The worsening conflict in Libya cause instability in various commodities such as oil prices rose sharply to U.S. $ 112 per barrel. Although the situation in Libya is not going to threaten the global recovery, but it caused some alarm if it spreads and impinge on other countries oil priodusen which more substantial, like Saudi Arabia. If this happens, oil prices could spike above a record U.S. $ 147 per barrel occurred in 2008. A high price will certainly damage the national economy in the world, and hitting demand for commodities.
Except for gold and silver, that is. The two precious metals benefited from the growing fears to climb to US$1,409 and US$33.3 per ounce respectively. In contrast, platinum and palladium, with their greater industrial uses, fell back. Platinum closed lower at US$1,808 per ounce while palladium shed 7.7 per cent to US$777.75 per ounce.
Industrial base metals also suffered from the Libyan crisis. Copper closed lower at US$9,675 per tonne, or US$4.39 per pound. Nickel slipped to US$27,730 per tonne, and zinc also closed lower, at US$2,488 per tonne.
All the uncertainty made it a mixed week for the majors. BHP Billiton gained 1.8 per cent to 2,434p, Anglo American also gained 1.8 per cent to 3,285p, but Xstrata slipped 3.4 per cent to 1,382p. Rio Tinto closed 2.9 per cent lower at 4,270p, as it announced that its coastal operations in the Pilbara region of Australia continue to be hampered by issues associated with tropical cyclones.
Silver miners also had a mixed week, despite the strength in the silver price. Arian Silver closed 2.3 per cent lower at 43p, despite announcing the intersection of good silver grades six kilometres west of its San Jose site in Mexico. Mineralisation remains completely open along strike and at depth. But Hochschild Mining gained 6.5 per cent to 600p as it announced a resource upgrade at the Inmaculada project in Peru, where silver resources now amount to 76 million equivalent ounces at a grade of 498 grammes per tonne.
Gold producers were also in the news. In announcing Avocet Mining’s full-year results, chief executive Brett Richards revealed that his company is hoping to double the current one million ounce gold reserve at its Inata gold mine in Burkina Faso by the autumn. Such an upgrade would double the mine life to 12 years. Avocet is also drilling elsewhere in the region with a view to identifying its next mine. The shares edged lower to 217p.
Meanwhile, management at Medusa Mining issued a production forecast for operations at the company’s Co-O mine in the Philippines. The company expects to produce 102,000 ounces for the full year to June, at cash costs of just US$190 per ounce. Medusa has also approved construction of a new plant with a capacity to produce 200,000 ounces per year. The shares slipped 3.3 per cent to 440p.
In South Africa, Pan African Resources hasn’t quite been able to lift its gold production to the 100,000 ounces per year threshold yet. But on the platinum side the company appears to be making good progress. Construction at the Phoenix project is scheduled to start in the spring, with the company targeting commissioning this October, and full production in the first quarter of 2012. The shares gained 2.4 per cent to 10.5p.
In gold exploration, Mali-focused African Mining & Exploration has started drilling at the Karan licence, where there’s been extensive artisanal mining over many years. That news wasn’t enough to get the market excited, though, and the shares closed seven per cent lower at 15.7p.
Shares in diamond miners slipped back despite positive news from the sector. By acquiring the Finsch mine in South Africa, Petra Diamonds has transformed an already strong production outlook, and turned itself into the largest independent diamond miner. Chief executive Johan Dippenaar said he didn’t see any other deals on the horizon, but added that generating US$1 billion in turnover was very much in the group’s sights by 2019. Market commentators expressed some disappointment that profits hadn’t been higher, though, and the shares closed 1.3 per cent lower at 173p.
DiamondCorp provided further evidence of the strong rebound in diamond prices, with the announcement that it had sold 1,321 carats of diamonds recovered from tailings at its Lace mine, for US$94 per carat. This exceeds the US$55 per carat received in September 2008, just prior to the price collapse, and compares with the US$33 per carat received in May 2009 at the bottom of the market. The shares closed 1.7 per cent lower at 14.75p.
And, following encouraging recent sampling results, it came as little surprise when Stellar Diamonds announced it would now focus on the development of its kimberlite diamond projects, albeit the alluvial projects continue to generate useful cash flow. Even so, Stellar closed 8.7 per cent lower at 8.9p.
Among energy commodities, Kalahari Minerals announced it was in talks with Australia’s Extract Resources with a view to simplifying the ownership of the Husab uranium project in Namibia. Husab hosts the world-class Rossing South deposit, and Extract, in which Kalahari holds a 41 per cent interest, has long been in talks with Rio Tinto, which controls the nearby Rossing mine, about the possibility of combining the two operations. Recent chemical assays have confirmed new targets at Husab and Kalahari's shares climbed 2.6 per cent to 246p.
In the coal space, shares in Churchill Mining fell 20.7 per cent to 88p after it announced that despite booming Asian coal demand, it still hasn’t finalised an investment package to fund development of its substantial East Kutai coal project in Indonesia. Churchill is currently examining three proposals from Indonesia, India and the Middle East. Elsewhere in coal, Beacon Hill Resources has completed drilling at the Minas Moatize coal project in Tete, Mozambique, where the company aims to expand and further define the current resource of 33 million tonnes. An updated resource is due shortly, and in the meantime the company continues to sell coal domestically, ahead of first exports. The shares gained 2.2 per cent to 17.13p.
