Foreign exchange effects on metal prices

At first glance, the effects of foreign currency zig-zags and inflation fears on mining are difficult to picture. Perhaps one way is to treat them simply as a foreign remittance being sent to you monthly. You would notice the fluctuation in the value received.

There is instability of international currency exchange rates viewed from a Canadian or U.S. dollar standpoint, but the prices of gold and other Canadian metals have fallen in strong currencies such as the Japanese yen, West German mark and Swiss franc. Precious and other metals are now an extraordinary bargain for them.

The Canadian dollar has gained 11% in value against the U.S. dollar since 1985; that is, our own mines now get much less in Canadian funds for metals sold offshore to show in their balance sheets, as prices are traditionally denominated in U.S. dollars.

Consider, for example, one mining company, Noranda Inc., which explained recently that Canadian dollar gains against U.S. currency mean that each one-cent increase in the Canadian dollar’s U.S. value costs it $16 million in after-tax profit. The first four months of 1988 saw a reduction in annual earning power by about $100 million after taxes and first-quarter profit fell to $30 million less than it would have been. Hard currency woes

Several Latin American mono- commodity mining nations have to mine and export the maximum possible to earn desperately needed hard currency, to maintain low- wage employment to keep down domestic unrest. This producing frenzy has had the effect of damping down certain dollar metal prices by flooding the market, which is painful competition for Canada’s high-cost mines.

The mining country of South Africa has different currency problems. The rand currency’s value hit a record low of 4.17 to the U.K. pound sterling during the first half of May this year. It fell even further in terms of U.S. dollars, reaching the lowest level in over a year at 2.24 rand to the U.S. dollar.

In the last few years, the rand price received by the mining companies for gold, platinum, etc. has risen considerably because of the rand’s weakness abroad. This has had some advantages. However, gold, the source of almost half of South Africa’s export earnings, has been at a virtual standstill at $450(US) per oz since February this year (until just recently).

This lull has not helped South Africa. A higher gold price would translate into larger amounts of rands for the companies and extra funds for the beleaguered government. South Africa’s inflation rate is a lusty 13.4% per year, making imported dollar products increasingly expensive, some of them vital to mining. Prices should rise

If and when the U.S. dollar starts a strong climb in value again, prices of gold, silver and other metals should rise, as expressed in the currencies of large metal-consuming economies in Japan, West Germany, the U.K., etc.

One predictable effect is that when those countries see metal prices climbing again in terms of their own currencies, they will buy more bullion and metals than usual in that rising market to protect themselves against even higher prices and this buying rush will help to boost the international dollar prices of most metals.

However, a stronger, more stable U.S. dollar, if taken as an isolated factor, could well contribute to a weakening of the dollar prices of metals, but a really steep dollar fall could precipitate increased inflation, which usually strengthens gold and metal prices.00400 3/8 T. P. (Tom) Mohide, a former president of the Winnipeg Commodity Exchange, served as a director of mining resources with the Ontario Ministry of Natural Resources prior to his retirement in 1986.