Mining Blues will Blow Over

Transcription

1 Mining Blues will Blow Over Mining Loses its Luster. Philippine mining shares outshone all sectors in 2011, up 97%, but unraveled in 2Q & 3Q That left out a measly 4% gain for the sector as of early Sept, 2012 from peak 60% gain four months into Two unfortunate events were behind it: a recent policy freezing new Philippine mining contracts damping investors zeal and waning China s appetite for metal due to a deepening economic slowdown. If these events were to reverse, will the plight of Philippine mining blow over? China Politics to Reshape Growth. A big part of the answer is in China s new political leadership this year and the way it will steer the China growth model. Will it be a repeat of the steelintensive investment-led growth in the past decade or a consumption-led one, slower maybe but allows for shifts in the economy? China s fiscal stimulus was pipelined, similar to its 2008 spending program, but this time Chinese authorities are making sure it will avoid the risk of inflation, bad debts and property bubble, all lessons of the past. China s Fortunes Will Rock the Global Metals Markets. China s growth fortunes will continue to rock the global metal markets. While China is also a big metal producer nd largest in copper (a 3 rd of 15m tons world output, next to the biggest, Chile s 6.5m tons) and gold producer (15% of 4.0k ton of world output) --- its double-digit growth in the past decade had turned it into a net metal importer. China is the world s biggest buyer of copper, (9m tons or half of world output); and nickel ores (the latter 40% of 1.7bn tons of world output). China is also the world s 2nd biggest buyer of gold, (20% of world demand, next to India s 30%). China imports 900k tons of copper, three times the US importation. China is also the world s biggest steel maker, a market worth $100bn, and very important to the profitability of Australia s mining giants -- BHP Billiton, the world s largest miner; Rio Tinto, the world s 3rd largest; Fortescue Metals Group Ltd., the world largest iron-ore exporter. Macquarie predicts China s consumption of nickel and copper will rise further to 58% and 50% of world output in 2020 from just 6% and 38% in 2000, respectively. China is the Philippines Mining Locomotive. Outside of the country s growing gold black market, it was the nickel growth story that led Philippine mining in Nickel had an output share of almost half or Php22bn of the industry s output value of Php51bn in 1H2012 vs only a third of the Php122bn output in the entire That was a continuation of nickel s growth in 2011, up 80% in output value and also higher by 50% in sales volume growth to 21m tons. Nickel fueled the 9% rise in RP mineral output in In 1H2012, copper shipments grew 21% value-wise but the Philippines is more of an importer, among China, India, Brazil and Japan. RP is the world s second largest nickel ore exporter, same level with Indonesia, with a share of 13% of world output and ranked next to Russia s 15% share. On the other hand, gold was going to the black market as small scale miners evaded higher taxes in the face of reduced BSP gold purchases in 1H2012 of just 5% of last year s 15k kg. Government blamed the 26% mining output slump to Php51bn in 1H2012 to gold smugglers evading higher taxes. This year, Philippine gold shipments in terms of value of Php18bn were only 28% of the whole 2011 output worth Php63bn. LME Nickel Spot Recovery in China s steel market had seen inventories fall at a loss to steel traders at the rate of -$60/ton. It is the start of restructuring that shot down iron ore prices to three year lows of $89/ton. Iron ore is essentially low grade nickel ore rich in iron and a key steel ingredient. Steel inventory destocking will clear a predicted 45m tons world nickel surplus this year and usher deficits of -4.1m and -11.1m tons in 2013 and 2014, respectively, Deutsche Bank (DB) predicts in its last July 2012 Commodities Report. That will help raise nickel ore prices to $19.5k/ton or $8.85/lb in 2013 and further to $20k/ton or $9.07/lb in 2014 from the current three-year low of $15k/ ton, dragged by a 119k ton stockpile. Another good news is that it won t be long when the inefficient state-controlled Chinese steel mills will be stripped of incentives to continue running steel surpluses and sacrificing profits only to fund tax revenues of local governments in China. Gold Targets $2000/oz. in 2013 on Investment Demand. Gold rallied to six-month highs on Sept. 6, 2012, ahead of the ECB s bond buying program which affirms prices potentially hitting $1,900/oz in 4Q12 from $1,700/oz this quarter and further rising to $2,050/oz in 2013 before correcting to $1,800/oz in A key driver is investment demand gold bars and coins, medallions, and ETFs up 19% this year based on DB forecast. Investment demand is linked with expectations of slowing global growth and monetary easing and a resulting shaky dollar. In contrast, there will likely be a drop in jewelry demand of -4.1% and flat industrial usage growth of 1.3% in the next two years, according to DB forecasts.