Also in the Tete region of Mozambique, Baobab Resources jumped 23.1 per cent to 24.6p after it released a promising update from its Tete iron, vanadium, and titanium project. The latest results show that the resource contains a broad body of heavily mineralised magnetite.
Also in iron ore, London Mining announced the results of a scoping study investigating the potential of a 15 million tonnes per year operation at its Isua project in Greenland. The project has an estimated post-tax net present value of between US$2.5 billion and US$4.5 billion, with a capital requirement of US$2 billion, and could be in production in early 2015. Big numbers, and some commentators wondered if the company was spreading itself a little thin. London’s shares slipped 10.3 per cent to 368p.
Recently-floated Ferrum Crescent has begun drilling at its Moonlight iron ore project in South Africa. That wasn’t enough to satisfy punters in a jittery market, and the shares closed 5.5 per cent lower at 15.13p. Also weaker, Ferrexpo fell by 6.8 per cent to 409p as it announced plans to acquire up to 1,000 newly-built open rail car wagons to transport iron ore pellets to the Ukrainian border, for onward delivery to customers. Each wagon will cost up to US$120,000.
In other commodities, Connemara Mining eased 2.6 per cent to 22.9p after it announced it had begun drilling for zinc on its three-licence Thurles block near the Lisheen zinc mine in Tipperary. The company also raised £1.05 million through a placing at 20p. Each new share also comes with a 12 month warrant exercisable at 35p. The new money will be used to finance an expanded drill programme in Ireland,
Meanwhile, Alexander Mining slipped 8.6 per cent lower to 15.53p after it announced plans to build a pilot cobalt processing plant in partnership with Anvil Mining at the Mutoshi deposit in the Democratic Republic of the Congo. The plant will use and test Alexander’s proprietary Ammleach mineral processing technology.
Amongst fund raisers, Titanium Resources Group raised £11.4 million through a placing at 10p. The new money will be used to repay a significant part of a loan from the Sierra Leone government. The company also changed its name to Sierra Rutile, or back to Sierra Rutile, as old hands will know. The shares leapt 60 per cent to 15p.
Finally, gold and copper explorer Bezant Resources raised £4.75 million through a placing at 50p, and will use the proceeds to fund the acquisition and initial work programme at its new Eureka project in Argentina. Bezant’s shares closed 10.9 per cent lower at 50p.
The worsening conflict in Libya cause instability in various commodities such as oil prices rose sharply to U.S. $ 112 per barrel. Although the situation in Libya is not going to threaten the global recovery, but it caused some alarm if it spreads and impinge on other countries oil priodusen which more substantial, like Saudi Arabia. If this happens, oil prices could spike above a record U.S. $ 147 per barrel occurred in 2008. A high price will certainly damage the national economy in the world, and hitting demand for commodities.
Not much. Australian market is about as exciting as watching Canada and Kenya to play cricket in India, in a competition that some wag thought should be called the World Cup. I think the third eleven of my old school will give some teams run for their money.
Doesn’t sound like there’s much of interest to report at all?
I wouldn’t say that. Three men and a dog watched the Canada-Kenya game in a stadium built to hold a crowd of 100,000, but the action on the ASX was at least well-followed by investors all round world, even if they weren’t exactly riveted by what the traders got up to. With that in mind, we’ll ferret out the more interesting movements in the Aussie market to brighten things up. But before we do that, let’s just set the scene. The all ordinaries index lost two per cent last week. The metals and minerals index lost 2.2 per cent, and the gold index eased by one per cent. One major event that affected the Australian market was, naturally, Libya’s growing civil war. But there was also concern about China’s continued tightening of its red-hot economy, and about yet another grand tax plan from the Australian Government.
You’re not serious? Another new tax on top of the mining tax?
Yup. The latest is a proposed carbon tax. Not a carbon trading scheme, just a flat tax, which we are told will become a trading scheme sometime in the future, maybe. Mining and oil will be hit hard by the new tax, which could harvest around A$3.5 billion a year. Perhaps unsurprisingly, it’s the creation of the Green Party, which is having an increasing say in how the country is being run. All of which means is that we’ve had three new taxes proposed in less than 12-months: the mining tax, a flood levy, and now the carbon tax.
Sounds like the current government might have a death wish.
No doubt about that, especially as the Prime Minister, Julia Gillard, said several times in the campaign before the August election that she would not introduce a carbon tax. Her exact words, on August 16th were: “There will be no carbon tax under the government I lead”. The critics have been merciless over that clear breaking of a promise, referring to her as “Ju-Liar” Gillard, a tag which seems to be catching.
Enough of the background. Time for prices, starting with the exceptional performers, followed by a call of the card.
Trawling through companies you’ve probably never heard of is always fun, and is often a way to discover or rediscover one or two fresh investment ideas. One bright light last week was Aguia Resources (AGR), which rose by A29 cents to A$1.20 in early Friday trade, as in interest in its plans for potash production in Brazil grew. The shares then eased somewhat to close at A$1.07, an overall gain for the week of A16 cents. Another company attracting interest was Alcyone (AYN), which rose A1.4 cents to A6.3 cents in response to the ongoing strength in the silver price. Meanwhile, another silver player, Cobar Consolidated (CCU), continued to move up, adding A5 cents to A93 cents. And Corazon Mining (CZN) caught the eyes of a few traders, on the strength of its exposure to Colombian platinum, and because it’s the latest plaything of Ed Nealon, the man who helped create Aquarius Platinum. Corazon’s shares rose A1 cent to A11.5 cents. In percentage terms the best of the new names was Metaliko (MKO), which reported encouraging gold assays from its Anthill prospect in Western Australia. Among the best was 44 metres at 2.4 grams of gold a tonne from a depth of 56 metres. That result helped Metaliko add A7 cents to A21.5 cents, though the shares did get as high as A24 cents on Friday.
