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April Updates

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Markets beyond the worst?

The turn in metals prices was being called in April on news that profits of China’s industrial corporations jumped in March by the most since July 2014. Industrial output growth in China quickened to 6.8% in March, surprising analysts who had expected it to rise 5.9% on an annual basis. Contributing to the bullish mood was China’s move to scrap export subsidies on a range of products, most notably steel. The Bloomberg Commodity Index rose 7.8% in April after a 3.8% gain in March, rebounding after January’s level fell to the lowest since at least 1991. Speculators were reported to have piled into US commodity futures, with trade data showing more than 75% of funds in the market holding long positions. As sentiment improved, Glencore sold bonds for the first time since the rout in commodity markets forced it to trim debt and sell assets. However, key mining industry players were cautious about the rally’s long-term sustainability. BHP Billiton does not expect recent rises in iron ore and coal prices, for example, to hold for more than a few months, as the uptick in prices would bring more supply to the market.

PULL QUOTE: ‘Key mining industry players were cautious about the rally’s long-term sustainability’

Precious metal producers guarded about celebrating price rises

Gold prices surged 15% in the first three months of 2016, the biggest quarterly rise in nearly 30 years, boosting miners’ share prices, attracting new investment and promising to bolster the economies of gold-rich countries. Driving the recovery was a mix of global risk, diminishing hopes of near-term US rate rises, a weaker dollar, modest oil price recovery and March central bank purchases: Russia bought 430,000 ounces of gold and Kazakhstan 86,819 ounces. Silver helped lead gold higher as Chinese silver imports climbed 39% in March, rebounding from the lowest levels since 2014, according to Customs figures. Sentiment was also helped when Barrick and Goldcorp both announced analyst consensus-beating Q1 earnings figures. Better market levels was a factor in Standard & Poor’s revision of their outlook from negative to stable for AngloGold Ashanti and Gold Fields. Yet while all this gives hope to a battered mining industry, after four tough years producers in Africa are still too wary to call the bad times as over. As Endeavour Chief Executive Neil Woodyer said. “There is optimistic caution.” And Randgold CEO Mark Bristow commented that the industry needs more time to recover and generate cash.

PULL QUOTE: ‘After four tough years producers in Africa are still too wary to call the bad times as over’

M&A and JVs indicate recovery

African producers say they need more than Q1’s recovery before plunging into new investment. Yet the recent spate of bids could be another indication of sector recovery. Amara Mining, which has projects in Ivory Coast and Sierra Leone, is the target of a $85 million bid by Australia’s Perseus Mining and Canada’s Endeavour Mining, which owns gold mines in Ivory Coast, Mali and Ghana, is in the process of taking over TrueGold, another West Africa-focused miner. Amara CEO John McGloin said there was a sense that things could be turning around, but “..people aren’t high flying. There is confidence, not exuberance.” In the fourth quarter of last year mining M&A reached the lowest levels recorded since KPMG started monitoring the sector in 2012, the consultants say. Now, as markets improve, BHP Billiton CEO Andrew Mackenzie told The Australian newspaper that the world’s biggest miner is “ready to pounce,” but he also expects any deals to be “few and far between”. Prospects for JVs seem better – Randgold Resources has entered a joint venture in Democratic Republic of Congo with an Israeli billionaire Dan Gertler – controlled company and a state miner. Randgold has also signed joint ventures in northeastern Congo with the Toronto-listed Kilo Goldmines, Deveron Resources and Loncor Resources.

PULL QUOTE: There is confidence, not exuberance. Amara CEO John McGloin

Diamond sales improve as Alrosa tests out radical moves

Futures trading in diamonds is a project being floated by Russia’s Alrosa at a time when demand for the stones seems to be recovering. The latest De Beers report shows rough diamond sales of $1.8 billion for the first three sites of 2016, in line with a forecast from JP Morgan Analysts for the whole of H1 2016. Figures from Alrosa were also encouraging, sales revenue rising from the 2015 Q1 figure of $1.1 billion to $1.3 billion in Q1 2016. The improvement is put down to production cuts and increased marketing after an 18% drop in 2015’s prices, and restocking in 2016. Sales in 2016 across the industry have generally been good so far. However, comments from Petra, Rapaport Morgan Stanley, Deutsche Bank and Citi all reflect the view that continued recovery depends on supply control from the major producers to the midstream and stable retail demand. Meanwhile, Alrosa and the Moscow Exchange are testing out brokers on yet another attempt to provide a hedging contract, the investment trade to be in standard diamonds weighting 0.5 and 1 carat, costing around $80 and $25. Alrosa is also exploring further radical change to its selling strategy with the launch in Russia of unilateral auctions of rough diamonds and industrial stones.

Business challenges in South Africa

  • The rand is teetering on the brink of ‘junk’ status, according to all but one of the 17 economists surveyed by Reuters. They see Standard & Poor’s downgrading SA’s foreign currency sovereign credit rating to sub-investment grade. While SA’s bonds are already trading in line with ‘junk’ status there would still be significant capital outflows, as a downgrade would force selling by institutions, which only have a mandate to purchase investment-grade bonds.
  • In another attempt to raise gold sector wages, South Africa’s Association of Mineworkers and Construction Union (AMCU) gave a 48-hour strike notice to Sibanye Gold.
  • Better news on SA Mining Charter changes: consultations look like being extended after mining companies objected to a new draft law demanding that companies must at all times be at least 26% black-owned, even if some of the black shareholders choose to sell out. Companies say it would impose unfair conditions and that it should not be their responsibility to do constant checks.

 

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