Commodity Blog

Archive for February, 2008

Newmont Mining Corp., the world’s second-largest gold producer by volume, said global production of the precious metal will decline as new deposits that are profitable to mine become harder to find.
“It’s more unlikely that we’ll find big deposits, near the surface, that are economic to mine,” Chief Executive Officer Richard O’Brien said today in a presentation to analysts in Denver, where the company is based. “We see a continued decline in production — not just ours, but everybody’s.”
Global output fell to a 10-year low of 2,479 metric tons in 2006, according to London-based researcher GFMS Ltd. The firm expects 2007 production of 2,444 tons.
Gold prices have gained for seven straight years, reaching a record $942.20 an ounce on Jan. 30, amid increased investor demand, higher costs of production and a dearth of new discoveries to replace output. Mining companies had reduced exploration expenditures in the previous decade after bullion prices dropped as low as $253.20 an ounce in 1999.
Newmont estimates that only 4 percent of all new gold discoveries are larger than 5 million ounces, O’Brien said. Newmont will consider developing deposits smaller than 10 million ounces in future, he said.
Boddington Mine
The company is digging the Boddington mine in Australia and will decide this year whether to develop the Conga deposit in Peru and the Akyem project in Ghana. Newmont also made a new discovery at its Nassau joint venture with New York-based Alcoa Inc. in Suriname, Newmont exploration manager Ian Douglas told analysts in Denver.
The company budgeted $240 million to $255 million for exploration projects in 2008, up from $198 million spent last year, O’Brien said. Contractor drilling costs jumped 30 percent in 2007, he said.
Newmont rose 65 cents, or 1.3 percent, to $50.87 at 1:20 p.m. in New York Stock Exchange trading. The stock has gained 4.2 percent this year.

Gold N.Y. Spot $ 918.8
Silver N.Y. Spot $ 17.07
Lead LME Cash $ 1.3041
Copper LME Cash $ 3.4523
Zinc LME Cash $ 1.0614
Nickel LME Spot $ 12.41
Aluminum LME Spot $ 1.2134
Platinum N.Y. Spot $ 1874.00
Palladium N.Y Spot $ 439.00
Oil WTI Cushing $ 89.3
Natural Gas (Henry Hub)($/MMBtu) $ 7.99
Mid-Columbia (US$/MWh) $ 68.02
CAD/USD (current) $ 0.9962
AUD/USD $ 1.1138
USD/AUD $ 0.8978
USD/CAD $ 0.9886
CAD/USD $ 1.0115
EUR/USD $ 1.4496
Nasdaq 2317.17
DJI 12273.18
S&P/TSX 12984.82
S&P/TSX Global Mining 108.36
Lead LME Stocks 49,000
Zinc LME Stocks 115,600
Copper LME Stocks 166,750
Nickel LME Stocks 46,926
Copper COMEX Stocks 13,978

As unnerving as the markets’ latest roller-coaster ride has been for investors, commodities remain a good bet for respectable gains in a portfolio, experts say. From corn and wheat to oil, iron ore, coal and precious metals, prices are likely to be driven higher by worldwide supply shortages and growing demand.
“Commodities have a bright future, but investors should recognize that these stocks are cyclical,” says Ari Levy, vice-president and director, TD Asset Management Inc., who is portfolio manager for TD Resource Fund and TD Energy Fund.
For the most part, Mr. Levy and other investment experts are bullish on commodities because whether or not the U.S. economy falters, demand is huge in other much larger markets such as China and India, where there have been few signs of an economic downturn.
“In the 1990s, when commodity prices were low, companies stopped looking for mines and building refineries. As a result, supply has not kept up with demand. Investors are starting to see this and the supply side is driving the markets,” says Craig Porter, vice-president and portfolio manager for Front Street Capital in Toronto. His company manages a handful of funds for the Canadian Imperial Bank of Commerce, including CIBC Precious Metals Fund and CIBC Canadian Resources Fund.
Investors looking for a piece of the commodities action have a long list of options, including individual shares, mutual funds and exchange traded funds.