2 Copper Deficit Will Persist as Stockpiles Fall; Price Targets $8,000/ton in 4Q12. Global refined copper demand fell almost 1% through June as Chinese demand faltered. But DB forecasts the copper market will remain in deficit worth 540k tons this year which should be supportive of a price improvement in 4Q12 to $8k/ton as China consumes a yearly 5% going to 2013 and We think surpluses predicted by DB in 2013 and 2014 worth 206k and 470k tons, respectively, may be delayed as stockpiles in warehouses monitored by the London Metal Exchange, the largest metals bourse, dropped to the lowest level in almost four years and due to delays in mine expansions. The latter was according to Codelco, the world s biggest producer. There is a strong support for copper prices at $3 a pound or $6,614 a ton. Demand will match or exceed supply, Codelco added. Add to that the expected policy intervention in the key regions (Europe, US and China) underpinning global growth into 2013 with which copper prices (and gold prices as well) have risen in tandem. Copper prices tripled when the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June Copper rose 1.3 percent to $7,699 a metric ton this year on the LME after a 21 percent slump last year. Philippine Nickel Miners See an Opening, High Cost Producers Will Be Priced Out. While the fallout of China s reduced demand for metals is on the world s biggest miners given their increasingly higher cost of operations amid competitive commodity prices, the opportunity is just opening up for low-cost nascent mines with proximity to China like the Philippines. Although wages in West Africa are the world s lowest at $2/day -- its gold projects are already attracting Australian miners complaining of high carbon and mining taxes, bureaucratic redtape and high wages at home-- West Africa is far from China. Philippine nickel producers with vast nickel ore reserves rich in iron content (48%) have taken advantage of the steady China offtake. These are Marcventures Holdings Corp., (MARC), Oriental Peninsula Resources Inc., (ORE) and Benguet Corp. which have stepped up shipments in 1H2012 above last year k tons for Marc; 2m tons for ORE; and 790k tons for Benguet, all low grade with high iron content (48%-49%). Some companies are on the hunt for more base metals assets around the world and believes the current global economic gloom may provide buying opportunities such as Chinese-owned Minmetals Resources, DMC Holdings, Inc; Benguet and even ORE, itself. In the ongoing APEC summit, Russian firms announced they are eyeing Philippine mining assets. The China Growth Story in Unbroken and so is Mining. We believe China has not completely come to a halt: urbanization is continuing, buildings are being constructed, and 2,018 kilometers (1,254 miles) of roads and big new railway projects are slated for the autumn, 18 of them in Chinese cities including Suzhou, Hangzhou, Guangzhou, Tianjin and Shenzhen. All of these programs -- worth $126 billion or 1.7 percent of 2011 gross domestic product and to run from the second half of the year to will require steel, and China s steel demand growth is still expected to be positive this year. These developments in China comply with Premier Wen Jiabao July 2012 statement that promoting investment growth is key to stabilizing economic expansion and that is being made urgent by expectations that 2H2012 data won t be good, following negative data releases: 2Q12 GDP being the slowest pace in three years; manufacturing slowdown in August, the lowest PMI levels since March 2009; and 1% export gains slump in July from 11 percent in June. Global Steel Restocking in 2H2012. The International Stainless Steel Forum does not expect the negative growth rates of stainless steel output seen in 1Q12 of -2.7% to 8.5m tons to continue for the rest of Markets will be driven by real demand with restocking occurring as early as the 2H2012. China will be the key consuming country of the whole gamut of the metal complex in 2020 which include copper, aluminum, nickel and lead, according to Macquarie projections. China s lower than peers per capita consumption of copper, nickel and gold show a significant upside as per capita income improves with economic recovery. China s growing middle class now 18% of its population those able to spend daily a range of $10-$100, will be a force behind jewelry demand as well as India. Global and Commodities Recovery. While the adjustments in the metal market will not be completed overnight, the process has began in the world s biggest metal market which is China, starting with the steel industry. And that s happening against a backdrop of improving growth prospects based on IMF forecast for China and the US to 8.5% and 2.3%, respectively, from this year s predicted 8% and 2%, respectively. Commodities may rise another 10 percent, according to Goldman Sachs Group Inc. Page 2

3 ANNEZ A : Table 1 Table 2 Table 3 Page 3

4 Table 4 Table 5 Table 6 Figure 1 Figure 2 Page 4

5 Figure 3. Primary End-Uses for Nickel 2011 Figure 4. Global Refined Nickel Consumption by Countries in Source: International Nickel Study Group (INSG) Figure 5. World Nickel Production 2011 Source: Economic Intelligence Unit (EIU) Figure 6. World Nickel Reserves 2011 Source: Mineral Commodity Summary 2012, USGS Source: Mineral Commodity Summary 2012, USGS Figure 7. Supply Breakdown of China s Imported Nickel Ore Page 5 Source: Bloomberg

6 Investment Advisory Group-Research Industry Opportunity Report September Figure 8 Figure 9. Figure 10. Figure 11. Figure 12. Page 6