PDAC 2015: The ‘first green shoots have emerged’

With metal markets being the number-one indicator for the health of the global mineral exploration industry, a great way to kick off the technical program of the Prospectors & Developers Association of Canada convention in Toronto is to take in the “Commodities and Market Outlook” session on Sunday afternoon. This year’s talks, taken as a whole, saw some of the world’s most august commodity forecasters predict mild price increases for virtually every major metal and mineral this year or next.

Ivanhoe Mines executive chairman Robert Friedland started with a rousing big-picture pep talk that was fitting for a weary crowd ground down by three years of increasingly worse mining markets. He focused on a familiar theme: the growing urbanization of the world’s population, and the ineluctable need for metals to sustain urban living even as economies move away from fossil fuel dependance.

In particular, he argued for the excellent long-term prospects for copper and platinum (Ivanhoe’s current focus, not coincidently), stating that platinum-dependent fuel cells would eventually win out in electric cars over lithium batteries “that catch fire” with the slightest impurities present.

William Tankard, research director for mining at Thomson Reuters, said that prices for silver, platinum and palladium had seen the “impact of U.S. dollar strength” in 2014, with a clear negative correlation, unlike for gold prices. And unlike for gold, there has been no massive sell-off in silver exchange-traded funds (ETFs), as was seen in gold ETFs in 2013.

Tankard noted that the silver market had expanded by a quarter to a third over the past decade, with the declining use of silver in photography being more than made up by increased industrial use and investment, and a decline in scrap supply offset by increased mine production.

Tankard is “cautiously optimistic” for silver prices, and his group at Thomson Reuters (formerly GFMS) predicts an average silver price of US$16.15 per oz. in the first half of 2015 and US$16.50 per oz. for 2015 as a whole.

For platinum group metals (PGMs), Tankard said, unlike in 2012, there had been no PGM price rise due to the miners’ strikes in South Africa in 2014 because the market had been expecting them and had amassed sufficient stockpiles.

He stated that 60% of PGM production worldwide is being mined at a loss, but that production cuts are hard to make in number-one producer South Africa, as “platinum in South Africa is a job creator, foremost.”

Gold guru Martin Murenbeeld, chief economist at Dundee Capital Markets, is “mildly bullish” on the gold price, and said the defining event in gold for 2013 was the “orgy of ETF sales,” while the theme for 2014 had been “searching for a bottom” in the gold price.

He laid out his five bearish factors for gold: the U.S. Federal Reserve ending Quantitative Easing and raising interest rates; a firm U.S. dollar; a sluggish world economy; competition with the S&P 500 stocks for investment dollars; and the still substantial overhang of gold held in ETFs.

As for gold’s bullish factors, he listed strong physical demand from Asia, which is benefitting from the oil-price drop; central banks continuing to buy gold; a “global debt crisis that is going to worsen”; a U.S. dollar that “is overvalued”; “ETF supply turning into ETF demand” in 2015; and a positive comparison of today’s circumstances with long-term patterns of commodity cycles.

He also mused whether “geopolitics would be a defining factor for 2015.”

He predicts gold prices will average US$1,237 per oz. in 2015, end 2015 at US$1,270 per oz. and average US$1,315 per oz. in 2016.

 Jonathan Leng, manager of zinc, lead and gold mine supply at Wood Mackenzie, said his “feeling is that this year is going to be dull” for the zinc market, which has a well-known list of scheduled mine closures and limited new mine supply.

He noted that there are few majors involved in zinc mining — unlike in the early 2000s — and that there is “no shortage of projects” waiting to be developed by juniors and mid-tier miners who have less financial muscle than the majors.

Still, he sees a “bright outlook for the zinc price” … “with a balanced market trending towards deficit.”

CRU Group director Paul Robinson calculated that in 2014, US$183 billion had been lost in the mine-production value of the 11 commodities that were the topic of the afternoon session, which has “created a lot of negative sentiment.”

He sees 2015 as “better but still slow” for the basket of commodities CRU follows, with this year seeing the “first year of price increases since 2011.” He intoned that “China, more than ever, is vital” in terms of commodity demand and that the “first green shoots have emerged.”

He describes iron ore’s prospects as “gloomy” and predicts that iron ore prices will average US$65 per tonne in 2015, which should become the floor price. He quoted Rio Tinto chief Sam Walsh saying recently that Rio Tinto is producing iron ore at a mind-bending cost of just US$17 per tonne from its vast Australian mines, leading to huge profits, even at US$65 per tonne iron ore. (It’s US$20 per tonne for BHP Billiton in Oz.)

Robinson noted that at the peak of the iron ore market in 2013, global mine production was worth US$270 billion, but that sum is collapsing to US$135 billion in 2015. That sum would cause iron ore to slip behind coal as the world’s most valuable mined commodity by total dollar value.

He said that globally about a third of iron ore is being mined at a loss, and that “further cuts are required … 2015 is going to be ugly.”

By 2018, he said, CRU is “more optimistic” about iron ore, and adds that China will “still spend US$580 billion on commodities through 2023.”

He declared that “China is closed to people now” in terms of foreign miners selling iron ore into that market, but there are niche opportunities in Brazil, Europe and the Middle East for high-quality products.

Jonathan Sultoon, senior analyst at Wood Mackenzie, called the current environment a “non-traditional time” for metallurgical and thermal coal, with mining costs exceeding prices and a “significant number of miners losing money” due to a “wave of oversupply.”

Amidst a “fragmented market,” he hailed Glencore for “showing leadership in announcing cuts” at its export coal mines in Australia, and said a recovery in coal markets “should begin in 2016.”

Complicating the picture has been the crash of the Russian ruble, which has given Russian met and thermal coal producers growing profit margins, such that “for now, Russia is a capacity issue.”

Michael Schwartz, manager of market research at Teck Resources, described the recent price volatility for copper as being “not due to fundamentals” and showed that most analysts predict a price of US$2.90 per lb. for 2015.

While he said there will be “little growth” in copper mine production from now till 2020, he noted that new smelting capacity had been “growing like crazy” and that a two-tier market for copper had emerged, with high-quality product commanding a premium that is not seen in the spot price for copper.

The falling ruble also impacted global po
tash and phosphate markets, senior consultant for fertilizers at CRU Group Juan von Gernet said, with Russia and Belarus pulling away from Canada in terms of lowered production costs.

Mark Selby, president and CEO of Royal Nickel and a former Inco exec, wound up having the most bullish near-term outlook for his session topic. He said nickel is “about to outperform other metals,” and that the investment scenario he sees is “even better than it was in 2002” ahead of nickel’s wild peak years of 2005–07.

The main reason for his optimism is twofold: nickel is used in high-value applications — a stage that the Chinese economy is only now entering; and there will be delays in mine production coming out of Indonesia due to its ban on exporting nickel ore, and from the Philippines due to local political opposition to mine development.

“We see big deficits emerging,” Selby said. Noting that nickel prices have “always turned quickly,” he said, “you need to get on the nickel bandwagon, and get on it now.”