Although our conviction is being tested by a sharp pullback towards support levels in recent days, we remain modestly positively towards mining equities on a three-month horizon. We target a move up towards resistance in the 20,000 area by FTSE 350 Mining Index over the coming months as we expect additional monetary easing by developed market central banks. In addition, stimulus measures from China will provide a short-term boost to metal prices. However, any bounce will be temporary and we remain medium-term bears. Stimulus measures will fail to sustainably reverse the economic slowdown in China and import demand from the world's largest consumer of industrial metals will continue to disappoint. As such, we expect an eventual move by the FTSE 350 Mining Index to new post-crisis lows over the next 12 months.
|Bounce Losing Steam|
|UK - FTSE 350 Mining Index (Weekly Chart)|
Gold equities have outperform ed over the past month and we expect this trend to broadly continue over the next 12 months , buoyed by loose monetary policy from central banks around the world. Meanwhile, iron ore prices have staged an impressive comeback to US$104/tonne, after hitting a three-and-a-half year low of US$86/tonne in early September. We are modestly positive towards iron ore prices over the remain der of 2012 as infrastructure stimulus announcements by the Chinese government will likely underpin greater imports. Whilst platinum miners have enjoyed a reprieve of late, we do not expect this to be sustained as rising costs , n otably wage increases, continue to weigh on profitability.
|Majors To Continue Reducing Capex|
|Global - Select Mining Equities, % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
Key Developments: Asia
China: Heading For More Golden Investment - Chinese company Zhongrun Resources Investment Corp has agreed to acquire a 42% stake in Australian gold miner Noble Mineral Resources Ltd for US$88mn. In line with our expectation, soaring domestic demand for gold has prompted many Chinese companies to pursue the commodity with a string of overseas acquisi tions . Indeed, gold investment in China has been on the rise following the deregulation of the domestic gold market in 2001 and the opening of the Shanghai Gold Exchange (SGE) in 2002. We believe demand for gold in China will continue to accelerate given large increases in investment, jewellery consumption and central bank purchasing. That said, we expect significant slowdown in the expansion of China's gold production over the coming years due to falling grades and depleting gold reserves at some of the country's largest mines, along with an increasing number of smaller mines being closed down as part of China's 12 th Five-Year Plan (2011-2015).
|Growth To Slow Markedly|
|China - Gold Production & Growth|
Indonesia: Dimmer Outlook For Miners But Potential For Policy Moderation - The Indonesia government is planning to increase export royalty payments by mining companies to 10% in renegotiated deals as the country looks to boost revenue from the growing mineral sector. No doubt, the recent changes in Indonesia's mining code have made the country a less attractive place for investment. While there is the possibility for further reforms, especially in the run up to the 2014 general election, we think the worst is behind us and do not expect any further significant policy changes in the near term. We forecast base metals prices to head broadly lower over the course of 2012 and 2013, and thus expect to see a moderation in the government ' s stance during a period of low er profits for mining companies.
|f = BMI forecast. Source: BMI, WBMS, Indonesian Coal Association|
|Mining industry value||2009||2010||2011||2012f||2013f||2014f||2015f||2016f|
Key Developments: Americas
Peru: Mining Set To Expand Despite Rural Opposition - Peruvian President Ollanta Humala ' s administration is facing social unrest and rising environmental concerns among Peru ' s rural population, leading to potential delays and cancelations in planned mining investment. Yet with minerals comprising 60% of Peru ' s export revenue and with a new tax structure expected to provide an additional US$1bn a year in revenue, we believe the administration will not seek to stifle investment and force miners to revaluate expenditures and expansion plans in Peru. Therefore, our view is that Peru ' s active and growing mining sector will develop as copper and gold projects come online in the coming years. Our forecast remains that Peru ' s mining sector will grow at an average rate of 5.1% per annum, with the sector ' s value reaching US$23.1bn by 2016.
