Our expectation for a bounce in Q412 is playing out well with the FTSE 350 Mining Index, continuing in its upward trajectory since August. However, we expect the bounce to be temporary as China's slowdown resumes in 2013 and our bearish industrial metal s view play out. O ur below consensus view on iron ore prices will be particularly resonant for the FTSE 350 Mining Index as the companies that dominate its composition, BHP Billiton , Rio Tinto , Anglo American and Xstrata are predominantly reliant on iron ore profits.
|Heading To 20,000...|
|UK - FTSE 350 Mining Index (Weekly Chart)|
US Coal companies had a good week, most notably with positive earnings results for Peabody Energy . However, we maintain our bearish outlook for US coal companies as low natural gas prices will continue to restrain coal prices in the country. Furthermore, we expect greater regulation in the US coal industry over the coming years, especially with our expectation for Obama to be re-elected next month. W hilst companies such as Peabody and Arch Coal are in no immediate threat , we expect greater consolidation in the coal sector as low coal prices and rising costs result in several bankruptcies in the US coal market in the coming years.
|...But Bounce Will Be Short-lived|
|Global - Select Mining Equities, % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
Key Developments: EMEA
Mozambique: Mining Sector Boom Making Its Presence Felt - Coal accounted for 9.5% of Mozambique's exports in Q212, up from 2.6% in Q112 and 0.8% in 2011. This share is set to grow almost exponentially over the coming years as output from mines in the north-western province of Tete come online. Tete reserves are some of the largest in the world and will drive the country's mining sector value from US$205mn in 2011 to US$760mn in 2017. We therefore expect to see coal becom e an increasingly large part of Mozambique's exports, providing a significant boost to GDP growth.
|Mining Sector Boom To Boost GDP Substantially|
|Mozambique - Mining Industry Vale|
West Africa: Jindal Looking To Africa's Resources - Jindal Steel , India's second largest steel company, is looking at Africa's iron ore reserves for further growth opportunities. The company says it is nearing a US$2.0bn investment in West Africa. The company has yet to state which project will be acquir ed but announced that prospects are also being considered in Sierra Leone, Guinea and Cameroon. We have highlighted this trend of Indian companies looking to Africa's deposits as the regulatory environment in India is particularly restrictive for new investment. This is likely to continue and we highlight iron ore deposits in West Africa and coal reserves in Southern Africa as best placed to attract attention given India's deficit in key steelmaking and power generation sources.
Key Developments: Americas
Brazil: Vale Announces Fall In Profits - Vale announced a Q312 year-on-year net profit fall of 66% on the back of lower iron ore prices and weakening global demand. In the same period Vale's net revenue fell to US$10.73bn, down 34% y-o-y . The fall in revenue and profit prompted the company to announce it would put on hold the Guinea iron ore project and sell nickel assets in Canada due to high costs and declining ore grades. Though the firm stated that future projects and investments will be reviewed , it maintained that it would complete expansion projects already underway in South America and Africa. However, Vale is unlikely to meet the 2012 capital expenditure goal put forth earlier this year given the selloff in iron ore prices. We remain below consensus on iron ore prices, expecting them to average US$115/tonne in 2013 , compared to US$135/tonne in 2012 and US$176/tonne in 2011 . Therefore, we do not expect Vale ' s profits to return to their previous highs anytime soon.
|Vale Restrained By Weak Iron Ore Prices|
|Vale & Iron Ore Prices, Rebased|
Canada: Teck Defers Capital Expenditure - Teck Resources, Canada's largest mining firm, announced a 78% y-o-y decline in Q312 profits, whilst sales declined 26%, largely due to a fall in metallurgical coal prices. To compensate for the declines, Teck announced it would defer US$1.5bn from its 2012 and 2013 capital expenditure plans while also cutting operating expenses. Teck's decrease in capital expenditure is in line with a broader global trend in the mining sector. Lower prices for coal and base metals and weaker global demand have led firms to cut back on investment into new, or greenfield, projects and instead focus on current operations.