ENERGY
Mr. Levy suggests investors take a hard look at oil, in particular shares in companies with large-scale, ongoing growth projects that will enable them to capitalize on rising demand.
He is high on firms working in Alberta’s oil sands, including TSX-listed Suncor Energy Inc. and EnCana Corp., both of which showed double-digit gains at the end of 2007. He suggests buying individual stocks or purchasing them through mutual funds.
Mr. Levy also likes the prospects for natural gas, and again recommends EnCana.

METALS
Mr. Levy is also bullish on aluminum because the material’s tensile strength and lightness are desirable for many manufacturers. A company he likes is Pittsburgh-based Alcoa Inc., which trades on the New York Stock Exchange.
He says another good bet is zinc (used in construction, transportation, consumer goods and electrical appliances), which appears to be lacking in supply as global demand for the metal continues to rise, particularly in China.
Investors interested in adding zinc to their portfolios should consider TSX- listed Teck Cominco Ltd., of Vancouver, which Mr. Levy notes is involved in exploration for and mining of zinc, as well as copper, lead, gold and metallurgical coal.
“I do not see huge increases in supply growth to match global demand, in particular China’s need for plating,” he says.
Mr. Porter thinks there’s good money to be made in iron ore and coal. He recommends investors take a hard look at Companhia Vale do Rio Doce, the Brazilian iron ore company that took over Inco last year and is the world’s largest iron ore producer.
As 25 million Chinese people annually move from the countryside to cities, that country will need hospitals, schools, roads and new housing, all of which will require steel, Mr. Porter says. “Both the iron ore and coal needed to make steel are in very short supply. There are deposits out there but a lot of mines have yet to be built or the existing ones have capacity constraints,” he says.

DIAMONDS
Diamonds are also high on Mr. Porter’s commodities list. He reasons that as economies strengthen in the world’s poorer countries, their citizens will have more disposable income for luxury purchases. This, combined with shutdowns of mines at the end of their economic life by huge companies like De Beers, could produce a diamond shortage within five years, he says.
Mr. Porter’s diamond picks are Harry Winston Diamond Corp., a high-end jewellery retailer that owns the Diavik diamond mine in the Northwest Territories; and junior mining company Rockwell Diamonds Inc. of Vancouver, which operates in South Africa and has a history of mining high-grade diamonds.

AGRICULTURE
Mr. Porter also sees solid growth potential in agricultural commodities, as Asian countries add more meat to their diet in place of vegetables and rice. He sees prices rising as the demand for animal feed such as grain and corn rises; he expects prices to get a further boost as demand for ethanol rises and producers clamour for more of the corn used to make the fuel.
His recommendations are Saskatoon-based Potash Corp. of Saskatchewan Inc., which produces and markets potash, nitrogen and phosphate products to fertilizer, industrial and animal feed customers around the world; and Agrium Inc. of Calgary, a major supplier of agricultural products and services in North and South America and supplier of specialty fertilizers in North America. Both trade on the TSX and the NYSE and can be purchased in various mutual funds.
Mr. Porter also likes the ETFS Grains Fund, listed on the London Stock Exchange, which tracks the price of corn, soybeans and wheat.
“No matter what the commodity, there are bound to be hiccups,” he cautions. “Over the past five years, there has always been something that has sent the sector in a correction — SARS, bird flu, fears that China would slow down — but things always bounce back,” he says.