Interesting. But now let’s switch across to the sectors, starting with gold.
Good choice because gold was the only sector that produced more than a couple of risers, though even here most gains were modest. Among the notable performers, Allied (ALD) added A4.5 cents to A65 cents, Crusader (CAS) put on A5 cents to A$1.14, and Kingsrose (KRM) gained A4.5 cents to A$1.37. Silver Lake (SLR) was also better off, up A14 cents to A$2.05 after a positive presentation by its chief executive, Les Davis, at an explorer’s conference in Fremantle. After that it was all down. Among the fallers, Troy (TRY) fell A9 cents to A$3.73, Kingsgate (KCN) fell A31 cents to A$9.35, Mt Isa Metals (MET) fell A6 cents to A62 cents, Ausgold (AUC) fell A15 cents to A$1.40, and Resolute (RSG) fell A7 cents to A$1.32.
Base metals next, please.
There was weakness right across the copper, nickel and zinc sectors, barring a handful of minor upward moves. The best performances in copper came from Hot Chili (HCH) which put on A2.5 cents to A66 cents, and Sumatra Copper (SUM), which rose half a cent to A28.5 cents. Best of the zinc companies was Overland (OVR), which announced an expanded resource at its Darcy project in Canada. In response, shares in Overland rose by A1.5 cents to A26 cents, but did get as high as A30 cents on Friday. No nickel company rose.
Elsewhere in the copper space, it was all down. Equinox (EQN) fell A21 cents to A$6.22. Exco (EXS) fell A5 cents to A58 cents. Marengo (MGO) fell A2.5 cents to A30 cents. Sandfire (SFR) fell A2 cents to A$7.24. OZ (OZL) fell A7 cents to A$1.64. Discovery (DML) fell A11 cents to A$1.26. In nickel, it was no better. Independence (IGO) fell A16 cents to A$6.82. Mincor (MCR) fell A5 cents to A$1.69. Panoramic (PAN) fell A20 cents to A$2.27. Finally, Western Areas (WSA) fell A22 cents to A$6.68.
In zinc, Perilya (PEM) fell A5 cents to A62 cents, Prairie Downs (PDZ) fell A4 cents to A20.5 cents, and Terramin (TZN) fell A3 cents to A39.5 cents.
Across to iron ore and coal.
It was a similar picture in both iron ore and coal: most down, a few up. The only rise of real interest among the iron ore companies came from Brockman (BRM) which added A39 cents to A$5.49, as it continues to resist the curious takeover bid from Hong Kong’s Wah Nam taxi-hire firm. The only rise of interest among the coal companies came from the coking coal explorer, Carabella (CLR) which added a sharp A35 cents to A$2.25.
Elsewhere in iron ore it was all down. BC Iron (BCI) fell A7 cents to A$3.04, even though it loaded its first shipload of ore this week. Fortescue (FMG) fell A38 cents to A$6.50, despite reporting a major new discovery. Also weaker were Atlas (AGO), down A7 cents to A$3.90, Gindalbie (GBG), down A4 cents to A$1.14, and Iron Ore Holdings (IOH), down A10 cents to A$1.70.
In coal, Aston (AZT) fell A39 cents to A$8.82, Coal of Africa (CZA) fell A7 cents to A$1.39, Riversdale (RIV) fell A52 cents to A$15.18, and Stanmore (SMR) fell A3 cents to A$1.22.
Uranium and the minor metals to close, please.
Uranium companies were hammered by the sharp fall in the uranium price following reports that a Chinese utility was selling part of its stockpile. Manhattan (MHC) fell A18 cents to A98 cents. Berkeley (BKY) fell A10 cents to A$1.49. Bannerman (BMN) fell A5.5 cents to A76.5 cents. Extract (EXT) fell A41 cents to A$9.15, and Paladin (PDN) fell A16 cents to A$4.98.
In potash, the best performer was South Boulder (STB), which managed to rise by A40 cents to a fresh all-time high of A$5.13, before easing to end the week at A$5.00.
The minor metal companies were mostly weaker too. In tin, Venture (VMS) dropped A2 cents to A53 cents, and Kasbah (KAS) dropped A2 cents to A33.5 cents. The rare earth companies, Lynas (LYC), Arafura (ARU) and Alkane (ALK) lost ground too. Lynas fell A3 cents to A41.90, Arafura fell A4 cents to A$1.22, while Alkane fell A8 cents to A$1.16. Lithium companies were also weaker. Galaxy (GXY) lost A9 cents to A$1.44, and Orocobre (ORE) slipped A15 cents lower to A$3.05. Reed Resources (RDR) also fell, A5 cents weaker at A65 cents after it announced a big capital raising to pay for its acquisition of the Meekatharra gold assets of Mercator Gold.
Connemara Mining (LON:CON) has raised £1.05 million for an expanded drill programme on its zinc assets in Ireland. The programme will be focused on the Stonepark zinc discovery and the Thurles area near the existing Lisheen zinc mine, operated by Vedanta Resources (LON:VED). Lisheen is one one of the largest producers of Zinc concentrates in Europe.