|Lower Prices To Restrain Any Rebound|
|Canada - Teck Resources Share Price (CAD)|
Key Developments: Asia
Indonesia: Chinese Investors Jump On The Bandwagon For Refinery Investment - Tonghua Jianxin Metallurgy Co , has opened the company ' s first office outside of China in Jakarta this month , with plans to build a smelter capable of processing up to 50 tonnes of n ickel ore per day . In line with our expectations, the imposition of a 2014 export ban on raw materials has prompted a string of Chinese companies to undertake refinery investment projects in Indonesia. Exporters with plans to construct smelters by 2014 will be exempted from the ban , but not without paying a 20% tax on raw mineral exports. We believe strong, albeit slower nickel demand growth from China, the world's largest consumer of nickel, will continue to spur growth in Indonesia's mining sector given the country's abundance of metal reserves and close proximity to key demand centres. Overall, we forecast Indonesia's mining sector value to reach US$132bn by 2017, growing at an annual average rate of 6.5% from 2011 levels.
|On The Climb|
|Indonesia - Mining Industry Value & Growth|
India: Bauxite Shortage Remains A Real Threat - Vedanta Aluminium , India ' s largest aluminium producer, has resumed operations at the company's refinery in Odisha after an acute shortage of bauxite led to a 10-day hiatus in production. While we expect the proposed 2011 Mines and Minerals Development and Regulation (MMDR) bill to bring about positive developments in India's mining sector, growing environmental concerns, coupled with a lack of significant expansion plans, will continue to curb bauxite production over the coming years. This is likely to be exacerbated by the existence of significant hurdles including antiquated infrastructure, red tape and a hostile security landscape due to the prevalence of the Maoist insurgent groups in the eastern state of India, where most of the country ' s bauxite reserves are located.
|Compensating With Imports|
|India - Bauxite, Alumina & Aluminium Imports, 2002-2012 (tonnes)|
Kazakhstan: One Bright Spot To Keep A Close Eye On - The Kazakh authorities recently approved the development of the Karchiga copper project by Orsu Metals , a London-based precious metals company. We believe the abundance of mineral reserves in Kazakhstan has colossal potential for development and could effectively transform the country into one of the world's hottest regions for mining investment. As a central Asian country, the strategic location of Kazakhstan provides mining companies with easy access to the key commodity markets of China and India . Although a proliferation of labour disputes across the land-locked country will continue to dent Kazakhstan's political risk profile, President Nursultan Nazarbayev's firm grip on security forces will see to it that investor appetite remains anchored. The government's renewed focus on instilling a positive investment climate will be a major boon to the mining space going forward.
|Land Of Wealth|
|Kazakhstan - Coal & Metals Mines|
|Source: BMI, Company Announcements|
|Africa||Volta Resources||Kiaka||Gold||Intersects 126m @ 1.9g/t uncut gold|
|Argentina||ECR Minerals||El Abra||Gold||Geochemical sampling completed|
|Australia||Sunrise Resources||Cue||Diamond||Mineral chemistry supports commercial potential|
|Australia||Syndicated Metals||Yamamilla-Floodbird||Copper||Fresh intersections of up to 4.6% copper|
|Botswana||Botswana Diamonds||Letlhakane||Diamond||Concentrations of diamond indicator minerals found|
|Brazil||Centaurus Metals||Jambreiro||Iron ore||Key environmental licence issued|
|Cameroon||Afferro Mining||Ngoa||Iron ore||Mineralised zone with 1km strike remains open at depth|
|Spain||Ormonde Mining||Cabeza||Gold||Trenching returned 21m grading 3.7g/t|
|Sweden||Northland Resources||Tapuli||Iron ore||First blast completed|
|Tanzania||Resolute Mining||Nyakafuru||Diamond||Reverse circulation and diamond drilling continued|