The FTSE 350 Mining Index has pared back some of its recent gains and is close to support around the 18,000 level. However, we do not think that the gains are over and expect a further move up to resistance at 20,000 around the end of 2012. Beyond our near term outlook, our below consensus views on China's economy and base metals prices will be a drag on mining equities over 2013 as a whole. Indeed, 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 disappoint over the medium term.
|Bounce Losing Steam|
|UK- FTSE 350 Mining Index (Weekly Chart)|
In line with our expectations, the recent rise in China's construction and infrastructure investment activity has fuelled a rebound in iron ore prices to US$122/tonne as Chinese steel mills replenish their inventory levels. While the boost in prices offers a much needed respite for iron ore miners such as Vale and Rio Tinto, we expect this to be short-lived and forecast prices to head broadly lower in 2013. In contrast, while gold prices have headed lower in recent days, our expectation for prices to remain elevated by historical standards bodes well for the long-term growth prospects of gold miners. Indeed, gold miners will continue to outshine its peers across the wider metals complex over the coming quarters.
|Iron Ore Jumps, Gold Pares Gains|
|Global - Select Mining Equities, % Chg. Over Past Month (LHS) & Past 12 Months (RHS)|
Key Developments: Asia
Myanmar: Unearthing Asia ' s Hidden Gem - With the passage of the new Foreign Investment Law (FIL), Myanmar's mining sector is poised to experience blistering growth and could become one of the country's most important economic growth engines. Among the last frontier markets remaining in Asia, Myanmar possesses potential to become one of the hottest mining regions in the world. The country boasts an enormous amount of mineral deposits including zinc, lead, natural gas and petroleum, along with substantial high grade reserves of copper and coal. Apart from its spectacular resource endowment, the country also benefits from its close proximity to China and India, providing a ready market for Myanmar's mined minerals. While the period of record commodity prices may be over, our expectation for metal prices to stay elevated by historical standards will continue to incentivise production and encourage miners to expand capacity. Indeed, prices will be supported by continued loose monetary policy in developed markets and a weak dollar.
|Myanmar - Mining Industry Value & Growth|
China: Chinese Steel Mills Drive Iron Ore Prices Higher - Iron ore prices rose to a three-month high to reach US$122/tonne as Chinese steel mills continued to replenish their inventories in a bid to satisfy stronger end-user demand. Indeed, despite significant overcapacity in the domestic steel industry, we expect Chinese mills to maintain production run rates in anticipation of central government infrastructure stimulus in early 2013. As part of our positive near-term view towards industrial metal prices, we believe iron ore will be supported by steady Chinese import demand over the next few months and expect prices to remain resilient in the near-term. Looking longer term, weaker Chinese demand will combine with steadily improving mined supply to loosen the market and push prices back down towards the US$100/tonne level. This is underpinned by our expectation that demand from Chinese steel mills will eventually weaken as a continued contraction in Chinese economic growth forces a cut in steel production rates.
|Weak Steel Production To Eventually Drag On Imports|
|China - Iron Ore Imports & Crude Steel Production Growth|
Australia: Cutbacks To Continue, But Worst Is Over - BHP Billiton is planning to expand its iron ore capacity by nearly a fifth while simultaneously implementing a series of cost reduction measures amid a weakening outlook in the global mining industry. Whilst Australia has borne the brunt of major capex delays over the past six months, we believe the worst is over for the country in terms of cutbacks in spending on projects. Although China ' s demand for commodities will experience a significant slowdown as compared to the previous decade, we remain generally optimistic over the future outlook of Australia ' s mining boom. The country will retain its dominance in the global mining sector as investors remain attracted to the rare combination of a very positive business environment and substantial mineral reserves. Furthermore, the cost of production in Australia is among the lowest in the world and it will continue to remain competitive even with lower average prices in 2013 and 2014. Indeed, Australia continues to dominate in terms of new projects being announced, showing that investment appetite in the country remains strong.
