It was a long time coming, but from the vantage point of early 2004, we can probably screw up our courage and declare the long resource-industry slump over, and maybe call 2003 the Year of the Bullion Bull.
For the first time in a long time, resource companies are the darlings of the exchanges, financings are coming thick and fast, and an industry that had grown used to having doors shut in its face is again welcome in the capital markets. We’re relieved, too: and hopeful that this time the good years won’t be poisoned by scandal and hype.
For the first time since 1997, the amount of money spent on mineral exploration increased. And what an increase: expenditures were up 26% from the previous year, at US$2.2 billion.
That’s a long way from the peak of US$5.2 billion in 1997, back when capital was being thrown at the mining business faster than it could be poured down drill holes. And in a way, that’s a good sign: if it becomes too easy to raise money, some may not be well spent. Investors, we’ve noticed, get upset about that, and desert the sector for protracted periods. We’re optimistic. There’s a long way to go before exploration companies are spending at 1997 levels again, and there’s good reason to believe the industry itself is a bit wiser.
One of the themes that dominated the year was the recovery of the gold price, but in fact we’ve seen a generalized recovery throughout the metal markets. As it was gold that led the way out of the last price slump, though, it seems fair to look at it first. Gold started the year at US$342.20 and finished it at US$417.25, for a gain of 22%.
A big part of the rise in the gold price was, admittedly, the weakness in the U.S. dollar; that is natural in any dollar-denominated price. But as the World Gold Council kept trying to tell us over the past five years, gold prices denominated in other currencies were already going up. If they’re now flat against those other currencies, that only means that U.S.-dollar exchange rates are coming back into line.
The U.S. dollar index, maintained by the Federal Reserve Bank, was down only 9% against a broad basket of currencies in 2003, and only 15% against the currencies of major trading partners. However significant the fall of the greenback has been, there was more to the rise in the gold price than just that.
One of the other factors had to be continued retreat by the gold hedgers. Barrick Gold, the paragon of the hedgers (and bete noire of the gold bugs) sold all its gold production at the spot price in the third quarter of 2003, the first time the company had done so since starting its hedge program.
Simple delivery into the spot market, though, wasn’t enough to explain the rising price, and neither were the relatively steady levels of both supply and demand.
The base metals recovered strongly in 2003, thanks to a global economic recovery and to a resurgence in the commodity-hungry economies of the Pacific Rim. But another factor has come into play, one not generally noticed: tighter supply, particularly in the copper and nickel markets. Copper is one of the few metals where production cuts from a single large producer — BHP Billiton, for example, or Codelco — can significantly move the market. In 2002, and again last year, major producers did accept the discipline of the marketplace, and the survivors are reaping the reward.
The rebound in the nickel markets — a rise of 135% — brings us to one of the more intriguing what-ifs of recent mining history: Voisey’s Bay would originally have come into production in 2002, had there been no hold-up in development. That would have put 60,000 tonnes of nickel on to the market, and it’s interesting to speculate whether that would have kept the nickel price down — after all, the market is not in a very deep deficit — or if it would have meant that Voisey’s shared in the nickel boom.
The improved metal markets, which seem to have taken some pundits by surprise, and the renewed interest in mineral exploration, underscore one of the themes that kept resonating during the long commodities slump. There really were very few good new projects, and no promise of a sustainable supply of many metals. We are probably witnessing the early days of a much better market for resources, and the response from the capital markets has been to get back in on the ground floor.
Last year was also the Year of the Loon, as the national currency ran up 22% in U.S.-dollar terms. The loonie had been much derided in the popular press in recent years, which said a lot about the level of economic literacy in the media. (It is a fallacy to think that business reporters had come straight over from the sports department, where big numbers are generally thought good, and small numbers bad. After all, if they’d been sportswriters, they’d write better prose.)
Instead, those of a nervous disposition in the mainstream media — which is to say, quite a few reporters — have lately discovered that in the export industries, a low Canadian dollar had depressed production costs. There is suddenly much hand-wringing about what a higher dollar might do to the automotive and other manufacturing sectors, and to the resource industries.
In reality it’s a wash, at worst, but more likely a net improvement for Canadian commodity industries. The broadly based LMEX Index of the London Metal Exchange was up 44% in 2003, and the Scotiabank Commodity Price Index, which includes agricultural, forest-products and energy prices, as well as the metals, is up 18%, all in U.S.-dollar terms. Against that, a 22% rise seems easy to live with.
Compare three other commodity currencies: the Australian dollar rose 34% against the greenback in 2003, the South African rand, 28%, and the Swedish krona, 21%. U.S. commodity producers may get the best out of the price increases, but there are several other boats being lifted by this rising tide — to varying heights. It remains for the commodity producers blessed (or cursed, depending on the attitude you take) with a rising national currency to take advantage of their bigger financial muscle and bring in capital improvements that can bring down their operating costs.
If 2004 comes through with steady economic growth, keeping demand for metals up, and if the industry uses the newly available capital wisely, there may be more good years ahead.
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