Commodities sink in jittery markets

The twentieth trading week of the year was characterized by a wide retreat in commodity prices as doubts grew regarding the health of the global economy in the face of continued sovereign debt problems in Europe and new signs that Chinese economic growth is cooling.

• The pullback was bracing among the precious metals: Spot gold prices fell more than US$56, or 4.5%, to US$1.179.75 per oz. (but have rebounded at presstime to US$1,216 per oz.); silver dropped from US$19.50 per oz. to below US$18; platinum plummeted US$214 to US$1,501 per oz.; and palladium was hit worst of all among the precious metals, tumbling US$88, or 17%, to US$440 per oz.

The turnabout in sentiment for platinum group metals was especially notable, as major bull runs that began in late 2008 look to have come to an end. Only a few weeks earlier, PGM proponents were touting the positive outlook for PGM demand and prices thanks to the introduction of new PGM exchange traded funds and the apparent recovery of the global auto industry.

It was even grimmer in the base metals sector, which has rolled over and is out of breath: copper prices have sunk back to the US$3- per-lb. range after hitting US$3.50 a month earlier; spot nickel has fallen to US$9.50 per lb. after having traded above US$12 per lb. in early April; Spot lead is trading around US78¢ per lb., with April’s highs above US$1 now a distant memory; zinc has followed lead’s lead, and is now trading at US83¢ after peaking above US$1.10 in early April; and aluminum prices dropped below US90¢ per lb.

With oil prices also on the downtrend and falling below US$70 per barrel, the commodity-leveraged Canadian dollar took a series of major hits in May, trading well below US92¢ after having flirted with parity in mid-April.

• In mining, the biggest story was the late-breaking news that Cliffs Natural Resources is trying to step up its presence in northern Ontario’s blossoming Ring of Fire chromite camp with simultaneous hostile bids for KWG Resources and Spider Resources, with their stakes in the Big Daddy and related chromite deposits being the prize.

Management of both juniors, distracted and enjoying the long holiday weekend in Canada, were caught off-guard by the American miner’s surprise bids, but had managed to scramble together a KWG-Spider merger proposal by the end of the day on May 26. Look for more twists and turns ahead in this unusual three-way corporate battle.

• A couple of Canadian juniors tabled positive feasibility studies for major mining project proposals on Canadian soil.

With a successful technical study in hand, the board of Consolidated Thompson Iron Mines — led by executive chairman and former high-profile politician Brian Tobin — has swiftly greenlighted the doubling of the company’s Bloom Lake iron ore project in Quebec to 16 million tonnes of concentrate per year beginning in the third quarter of 2012. The expansion will cost another US$525 million, but could be paid back in under two years of production. Meanwhile, the company starts delivering in June into existing off-take agreements for its current 8-million-tonne-per-year output.

Detour Gold didn’t disappoint with the unveiling of a feasibility study of its large, wholly owned Detour Lake gold project in northern Ontario. Based on a US$850-per-oz. gold price, in-pit reserves now stand at 11.4 million oz. gold, which would allow for the mining of 649,000 oz. gold annually for 16 years at a cash operating cost of US$437 per oz. The study shows a pre-tax net present value of US$1.03 billion at a 5% discount rate and an internal rate of return of 14.4%, but at current gold prices, these figures soar to US$3.1 billion and 30.7%, respectively. Capital costs are pegged at US$992 million.

Obviously, with such large, new production projections, both juniors are that much more attractive as takeover targets.

• On the legislative front, in mid-May the federal Conservative government introduced Bill C-X, or the Nunavut Planning and Project Assessment Act, which, if passed, will fulfill the government’s final legislative obligations under the Nunavut Land Claims Agreement of 1993.

The government says the bill is designed to ensure clarity, consistency and legal certainty with respect to land-use planning and environmental assessment processes in Nunavut, and notes that it was prepared in close consultation with the Nunavut government, Nunavut Tunngavik Incorporated, the Nunavut Impact Review Board and the Nunavut Planning Commission. The bill sets out steps for the future transfer of remaining land and resource management responsibilities from the federal government to the Nunavut government.