Also today, Minco PLC (LON:MIO) said its joint venture partner for the Pallas Green zinc project, Xstrata (LON:XTA) has completed a preliminary assessment of the project, and considers it to be economic at its current stage.
What’s more, Xstrata has increased the inferred resource there substantially. The new resource of 17.6 million tonnes at a 6 percent zinc cut-off is 56 percent greater in tonnage than the previously published JORC compliant resource published in August 2009.
Five rigs are already at work on the Stonepark zinc property in Limerick, where a total of 65 holes are planned for this year. Drilling has also started in the Thurles area to follow up targets identified in earlier prospecting.
At Pallas Green, Xstrata Zinc is proposing a €13 million exploration and development programme for 2011. The proposed budget comprises continued definition and exploration drilling for €10 million coupled with an initial pre-feasibility study which is estimated to cost €3 million. The will be two-thirds infill definition work and one third exploration, for a total 100,000 metres in 230 holes.
What makes the recent developments at Stonepark and Pallas Green even more interesting is the fact that they are literally next to each other and that Minco and Connemara are in joint ventures with large and respectable partners in the industry: Connemara controls 25 percent of Stonepark while Canada’s Teck Resources (TSX:TCK, NYSE:TCK) has 75 percent, and Minco holds a 23.6 percent participating interest in Pallas Green, with Xstrata’s zinc business holding the remainder.
Zinc could be a commodity to watch. Commentators and analysts have recently been pointing out that over the next few years demand may exceed supply, as demand for galvanized steel is expected to soar in the wake of increasing migration from the countryside to cities particularly in China and India.
China currently accounts for around 30 percent of the global zinc demand, and its construction industry is growing more than 10 percent every year. Car production is also growing.
Credit Suisse expects a zinc supply shortfall in 2016, while RBC Capital Markets would not be surprised if it occurred as early as 2014.
Considering that the partners in the Stonepark and Pallas Green projects are already very upbeat on their respective prospects, a hike in zinc prices while they are being developed hast the potential to massively improve their economics. Both mines are currently planned to start production in 2017.
Irish broker Davy commented on the news regarding new zinc mines in the the country, with a particular focus on the Minco story. It noted that Ireland has a long history of zinc and lead mining with a major new project discovered nearly every decade over the last 40 years.
“There are very good indications that the Pallas Green project will join this list with a proposed mine start-up date of 2017. While confirmed economic with substantial grades of zinc and lead, there is still some way to go to establish the ultimate size and economic footprint.”
Davy views the positive aspect of the work in the wider Pallas Green area as being that the presence of widespread and ubiquitous mineralisation points to ongoing future additions to resources.
“In fact, management at Minco believes that the higher-grade core of the deposit still remains to be established. This refers to the possibility that deeper drilling will locate mineralisation adjacent to a feeder fault line, a defining characteristic of the Irish zinc ore fields, and one that has delivered really good grades and tonnes in other Irish zinc projects,” it added.
Even though it was a holiday-shortened trading week last week in both Canada and the United States, traders were kept extremely busy by the continued flow of corporate earnings for the fourth quarter of 2010 and by some interesting drill results that came in. Once all the trading was done the TSX Ventures Exchange, home to more junior exploration companies than anywhere else in the world, had dropped 1.98 per cent, while the TSX Gold Index had fallen 1.50 per cent.
Anything new on the proposed merger between the TMX Group and the London Stock Exchange Group?
Well, funny you should ask because the Ontario government has started to throw its weight around, and has announced plans to set up a committee to review the proposed merger. Given that the Federal government is already looking at the deal from the Canadian Investment Act perspective, and that the Ontario Securities Commission and the entire province of Quebec all want their say in the matter, there is now a bigger risk that the entire deal could hit a political snag. But we will see.
Speaking of big politics, I see that the gigantic Pebble project in Alaska is in receipt of a positive preliminary economic assessment.
Nothing we did not already know, though, and the market responded accordingly. The copper-gold-molybdenum project hosts a measured and indicated resource holding 55 billion pounds of copper, 67 million ounces of gold, and 3.3 billion pounds of molybdenum. The reference model projected that over a 45 year period the project could produce 31 billion pounds of copper, 30 million ounces of gold, 1.4 billion pounds of moly, 140 million ounces of silver, 1.2 million kilograms of rhenium and 907,000 ounces of palladium, all while mining only 32 per cent of the total Pebble resource. Capital costs are a staggering US$4.7 billion, excluding the costs for outsourced power, road and port infrastructure. Be that as it may, Pebble has met with steep opposition from environmental, sportsmen's and fishery groups. Northern Dynasty, which owns 50 per cent of the project, closed down C$1.89 at C$17.45. London-listed Anglo American owns the other 50 per cent.
You were speaking of earnings a moment ago, before politics intervened?
Goldcorp came out with some stellar numbers. The gold major tabled fourth quarter earnings of US$331.8 million compared with US$66.7 million for the same period in 2009. The company produced 678,600 ounces at a total cash cost of US$164 per ounce. For 2010 as a whole Goldcorp had earnings of US$1.6 billion, or US$2.14 per share, compared with US$240.2 million or US$0.33 per share in 2009. Goldcorp ended the week up C$1.53 at C$46.
Meanwhile, Yamana Gold posted record revenues of US$535 million for the fourth quarter of 2010, and earnings of US$160 million, or US$0.22 per share. Production came in at 286,682 gold equivalent ounces at cash costs of negative US$34 per gold equivalent ounce. For 2010 as a whole, earnings hit US$451 million, or US$0.61 per share, on production of 1,047,191 gold equivalent ounces at a cash cost of US$50 per gold equivalent ounce. Yamana ended the week up C$0.17 at C$12.35.
