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By Shane Lasley
Mining News 

Gold, copper glimmer on China appetite

With western economic powerhouses in turmoil, miners and analysts see resource hungry Far East nation as driving force for metals


Last updated 3/25/2012 at Noon

Worries about the ongoing sovereign debt crisis in Europe, uncertainty about where the U.S. economy is headed and a slowing of growth in China is prompting miners to favor gold over industrial and luxury minerals such as nickel and diamonds.

Some 62 percent of mining executives from 802 global mineral exploration and development companies said they expect gold prices to increase by at least 20 percent over the next two years when responding to questions about future commodities prices during the Fraser Institute's Survey of Mining Companies: 2011/2012. Only about 11.5 percent of this group thought the safe-haven metal would lose value over the same period.

These industry leaders forecast prices for silver, copper, diamonds, coal, zinc, nickel, potash, and platinum to hold steady or slide during the next two years.

Metal analysts agree that apprehension over the state of global affairs will continue to support strong gold prices.

"Continued demand from investors seeking wealth preservation in an environment of uncertain global economic growth, pessimism about fiat currencies, increasing social unrest and negative real interest rates are expected to fuel investment demand for gold," according to David Haughton, co-head of BMO Capital Markets' Metals & Mining Equity Research.

Copper outlook bright

Gold, though, is not the favored mineral of BMO Capital's metals and mining analysts. The financial service provider's research team sees copper as having more luster than its precious metal counterpart.

"The outlook for copper, along with BMO's other top commodity picks, strongly takes into consideration where Chinese demand is headed," Tony Robson, co-head of BMO Capital Markets' Metals & Mining Equity Research, said upon releasing the research team's first quarter 2012 report.

The global firm said copper is set to shine this year with an average price of US$3.80 per pound and a long-term forecast of $2.75 per pound, upgraded from its previous outlook of $2.50 per pound.

Mining executives too have a vigilant eye on China as they gauge demand for the metals they produce.

"As with most materials markets outlooks these days, when you look at copper you also have to focus on China, since China accounts for more than 40 percent of global copper consumption," Teck Resources Ltd. President and CEO Don Lindsay told industry leaders gathered at BMO Capital's 21st Global Metals & Mining Conference in Hollywood, Fla.

"As they continue to urbanize 20 million people per year, the electrical generation, transmission and distribution has to roll ahead of the movement of people," he added.

China's dominant role in consumption of copper and other metals has analysts and miners keeping tabs on the Far East country's economy, especially during the recent cooling of gross domestic product growth.

Lindsay said he is frequently asked whether Teck foresees China's economy making a hard or soft landing.

"Judging by recent economic data, and the government's recent actions on bank reserve ratios, we think neither will occur," he answered.

"Keep in mind that this is policy-driven slowdown - they want to slow down, and they are targeting GDP growth-rates in the 7 percent range. In absolute terms though, this is still more growth than five years ago when their percentage of growth was 10 or 12 percent on a smaller economic base," he added.

Over the past five years, China's economic base has more than doubled, from a GDP of about US$3.5 trillion in 2007 to US$7.3 trillion in 2011.

"With recent GDP growth of 8.9 percent and industrial production growth at 12.8 percent; these numbers look very good indeed," the Teck leader said.

In order to sustain growth in a troubled global economy, China is targeting 7.5 percent GDP growth for 2012.

"The economic slowdown in China is mainly the result of our proactive macro controls. One should recognize that China's economy is under downward pressure due to the contraction of the external market caused by the European debt crisis," China's Premier Wen Jerboa explained during a March 14 news conference. "Under such circumstances we have taken the decision to adjust downward China's GDP growth target, mainly because we want to continue to press ahead with our structural economic adjustment."

According to preliminary data for February, China's appetite for copper has not yet been sated.

Barclays Capital reported that unwrought copper imports for February where 484,569 metric tons, the second-highest level on record. The financial firm said this monthly increase of 17 percent was a surprise.

"There are many theories in the market as to why February's imports were so strong, including financing deals and arrival of delayed shipments," Barclays said in response to the copper data.

The global financial services provider said that if you take a longer-term look at the import data the growth is closer to 5 percent. Even this more modest number indicates increasing imports despite a cooling economy.

"Our belief for this year is if China's not importing it, you probably should not be investing in it, because with a negative GDP growth for Europe perhaps offsetting a slightly positive one in the U.S. we need the BRICs (Brazil, Russia, India and China) to drive commodity demand in 2012 much more so than 2010 and 2011," Robson told global miners gathered at the 21st Global Metals & Mining Conference.

China's appetite is also the driving force behind the demand for other industrial commodities such as zinc, nickel and thermal coal.

