Consolidation, sustainability, and the allure of the mysterious East: the 71st annual convention of the Prospectors & Developers Association of Canada (PDAC) did not want for themes.
It seems gold is not the only item on the rise. The 2003 convention was host to more than 8,000 delegates, exhibitors and visitors, as compared with roughly 7,000 last year. Moreover, 225 companies participated in the investors exchange, a 30% increase over last year; the trade show featured 280 exhibitors, a 10% increase over 2002.
Maurizio Bevilacqua, secretary of state for international financial institutions, opened the convention, standing in for Natural Resources Minister Herb Dhaliwal. Bevilacqua began by telling the audience that Canada’s “economy is strong, our people look confident, and our future looks bright. This is the state of the nation.”
In keeping with recent developments in mineral exploration, a whole afternoon was devoted to presentations on the economy and mineral industry of mainland China. Delegations from Beijing attached to the Ministry of Land and Resources and the Chinese Mining Association gave a number of talks concerning foreign investment in the Chinese mining sector.
Statistics about the country’s economic strength and potential are impressive:
r Mining and mining related activities make up 30% of China’s current gross domestic product.
r One-fifth of the country’s entire workforce is employed directly or indirectly in the resource sector.
r China expects to quadruple its gross domestic product by 2020.
r Mineral imports and exports account for 15% of China’s total foreign trade.
r Since 1990, domestic consumption of copper, aluminum and zinc has increased by 110%, 323% and 270%, respectively.
Canadian resource companies that have explored China over the past decade also voiced their opinions about the country’s potential. Robert Horn, vice-president, exploration, for
Gilles Laverdiere, of HMZ Metals, said a person wishing to enter the mining industry, or any other industry, in China must first develop a personal relationship with a partner and make sure the partner has the necessary personal, social, business and government connections.
Greg Hall, of
A major problem faced by foreign exploration companies in China is that geological data are not on a central registry, and unless you are Chinese, you cannot get a land title map. Also, topographical and gravity data are considered state secrets and often are not available, and reserve calculations are not based on internationally accepted processes.
Robert Friedland, chairman of
Friedland believes the U.S. dollar has begun a majestic, long-term rollover and will “sink like the Titanic” because China will export awesome deflation. This will depress Western economies, and especially hurt unions and urban real estate markets.
Friedland said the Chinese economy must be supplied with iron ore, platinum, aluminum, copper, nickel, metallurgical coal and gold, and he stressed that Canada has a vibrant mineral industry that can meet those needs. China also consumes large amounts of sugar, vegetable oils, coffee, natural gas and wood and wood pulps.
“We are heading into a long deflationary period,” said Friedland, “but, paradoxically, this is good news for people in the mining industry. The price of commodities is going to go up and up over a long period of time.”
Donald Coxe of Chicago-based Harris Investments kicked off the convention with a thought-provoking talk on the macro-economics of the global economy and the outlook for commodities, especially gold.
He said the U.S. Dollar Index (USDX, which measures the U.S. dollar’s strength against a trade-weighted basket of six currencies — the euro, yen, U.K. pound, Canadian dollar, Swedish krona and Swiss franc) will soon require a change in its calculation so that it reflects China’s growing economic importance.
China’s currency, the renminbi, has been pegged to the U.S. dollar, but Coxe said this contravenes the rules of the World Trade Organisation (WTO), which China joined last year.
He reckons that the Chinese government has “actively suppressed” the value of its currency by 40-50% relative to the U.S. dollar, so that when the renminbi is inevitably allowed to float, the U.S. dollar will sink and the renminbi will assume a rank of third or fourth place among the USDX currencies.
“As a base case, gold will hold its value” when the renminbi floats, he said, but he believes it’s more likely that gold will soar to US$450 or US$500 per oz. based on this event alone.
Thus, Coxe suggests gold can be viewed as a kind of time-insensitive option on the floating of the renminbi.
Overall, he said, with the U.S. dollar in decline since February 2002 and other currencies such as the yen and the euro “representing stagnation,” gold will take on a greater role as an alternative currency.
“We’re in the early stages of a bull market for gold…with lots of upside room for gold stocks, which are still near their all-time lows,” he said.
“The impact of China is truly amazing,” he continued. “With its astonishing growth, China will ultimately become the price-setter on produced goods and the price taker on commodities.”
Regarding the U.S.-led “war on terror,” Coxe commented that his training as an historian taught him that “there’s no doubt: wars use up metals,” and that this consumption will spur continued demand for metals.
As an aside, he confessed that he had “no pretensions to the mystical view of gold” and that those who advocate that there are large, hidden forces working to depress the price of gold are “bereft of a knowledge of history and overwhelmed by a sense of conspiracy.”