|Capex To Drop Off On Lower Prices|
|Mining Capital Expenditure (US$mn) & LME Metals Price Index|
Key Development: Americas
Chile : Delays Plague Mining Firms - The world's two largest gold miners, Canadian firms Barrick and Goldcorp , continue to face troubles in Chile. Chilean regulators ordered Barrick to halt construction at its Pascua Lama mine after discovering health violations, citing excessive dust levels. This is the latest setback for Barrick's largest current project in development. As we have already highlighted, the firm has also raised its capital expenditure outlook for the project to between US$8bn to US$8.5bn, nearly triple its original US$3bn estimate in 2009. Goldcorp is also facing difficulty, with its El Morro mine project still facing delay after Chile's Supreme Court upheld an injunction in April that suspended the mine's environmental permit. Chile in particular is presenting challenges to mining firms, in the form of higher labour costs, insufficient electricity supply, and local opposition to mining projects on social and environmental grounds. We maintain Chile's business environment is positive overall, though if such concerns persist we may revise in the near future our assessment of the country's risks
|Growth Steady, For Now|
|Chile - Mining Industry Value & Growth|
Guatemala: Uncertain Future For Mining - We foresee Guatemala ' s mining industry coming under increasing pressure as citizens and non-governmental organizations become more vocal in their opposition to mining operations in the country. Canada ' s Tahoe Resources has come under particular pressure, with citizens in the Mataquescuintla municipality, the location of its flagship Escobal silver mine, voting against mining operations by a 98% margin. Though the vote is not legally binding, it is reflective of broader anti-mining sentiment in the region which may present challenges for mining investment. As of yet though, mining projects remain in development, including mines from Goldcorp and BHP Billiton . With state and municipal governments ' revenue from royalties increasing dramatically between 2006 to 2011, the central government is likely to take a more balanced approach towards further regulation. However, the central government has already distanced itself from an earlier proposal that would grant it up to 40% control of mining interests. Given elevated precious metal prices , and gold in particular, investment into Guatemalan deposits is likely to continue as long as operationally feasible.
Key Developments: EMEA
Sierra Leone: Election To Determine Future For Mining Investment - Sierra Leone goes to the polls on Saturday in an election which could have significant bearing on the future of the country's booming mining industry. Whilst rapid growth in iron ore output is almost certain, regardless of the outcome of the vote given the size of the mines due to come online, the parties differ on how to attract investment, and importantly tax the mining sector. The incumbent, Ernest Koroma, who our country risk team expects to win, plans to continue with the investment friendly approach that has attracted substantial FDI inflows. The main opposition candidate, Julius Maada Bio has stated he will significantly increase taxes on mining companies and increase the state's share in mining projects which would be particularly harmful for future investment given our below consensus view on iron ore prices.
|Mining Boom Underway, But For How Long?|
|Sierra Leone - Iron Ore Production|
Cameroon: Further Positive Results Attest To Growth Potential - Afferro Mining has announced positive results at its Nkout iron ore prospect in Cameroon, the latest project which points to a bright future for Cameroon's nascent mining sector. The company announced intercepts graded around 55%, a similar ore grade to the substantial mineral reserves in Sierra Leone and Guinea. Together with Sundance Resources and Legend Mining , Cameroon has over 1.2bnt of iron ore due to come in the next few years. Whilst substantial impediment remain, most notably in terms of the deficit in transport routes and electricity supply, we remain moderately optimistic that the mining sector will reduce oil's dominance in the economy over the coming decade.
|Source: BMI, Company Reports|
|Brazil||Colossus Minerals||Serra Pelada||Gold, Platinum, Palladium||100m left to reach a new and deeper part of the Central Mineralized Zone|
|Cameroon||Afferro Mining||Nkout||Iron ore||High grade intercepts indicate a potential direct shipping ore (DSO) zone|
|Canada||Gold Bullion Development||Granada||Gold||Total resource at 2.6moz|
|Canada||Spanish Mountain||Spanish Mountain||Gold||Completion of Preliminary Economic Assessment (PEA)|
|Canada||Northern Tiger Resources||Sprogge||Gold||Trenching returned 8.5g/t gold over 6.8m|
|Chile||Herencia Resources||Paguanta||Silver, Zinc, Lead||More high grade deposits identified|
|Ghana, Burkina Faso||Endeavour Mining||Youga, Nzema||Gold||Production totaled 49.5koz|
|Nicaragua||Cordor Gold||La India||Gold||Commencement of 7,000m drilling programme|
|Sweden||Northland Resources||Tapuli||Iron ore||First iron ore blasted|
|Tanzania||Kibo Mining||Morogoro South||Gold||Significant anomaly identified|