Gold continues climb

Global miners and market analysts agree that the continued weakening of the U.S. dollar and other global currencies will continue to support a strong gold price.

"We think, as a result of a number of the monetary policies, other currencies are going to continue to be under pressure and on a relative basis gold will perform well," Barrick Gold Corp. President and CEO Aaron Regent told attendees of BMO Capital's Global Metals & Mining Conference.

The Barrick executive pointed to the 440 million tons of gold hoarded by central banks in 2011 as validation of his bullish view of the safe-haven metal.

Gold, which fetched an average US$271 per ounce in 2001, has made consistent price gains over the ensuing decade. In 2011, the price of the precious metal climbed from US$1,389 per ounce to US$1,531 per ounce peaking at US$1,900 in September.

The precious metal averaged US$1,571 per ounce for the year, a 28 percent jump from the average US$1,225 per ounce for 2010.

BMO analysts foresee a continued upward climb in gold prices through 2012, though at a slower pace than in recent years. The financial firm forecasts the yellow metal will fetch an average of US$1,700 per ounce for the year.

"Optimism that Europe will be able to navigate its debt crisis, encouraging U.S. economic indicators, and improving consumer sentiment may serve as headwinds in the early part of the year," the financial firm wrote in its first quarter metals report. "As the U.S. navigates the later-stages of its presidential election campaign, the severity of the fiscal imbalance may again come to the forefront and erode recent dollar strength."

China is expected to be an increasingly important driver for demand of physical gold.

"In addition we are seeing strong demand from emerging markets like India and China; and in particular China," Regent said.

The Barrick CEO told colleagues attending the Global Metals & Mining Conference that he expects China to overtake India as the world's largest gold-buying country by 2013.

Christopher Barker, a precious metals analyst and contributing writer for The Motley Fool, sees a more fundamental driver to the current gold bull market.

"One of the factors that few seem to recognize as a potential driver for gold at this juncture involves the rate at which all-in mining costs have surged higher along with gold prices to effectively inhibit the development of new supply," Barker told Mining News.

In February, AngloGold Ashanti CEO Mark Cutifani said he estimates the average price to produce an ounce of gold is US$1,650, when the capital costs are factored into the all-in production costs.

The analyst believes these costs will prevent the gold price from going much lower and puts many of the more expensive mines to build and operate outside the economic window.

"It's not only remote projects like Newmont Gold's Hope Bay (Nunavut) that come under strategic review within such an environment, but also a wide array of previously less economic or sub-economic projects that most analysts would have envisioned as already offering robust economics in this strong gold price environment," said Barker.

"When one adds to that condition the severe financial impairment of junior explorers and developers by virtue of a noticeably lackluster level of participation by equity investors, I believe that something has to give to alleviate this broadly unsustainable condition," he added.

Venture capital scarce

Despite continued strength in commodities prices, miners and junior explorers have been hit hard by the turmoil and uncertainty in the global financial markets. BMO said share prices of the juniors it covers slid an average 35 percent over the past 12 months, and producer share prices have dropped 17 percent.

"We still see a dichotomy; we still see that share prices are weak but commodity prices are strong," BMO Capital's metals research team wrote.

Global financial fears have resulted in investors moving their money away from the mining sector. This is particularly tough for the junior explorers that depend on venture capital to seek the next deposits of copper, gold and other metals the world needs and desires.

Or as one unnamed exploration vice president who responded to the Fraser Institute survey put it, "We have enjoyed the party for the last few years, now we will have to tolerate the hangover. Everyday people need to manage their finances better, and governments need to follow suit."

"Whatever happens in 2012, the bad news is already likely factored into mining equity prices," the analysts added.

Despite the dichotomy, the Metals Economics Group foresees a slight increase in exploration spending in 2012, according to an exploration report that the mining research group released in conjunction with the Prospectors and Developers Association of Canada convention held March 4-7.

"Although early indications are that some juniors plan to increase their exploration budgets in 2012, unless equity markets improve over the first quarter, many will likely be forced to reduce exploration spending this year. We therefore expect a slight decline in spending by the juniors, offset by increased spending by the producers, resulting in a net increase of 5-15 percent in exploration spending by the industry as a whole in 2012-a relatively small change compared with the 40-50 percent swings of the past few years," according to MEG's World Exploration Trends 2012.

Despite the robust exploration spending in recent years, Regent said the mining industry is struggling to keep up with the growing demand for metals.

"Continued industrialization and urbanization of countries like China and India will be strong pulls for demand," the Barrick CEO said. "The industry is challenged to mount a supply response. It's difficult to find deposits, and once you find them it is difficult to put them into production."


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