Russia’s largest metals producer Norilsk Nickel (GMKN.RS) is preparing to place a EUR35 a share takeover offer for German copper manufacturer Norddeutsche Affinerie AG (NDA.XE), or NA, Austrian magazine FORMAT reports in a preview of its Friday issue.
The magazine bases its report on rumors in German investment banking circles. It doesn’t name specific sources.
Asked by Dow Jones Newswires Thursday, NA spokeswoman Michaela Hessling said: “We have absolutely no knowledge of this.” A Norilsk Nickel spokeswoman wasn’t immediately able to comment on the information.
The takeover rumor surfaces at a time when NA has placed a takeover bid for its Belgian peer Cumerio (CMR.BT) and is negotiating with Austrian industrial group A-Tec Industries (ATEC.VI) for its 25% stake in Cumerio. A-Tec furthermore holds a 13.7% stake in NA.
FORMAT quotes A-Tec Chief Executive Mirko Kovats as saying he is ready to consider the rumored offer.
“This would be the best that could happen from my point of view,” Kovats told FORMAT.

Gold N.Y. Spot $ 904.1
Silver N.Y. Spot $ 16.76
Lead LME Cash $ 1.2633
Copper LME Cash $ 3.3317
Zinc LME Cash $ 1.0578
Nickel LME Spot $ 12.01
Aluminum LME Spot $ 1.1794
Platinum N.Y. Spot $ 1835.50
Palladium N.Y Spot $ 421.5
Oil WTI Cushing $ 86.6
Natural Gas (Henry Hub)($/MMBtu) $ 7.95
Mid-Columbia (US$/MWh) $ 72.17
CAD/USD (current) $ 1.0105
AUD/USD $ 1.1186
USD/AUD $ 0.8940
USD/CAD $ 0.9974
CAD/USD $ 1.0026
EUR/USD $ 1.4518
Nasdaq 2274.24
DJI 12199.86
S&P/TSX 12870.21
Lead LME Stocks 49,000
Zinc LME Stocks 112,725
Copper LME Stocks 169,475
Nickel LME Stocks 46,782
Copper COMEX Stocks 13,978