Supply and demand
Bruce Alway, an analyst with Gold Fields Mineral Services, gave a rundown on the supply and demand numbers for gold in 2002, in a lead-up to next month’s release of GFMS’s Gold Survey 2003.
On the supply side, GFMS estimates that global gold mine production in 2002 was 2,543 tonnes, down from the record high of 2,602 tonnes in 2001 — the first annual decline since 1995.
This decline in output was largest in the U.S., which was hampered by lower grades and operational difficulties, and in Indonesia, where grades were lower at the Grasberg mine.
The fall was offset by growing production out of Russia, Peru, Mali and Tanza
nia.
Overall, if gold averages US$325 per oz. going forward, GFMS predicts a 100-tonne (3.2-million oz.) drop in global production by 2006. However, if gold maintains an average of US$375 per oz., there will only be a small decline.
On the demand side, GFMS saw two large factors in 2002: the third consecutive year of declines in net producer hedging; and an overall 12% drop in jewelry demand, with particularly acute declines witnessed in India.
“There is a lot froth in the gold price right now,” said Alway. “We expect it to stay high until [current political tensions] are resolved, which could result in a massive round of profit-selling.”
Still, he said gold would “retain positive sentiment which would limit any weakness,” so that a price rally “should remain intact” for the first half of 2003, when gold prices should average US$350 per oz. and range between US$330-US$370 per oz.
PGEs
Gordon Bassett, from the Wayne, Pa., office of refiners Johnson Matthey, shifted the audience’s attention to platinum and palladium, characterizing 2002 as being a “year of contrasts” for the two metals, with platinum prices soaring and palladium prices collapsing.
Platinum demand hit an all-time high of 6.4 million oz. in 2002, spurred by a 13% increase in Chinese jewelry demand to 1.5 million oz., up from virtually nil less than half a decade ago. And, in a sign of the economic times, Chinese platinum demand surpassed Japanese demand a few years ago.
Industrial demand for platinum was stable in 2002, with growing platinum use in auto-catalysts being tempered by drawdowns in manufacturers’ stockpiles.
Of particular note, the rising use of diesel car engines in Europe is bullish for platinum, since only this metal, and not palladium, is used in this specific application.
Platinum mine production in 2002 was characterized by an 8% increase in South African output, which offset a 27% drop in Russian supply to 950,000 oz.
Scrap recovery was also robust, showing an 8% rise to 570,000 oz. in 2002.
Palladium markets witnessed a stunning 28% drop in demand during 2002, to 4.88 million oz., owing, he said, to heavy drawdown of stocks by automakers, who “didn’t need to buy a whole lot last year,” and weak demand from the electronic sector.
Bassett noted one bullish development: after the selling of another 1 million oz., the U.S. government’s strategic palladium stockpile has only about 150,000 oz. left, so government sales “won’t be a factor going forward.”
Six issues
He concluded by describing six key issues to keep an eye on in the platinum and palladium markets:
r the broad economic outlook;
r auto-industry consumption strategies;
r Chinese jewelry demand;
r South African mine expansions;
r Russian sales; and
r the actions of speculators, who have added an estimated US$50 per-oz. premium to platinum prices.
Diamond expert Charles Wyndham of London-based WWW International Diamond Consultants spoke about “the most emotional of commodities,” and argued that, contrary to De Beers’ assertions, diamonds do have intrinsic value.
While diamonds have performed better than any other luxury item since 9/11, Wyndham described a diamond industry that has entered a state of flux after decades of stability.
The uncertainty has been spurred by four recent developments: Canada’s emergence as a major diamond player; the decision by
While Wyndham predicted that diamonds prices will become more volatile, he reassured the audience that “over time, the prognosis for diamonds is extremely positive.”
Synthetics
In response to a question from the floor about the threat posed by synthetically produced diamonds, Wyndham said there is “no reason to be concerned,” since synthetics could never have the same “emotional value” as natural diamonds. He noted that in other gem categories, synthetics have not brought down prices for competing natural gems.
The copper market was characterized by Peter Hollands of London-based Bloomsbury Mineral Economics as being “the same for 19 years and different for the past year,” and he added that the “whole of the future will be like the last year.”
Following the copper market during those first 19 years was easy, he said, as it required only a “mechanistic analysis” that focussed on “counting tonnes and looking for the high-end of the cost curve.”