And Centerra Gold reported fourth quarter earnings of US$153.1 million, or US$0.65 per share, on revenues of US$323.3 million. That was slightly better than 2009 fourth quarter earnings of US$140 million, or US$0.60 per share. The company produced 249,866 ounces at a total cash cost of US$311 per ounce. Centerra ended the week up C$0.13 at C$18.44.
Lots of happy faces there. How about drilling news?
International Northair Mines sparked a trading frenzy when it announced a drill intercept of 80.45 metres running 123.5 grams silver per tonne from the San Gregorio zone on its La Cigarra project in north central Mexico. Shares of International Northair closed at C$0.38 for a C$0.225 gain, on over 32 million shares traded. That’s impressive stuff, given that the company only has a little over 50 million shares, fully diluted, on issue.
Elsewhere, Hathor Exploration cut new uranium mineralization 40 metres to the east of the East Zone on its Roughrider project in Saskatchewan. Highlights included 16.5 metres of 2.14% U308 and 18 metres of 1.3% U308. Hathor ended the week down C$0.03 at C$3.06.
In corporate news, but sticking with uranium, Denison Mines launched a friendly A$57 million cash bid for White Canyon Uranium. Under the terms of the deal, Denison would pay A$0.24 cash per White Canyon share. White Canyon owns a number of advanced exploration projects in Utah, close to Denison’s White Mesa mill. Denison also announced a C$65 million share issue priced at C$3.55 per share. The uranium producer ended the week down C$0.32 at C$3.76.
The copper market had a rather volatile week. How did the Canadian companies react?
Price action was driven by individual company news rather than the price of copper itself. A case in point was Copper Mountain, which announced that it remains on track to begin full production at its Copper Mountain open-pit copper project in British Columbia by June 2011. That was good enough to keep the ship fairly steady, and Copper Mountain closed at C$6.72 for a C$0.08 gain.
Also ticking up was Redzone Resources, which bucked the downtrend in copper by cutting 108 metres grading 0.81% of the red metal as well as 0.015% molybdenum at its Lara project in southern Peru. Redzone added C$0.06 to close at C$0.71.
There was a bit of a pull back on the junior bourse this past week, but with the TSX-V having recently hit two and a half year highs, a modest correction is probably a good thing. Commodity prices look set to remain high for the foreseeable future and that should bode well for the resource-rich Canadian markets. We will see what next week has in store.
Newmont Mining CEO Richard O'Brien said Thursday that the company "generated the highest revenue, net income and operating cash flow in our 90-year history" last year, thanks to rising metals prices converging "with our emphasis on operational execution."
During a conference call with analysts, Newmont Executive Vice President of Discovery and Development, Guy Lansdown said the company is particularly encouraged by over 8 million new gold ounces in reserves and 33 million new pounds of copper.
"As a large senior gold producer, we are thrilled to be in a position to boost our reserves on a net basis and primarily through the drill bit," he remarked.
On Thursday Newmont reported attributable gold reserves of 93.5 million ounces and record attributable copper reserves of 9.4 billion pounds.
In 2010 Newmont reported attributable gold production of 5.4 million ounces and attributable copper production of 327 million pounds, a 44% increase over copper production in 2009. Gold production increased last year due to the first full year of production at Boddington and a full year of mining higher grade ore at Batu Hijau.
However, gold production in Nevada dropped 13% last year due to the completion of underground mining at Deep Post, lower Gold Quarry ore mined due to a pit wall failure, and lower leach tons placed at Twin Creeks and Carlin.
Brian Hill, Newmont's executive vice president of operations, told analysts "Our Africa region had a terrific year" due to 540,000 ounces of gold production. He forecast this year's African production to range from 550,000 to 590,000 ounces, primarily due to higher expected ore grades.
Newmont says this year's total attributable gold production is expected to range from 5.1 million to 5.3 million ounces with attributable copper production of 190 million to 220 million pounds.
The company reported that adjusted net income rose 39% to a record $1.9 billion or $3.85 per share in 2010, compared to $1.4 billion or $2.79/sh in 2009. Net income increased 76% to $2.3 billion or $4.63 per share in 2010, compared to $1.3 billion or $2.26/sh in 2009.
Adjusted net income for the fourth-quarter 2010 was reported at $574 million or $1.16 per share, up slightly from $561 million or $1.14 per share reported during the same quarter of 2009. Net income for the fourth-quarter 2010 was reported at $812 million or $1.65 per share, up from $588 million or $1.14/sh reported during the fourth-quarter 2009.
Meanwhile, Newmont has budgeted for $2.1 billion to $2.5 billion in capital expenditures this year, up from $1.4 billion in 2010. Approximately 40% of the capex is expected to be related to major project initiates including further development of Akyem in Ghana, the Conga Project in Peru, Hope Bay in Canada, and the Nevada project portfolio.
In a statement, O'Brien said, "We continue to advance our Conga Project in Peru, which contains over 6 million attributable ounces of gold and 1.6 billion attributable pounds of copper reserves. Similarly, we continue to advance with our Akyem Project in Ghana, which contains over 7 million attributable ounces of gold reserves."
"Advancing these two world-class mining projects, as well as continuing our drilling programs at Hope Bay in Canada, remain some of our top priorities in 2011," he added.