Metals markets could see longer-term prices move up if BHP Billiton Ltd.’s (BHP.AU) sweetened $147.7 billion takeover bid for rival global miner Rio Tinto Ltd. (RIO.AU) proves successful.
The key synergy and future money spinner for the merger is still iron ore, where longer-term prices are likely to rise, but there is also upside potential for alumina and copper on a regional basis, analysts said.
A takeover would create a $336 billion mining giant with a leading position in iron ore, copper, coal, alumina and aluminum.
When BHP announced its initial and informal bid proposal back in November, commodity consumers led by China cried foul fearing consolidation would give the company unprecedented pricing power in iron ore and other raw material markets.
A merged entity would control 36% of the global seaborne iron ore market, coming in just behind Brazil’s CVRD, the global number one with a 300-million-ton annual production.
This is indeed a worrying development for Asian and European steel mills, but BHP on its part has been on a charm offensive since then, talking to Chinese steel mills among others and placating at least some.
More importantly, Aluminum Corp. of China, or Chinalco, along with U.S-based Alcoa Inc., has taken 9% stake in Rio Tinto which it bought from the open market for $14.5 billion.
State-owned Chinalco has said it doesn’t plan to make an offer for the whole of Rio Tinto, or seek a seat on the company’s board, but the stake has effectively given the Chinese a seat at the negotiating table as well as more say in pricing matters.
That has put the focus back on BHP’s offer price, rather than the bigger market share it would command, should the merger goes through.
Interestingly, BHP’s Chief Executive, Marius Kloppers has said the latest offer represented the best price based on information currently available, hinting the miner could sweeten the offer if it saw greater synergy in the deal.
The implication is that if Rio wants more money, it will need to open its books and share information with BHP to allow the identification of further synergy, said ABN Amro analyst Warren Edney.
It was also significant that Kloppers said the miner could have necessary regulatory approvals by the second half of this year. “Following detailed analysis, we believe that any regulatory concerns can be addressed without meaningfully impacting the benefits of the combination,” he said.
While competition issues will be “a reason why there won’t be a quick deal,” concern over antitrust issues “appears to be overdone,” said ANZ Commodity Strategist Mark Pervan.
Many see Chinalco Rio Tinto buy as an admission that fighting the merger from a regulatory angle to prevent further consolidation in the already highly concentrated iron ore market won’t be easy.
“There’s no international regulatory body for the Chinese to turn to,” said Commodity Analyst Tom Price at Merrill Lynch.
Regulatory concerns at the ACCC, the Australian Competition and Consumer Commission, will be limited as the body focuses on domestic issues, and the vast majority of Australia’s iron ore is for export.
Complaints by European steel mills lack teeth because they import iron ore from Brazil rather than Australia.
Iron Ore Prices To See The Biggest Impact
Despite lower first-half profits of $6.02 billion, down 2.4% on year, BHP Wednesday said it was positive about the outlook for its products while Asian economies showed little sign of slowing.
Even amid mounting concerns about the U.S sliding into a recession and the International Monetary Fund downgrading its forecast for global economic growth, BHP in January announced it signed a revised iron ore sales agreement with Chinese steel maker Boasteel, to supply 10 million tons a year for the next ten years, up from an earlier agreed 6 million tons a year.
However, many forecasters have scaled back expectations for Chinese growth, with Barclays Capital cutting its 2008 growth forecast to 8.85 from 10.2% earlier.
But for commodities, that slowdown will have little impact, analysts such as Yingxi Yu at Barclays Capital say. Even in single digits, China’s growth is still far stronger than elsewhere and large-scale Chinese infrastructure projects that are independent from export markets will still go ahead.
While the fundamental outlook in the industry hasn’t substantially changed since BHP first announced its intention to buy Rio, a merger could also act as a hedge, should there be a slowdown.
If demand does weaken from current levels, this new generation of mining giants may use their size to fight off lower prices, said Peter Richardson, a commodity analyst at Melbourne-based resource fund Craton Capital, which has assets worth around $350 million under its management.
Steel mills may not see an immediate impact, but in the long run, BHP will have the ability to squeeze production to support prices, despite Kloppers’ assurances that BHP/Rio would raise raw material production, and make it cheaper.
“BHP is pushing for an iron ore index as a proxy for spot prices rather than (have) annual contracts. They would only do this if they believe they have sufficient control over supply,” said Merrill Lynch’s Price.
Alumina, Copper Pricing To Change Too
Rio’s own $38.1 billion acquisition of Canada’s Alcan in November would mean a combined BHP-Rio would have a stranglehold on much of the world’s supply of alumina, the raw material used in the production of aluminum.
Alumina prices are currently linked to metal prices on the London Metal Exchange but that may change.
BHP wants to dismantle that linkage, favored by integrated producers such as U.S-based Alcoa Inc. Kloppers has argued that, like previously with iron ore and steel prices, the current pricing for alumina doesn’t reflect the market’s supply and demand fundamentals.
“In iron ore, spot markets trade at a sizable premium to contract prices, and act as a bellwether for contract prices,” said Pervan. “Delinking alumina from the aluminum price would be bullish for alumina and would pressure high-cost smelters,” he said.
In copper, BHP/Rio’s potential control of 13% of global copper mines wouldn’t be of concern given Chile’s state-owned copper giant Codelco claims a similarly dominant position. But the merged entity would control around half of copper concentrate imports into Asia, potentially worrying smelter costumers there, said Price.
BHP and Rio co-own Chile’s Escondida mine, the world’s largest copper mine with a capacity of 1.2 million tons and producing about 9% of global copper consumption. “That doesn’t sound like much but Escondida accounts for about half of copper concentrate supply into Asia,” said Price.
BHP owns 57.5% of Escondida and Rio 30%. The remainder is held by a Japanese consortium led by Mitsubishi Corp. which has 10% and the International Finance Corp. which has 2.5%.