Today, Hollands said, there are two new factors in copper:
r Strategies of low-cost producers — Showing unusual discipline, industry giants
r Emergence of significant stockpiles — Both Codelco and the Chinese government have amassed 250,000 tonnes of copper apiece and are continuing to add to their hoard. If copper prices do rally in the future, these stockpiles and others totalling 1 million tonnes will be sold, capping any upward moves to around the US$2,000-per-tonne mark.
As well, Hollands said, the industry still has 750,000 tonnes per year of idled capacity, though, overall, the “swing sector is not swinging — it’s just shut down,” and the market balance has shifted from surplus to deficit.
For 2003, Hollands said prices and capacity utilization should gradually recover, but for 2004-06, the cycle will be dampened by high-grade mining and the selling of copper from stockpiles.
In particular, he noted that nickel stocks are low, new nickel supply is quite limited until at least 2006, and China is emerging as a “bright spot” for nickel consumption.
Another important development, he said, was the new “money-oriented management philosophy” at Russia’s Norilsk and that company’s growing financial muscle.
For 2003 and 2004, Ranieri predicts a nickel price of US$3.44 and US$3.65 per lb., respectively.
He said Falco should have a bankable feasibility study of its 49%-owned Koniambo nickel-laterite project in New Caledonia completed by this summer. The mine should be able to produce 60,000 tonnes of nickel per year in the form of ferronickel, beginning in 2007-08.
“The project economics for Koniambo look robust,” he said.
The big picture is still fairly grim for zinc, but Andrew Roebuck,
One positive development is that mined and refined zinc production has finally leveled off at a peak of 6.5 million tonnes per year.
Zinc prices, on the other hand, have tumbled to an average of US35 per lb., and are now at their lowest prices in 60 years, adjusted for inflation.
Smelter closings
Treatment charges have also declined, and with the shrinking smelter margins, there has recently been a spate of smelter closings, suspensions and curtailments.
Once again, China stands as a major factor, being simultaneously the biggest miner, refiner and consumer of zinc. The country became a net importer of zinc concentrate in 2001, even as refined zinc exports continue to fall.
David Orava of Senes Consultants in Richmond Hill, Ont., opened the technical sessions by officially launching Environmental Excellence in Exploration or E3, a CD-based e-manual designed to emphasize proper environmental and socio-economic practice from the earliest stages of exploration. The presentation was similar to one given at last year’s convention by E3 project manager Neil Westoll. Although there was a room where people could test-run an E3 demo CD, the presentation lacked a fo
rmal taste of what users could expect when they slip the E3 CD into their computers. Some people in attendance who were involved in the design and content of the project were disappointed that the presentation was not more specific. Others said that it lacked the passion needed to get people interested in the project (read: buy subscriptions).
The e-manual will have regular updates and help the industry develop the “social licence” needed for ongoing growth.
“It’s going to be one of the things that helps us move forward as an industry,” said Orava.
E3 was created in 1999-2000 by a group of mining company representatives and the PDAC.
Those wanting to buy E3 can do so at the PDAC office in downtown Toronto or online. The prices vary for different subscribers.
Consolidation
Alex Davidson, senior vice-president of exploration with
Davidson said “big companies needed to spend more on exploration, or else at current annual exploration rates reserves will be depleted in 10 years.”
He cited deep cuts in exploration budgets as the chief cause.
In 1997, Barrick,
“We are now seeing fewer players at the top who are now spending a larger percentage of shrinking global exploration expenditures,” said Davidson.
He added: “There have been just two significant gold discoveries over the past three years, which has forced companies to merge to show production and reserve growth. The result is a re-shaped gold mining industry with fewer companies and a widening of the gap between the major companies and the small companies.”
He backed up his assertion with numbers: in 1998, there were 40 primary gold-producing companies, of those 14 were intermediate producers controlling 24% of production and 20% of market capitalization. By 2002 that group had shrunk to 22 through consolidation and there were only six intermediate producers controlling 10% of production, and 11% of market cap.
Furthermore, in 1998, the top eight gold producers controlled 66% of production and 65% of market cap, whereas last year nine majors controlled 86% of gold production and 80% of market cap.
Three reasons
Davidson listed economies of scale, the need to improve rates of return, and the need for growth as the three main reasons for consolidation.
He predicts that further consolidation is on the horizon.
“Rising gold prices are likely to focus on investor interest on companies with the best prospects for organic production growth,” said Davidson. “This will increase the heat on companies lacking good organic growth to hit the acquisition trail.”
He added that consolidation is also likely to continue at the level of individual assets. In other words, companies will swap or reshuffle contiguous assets or joint-venture properties amongst themselves in order to maximize returns.
