In line with our expectations mining equities have lost some of their recent gains as the recent bounce has fizzled out. Our expectation that the FTSE 350 Mining index will retest support at 16,000 is looking set to play out and we expect support to ultimately give way as Chinese economic growth comes in below expectations and the eurozone crisis continues to rumble on.
We see room for a short-term bounce in mining equities on the back of QE3 by the US Federal Reserve, which we expect to occur in the coming months and given the oversold nature of many mining companies on a technical level. Over the medium term however, we remain bearish mining equities as the extent of China's slowdown becomes apparent. That said, gold mining companies could outperform as we expect gold prices to prove resilient.
Key Developments: EMEA Ghana: Oil Growth To Overshadow Mining Sector - Ghana's gold production has increased by 64% in the first quarter of 2012 to 1.5moz (million ounces) as elevated prices have incentivised increase production. Gold production, which will remain the mainstay of Ghana's mining sector for years to come, will grow strongly over the coming years encouraged by gold prices, which we forecast to remain elevated until at least 2013. However, while we also expect impressive growth in bauxite production, it will be overshadowed by growth in the country's oil production from 2012. Growth in the oil sector, and the wider economy, will lead to the mining sector's share of GDP decline from 3.7% in 2010 to 1.8% in 2016.
Tanzania: Government Seeking Greater Revenue From Mining - The government of Tanzania has stated that mining companies have failed to pay their share of mining taxes and is seeking ways to increase tax collection. This follows plans to enact a 30% corporate tax on gold mining companies. Although these moves will inevitably weigh on miners' profits, we believe the impact on the industry to be limited as it will only be imposed on companies operating for more than five years. Furthermore, much of the world is enacting similar tax increases, notably Australia's 30% super tax and Indonesia's 20% export tax on 14 raw materials. Indeed, we highlight greater concerns present in Tanzania's mining sector, namely the lack of adequate infrastructure which will be a greater impediment to investment.
Key Developments: Asia China: State Dominance To Grow With Consolidation - As part of a national plan to achieve widespread industry consolidation, the Chinese government aims to shut about 3,000 small coal mines with a combined capacity of approximately 100mntpa by the end of 2015. We believe this consolidation effort will be generally successful as mining activity in China is heavily regulated by the government, but the impact on coal output is likely to be limited as these mines account for less than 3% of China's total capacity. In our view, strong demand growth will continue to underpin production and China's coal mine production will increase from an estimated 3,378mnt in 2011 to 4,181mnt in 2016, growing at an average rate of 4.6% per annum over the period.
Myanmar: Business Environment Challenges To Persist - The government of Myanmar recently invited foreign firms to invest in its mining sector in a latest bid to open up the economy after more than half a century of international isolation. However, we retain a degree of caution towards Myanmar's growth potential as progress towards democracy is far from assured and the pervasiveness of corruption is still a major problem facing the country. The lack of infrastructure support in Myanmar is also a major hurdle for investors. Compared with its regional peers, Myanmar's road network significantly lacks coverage with about 50% of all freight in Myanmar is transported by river barges that are heavily affected by seasonal changes in water levels.
Key Developments: Americas Peru: Rising Costs Weigh On Mining - Newmont Mining, the largest gold producer in US, reported a 28% fall in net income to US$279mn as a result of higher cash costs and a more than projected decline in production. The corporation has also recently halted construction of a US$4.8bn Minas Conga project in Peru due to strong opposition from the locals over the environmental impact of mining. We have highlighted the theme of rising costs as well as our expectation for lower metal prices which we expect to result in a reduction in capital expenditure over the medium term, with projects in Peru particularly at risk.
|GLOBAL - POTENTIAL PROJECTS AT RISK|
|Country||Mine||Metal||Parent Company||Estimated Production||Year|
|Australia||Olympic Dam||Copper/Uranium||BHP Billiton||Copper: Increase from 300 to 750ktpa||2015|
|Brazil||Minas Rio||Iron ore||Anglo American||26.5mntpa||2013|
|Chile||El Morro||Copper/Gold||Goldcorp||90ktpa of copper, 210kozpa of gold||na|
|Guinea||Simandou North||Iron ore||Vale||95mntpa||2015|
|Guinea||Simandou||Iron ore||Rio Tinto||15mntpa||2015|
|Pakistan||Reko Diq||Gold||Barrick Gold||Resources: 9.5moz||na|
|Papua New Guinea||Frieda River||Copper/Gold||Xstrata||246ktpa of copper, 379kozpa of gold||2013|
|Peru||Tia Maria||Copper||Southern Copper||120ktpa||2015|
|Philippines||Tampakan||Copper||Xstrata||Reserves: 13.5mnt of copper and 15.8moz of gold||2015|
|Zimbabwe||Murowa||Diamonds||Rio Tinto||2mn carats pa||2014|
|Source: BMI, Company Announcements|
Ecuador: Mining Reforms To Attract Investment - Ecuador's government is preparing reforms to the country's mining sector which should result in contracts with some of the largest mining companies in the coming months. The government is eager to conclude negotiations with Kinross Gold and Ecuacorriente which will pave the way for future investment. These reforms contrast significantly with much of South America which is seeking to increase government involvement in the sector and raise taxes. We expect these reforms to result in rapid growth in the country's mining sector, particularly in its gold and copper deposits, which are some of the largest undeveloped mines in the region.
|KEY PROJECT ANNOUNCEMENTS THIS WEEK|
|Australia||Integra Mining||Cock-eyed Bob||Gold||Reserves: 580koz|
|Australia||Alkane Resources||Tomingley||Gold||60kozpa in 2013|
|Canada||Northern Tiger Resources||3Ace||Gold||Drill results with weighted average of 50.3 g/t|
|Canada||Crosshair Energy||Juniper Ridge||Uranium||Maiden resource of 5.2mnt|
|Ethiopia||Tigray Resources||Terakimti||Copper||Intercepts averaging 3.24%|
|Indonesia||Realm Resources||Katingan Ria||Thermal Coal||Resource upgrade to 102mnt|
|Macedonia||EurOmax||Ilovitza||Copper/Gold||Resource upgrade to 841kt copper metal and 4.45moz gold|
|Saudi Arabia||KEFI Minerals||Jibal Qutman||Gold & Silver||High grade intercepts discovered|
|Tanzania||Helio Resource||SMP||Gold||Rerserves: 1.0moz|
|Uruguay||Orosur Mining||Arenal Deeps||Gold||All permits secured for production; 55-58kozpa in 2012|
|Source: BMI , Company Results|