In line with our expectations, the FTSE 350 Mining Index has continued its upward trajectory since August, edging higher towards the 20,000 resistance level. We remain modestly positive on mining equities over the rest of Q412 , as China embarks on further stimulus programmes and the impact of QE3 continue s to be priced into the markets. That said, we expect the bounce to eventually dissipate as China's structural slowdown resumes in 2013 and our bearish industrial metals view play out.
|Potential For Further Bounce|
|UK - FTSE 350 Mining Index (Weekly Chart)|
US coal companies such as Peabody Energy continue the Q4 outperform ance of other sectors, with the company's third quarter earnings and forecast full-year profit beating analysts' estimates. However, outperformance will not continue into the medium term as low natural gas prices will restrain coal prices in the country. On the other hand, we expect mining companies, such as Vale , with heavy exposure to the i ron ore sector to enjoy a short- term respite in line with our overall positive short-term view on metals . Indeed, iron ore prices have reached a three-month high, at US$120/tonne, and will likely remain resilient in Q412 as Chinese steel mills replenish their stockpiles on expectations for further stimulus measures.
|Short-Term Respite For Iron Ore Miners|
|Global - Select Mining Equities, % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
Key Developments: Asia
Australia: Iron Ore ' s Growth Story Intact - BHP Billiton , the world ' s largest mining company, has announced plans to spend more than US$6bn, an increase of about a third, on the expansion of its Australian iron ore operations in 2013. The company is committed to a low capital cost strategy that involves the improvement of port and rail operations, which has the potential to further boost production capacity at the operating mines. We believe Australia ' s iron ore production will continue to experience healthy growth over the coming years as major miners back plans to lift output in spite of lingering concerns over China ' s economy. We expect Australia to remain the world's largest iron ore miner, and, along with West Africa, a key centre of global iron ore production growth. However, the impact of a super tax on iron ore miners' profits and carbon emissions will weigh on production growth. Overall, we forecast iron ore production to reach 634mnt by 2017, increasing at an annual average rate of 4.8% from 2011 levels. This will mark a significant slowdown from the previous decade, during which growth averaged 10.3%.
|Australia Leading The Charge|
|Select Countries - Iron Ore Output, 2009-2017 (mnt)|
Pakistan: Overwhelming Challenges Weigh On Mining Boom - Pakistan boasts the world's fifth-largest coal deposit, with substantial reserves in copper, zinc, lead and aluminium. The Thar coalfield located in the Tharparkar District of Sindh province has an estimated reserve of more than 185mnt (million tonnes). In line with our expectations, declining ore grades and dwindling supplies of mineral resources have prompted an increasing number of foreign investors to venture abroad and undertake investment opportunities in frontier regions. Alongside the likes of Mozambique, Mongolia and Vietnam, Pakistan looks set to receive a surge in mining investment. While an abundance of mineral reserves could potentially transform the country's mining sector into an economic growth engine, we remain sceptical of the near-term prospects of the industry. Indeed, the lack of political stability, chronic energy crisis and a credible regulatory framework will act to impede growth in an otherwise promising sector.
|Pakistan - Mines|
China: Tighter Grip On Coal Mines, But Production To Press On - China, the largest coal producer and consumer in the world, is suspending operations at smaller mines in an attempt to improve work safety ahead of the once-in-a decade leadership transition. The suspension is expected to affect mines in provinces such as Inner Mongolia, Shanxi and Shannxi, which together account for more than 60% of the country's production. Nevertheless, we do not expect a substantial decrease in China's coal production over the coming years. The Chinese government has been actively undertaking serious efforts to develop domestic coal reserves located in the west and centre of the country, both relatively untapped areas. The government is currently looking for companies to invest in deposits in the Ningxia province which is estimated to contain approximately 2.7bnt in reserves. We forecast China's coal production to grow at an annual average of 4.2%, from 3.4bnt (billion tonnes) in 2011 to reach 4.3bnt by 2017.