Where will consolidation activity be centred? “I think a good deal of the ‘urge to merge’ is going to be played out in the mid-cap tier of companies seeking to get on the big fund radar screens,” he said.
Mining magnate and promoter Robert Friedland was in fine form discussing Ivanhoe Mines’ foray into Mongolia’s Gobi Desert in search of gold.
He talked mostly of China’s emergence as an economic force on the world stage and how other countries could take advantage of its economic growth. Friedland said 18 million Chinese are joining the workforce each year, none of whom were brought up on Chairman Mao.
“It’s a good idea to be friendly with a dragon. Don’t piss him off!” said Friedland, talking of Canada’s business relationship with China. He called Mongolia the “Chinese Canada,” in reference to its proximity to China, comparable to Canada’s closeness to the U.S.
‘Major mining house’
Friedland was also careful to emphasize how the copper and gold that would one day come from deposits such as Oyu Tolgoi, outlined by Ivanhoe in Mongolia, would serve Chinese markets via a yet-to-be-completed 80-km rail line.
“We think we have the unique opportunity to build a major mining house that’s a direct play on the Chinese economy,” said Friedland. In terms of inferred resources alone, the four Mongolian deposits are estimated to contain 10 million tonnes copper and 9 million oz. gold in 1.6 billion tonnes averaging 0.63% copper and 0.17 gram gold per tonne, at a cutoff grade of 0.3% copper-equivalent. Ivanhoe has completed well over 120,000 metres of drilling on the property to date.
But does Friedland plan to auction it off like he did with the massive Voisey’s Bay nickel deposit?
“We’re of the opinion that Oyu Tolgoi is quite different than Voisey’s Bay. Voisey’s Bay was a one-off. I don’t think anybody’s ever found another one.
“The difference in the Gobi is that the rocks are naked; the area is vast and we don’t have to build a smelter. In China we have 110 copper smelters that are captive, eight of which are world-class. Since we don’t have to build a smelter and we have such a large mineral province, our company’s not for sale.”
He did, however, leave some room open for partnerships: “We are interested in the possibility of strategic partnerships with all of the major mining groups who have approached us, and we’ve been in conversations with virtually everybody.”
Challenges
John Witteman, environment services manager at BHP Billiton’s Ekati diamond mine, discussed some of the socio-economic challenges involved with developing the Ekati diamond mine, located 200 km south of the Arctic Circle in the Northwest Territories.
Throughout the exploration, development and construction of the Ekati diamond mine, BHP Billiton Diamonds met with members of the surrounding aboriginal and local communities, conducting site visits for community residents, and encouraging discussion and information exchanges on land use and potential employment.
Through discussions with all the aboriginal groups who historically shared the Lac de Gras area, agreements were formed with each group regarding employment, training, scholarships, community involvement, business opportunities, environmental mitigation, and cultural sensitivity.
“At Ekati 42% of the 780 employees are aboriginal,” said Witteman.
He said BHP Billiton encourages employees to become involved in their communities. Through the Ekati diamond mine community partnership program, contributions are made to charities that promote literacy, health and safety for families. The program also supports cultural and sporting activities throughout the Northwest Territories.
He added that safety is one of the company’s highest priorities at the mine and it has developed an air quality program, reduced unhealthy noise levels, and devised a “positive-attitude” safety system whereby employees are monitored for depression and emotional issues.
Opprobrium and praise
The convention also heard a lunchtime address from Bjorn Lomborg, a statistician and political scientist from Denmark’s University of Aarhus, and author of The Skeptical Environmentalist. His book, which questions prevaling pessimism about environmental degradation and the usefulness of measures to combat global warming, has predictably earned him opprobrium from environmental activists but — just as predictably — has won him praise from some business groups.
Lomborg said that to panic about the state of the ecosystem would lead to faulty public policy and to the misallocation of resources that could be put to better uses elsewhere. “If we think the world is getting worse and worse, and it’s not true…we’re likely to make bad judgments.”
Club of Rome-style fears that mankind will shortly run out of resources do not stand up to reality, he noted, pointing out that the ratio of oil reserves to annual consumption — a ratio that was estimated at ten years in 1920, and changed little up to 1940 — is no
w at its highest level ever, and that changes in technology are likely to make other sources of energy more feasible before the earth’s hydrocarbon reserves run out.
Using the example of air quality in large cities, Lomborg contended that while newly expanding economies in the Third World were creating large, smoggy cities, that their experience would parallel that of cities in the developed world, where concentrations of airborne particulates and sulphur dioxide peaked at one stage of development, and then decreased. London, for example, had its dirtiest air in the late 19th century, and now has cleaner air than it had in Tudor times. Once an attractive enough standard of living is attained, he said, “you start to buy some environment.”
