from the US because of the economic crisis has resulted in over 10,000-12,000 job losses in the last one-and-a-half months.

India's over Rs 100,000 crore diamond processing industry is facing serious economic crisis as the demand from the US has fallen tremendously. According to industry estimates, the US demand has fallen almost 50 per cent during the last one year and the the deepening economic crisis has only worsened it. New orders for Christmas, which usually starts coming around the first week of November, has dried up this year. Instead, India's exporters to the US have started recalling unsold inventories to test the domestic market.

The demand for diamond jewellery is growing in China, Japan and West Asia and the unsold inventories from the US are expected to be diverted to these markets.

Confirming the lay-offs, Vasant Mehta, chairman of Gems & Jewellery Export Promotion Council (GJEPC) said the real numbers would be known only after a month or so when labourers generally resume the post-Diwali work by November-end as normal practice. According to Mehta, labourers have been asked to stay back until inventories fall from pre-Christmas sales.

Meanwhile, Diamond Trading Company, the trading arm of global diamond mining major De Beers, has reduced the box size or the value of site for Indian customers for the remaining two months of the current calendar year and has decided to divert the rough diamond to countries like South Africa and Belgium.

Praveen Nanavati, joint secretary of Gujarat Heera Bourse, feels Indian site holders have already lifted the quantity for the whole year within 10 months on growing demand for rough and semi-processed diamond globally. The industry now has a huge pile-up of inventory worth about Rs 80,000 crore, equivalent to India's annual exports. Hence, asking workers to return could only add to the overheads, said Nanavati.

Demand for luxury goods declines during recessions. Hence, the export of diamond jewellery may be hit badly this year, said Mehta.

Meanwhile, the public sector MMTC Ltd has also recorded "zero" orders from its limited 4-5 customers to procure rough diamonds on their behalf.

"We have had no orders from our customers during the last three months," said an official involved in import of roughs mainly from Russia and Israel.


Nickel - As low as it goes

Mining Journal

31st October 2008

SPEAKERS at an investor seminar on nickel this week signalled that the price of the metal is about to recover. Even by its own volatile standards, nickel has had a remarkable past 40 months (see graph). The metal rose to an all-time high of US$51,600/t in May 2007, then fell away to US$26,300/t by the end of the year. The metal improved to US$33,200/t in early March this year before slumping to just US$9,350/t last week.

Nickel has since recovered by one-third to US$12,600/t and the 110 delegates at the 20:20 seminar were advised by all five corporate presenters that this signalled the bottom of the cycle. Although the explanations varied slightly, all of the speakers referred to the number of producers, and near-producers, who were ‘out of the money' at these market prices.

This Tuesday's event (the latest in a series of specialist investor events organised by Aspermont UK, publisher of Mining Journal) was opened by editorial director Chris Hinde, who reminded delegates that nickel is mined from sulphide or laterite ores, each providing an almost equal share of the current production of primary nickel (although laterites account for an estimated 72% of the remaining in-ground resources). To put the subsequent corporate presentations into context, Dr Hinde observed that the main nickel sulphide deposits are in Australia, Canada, the Russian Federation and South Africa.

These deposits are frequently associated with copper and platinum group metals and are often exploited in underground mines. In contrast, the laterite deposits are operated as open-pit mines, and are mainly located in Western Australia, New Caledonia, Indonesia, the Philippines, Colombia, Cuba, Venezuela, Brazil and the Dominican Republic. Cobalt is recovered as a by-product. World mined nickel production in 2007 was 15% higher than the output in 2004 (see table), and was up 8.8% compared with 2006. Refined output rose 6.4% last year. Year-onyear increases of 59%, 25% and 22% were achieved in the Philippines, Indonesia and New Caledonia, respectively. As a result, Indonesia overtook Australia in third place in 2007, and the Philippines has come from nowhere four years ago to joint sixth place last year.