Newmont also has budgeted $335 million to $345 million for exploration programs in 2011.
Vale confident, able to obtain the greatest benefit with the smallest budget of the three producers with the greatest cost. It indicate that vale can became the most profitable of world mining franchise company (though not the largest).
During 2010, Brazilian supergroup Vale generated nearly USD 33.7bn in revenue from its ferrous division, overwhelmingly from seaborne iron ore, where it ranks as the world leader. For Vale, this business produced EBITDA (earnings before interest, tax, depreciation and amortisation) of USD 24bn, indicating the astonishing margins available from what ranks as the world's most profitable (though not biggest) franchise.
Vale's revenues for 2010 as a whole were USD 45.3bn; leaving aside the ferrous division, the extra revenue generated just USD 2.1bn in EBITDA. Most of these profits were sourced from Vale's mining of nickel and copper.
VALE: ADJUSTED EBITDA BY BUSINESS AREA
USD m 2010 2009 Ferrous minerals 23,976 8,395 Coal 21 -1 Base metals 2,294 1,159 Fertilizer nutrients 176 255 Logistics 345 295 Others -696 -938 Total 26,116 9,165
Global seaborne iron ore prices are essentially set at effectively the marginal cost of the highest cost producer of seaborne iron ore. For the big, low cost, established miners of iron ore, this means boom times, a "purple patch" that is now extending into years.
A report by the UNCTAD Trust Fund on Iron Ore Information, in cooperation with the Sweden-based Raw Materials Group, put world production of iron ore at 1.588bn tonnes in 2009. (Vale sold just under 300m tonnes of iron ore and iron pellets in 2010).
Chinese production figures for 2009 -- re-evaluated and reduced in the latest study -- came to 234mt (million tonnes), on a "comparable grade" basis, by "upgrading" Chinese grades to the same magnitude as the world average of 63-64%.
China has in recent years fallen to fourth globally in production, after Australia (394mt), Brazil (300mt), and India (257mt). Global recession or not, iron ore trade climbed to a record level of 955mt in 2009, up 7.4% from the previous year.
Australia (which houses the main iron ore activities of Rio Tinto and BHP Billiton) ranks as biggest exporter: in 2009 it sent 363mt overseas (a 17% increase); Brazil fell by 3% to 266mt, and India was at 116mt. India's Sesa Goa (part of the Vedanta group) has big growth ambitions; state-controlled NMDC, also an exporter, seems to be crying out for full privatisation.
Crucially for miners of seaborne iron ore, China surrendered self-sufficiency (from Chinese iron ore mines) starting around six years ago. China not only uses all of its iron ore, it is also by far the largest importer of the mineral, accounting for two-thirds of world imports. Despite the 2008 "recession", China's intake of ore climbed by 41% in 2009, to 628mt. Vale, Rio Tinto, and BHP Billiton together controlled 35% of total iron ore production and 61% of total seaborne trade in iron ore in 2009.
Fresh iron ore mining capacity streamed in 2009 was nearly 75mt globally, says the UNCTAD report. More than 685mt of new production capacity may come on stream between 2010 and 2012. Competition is broadening; steelmakers such as ArcelorMittal increasingly invest in "captive" iron ore and also coking (metallurgical) coal operations.
Tightness in iron ore remains a potent theme. As Vale put it today; "The quality of Chinese iron ore has been deteriorating continuously, requiring an increasing amount of run-of-the-mine to produce iron ore to be used in blast furnaces and failing to accelerate production as envisaged.
"A clear indication of the tightness in the global supply of iron ore is the fact that in order to meet its growing demand for imports China has been widening its base of suppliers, adding small scale non-traditional suppliers as well as overland suppliers, since the traditional seaborne suppliers - Brazil, Australia and India - have not been able to satisfy its appetite for the raw material".
For the three established kings of seaborne iron ore, this is a theme that could remain in place for years to come. There are a number of smaller established players in the seaborne trade, such as South Africa's Kumba Iron Ore, but the entrance costs for new players are expensive.
Perfect timing would have been about eight years ago. In its 2002 annual report, Australia-listed Allied Mining & Processing said it was considering an "entry contribution for an investment in an operating gold business in Peru". Much time and effort had been put into evaluating the opportunity, and the board was confident that within 12 months it would be successful in securing a project on which it would be able to put its principal assets to use.
The board decided to divest its non-core businesses, including Allied Medical, and the Mt Nicholas iron ore project. In 2003, The Metal Group acquired Allied Mining & Processing. Going beyond substantial tenements at Mt Nicholas, the new owners promptly acquired Iron Ore Australia - along with its Mt Lewin tenements - and went big on iron ore. The acquiring group bought with it a new CEO, Andrew "Twiggy" Forrest, and a change in name to Fortescue Metals, which today boasts a market value of just over USD 22bn.
For the Big Three, expansion is available, and is happening, both on a brownfields and greenfields basis. Rio Tinto and BHP Billiton are expanding from traditional iron ore strongholds in the Pilbara, Australia, and Vale is growing production from its Carajás system in Brazil.
All three groups are busy with projects in West Africa, generally speaking the main general focus of the new global rush into iron ore. Vale has every intention of holding its position at the front of the pack, in anticipating growth in its iron ore output from around 300m tonnes to more than half a billion by 2016.