Precautionary
Turning his attention to the possibility of global warming — and he is a believer in the assertions of the International Panel on Climate Change — Lomborg compared the fears of global cooling that were common during the middle of the 20th century, when there were serious proposals to spread soot on polar ice packs to absorb solar heat and melt ice. It obviously would have been unwise, Lomborg said, calling the plan “an early application of the precautionary principle.”
Lomborg noted that the bad effects of a warmer climate would fall preferentially on the poorest countries, where a weaker system of infrastructure makes it harder to adapt to climate changes. He argued that the plans to limit carbon emissions under the Kyoto agreement would simply “buy a farmer in Bangladesh another six years” before global warming would force him to move anyway.
With that limited payoff, Lomborg said, the Kyoto agreements’ estimated annual cost to the global economy — US$150 billion to US$350 billion, from three to seven times the world’s development budget — would be better spent on other things like water supply and sanitation.
Jochen Tilk of
‘Right process’
Gordon Peeling of the Mining Association of Canada tackled the issue of corporate social responsibility, noting that companies “need the right process to meet community expectations and generate an adequate rate of return.” He cited numerous examples of where this process is paying off, including Antamina in Peru and Rosia Montana in Romania.
Peeling also cautioned mining companies against second-guessing community expectations. To do so puts access to property and permitting at risk while raising legal fees.
Craig Nelson, executive vice-president of
Created in 1998 through the merger of the gold assets of Gold Fields Ltd. and Gencor, Gold Fields currently has more than 20 years of consolidated reserves, making it unique among its peers, as most have half as much. Its biggest operations are Driefontein, Kloof and Free State, all of which are in South Africa.
Nelson went on to highlight his company’s successful partnership with the junior sector, noting it has invested US$14.5 million over the past four years. Today, the shares are worth US$35-40 million, representing nearly a 50% rate of return.
“Collectively, these alliances with juniors have worked well,” he said.
Nelson ended his discussion with a review of South Africa’s legislative framework, in the context of globalization. For instance, exchange rules prohibit domestic companies from spending more than R$2 billion on any project outside of South Africa, though he admitted that the company has never had a request turned down by the Reserve Bank.On the afternoon of March 10, delegates were treated to a feisty exchange of views about mine financing. Mining analyst Egizio Bianchini of BMO Nesbitt Burns kicked off the forum by highlighting current trends, noting that as mining companies have become more global, so have their investors.”More and more, non-North American companies are looking to tap the lucrative investor market on this continent,” said Bianchini. “Regulatory relaxation in home jurisdictions and with North American listings, a willingness to aggressively seek U.S. shareholders and North American research coverage, and a worldwide lack of quality mining vehicles have created an environment where offshore issuers are now able to tap this market like never before.”As for domestic miners, Bianchini said the group has begun to tap public debt markets far more than ever before, partly because bankers are reining in credit. In the U.S. alone, Canadian mining companies raised US$2.3 billion of the US$4.4 billion worth of corporate debt issued there last year. He also said companies would be wise to stick to higher-yield instruments, such as convertible debentures, to satisfy North America’s aging population.As for mergers and acquisitions, Bianchini told delegates to expect more in the future, from juniors and seniors alike.William Belovay, who also is employed by the Bank of Montreal but as manager of its precious metals fund, took aim at the cozy relationship between sell-side institutional investors and mining companies. This quasi-partnership, in turn, has downgraded mining investments to high-risk ventures from their traditional role as risky ones.”Our investment decisions and our end-route are plagued by the continued collusion of investment bankers, corporations and analysts,” he vented. “We all know about it, and there is nothing more that needs to be said about it.”He cautioned investors against warrants, calling them lingering land mines. Why? Because the moment they’re issued, hedge funds short the stock and “devastate the long-term holder’s performance.”Belovay also wondered how mining companies get away with reporting in-house reserves. “This is the same as a corporation approving its own financials.”Still, Belovay remains optimistic about the future. For instance, he said the fundamentals are there to push copper up by 100% and each of gold, copper and aluminum by 25% in 2005.Nevertheless, he ended his talk on a cautionary note: “Sincerity, not greed, is needed to bind bankers, miners and investors”.Coming to Belovay’s defence, though not by design, was Deborah McCombe of the Ontario Securities Commission. She reminded Canadian-listed mining and exploration companies of their responsibilities under National Policy 43-101, especially the role of the Qualified Person in areas of scientific and technical disclosure.On the topic of gold hedging — and a timely one at that, given the yellow metal’s recent rebound — Christopher Bradbrook, vice-president of
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