The FTSE 350 Mining Index continues to fall after its recent rally and is heading closer to support at 18,000. We forecast more sideways trading over the next few months as fundamentals for mining equities are roughly balanced . However, our core view remains that the current bounce in China's economy will ultimately surrender to structural headwinds in H213. This will lead to falling demand from the world's largest consumer of metals as Ch ina's rebalancing process picks up . Therefore, we see substantial downside potential in the medium term .
|UK - FTSE 350 Mining Index (Weekly Chart)|
Miners continue to suffer across the board as illustrated by producer indices . Coal, silver, and iron ore miners remain weak as prices all dip. European coal futures have moved lower on the back of ample supply , leading to continued woes for coal firms . We forecast that iron ore prices will continue to fall over 2013 and average US$118/tonne this year due to decreasing demand from China as fixed asset investment slows and weak developed world steel demand . PGM producers have suffered due to supply disruptions, though firms may see better performance this year as auto production remains healthy, driving demand for platinum used in emissions-decreasing catalytic converters.
|Weakness All Around|
|Global - Mining Indices % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
Key Developments: Asia
China: Bleaker Times For Chinese Steelmakers - As part of a growing effort to mitigate environmental pollution, China's Ministry of Environmental Protection is looking to impose new emissions rules on new steel mills in March 2013. Additionally, existing plan ts will become subject to restrictions imposed from January 2015, with a special focus on the sintered steelmaking industry. The new measures form part of the country's response to the hazardous smog that engulfed Beijing in late January. We believe the new ruling would deal the Chinese steel industry, currently the least profitable of the country's 39 industrial sectors, with another blow. The combined profits of China's 70 member mills tumbled by 98% y-o-y to reach US$252mn in 2012, while total sales dropped 4.3% to US$568bn. Furthermore, t he industry is facing falling exports stemming from anti-subsidy and anti-dumping investigations launched by the United States, the European Union and Australia. The Chinese State Council has also detailed a series of 'control measures' aimed at cooling the housing market following the surge in prices over the past six months (see our online service, 'Our Take On The Latest Property Curbs') .
|Production Facing Increasing Pressure|
|China - Crude Steel Production & Growth|
India: Poor Infrastructure Adds To Mining Woes - Infrastructure bottlenecks in India will curtail mining production while posing constraints to mineral imports over the coming years. Although considerable efforts have been taken by the government to fuel infrastructure developments, we remain sceptical as to whether many of the proposed changes will come to fruition. Many of the trophy projects involving experimental public-private partnerships (PPPs) are not making money and face erratic rules. In our view, a gauntlet of heavy bureaucracy and regulatory hurdles will continue to hobble the country's ability to increase mining production.
|Infrastructure Deficits Stifle Production|
|India - Coal & Iron Ore Production|
Key Developments: Americas
Argentina: Vale Looks To Sell Rio Colorado Assets - Brazilian iron ore giant Vale is seeking to sell its Rio Colorado potash project in Argentina after suspending the project in recent months. Vale has already spent US$2.2bn on the project, which was to include a potash mine, railroad, and port terminal at Bahia Blanca. The final cost was estimated at US$6bn. Vale halted the project after the Mendoza government failed to grant Vale tax concessions it argued were crucial to make the project economically feasible. As we have highlighted before, Argentin e mining costs have escalated in recent years due to, among other things, inflation, capital controls, and local content requirements. The issue also highlights Vale's woes and the firm's drive to cut costs and reduce capital expenditure s , in part by sell ing non-core assets.
|Argentina Continues To Lag|
|Americas: Mining Risk/Reward Ratings|
Canada: First Quantum Acquisition Of Inmet On Cusp Of Success - Vancouver-based First Quantum Minerals is set to take control of Toronto-based Inmet after 61.5% of Inmet shareholders, despite opposition from the company's board, tendered shares in favour of t he hostile takeover. Inmet has rejected two previous unsolicited offers from First Quantum, leading First Quantum to go hostile. Should the deal go through, as appears increasingly likely, First Quantum will gain control of the US$6.2bn Cobre Panama project, a massive copper and gold project in Panama. First Quantum claims its technological expertise and capital resources will allow it to develop the project on time and more cheaply than Inmet. The project will also further support the nascent Panamanian mining industry, which we feel has solid potential given the country's mineral reserves and favourable business environment.
