W e expect a continued, albeit modest consolidation in mining equities over the c oming weeks after such a weak February-April. Leading indicators suggest that Chinese economic data should remain moderately positive in Q313, which should help sentiment towards industrial commodities and mining companies recover slightly from recent bearish extremes. However, respite will be limited and w e expect mining companies to continue underperforming the wider equity index over the coming months. Our downbeat view stems from our expectation that China's economy will experience a renewed and sustained slowdown by the end of 2013. Our forecasts for industrial commodity prices are generally bearish and below consensus expectations . Thus, we expect mining revenues to di sappoint in the coming quarters and this will undermine equity performance.
|Struggling To Gain Firm Footing|
|Bloomberg World Mining Index (Weekly Chart)|
While the outlook for mining companies is generally downbeat, there will clearly be nuanced performance across the index. Steel and aluminium producers will continue to struggle for the next few quarters as their respective industries remain mired in overcapacity. Mine service companies will also remain under pressure in 2013 as the mining industry continues to consolidate and the ambitious mine expansion projects made in recent years get scaled back.
|Global - Mining Equities % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
In contrast, our expectation that thermal coal prices will prove fairly resilient in the coming years leaves us more positive towards companies that can benefit from a growing Asian coal deficit. Finally, the relative outperformance of Vedanta Resources highlights that the company is well positioned to benefit from the significant growth in Indian refined metal consumption that we forecast in the coming years.
|No Sustained Rebound As China Slows|
|Global - Mining Indices % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
Key Developments: Asia
China: Steel Industry Running Out Of Luck - China's vice-premier Zhang Gaoli aims to strictly prohibit the further expansion of bloated industrial secto rs such as steel and aluminium in a bid to tackle significant overcapacity and rising environmental pollution. The Ministry of Environmental Protection would not permit the expansion of existing steel projects in 47 major cities, including Beijing, Tianjin, Chongqing and Shanghai. While concerns over maintaining employment will constrict the new Chinese leadership's ability to deliver potentially painful economic and politic al reforms over the near term, analysis of recent events in China suggests to us that the government will eventually thro w in the towel and allow market economics to work its way (see: 'Consolidation Catching Up With Bloated Steel Sector', April 19) .
|Steelmakers Under Increasing Pressure|
|China - Crude Steel Production & Growth|
India: Mild Respite For Iron Ore Sector - Following the partial lifting of the mining ban in Karnataka, the Indian state of Goa expects court approval for the resumption of iron ore mining to be completed by the end of the year. Goa is the largest iron ore exporting state in India, accounting for more than 70% of the country's total overseas shipments in 2011. While further lifting of the mining ban will offer some respite for domestic producers, we believe iron ore production in India will not bounce back considerably over the coming quarters. Apart from vital regulatory and bureaucratic hurdles, a significant recovery in output is highly unlikely as it takes approximately one to two years for the affected mines to become operational again.
|India's Waning Dominance|
|Select Countries - Iron Ore Production (mnt)|
Key Developments: Americas
Peru: First Quarter Mining Investment Up - Peru's Ministry of Energy and Mines reported that year-o n -year investment in the country's mining industry was up nearly 25% to nearly US$1.93bn. The ministry noted that the industry employs over 200,000 people in 22 separate regions. The report cited two major copper mining projects under development - Glencore Xstrata 's Las Bambas and Chinalco Peru 's Toromocho - as being major drivers of investment. The ministry also noted that plant equipment for beneficiation purposes increased to US$246mn, an 87% increase. This corresponds with our view ( see our online service, 'Beneficiation To Become Major Issue For Global Mining Sector', May 1, 2013 ) that Peru and Chile in particular are best placed to increase their production and exports of refined metals. However, we believe the ministry's remains overly optimistic regarding Peru's copper production. Though we see steady growth in mined output, we believe it will not double by 2016 as the ministry does. We further note that given our below consensus view on copper prices, Peru faces risks to the downside, as lower copper prices will discourage mined output growth and reduce the value of copper exports.
|Falling Prices May Lead To Falling Investment|
|Copper - Average Three-Month LME Prices, US$/tonne|
Dominican Republic - This week we highlighted a new deal reached between Barrick Gold and the government of The Dominican Republic regarding revenue sharing from the company's Pueblo Viejo mine, which it operates with Goldcorp ( please see our online service, 'Barrick Deal Eliminates Uncertainty', May 15, 2013 ). The deal clarified a number of outstanding tax issues that had led to gold shipments being held up by the country's customs agency and should allow full commercial production to proceed. However, we note that the new agreement rests on a potentially bullish assumption regarding the price of gold. Falling gold prices will lead to decreased revenue for both the government, as well as Barrick and Goldcorp, potentially causing future conflict as all parties seek to maximize their share of shrinking cash flows. We further note that given the growth of the country's mining sector, the industry will be an increasing source of both economic growth and government revenues.
|Mining Industry Increasingly Important For Growth|
|The Dominican Republic - Mining Industry Value & Share Of GDP (%)|
South Africa: Threat Of Strikes Intensifies - T he leader of South Africa's biggest platinum mining union, the Association of Mineworkers and Construction Union (Amcu) , has threatened to bring the country's mining sector to a standstill during wage negotiations. This uptick in rhetoric raises the already likely possibility of widespread strikes over the coming months. There has been a significant shift amongst miners away from the more mainstream National Union of Mineworkers (NUM) towards the more radical Amcu. Amcu now claim 105 000 members, a fifth of South Africa's mineworkers. Wage negotiations occur every two years, and workers will be eager to push for a 10-20% rise in salaries following the settlement after Marikana. If Amcu pursue a hard line, the potential for strikes is very high as mining companies will be eager to keep costs under control at a time of we aker outlook for metal prices. Because of these, and other risks, we expect very modest grwoth in the mining industry, with growth in 2013 mostly down to base effects.
|South Africa - Mining Industry Value Growth (% chg y-o-y)|
Mozambique: Vale Cuts Export Target By 30% - Following floods earlier in the year, Vale has cut its coal export target to 3.4mnt in 2013, from 4.9mnt. This illustrates how exposed mining companies are in countries such as Mozambique, which is often affected by flooding. We see this as a temporary dip in the growth story in Mozambique, with exports due to reach 6.4mnt in 2014 and 9.2mntpa thereafter. Indeed, we expect Mozambique to become a key driver of global coal production and exports in the coming years, which will mostly be sent to India and China.
|Source: BMI, Company Reports|
|Argentina||Minera IRL||Don Nicolas||Gold||Three new gold systems discovered|
|Australia||Sandfire Resources||DeGrussa||Copper, Gold||Addition of 64kt of copper and 93koz of gold|
|Australia||Sunrise Resources||Cue||Diamond||Initial microdiamond counts at Target 5 are highly favorable|
|Australia||Bullabulling||Bullabulling||Gold||Project resources increased by 3.9mnt at 1.68g/t to 113.2mnt at 1.02g/t|
|Austria||Noricum Gold||Rotgulden||Gold||Positive results from assaying of historical core|
|Brazil||Serabi Gold||Palito||Gold||Reinstatement of underground mine services; process plant underway|
|Brazil||Horizonte Minerals||Araguaia||Nickel||299 holes (8,688m) complete of Phase 3 infill drilling program|
|Dominican Republic||Unigold Inc||Candelones||Gold||Confirmation of historically tested mineralization|
|DR Congo||Mwana Africa||Zani-Kodo||Gold||Metallurgical study revealed ore to be non-refractory|
|Mexico||First Majestic||La Guitarra||Silver||Expansion of processing plant from 350tpd to 500tpd completed in April|