Vale: projected output, 000 tonnes
2011 2015 Iron ore 311,000 522,000 Nickel 295 381 Copper 332 691 Coal 11,600 42,000 Potash 800 3,400 Phosphate rock 6,400 12,700
The three groups have over the past four years spent an aggregate of close to USD 100bn on capital expenditure; Vale alone is budgeting for USD 24bn during 2011. These are confident mining companies, with cash to pay for big tickets for some of the biggest rides in the world.
FROM THE THREE* KINGS OF SEABORNE IRON ORE
USD m 2010 2009 2008 2007 2006 2005 Operating cash flow 62,591 27,585 55,380 35,942 28,494 21,589 Capital expenditure -27,122 -22,237 -26,696 -19,442 -14,365 -10,938 Free cash flow 35,469 5,348 28,684 16,500 14,129 10,651
BHP Billiton Calendar year, USD m 2010 2009 2008 2007 2006 2005 Operating cash flow 24,645 11,237 23,383 16,439 13,186 9,485 Capital expenditure -9,884 -8,753 -9,150 -7,791 -6,014 -4,409 Free cash flow 14,761 2,484 14,233 8,648 7,172 5,076 Stock buybacks -387 -246 -204 -7,617 -3,534 -130 Net debt 200 -7,915 -4,168 -12,004 -7,206 -8,724 Dividends -4,842 -4,564 -3,893 -2,694 -2,159 -1,684
Vale 2010 2009 2008 2007 2006 2005 Operating cash flow 19,669 7,136 17,114 11,012 7,232 5,161 Capital expenditure -12,647 -8,096 -8,972 -6,651 -4,431 -3,977 Free cash flow 7,022 -960 8,142 4,361 2,801 1,184 Net debt -15,966 -11,840 -5,606 -17,978 -18,108 -3,906 Equity raised 12,190 Rio Tinto 2010 2009 2008 2007 2006 2005 Operating cash flow 18,277 9,212 14,883 8,491 8,076 6,943 Capital expenditure -4,591 -5,388 -8,574 -5,000 -3,920 -2,552 Free cash flow 13,686 3,824 6,309 3,491 4,156 4,391 Net debt -4,393 -18,769 -38,577 -45,224 -2,775 -1,606 Dividends -1,754 -876 -1,933 -1,507 -2,573 -1,141 Equity changes 92 14,877 23 -1,616 -2,339 -777
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Four of the world's largest gold mining companies reported earnings that spectacular although the budget for the equipment also increases.
The world's four biggest (by production) primary gold miners have now reported preliminary numbers for 2010; Newmont has arguably produced the best overall numbers. On another tack, Barrick's awesome cash generating powers were on full view for 2010: for those rare investors prepared to look forward into the longer term, Barrick's outcome probably wins the contest.
Revenues at both Barrick and Newmont are assisted by sales of copper, a metal which turned in a singularly spectacular price performance across 2010. AngloGold Ashanti finally killed off its hedge book in October 2010, at costs running into billions of dollars spread across the past three years. Barrick wiped its hedge book out rapidly in 2009, also at a multi-billion dollar cost.
TOP FOUR GOLD DIGGERS*
USD m 2010 2009 2008 2007 Operating cash flow 11,311 8,183 5,058 3,484 Capital expenditure -6,884 -6,007 -5,918 -4,860 Free cash flow 4,427 2,176 -860 -1,376 Net debt -4,953 -7,068 -8,554 -4,657
Earlier this week, Barrick for the first time added free cash flow (simply operating cash flow, less capital expenditure) to its key statistics. An aggregation of the numbers for the four big gold diggers shows operating cash flow of USD 11.3bn for 2010, more than USD 3bn higher than the outcome for 2009, and well over double 2008's comparable number. (For insomniacs: BHP Billiton, the world's biggest diversified resources group, produced operating cash flow in 2010 of USD 24.7bn).
Aggregate capital expenditure for the top four gold miners in 2010 was USD 6.9bn (nearly half of that was from Barrick), rising inexorably as costs increase, but also indicating that the groups remain confident to invest in growth. Combined free cash flow for 2010 was USD 4.4bn, twice the outcome for 2009. Dividend payments have been rising, and the groups have been attending to balance sheet metrics. Net debt (including cash) fell sharply by end-2010 to USD 4.4bn, from a peak of USD 8.6bn two years previously.
For sheer cash generating power, Freeport-McMoRan is difficult to beat. The group operates the world's biggest gold mine, at the Grasberg copper-gold deposit. The stock is seen as a primary copper producer, and rated as such.
While the four big gold miners produced aggregate free cash flow of USD 4.4bn in 2010, Freeport-McMoRan by itself produced USD 4.8bn. Freeport-McMoRan benefits from operating big, established mine sites, along with attractive in-house brownfields opportunities.
Perhaps the major challenge for all miners is the demonstrable and alarming increase in capital expenditure, both for stay-in-business, and for new builds. Just as gold bullion prices have handily risen for a decade and boosted the headline fortunes of gold miners, so raw material, and other, costs have been rising in all directions.
At Barrick's Pascua-Lama gold-silver project on the Chile-Argentina border, pre-production capital is now expected to increase by 10-20% to USD 3.3-USD 3.6bn. Pressure on capital costs, says Barrick, "are primarily as a result of a stronger Chilean peso, labor, commodity and other input cost increases in both countries and higher inflation particularly in Argentina".
At the Cerro Casale gold-copper project in Chile, Barrick has announced a review of capital costs. Early indications, say Barrick, which holds 75% of the project, suggest that the capital cost may be higher by about 20-25% from the previous estimate of USD 4.2 billion (100% basis), based on a feasibility study completed in 2009. The major culprits in the revision: a stronger Chilean peso, higher labour, commodity and other input costs.
