Mining looks profitable in near term

The Nunavut Mining Symposium, held April 16-19 in Iqaluit, NU, the northern territory's capital, drew more than 500 delegates, a record for the annual gathering. Patricia M. Mohr, vice president of Scotiabank, delivered the keynote address, outlining the financial institution's 2012-13 outlook for metal prices, currencies and global growth.

Mohr, a commodity market specialist at the Toronto-based international bank, said price increases in the bank's widely respected Metal & Mineral Index at 11.1 percent per annum during the past five years have outpaced oil and gas at 4.4 percent per annum - an indicator of the mining industry's strong profitability.

In addition, strong growth in shipments of potash, coking coal, gold and nickel have boosted the overall weight of metals and minerals in the Scotiabank Commodity Price Index in the past decade. Spot iron ore prices, cfr Qingdao, China have been added to the Scotiabank Commodity Price Index, in view of the huge growth in production in the Labrador Trough, with shipments to China as well as northern Europe.

Mohr said most of the economic growth anticipated during the next 18 months will be centered in emerging markets, led by China, though modest growth is forecast for the United States and Canada.

"In China, no easing of mortgage restrictions on second and third homes - aimed at preventing property market speculation - is expected near-term," she said. "Investment demand had represented 20-40 percent of overall property demand in China. Chinese leaders are concerned about ensuring 'affordable' housing. However, (China's central bank) has allowed banks to offer mortgages at 10-15 percent discounts on the benchmark lending rate for 'first-time homebuyers', boosting home sales in recent weeks.

"While exports and lower private-sector housing starts may continue to drag, two initiatives will bolster China's economy - 1) China unveiled a massive 'social' housing program in the 12th Five-Year Plan in March 2011, which will provide an offset to weaker private-sector construction; and 2) the banking regulator will allow banks to make new loans to unfinished local-government investment projects to ensure their completion, provided they are 60 percent complete; this addresses the issue of high municipal-government bank debt linked to infrastructure spending to bolster China's economy, following the 2008 global recession.

While rail and road infrastructure investment has dropped, overall 'fixed asset investment' was still strong (up 21 percent in 2012:Q1), with relative strength in manufacturing," Mohr explained.

"China may tolerate somewhat slower growth in 2012 (in that) it no longer is pursuing growth at any cost. But the Asian country has foreign exchange reserves of US$3.18 trillion with which to bolster its economy, should activity weaken more than desired," she added.

China's massive 'social housing' program will be a key support for China's economy in 2012-13, according to Mohr.

"In 2012 targeted 'social housing' starts of 7 million units, along with the completion of units started last year, will offset most of the 2012 decline in private-sector residential construction. 'Social housing' construction is under-reported in China's housing data," she said.

In the United States, auto assemblies have recently buoyed industrial activity, and employment is again on the rise.

North American motor vehicle assemblies picked up to 13.4 million in first quarter of 2011, declined to 12.5 million in three months later due to auto parts supply cutbacks from Japan, but recovered again to 13.7 million in fourth quarter of 2011, rose to 15.7 million in the first quarter of 2012 and is expected to climb to 16.3 million in the second quarter. U.S. assemblies in first quarter of 2012 totaled 10.3 million units and are scheduled to hit 10.7 million in the second quarter, Mohr reported.

U.S. employment recovery recently has lagged at four times less than normal, but is starting to pick up. Mohr noted that U.S. payrolls advanced by 120,000 jobs in March, and gained 1.9 million jobs during the past year.

Mohr said West Texas Intermediate oil prices remain resilient despite a slow global economy. In addition, 'geopolitical risks' have recently underpinned oil prices amid concern that heightened tensions between Iran and the West will disrupt Middle East oil supplies. With recently stepped up sanctions against Iran, talks between Iran and six major 'powers' - who seek to curb Iran's uranium enrichment - got underway on April 14. However, a diplomatic resolution may remain elusive, she said.

Scotiabank is forecasting WTI oil prices averaging US$110 per barrel in 2012 and US$125 per barrel in 2013.

According to the bank's forecast, copper prices are expected to dip from an average of US$4.00 per pound in 2011 to US$3.90/lb. in 2012 and US$3.70/lb. in 2013, reflecting a slight decrease in China's appetite for the metal, which currently is almost double that of the United States, Japan and Germany combined.

Mohr said mine expansion will remain fairly limited for copper at 4.5 percent in 2012 but post stronger growth in 2013 at 10 percent (centered in Chile, Peru, Zambia, D.R. Congo, the United States and Canada, among others).

Gold will settle at US$1,700 in 2012, reflecting the possibility that its price may have peaked at US$1,921.15 in September 2011. The bank offered no forecast for gold prices in 2013.

Mohr said gold prices have recently been supported by reflationary monetary policy in the United States and Eurozone and expectations that the Federal Reserve might introduce measures to bolster the U.S. economy. "However, the lack of additional moves in Fed Chairman (Ben) Bernanke's Semi-Annual Monetary Policy Report to Congress triggered profit-taking. Further price gains will be highly dependent upon additional monetary policy accommodation by the Fed and the European Central Bank," she said.

Iron ore benchmark prices will retreat over the next 18 months but remain profitable, averaging US$245 per dry metric ton unit FOB loading port. However, significant capacity expansion in Australia, Brazil and smaller-producing countries such as Canada will pull down prices by mid-decade (US$145/dmtu in 2016), according to the forecast.

On the upside, Canadian producers in the Labrador Trough, which includes Nunavut, are now shipping iron ore to China, something that was only a dream several years ago, Mohr said. "Spot markets for iron ore have edged up (to about US$144.66 per metric ton) in March and early April, after an inventory correction last fall," she added.

Mohr said other mining issues and trends include:

Renewed calls for higher resource revenue and resource upgrading by governments; for example, the export ban by Indonesia on unprocessed nickel ore, copper concentrates, zinc and tin, as of 2014 (for miners already producing before Feb. 6).

Rising inflation - especially for copper, where cap-ex inflation surged by 28 percent in 2011 and mine operating costs (after by-product credits) by almost 24 percent. Engineering costs are under upward pressure alongside mine expansion. However, mine operating cost inflation in 2010-11 (since the 2008/09 recession) has been milder than from 2005-08 and by-product credits higher. Economic uncertainty has contained general inflation.

Low smelting and refining charges now - benefitting concentrate producers - but higher

TCs/RCs (copper processing fees) are expected by mid-decade;

China's enormous expansion in smelting and refining has pushed down TCs/RCs in recent years, but a likely slowdown in this expansion - as regulatory approval shifts from local governments to China's Ministry of the Environment (with tighter standards) means that global copper smelting/refining capability will move from 'surplus' to a 'balanced' position by 2014 and will tighten by 2015.