Mining analysts are missing the mark in their predictions for a sharp decline in metal prices, according to a report from Ernst & Young.
“Contrary to the continued assertions of mining analysts, current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices,” the report says of the recent runup in commodities.
“While analysts are wary of straying too far from their comfort zone of historic averages, the mining companies — by their actions — are taking a far more realistic view.”
Looking back, the Ernst & Young team found that short-term metal price forecasts by analysts since the start of 2005 have been “significantly adrift” of the eventual price reality, missing targets by between 20 and 200 per cent.
The end result is that most mines and mining companies have been “materially undervalued,” which means that significant premiums have often been paid over market prices. The report noted that over $100-billion (U.S.) has been spent on the Falconbridge, Inco, Phelps-Dodge and Alcan deals, as major mining industry players battle for a dwindling supply of low-cost production around the world.
“Research shows mining companies that have pursued growth through acquisitions have consistently outperformed those that have chosen to grow organically,” the report said.

Gold N.Y. Spot $ 904.60
Silver N.Y. Spot $ 16.54
Lead LME Cash $ 1.2655
Copper LME Cash $ 3.2568
Zinc LME Cash $ 1.0811
Nickel LME Spot $ 11.97
Aluminum LME Spot $ 1.1753
Platinum N.Y. Spot $ 1813.50
Palladium N.Y Spot $ 417.00
Oil WTI Cushing $ 88.00
Natural Gas (Henry Hub)($/MMBtu) $ 7.82
Mid-Columbia (US$/MWh) $ 74.03
CAD/USD (current) $ 1.0032
AUD/USD $ 1.1146
USD/AUD $ 0.8972
USD/CAD $ 0.9957
CAD/USD $ 1.0043
EUR/USD $ 1.4655
Nasdaq 2334.05
DJI 12366.50
S&P/TSX 12989.60
Lead LME Stocks 49,000
Zinc LME Stocks 112,825
Copper LME Stocks 171,975
Nickel LME Stocks 46,770
Copper COMEX Stocks 13,978

Barrick Gold Corp. (ABX), the world’s largest gold producer, expects to see the price of the precious metal trade north of $1,000 an ounce, in part bolstered by a decline in global output, the company’s vice president of exploration said Tuesday.
Alexander Davidson said output across the industry is expected to decline by 10% over the next five years as a result of lower production from South African mines due to power shortages and safety concerns.
He said global production also is being knocked by the increasing length of time it takes companies to get permits to mine, longer ramp-up to production times in part due to skills shortages and higher capital costs.
Davidson, speaking to Dow Jones Newswires on the sidelines of the African Mining Indaba in Cape Town, said average industry cash costs are expected to be in the $500 to $600 an ounce range going forward.
“We’re certainly bullish on gold north of $1,000,” he said.
Davidson said the strength in the bullion price will also be driven by the continued “flight to safety” in investors’ portfolios and the possibility of central bank purchases of the metal.
Toronto-based Barrick has a portfolio of 27 operating mines that produced 8.64 million ounces of gold in 2006.
As of 1340 GMT, spot gold was trading at $889/oz, having hit a record high of $936.95/oz on Jan 30.

Gold N.Y. Spot $ 890.20
Silver N.Y. Spot $ 16.37
Lead LME Cash $ 1.2542
Copper LME Cash $ 3.2664
Zinc LME Cash $ 1.0893
Nickel LME Spot $ 12.05
Aluminum LME Spot $ 1.1780
Platinum N.Y. Spot $ 1765.50
Palladium N.Y Spot $ 413.00
Oil WTI Cushing $ 88.40
Natural Gas (Henry Hub)($/MMBtu) $ 7.56
Mid-Columbia (US$/MWh) $ 73.49
CAD/USD (current) $ 1.0047
AUD/USD $ 1.1136
USD/AUD $ 0.8980
USD/CAD $ 1.0069
CAD/USD $ 0.9931
EUR/USD $ 1.4642
Nasdaq 2342.50
DJI 12401.13
S&P/TSX 13076.14
Lead LME Stocks 49,075
Zinc LME Stocks 113,025
Copper LME Stocks 174,775
Nickel LME Stocks 46,650
Copper COMEX Stocks 13,978