|China - Coal Production & Growth|
Key Developments: Americas
Chile: Barrick Gold Earnings Falter - The world's largest gold miner, Barrick Gold , announced Q312 earnings and sales missed estimates due to higher costs and lower production. Earnings were US$618m n , down 55% from US$1.37bn a year earlier. In particular, higher than expected costs for the Pascua-Lama gold/silver/copper mine project in Chile, the company's largest, hurt Barrick's bottom line. Costs for the project are now expected to total US$8.5bn, up from US$3bn announced in 2009, and production is not expected to begin before mid-2014. Barrick's Chilean operation has been delayed due to permitting difficulties stemming from environmental opposition and a lack of needed energy infrastructure. Barrick is not alone in its Chilean difficulties, as other mining firms have also faced higher costs and infrastructure constraints.
|Barrick Underperformance Relative To Gold|
|Barrick Gold vs. Gold, Rebased|
Mexico: Caminex Announces 2012 Investment - Mexico's mining chamber, Caminex, announced that it expects investment into Mexico's mining sector to reach an all-time high of US$7.6bn this year, an increase of 36% over 2011. The industry group predicts that investment will continue to rise in 2013 despite declines in base metal prices. This confirms the trend we have observed in Mexico of increasing mining sector development and output of gold, silver, and copper. Given our forecasts for strong gold and silver prices, as well as our expectation that copper will remain elevated by historical standards , we believe Mexico presents numerous investment opportunities. We do not expect President-elect Enrique Pena Nieto, who assumes office on 1 December, to push for additional mining taxes or other regulatory burdens.
Key Developments: EMEA
Mongolia: Further Delays In Mining Boom - Mongolia's Mining Boom has suffered another delay as China has restricted the supply of power to the mines after a dispute over exports. Over 90% of Mongolia's mineral exports go to China, which in return supplies to electricity to current mines and future projects. As mining output has ground to a near standstill, mining exports fell 41% y-o-y in September to US$324mn. This is the latest in a series of setbacks in Mongolia, however, we still expect the mining sector to undergo rapid growth as Oyu Tolgoi and Tavan Tolgoi come online and transform the country's economy.
|Ready For Takeoff From 2013|
|Mongolia - Mining Industry Value|
DR Congo: Government Seeks Greater Stake In Projects - The DR Congo plans to increase its share in mining projects from 5% to 35% in a revised mining code. The country is reviewing its 10 year old mining code and is due to be completed by the start of 2013. Whilst the government has allayed some fears by stating it would not be enacted retrospectively, it still represents a significant deterrent to investment for new projects. Indeed, this brings the country in line with Guinea where mining companies have withdrawn investment due to increased resource nationalism. Whilst the final details of the mining code have yet to be decided, it would represent a significant step back for the country which has made much progress of late in attracting investment.
|Source: BMI, Company Announcements|
|Australia||Bullabulling Gold||Bullabulling Gold||Gold||Completion of two deep diamond drilling|
|Australia||Sandfire Resources||Broader Altia||Diamond||Commencement of diamond drilling|
|Austria||Noricum Gold||Rotgulden||Gold||3D laser scan survey in progress|
|Canada||Northern Tiger Resources||3Ace||Gold||Drills 1.5g/t gold over 45.4m|
|Canada||Donner Metals||Bracemac-McLeod||Copper, Silver, Gold, Zinc||Pre-production activities to commence|
|Indonesia||Kingsrose Mining||Way Linggo||Gold, Silver||3.6koz of gold and 34koz of silver produced|
|Mexico||Cangold||Plomo||Gold||Four new gold zones discovered|
|Philippines||Toledo Mining||Berong||Nickel||185,878 wmt at an average grade of 1.81% Ni|
|West Africa||Merrex Gold||Siribaya||Gold||Drilling resumes|
|West Africa||Sovereign Mines of Africa||Mandiana-Magana||Gold||Assay results revealed coherent gold deposits|