Dr Hinde noted that the reasons for the 17-month bear market for nickel are well documented. The main factor has been an expectation of a collapse in demand for stainless steel, which accounts for about 65% of the consumption of primary nickel and is the bellwether of the international economy. Soaring nickel prices in 2006 and early 2007 led to increased development and takeover activity, although the only large new mine to enter production was BHP Billiton's Raventhorpe mine (however, the Yabulu refinery was extended). The Voisey's Bay mine in Canada is now at full capacity after a long ramp-up phase, and its 50,000t/y refinery is expected to start up in the second half of 2011. Other important projects in Canada include Xstrata's Raglan mine expansion and the company's developments at Nickel Rim South and Fraser Morgan. One of the largest projects due to come on stream in the next few years is the 60,000t/y Ambatovy project in Madagascar, which is scheduled to start commissioning in 2010 (owned 40% by Sherritt International Corp, 27.5% each by Sumitomo Corp and Korea Resources Corp, and 5% by SNC-Lavalin).

Takeover activity in 2007 included Norilsk Nickel's purchase of OM Group's nickel interests and its incorporation of LionOre Mining, Sherritt's takeover of Dynatec, and the purchase by Lundin Mining Corp and Belvedere Resources Ltd of nickel interests in Spain and Finland, respectively. The high prices encouraged production from the lower-grade laterite deposits of Australasia, and Chinese nickel pig-iron production soared. Chinese output jumped from 30,000t in 2006 to 85,000t in 2007.

At the beginning of 2007, LME nickel stocks were at very low levels (around 3,250t) but rose substantially during the year, to reach 47,900t in December. Similarly, producer stocks rose from 94,600t in January to a peak of over 103,000t in October 2007. This year, the price of nickel has been brought low by the US sub-prime crisis of mid-2007, and by the subsequent credit crunch and the onset of a full-blown recession.

A recent research report by Alto Capital concluded that juniors will struggle over the next two years, with little or no capital available to conduct exploration. The report predicts that "only the most financially sound projects will get off the ground", and says that "numerous nickel mines will shut as profits turn to losses".

However, Dr Hinde commented that there was at last some good news. Chinese metals traders have been widely quoted as predicting a bounce in the nickel price early next year. A favourite date for the start of the recovery is the Chinese New Year - which is celebrated next year on the same day as Australia Day (January 26). Moreover, Alto Capital's analyst, Carey Smith, is predicted a doubling in total nickel demand by 2030, and says that a realistic outlook for nickel prices over the next few years is US$15-17,000/t. The incredible rate of growth in the Chinese economy has slowed in recent months but Mr Smith observed that the market there is too large to ignore. It is expected that China will have consumed around 352,000t of nickel this calendar year, which is 25% of the anticipated global total of 1.4Mt/y, and a sixfold increase on just eight years ago.

The chairman of Allegiance Mining NL, Tony Howland-Rose, was typically ebullient at a recent nickel conference in Australia. He described the collapse of the nickel price as "a lot of noise", and the market collapse as a "chart hiccup". Mr Howland-Rose told delegates: "It is important that we keep the current economic conditions in historical context. If you take a longer-term view, the current mess doesn't look too disastrous". He concluded "we should not get too depressed as downturns like this create wonderful opportunities".


Lower nickel prices reduce employments in mining sector

Steel Guru

1st November 2008

ABS CBN reported that employment and average compensation in the mining and quarrying sector in Philippines started to fall in the April to June 2008 period as companies face declining mineral prices.

After a landmark Supreme Court decision in 2005 allowing foreigners to engage in mining activities, the sector has been touted as a major job provider as the government targeted to add 1 million jobs every year. But that was when mineral prices were reaching record highs, prompting local players to aggressively promote investments in the extractive industry.

According to the National Statistical Coordination Board's second quarter economic indices report, total number of employed people in the mining and quarrying sector was 17% lower as compared to the same period last year.

To provide a guide to those who analyze the economy based on current economic behavior and events, NSCB regularly tracks changes on the country's largest companies' production volume and gross revenue, and compares these with changes in employment, compensation, and compensation per employee.