Key Developments: EMEA
Mozambique: Rio Tinto Finds Success In Tete Province - Global mining giant Rio Tinto has re-launched its coal mining operations in the Tete province of central Mozambique. Apart from the government's assurances, an evaluation by Portos e Caminhos de Ferre de Mocambique (CFM), the owner of the Sena railroad, had given Rio the go-ahead following the release of an official statement in early March 2013. According to CFM, the railway line has been repaired and is geared to handle rail traffic for transporting coal again. This is in line with our view that Rio will eventually find success and press ahead with the development of the Benga project in the country. Mozambique has become increasingly amenable to foreign investment over the last decade as the government adopts a pro-business approach. Furthermore, t he development of the Benga mine was crucial towards the diversification of Rio's operations from iron ore, which accounted for 85% of its revenue in H112 . The miner remains optimistic that demand from China will continue to support the company's operations over the long run and do not foresee a sustained downturn in coking coal prices.
|Heading To Tete For Coal Reserves|
|Mozambique - Coal Mines|
South Africa: Labour Strife To Weigh On Platinum Output - The Association of Mineworkers and Construction Union (AMCU), South Africa's biggest union, has repeatedly refused to sign up to centralised bargaining on wage negotiations, fuelling fears that more illegal strikes could ensue. While we acknowledge that platinum prices will remain elevated by historical standards and continue to incentivise mining production, the threat of rising cash costs associated with labour strife is nonetheless, cause for concern. South Africa is the world's largest platinum producer, accounting for 71% of global supply in 2012. Indeed, we see few opportunities for growth in platinum output due to a host of factors including rising cash costs and tightening regulation. We forecast global platinum mine output to reach 6.9moz (million ounces) by 2017, marking an annual average growth of 2.0% from 2012 levels.
|Supply Concerns Continue To Lurk|
|Global - Platinum Production & Growth|
Angola: Growth In Diamond Output, But Oil To Remain Dominant - The announcement by Endiama , Angola's state owned diamond company, that it will commence production at four new diamond mines by 2014 provides a huge boost to the country's mining sector. However, we do not think that the growth will help diversify the economy significantly away from oil, an aim of the government. We expect the oil sector's value to reach US$30bn in 2017, with the mining sector worth US$2.5bn. That said, whilst the mining sector will be a minor contributor to the country's economic growth, many of the mining projects are in the north and east of the country, proving some economic benefit away from the capital and the western coast, where the oil sector is based.
|Oil To Remain Dominant Despite Mining Growth|
|Angola - Sectors By Value (US$bn)|
|Source: BMI, Company Announcements|
|Argentina||Patagonia Gold||Lomada de Leiva/Cap-Oeste||Gold||Lomada main heap leach project on target to achieve full operational status by late Q213 with an estimated production of 14koz of gold for H213|
|Australia||Silver Mines||Webbs||Silver||Reverse circulation (RC) drilling currently underway|
|Brazil||Centaurus||Jambreiro||Iron ore||Awarded engineering & procurement (EP) contract to Tetra Tech|
|Brazil||Horizonte Minerals Plc||Araguaia||Nickel||High nickel grades announced from latest drilling results|
|Chile||Herencia Resources plc||Paguanta||Silver-zinc-lead||Secured up to US$15 million to progress the development, permitting and resource/reserve expansion related work at its 70%-owned Paguanta project|
|Chile||Exeter||Caspiche||Gold-copper||Progress on water exploration program to identify, evaluate, and secure water sources to support initial heap leach gold stage and the follow-on gold - copper sulphide stage of a potential mine development at Caspiche.|
|Egypt||Centamin||Sukari||Gold||Forecast production for 2013 at 320koz. Cash operating cost of US$700/oz|
|Ghana||PMI Gold||Kubi||Gold||Regional air core drilling continues to identify anomalous gold|
|Liberia||Aureus Mining||Weaju||Gold||High grade intercepts from first drilling phase delivered|
|Mexico||Kootenay||Promontorio||Silver||latest drill results announced|