The bounce in mining equities that we forecast for Q312 is playing out well. We are modestly positive m ining equities over the coming weeks as we do not think markets have fully priced in the implications of QE3. In addition, equities will be buoyed by stimulus measures in China, which accounts for around 40% of global metals demand, which could push the FTSE 350 Mining Index to resistance at 20,000. Over the medium term, the picture is less optimistic as ultimately stimulus measures in China and the West will not prov ide sustained support to metal prices .
|Heading To Resistance|
|UK - FTSE 350 Mining Index (Weekly Chart)|
Gold miners will continue to outperform over the coming months as equities are buoyed by loose monetary policy and elevated gold prices . In addition, in contrast to industrial metals , which we are bearish towards over the medium term, gold prices will be relatively unaffected by our expectation for a slowdown in China. Whilst platinum miners have enjoyed a reprieve of late, we do not expect this to be sustained as rising costs, especially given wage rises, will continue to reduce their profitability.
|Q312 Bounce Playing Out|
|Global - Select Mining Equities, % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
Key Developments: Africa
Zimbabwe: South Africa Violence Presents Opportunity For Northern Neighbour - The ongoing strikes and wage negotiations at platinum mines in South Africa present a good opportunity for Zimbabwe to market itself as a major player in the global platinum market. Whilst there are significant risks to the development of Zimbabwe's platinum reserves, most notably with elections scheduled for the start of 2013, we expect the country to become the only major source of platinum output growth over the coming years. Indeed, we expect further wage rises at platinum mines in South Africa given the precedent set at Lonmin and this will further reduce profitability in an already struggling sector , which will increase Zimbabwe's comparative advantage .
|Zimbabwe The Only Growth Driver|
|Forecast Growth In Platinum Production (%)|
Saudi Arabia: No Gold Boom Coming - Barrick Gold have announced that their Jabal Sayid mine is facing several delays due to environmental regulation and have also lowered their 2013 production estimate. This highlights the regulatory difficulties that have hampered growth in the country's mining sector despite government expectations that the country will undergo rapid expansion in output over the next decade, which will reduce the country's dependence on oil. However, given that all current gold mines are expected to come off line in the coming four to seven years and the presence of only a handful of projects, we do not expect rapid output growth in the country, ensuring the oil sector remains dominant for the foreseeable future.
Key Developments: Asia
Afghanistan: Resource Bonanza Remains A Distant Hope - A consortium of Indian companies led by Steel Authority of India Ltd ( SAIL) is set to invest more than US$75mn in the first-phase development of Hajigak iron ore mines in Afghanistan, home to an estimated trillion-dollar reservoir of natural reserves. In line with our expectations, commodity-hungry nations such as India and China have been on the prowl for mining investment opportunities as they seek to secure long-term, stable supplies of natural resources to feed their ever-expanding economies. While Afghanistan looks set to experience a resource bonanza over the coming decades, we continue to cast doubts on the near-term prospects of the sector, and do not foresee a resource boom happening anytime soon. We believe the prevalence of corruption, war and lack of adequate infrastructure will remain significant hurdles to investment. Moreover, the impending departure of the North Atlantic Treaty Organization ( NATO) troops in 2014, coupled with the resurfacing of ethnic rivalries, will jeopardise an already tense political situation in Afghanistan.
|A Tough Fight|
|Worldwide Governance Indicators for Afghanistan (LHS) & Corruption Perceptions Index & 2011 Rank (RHS)|
Philippines: More Golden Opportunities On The Horizon - Canadian miner, B2Gold Corp , has recently announced its plan to purchase CGA Mining Ltd for an estimated US$1.1bn , as the former seek s to gain access into one of the largest gold mines in the Philippines. We believe the Philippine s ' gold mining industry will continue to experience healthy growth over the coming years as elevated gold prices incentivise production and encourage further investment. We expect gold production to reach 1.4moz (million ounces) by 2016, grow ing at an annual average rate of 6.8% from 2011 levels . Indeed, the dominance of small-scale miners in overall gold production will decline sharply by 2016 as several large projects come online.
|Source: BMI, Company Reports|
|Xstrata||Tampakan||360kozpa over 17 year mine life||Pending Appoval|
|Bezant Resources||Manyakan||95.6koz gold metal over 42 year mine life||Awaiting pre-feasibility study|
|Cadan Resources||Kalamatan||Target resource of 354koz to 7.8moz contained gold||Undergoing drilling programme|
|Lepanto Consolidated/Gold Fields||Far South East Gold||Maiden resource estimate by H112; Target resource of 58moz||Undergoing drilling programme|
|Cadan Resources||Tagpura Maangob||Target resource of 5.5moz to 11.7moz contained gold||Undergoing drilling programme|
|Benguet Corporation||Kingking||Total resources of 917mnt @ 0.33 g/t gold for 9.7moz gold||Undergoing drilling programme|
|Philex Mining||Boyongan||Total resources of 105.4mnt @ 0.98 g/t gold for 3.3moz gold||Undergoing bankable feasibility study|
|Philex Mining||Bayugo||Total resources of 118.5mnt @ 0.7 g/t gold for 2.7moz gold||Undergoing drilling programme|
Key Developments: Americas
Chile: Growth Ahead Despite Capex Cutbacks - The Chilean government's plans to attract US$100bn in mining investment by 2020 has hit a further setback as the country's top court rejected the US$5bn Central Castilla power plant which several mining projects were reliant on. Indeed, given our below consensus views on metal prices, we expect delays in some of the mega projects in the country. That said, Chile will remain a key destination for growth, albeit not as rapidly as the government estimates. Overall we expect the country's mining sector value to reach US$50bn in 2016, marking growth of 3.5% from 2011.
|Modest Growth Ahead|
|Chile - Mining Industry Value & Growth|
Canada: Low Iron Ore Prices Put Arctic Mine On Hold - ArcelorMittal ' s Mary River mine in the Canadian Arctic has been given the green light by regulators after a four year environmental review. However, given the slump in iron ore prices of late as well as collapsing steel demand the project is likely to be p ut on the backburners until prices recover. We do not expect a significant recovery in iron ore or steel prices over the foreseeable future and forecast iron ore to average US$115/tonne in 2013, significantly below consensus. Therefore, given the operating costs of the mine, which are some of the highest of new iron ore projects, we do not expect production to commence anytime soon.
|Source: BMI, Company Announcements|
|Australia||Greatland Gold||Ernest Giles||Gold: Higher grade gold values discovered|
|Australia||Cape Alumina||Bauxite Hills||Bauxite: Increased resource to 60mnt; Will proceed to pre-feasibility study|
|Canada||Donner Metals||Bracemac-McLeod||Exploration drilling intersects 2.83% copper, 13.09 g/t silver and 0.13 g/t gold over 19.35 metres|
|Canada||Century Iron Mines||Duncan Lake||Iron ore: 10mntpa in 2015|
|Colombia||Galway Resources||Vetas||Gold & Silver: Initial drilling|
|Ethiopia||Tigray Resources||Terakimti||Copper: Intercepts averaging 3.24%|
|Mauritania||Forte Energy||A238||Uranium: Resource upgrade to 23.4 million pounds|
|Mexico||Silver Bull||Sierra Mojada||Significant drill result. Intercepted 8.45 meters grading 17.0% zinc, 5.5% lead, and 57.3g/t silver|
|Nicaragua||Condor Gold||La India||Gold: 2.4moz in resources|
|Papua New Guinea||Marengo Mining||Yandera||Copper: 218Mt of inferred resources grading 0.37%|