Statistician Ms Maria Fe M Talento, who helped prepare the report, noted that the index on gross revenues of the mining and quarrying sector plunged 17.5% YoY in the April to June 2008 period.

Ms Talento attributed the lower employment in the mining sector to the slump in China's demand for nickel and chromite after the completion of the Olympic Village in Beijing. She said that mining companies engaged in the production of nickel, which is used for the production of stainless steel, may have stopped or reduced their operations amid a drastic fall in prices.

The compensation index considers the salaries and wages paid by industries both in cash and in kind. The average for all sectors in the second quarter was a 6.9% increase.


Russian gold miners say crisis causing asset sales

Reuters

1st October 2008

Leading Russian gold firms Polyus Gold and Polymetal said on Wednesday the global financial crisis was forcing many Russian miners to sell assets as they saw no other means of survival.

They did not say which assets were potentially for sale. "Not a week passes without us receiving an offer (to buy an asset)," Polyus CEO Yevgeny Ivanov told reporters on the fringes of a mining conference. Polyus is Russia's top gold producer. "The tendency is clear: we are witnessing a revision of all prospects. Many gold projects, which earlier planned an initial public offering of their shares or a sale to a strategic investors, are in deadlock for lack of funding." Vitaly Nesis, CEO of Russia's third-largest gold producer, Polymetal, said he believed the quality of assets on offer was low and that he expected their prices to fall.

"In the conditions of the crisis, the owners of the assets are less optimistic about the prospect of a public offering on an exchange," he told the conference. "The long-awaited process of owners revising down their asset value has already started," Nesis said. Speaking later on the sidelines of the conference, he added there were practically no assets on offer in Russia that would attract Polymetal at present.


Chile trims 2008 copper output forecast again

Reuters

29th October 2008

SANTIAGO - Chile on Wednesday trimmed its 2008 copper output forecast for the second time since July, this time to 5,45-million tons, citing operational issues but not slumping prices for the red metal.

Limited financing due to the global credit crisis may delay or cancel some new projects, said *Eduardo Titelman*, executive vice-president of Chile's state copper commission Cochilco, one of the world's leading copper think-tanks.

Copper prices rose above $2/lb on Wednesday, but they remained less than half the record levels of over $4 per pound hit in July.

A global credit crunch and fears the world could enter a recession have hit demand for metals like copper, heavily used in the auto and construction industries.

Titelman said Chile's copper output would retreat this year as operating setbacks hit capacity at some mines.

"This year, in 2008, Chile is estimating production of 5,45-million tons, a little less than previous forecasts, not because of the price but because of certain operational issues that have cut production capacity," Titelman told foreign correspondents at a breakfast meeting on Wednesday.

It was the second cut in the forecast since July, when Cochilco lowered its Chile copper output estimate to 5.59 million tonnes from a previous 5.7 million tonnes.

Chile is the world's largest copper producer, supplying about a third of global markets, but output has slipped this year as ore grades fell at some mines and mechanical failures hit others.

MINE FAILURES

Chile's Escondida, the world's largest copper mine, earlier this month declared force majeure on deliveries of some copper concentrates after it was forced to shut down a mill used to pulverize rock.

The shutdown of a SAG, or semi autogenous grinding mill, is seen cutting up to 10 percent of total copper output from the mine in northern Chile.

Chile's state-owned Codelco, the world's largest copper producer, said this week it had cut 2008 output estimates for its largest division, Codelco Norte, by 10 percent due to delayed plans to access high-grade mineral ore.

Titelman said output would bounce back in 2009 to about 5,8-million tons as bottlenecks were uncapped and new production was added to the national portfolio.

He said limited financing could delay the launch of certain new projects and some marginal projects might get canceled in the global copper market.

In Chile in particular, Titelman said most larger scale projects were protected because of low average costs of production of near 70 cents a pound.