|Steady Growth Outlook|
|Peru - Mining Industry Value|
Bolivia: Mining Firms To Exercise Caution - Given our below consensus view towards base metal prices in 2013, and with the Bolivian government ' s repeated nationalizations showing no sign of abating, we maintain a negative outlook on foreign investment in the country ' s mining sector. Though mining exports have nearly quintupled since 2006 and now make up 40 percent of the country ' s total exports, Bolivia ' s business environment for mining firms has substantially worsened following a wave of nationalizations and regulatory obstacles. President Evo Morales is likely to maintain populist policies to position him for re - election in 2014. With the government also requiring foreign firms to create joint-ventures with the state-run Bolivian Mining Corporation , or Comibol, and with mining destinations Peru and Chile maintaining greater openness to foreign firms and business-friendly policies, we maintain our negative outlook.
Panama: Sector To Develop Despite Local Opposition - Though Panama ' s mining output is unlikely to grow substantially in the short term, its untapped reserves of copper and gold could transform Panama ' s mineral industry as prices remain high and as mining firms move into underdeveloped frontier markets. Thus, we forecast strong growth in Panamanian mineral output through to 2016. Though local opposition, as in other Latin American countries, poses one of the largest stumbling blocks to mine development, the government ' s emphasis on economic development and desire to maintain strong growth, along with its desire to transform Panama into a regional financial and logistics hub, should further encourage a mining-friendly investment and business environment over the coming years.
Key Developments: Africa
South Africa: More Pain Ahead For Gold Miners - Workers at AngloGold Ashanti's Kopanang and Mponeng mines are on strike in a dispute over wages. The s e are jus t the latest in a wave of strikes in the country that ha s reduced output at the country's gold mines. We expect further disruptions to production over the coming weeks as workers seek better conditions and higher pay. Indeed, given the precedent set at Marikana, where workers were awarded a 22% pay rise, it is likely that mining companies will have to increase wages to placate unrest. This will further squeeze profits in a sector where margins are already low. Indeed, wages account for between 50% and 60% of gold mining company's costs in South Africa, a share which is only set to increase. This adds to our already bearish outlook for gold mining growth in the country and we expect to see the country' s share of global gold production continue shrinking .
|South Africa Lagging Behind|
|Select Countries - Gold Production (million ounces)|
Russia: Platinum Growth To Slow As Norilsk Lowers Output - Norilsk Nickel , Russia's largest platinum producer, has announced that it will not seek to increase platinum production to preserve the country's reserves and concentrate on copper mining. Given Norilsk's dominance of the platinum industry in Russia and the lack of any new entrants onto the horizon we expect this will ensure little growth in Russia's platinum production. Indeed, this is likely to remain the case unless the country relaxes the regulatory framework, which currently prohibits foreign investment into any significant platinum deposit.
|Source: BMI, Company Announcements|
|Australia||Metminco||Mollacas||Copper / Gold||Reserves: 79kt of copper and 63koz of gold|
|Congo||Elemental Minerals||Sintoukola||Potash||265% resource upgrade to 959mnt|
|Indonesia||Pan Asia Corporation||Transcoal Minergy||Thermal Coal||Feasiblity Study delivered; 1.5mntpa over 15 year mine life|
|Mexico||Cayden Resources||Morelos Sur||Gold||Drilling program commenced|
|Mexico||Silver Bull Resources||Sierra Mojada||Silver||Resource upgrade to 82.6moz|
|Mongolia||Draig Resources||Teeg||Coal||Drilling intercepts 86 meter thick hard coal seam|
|Morocco||Kasbah Resources||Achmmach||Tin||High grade intercepts; Current resource of 135kt|
|Peru||Cadente Copper||Canariaco||Copper||Community engagement agreement reached|
|Tajikistan||Kryso Resources||Pakrut||Gold||Resource upgrade to 5moz|
|USA||Nevada Copper Corp||Pumpkin Hollow||Copper||Positive permitting developments|