Bullish outlook for base-metal producers

Base metal prices may slip back next year from their 1988 highs if economic growth slows but they will likely remain significantly above their early-1980s lows for the period 1989-1993, London-based Metals & Minerals Research Services reports.

The result, the research firm says in a bullish review titled Metals Analysis Five-Year Outlook, will be that producers will enjoy a period of healthy financial returns unheard of since the early 1960s. Also, during the next five years, margins over cash operating costs will average 37.5%.

While the base metal market upturn was initially consumption- led, the company says it is now being maintained by a reluctance on the part of producers to reactivate idled capacity.

Consumption this year, it says, will on average be 25% above its 1982 low, but production will rise just 17%. And, despite exceptionally high output from the aluminum industry, average capacity utilization will be only 89%.

It is these twin forces which explain the spectacular concurrent fall in stocks, Metals & Minerals says. Stocks fell from 3.4 months’ demand at the end of 1982 to 1.1 months’ demand at the end of last year, and there has been little evidence of any change in 1988, it writes. In theory, the firm says, they also make today’s speculative markets vulnerable to widespread reactivation. Critical level

According to the company, the crucial level for industry stock cover is now 1.75 months’ demand, which was the figure in December, 1986. Before that time, prices were depressed; after that date, prices soared.

“Even though production is likely to grow more quickly in the next 2-3 years than consumption, stocks are not expected to rise above this critical level at any time in the coming half-decade,” writes the company in explaining the bullish tone of its price forecasts.

Soon to be past its best, the firm predicts, is copper, with mine capacity growth beginning to exceed that of consumption from now until late 1991. Metals & Minerals projects a net addition to annual mine production potential of 1.1 million tonnes during the next three years.

The lead market is believed to have the least to lose from any evaporation of general speculative interest: end-1988 stocks will not be greatly below those of the recent past, mine capacity utilization will still be below 80% and secondary output will be no greater than that in previous peaks. Also expected to remain broadly balanced, at considerably higher prices, is the zinc market. The company points out that while the commercial nature of the zinc industry protected it well through the early- 1980s recession, it left it ill-prepared for the production difficulties of 1988. Zinc stocks never rose as far as those elsewhere, so there was little slack on which to call. Similarly, mine-through-smelter production capacity was never too far out of line with demand. Openings of a number of major new zinc mines will be somewhat offset by closures of other mines. Stocks replaced

Nickel prices to 1993 are expected to average around an inflation- adjusted $3(US) per lb. While producers were initially hard-pressed to match booming 1987-88 demand, Metals & Minerals believes output is now running above consumption, and that 1989-90 will see significant stock replenishment.

Also, the company sees aluminum as the market with the soundest fundamentals, with prices likely to remain strong almost no matter what happens to the world economy, and it believes tin is poised for significant price gains.

The 5-year review also contains comments on precious metals.

Reserves of gold in Canada contained in proven and probable mineable ore stood at more than 1,700 tonnes in January, 1988, up more than 15% the previous year, the federal ministry of Energy, Mines and Resources reports in a recent monthly publication.

The increase, the ministry says, was attributed to new mines and commitments to produce gold from conventional gold mines, in by- product form from base-metal operations and from reclamation projects involving tailings and other gold-bearing wastes.

According to ministry statistics, about one-third of all net mineable gold reserves added to the national total in 1987 came from tailings. ERG Resources’ recently opened tailings project at Timmins, Ont., for example, added more than 60 tonnes to the net reserves total.

Conventional gold mines account for 78% of the mineable reserves and 87% of the reserves recoverable in concentrator products, the ministry points out. Reserves containing gold produced as a byproduct account for 16% of the total, with tailings reserves making up the remaining 6%.

Also, while recovery rates at conventional gold mines tend to top 90%, for tailings and byproduct- recovery operations the rate is closer to 50%.

The ministry names a couple of new tailings projects in the works, one at Hedley, B.C., involving Candorado Mines and Cantrell Resources, and the other at Nakina, Ont., involving Pelham Gold ‘N’ Grain and Cumo Resources. Also, other tailings projects are being evaluated in Newfoundland, Ontario and British Columbia.

Giant Yellowknife commenced operations at a tailings project in the Northwest Territories in May of this year, while LAC Minerals now has its own tailings reclamation operation under way at Kirkland Lake, Ont.