ANALYSIS - German Coal Plant Build To Slow As Crisis Bites

PlanetArk GERMANY

29th October 2008

FRANKFURT - The global financial crisis could prevent Germany from building enough coal-fired power plants to safeguard its future electricity supply.

Germany needs to replace most of its coal-fuelled stations over the next decade and many new coal plants are planned because of strong public opposition to nuclear power and concerns about relying too heavily on gas.

New coal projects already face strong public opposition over their carbon emissions and tougher penalties for operators under the European Union's emissions trading scheme.

These obstacles now seem less important than the rising cost of scarce capital to build the new power stations Germany needs.

"There is no indication that prices to build plants are easing and it will become increasingly difficult to get credit for projects unless they can be financed from the cash flow," said Felix Matthes of the Oeko-Institut think tank.

Germany, Europe's biggest electricity market, has built 8,000 megawatts (MW) of new capacity since 2000 but needs to replace another 32,000 MW by 2020.

Five out of 16 other projects planned up to 2012 are already under construction and will add another 7,000 MW, according to research by Reuters.

But the other 11 projects, with a total capacity of 11,000 MW, face intense scrutiny before getting the credit they need to progress, despite utilities' low risk profile, analysts say.

"Operators seeking finance for generation plants will be faced with high costs not because of their own ratings, which are still good, but because money in the capital markets is drying up," said Matthias Heck of private bank Sal. Oppenheim.

Heck said French GDF Suez' issue last week of an expensive two-part euro bond raising 1.9 billion euro ($2.36 billion) was a sign of how hard utilities were finding it to secure loans for their multi-billion euro plans.

The coupon prices were 6.25 percent for the five-year part and 6.875 percent for the 10-year part.

German utility E.ON said last week it was confident about refinancing several billion euro in debt by next May.

HIGH COSTS

Hopes that the financial crisis could cut, or at least tame, rising labour and materials costs that have dogged the construction sector over the last few years are also fading.

"There is no decline in the cost of power plant construction," said Bremen-based institute trend:research, which regularly polls engineers and their customers.

The price for building a hard coal-fired plant, which already rose significantly to 1,500 euros/kilowatt in 2007, has risen by another 200 euros/kW in 2008, it said.

Environmental costs of running coal plants are also set to soar from 2012 when generators will be forced to pay for all the carbon they emit.

Coal-biased utility RWE has warned that its coal plants may become unviable if full auctioning becomes a reality and hopes coal-reliant eastern European states like Poland will help defeat moves towards tougher limits on coal.

European utilities have made billions of euros from passing on the cost to consumers of emissions rights they were given for free in the early stages of the EU's Emissions Trading Scheme.

But that will all change from 2012 and investors' view of the sector may change with it.

"Special profit boosters such as free CO2 certificates will become a thing of the past for utilities, which may change investors' view of whether this sector is attractive much longer," said Oeko-Institut's Matthes of the big German firms.

FEW ALTERNATIVES

Half of Germany's power is generated by burning coal and there are few alternatives.

Wind power has grown rapidly in Germany but is too unreliable to fill the void that will be left by coal over the next few years.

Meanwhile gas has become unattractive over the last two years because its price is linked to oil and because of heightened concerns about becoming over-reliant on Russian gas.

Southwest German utility EnBW for example is investing in big coal and hydropower projects and studying upgrades to an existing gas plant, but on a much smaller scale.

"It does not help gas if oil prices have a temporary dip, I cannot imagine the gas suppliers agreeing long-term supplies this early in the oil down-cycle," said an EnBW spokesman.

The current plan to close all Germany's nuclear power plants over the next decade means the coal-or-gas debate is not the only important issue for the country's future power supply, Manual Frondel, analyst at the Essen-based RWI Institute said.

"It is more important whether or not Germany holds on to its nuclear exit programme up to 2021, because if it does, we will get a huge power generation gap between 2015 and 2020 which renewable energies won't be able to fill," he said.

(Reporting by Vera Eckert, editing by Daniel Fineren)

Story by Vera Eckert

REUTERS NEWS SERVICE

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