USD m 2010 2009 2008 2007 Operating cash flow 3,167 2,947 1,293 663 Capital expenditure -1,402 -1,769 -1,870 -1,672 Free cash flow 1,765 1,178 -577 -1,009 Net debt -385 -1,594 -3,107 -1,707
Operating cash flow 4,783 2,899 2,254 1,732 Capital expenditure -3,323 -2,358 -1,776 -1,046 Free cash flow 1,460 541 478 686 Net debt -2,724 -3,771 -3,119 -941
Operating cash flow 1,669 1,299 584 866 Capital expenditure -973 -1,019 -1,194 -1,015 Free cash flow 696 280 -610 -149 Net debt -1,255 -831 -1,358 -1,385
Operating cash flow 1,692 1,038 927 223 Capital expenditure -1,186 -861 -1,078 -1,127 Free cash flow 506 177 -151 -904 Net debt -589 -872 -970 -624
Operating cash flow 6,237 4,397 3,370 6,225 Capital expenditure -1,412 -1,587 -2,708 -1,755 Free cash flow 4,825 2,810 662 4,470 Net debt -1,017 -3,690 -6,479 -5,585
Crude-oil futures ended moderately higher Friday, as investors remained concerned about unrest in Libya and other Middle Eastern and North African countries, but gains were limited by assurances that other oil-producing nations could make up for production losses.
Light, sweet Crude for April delivery (CLJ11 98.23, +0.60, +0.61%) added 60 cents, or 0.6%, to settle at $97.88 a barrel on the New York Mercantile Exchange.
Never mind the relatively lackluster Friday: oil gained 14% this week, its biggest weekly percentage increase since January, 2009. Oil has settled higher in six out of the last seven sessions.
The week included a rollover from the March contract to the April contract. Weekly gains in terms of the April contract reached 9.1%.
Concerns about supplies in Libya due to the country’s unrest and fears of contagion to other Middle Eastern and North African nations roiled markets this week.
Other energy products such as gasoline posted fresh multi-year highs.
The front-month April Brent crude contract at London’s ICE also settled higher, up 78 cents, or 0.7%, to trade at $112.14 a barrel.
Some renewed buying interest in oil as well as other commodities such as gold came later in the session, as some traders positioned ahead of the weekend, trying to avoid staying out of the market ahead of the weekend –- with its potential for more unrest and laden with uncertainties.
Oil traded slightly lower for most of the session.
“We seemed to have wakened up to a calmer atmosphere in the market,” said Matt Smith, an analyst with Summit Energy in Kentucky.
While Libya’s production is compromised, traders have taken “comfort” from statements by the Saudis and organizations such as the International Energy Agency about spare capacity and use of emergency stockpiles, he added.
The market “appears to be taking the loss of most Libyan barrels as a given but does not expect further problems,” JBC Energy analysts said in a note to clients Friday.
Other analysts have cautioned, however, that Saudi Arabia’s heavier, sour crude oil — more costly and time-consuming to refine — is not a perfect substitute for Libya’s lighter, sweeter product.
“Complex refineries with ample coking and sulfur recovery capacity will fare better in this environment than those geared to running the higher-grade feed. However, from a global fuel supply perspective, we think there is plenty of spare refining capacity right now to convert additional sour barrels into products,” Tim Evans, an analyst with Citigroup’s Citi Futures Perspective wrote in a note to clients earlier this week.
Crude futures surged in recent sessions to levels not seen since the second half of 2008, breaching the key $100-a-barrel level, but ended on a weaker note Thursday.
“There is still a lot of nervousness in the market, but it’s not as elevated as yesterday,” said Arne Lohmann Rasmussen, a commodity analyst at Danske Bank in Copenhagen.
Futures on other energy products traded higher on Friday, with natural gas the star of the day on the back of gains of 3.4%.
Natural gas for April delivery (NGJ11 4.02, +0.13, +3.42%) , the new front-month contract, added 13 cents to $4 per million British thermal units.
That was natural gas’s highest settlement since Feb. 9. On the week, the fuel rose 3.2%.
Gasoline for March delivery (RBH11 2.74, +0.03, +1.26%) advanced 2 cents, or 0.8%, to $2.74 a gallon. That was gasoline’s highest finish since Sept. 12, 2008.
Gasoline gained 7.5% this week, the biggest weekly gain since December.
March heating oil (HOH11 2.94, +0.05, +1.86%) advanced 5 cents, or 1.9%, to $2.93 a gallon, putting weekly gains for heating oil at 8%, the largest weekly advance since October, 2009.
The settlement was heating oil’s highest since Sept. 26, 2008.
Libya’s crude exports have come to a virtual halt because of reduced production and a lack of workers at ports, as well as on security concerns, Reuters reported on Friday. Reuters also reported the Saudis had already increased their oil production by 8% to make up for Libya’s virtual halt.
In a statement released Thursday, the Paris-based International Energy Agency said it was in close contact with the Organization of the Petroleum Exporting Countries cartel and major producer countries.
The IEA also said that it is “always ready to immediately activate” its existing response mechanism if needed and that IEA members collectively have 1.6 billion barrels of emergency oil stocks at their disposal.
Danske Bank’s Rasmussen pegged the risk premium currently seen in oil prices at $15 to $20 a barrel and said it’s unlikely to be eroded any time soon, pointing to fears that unrest could spread even if the Libyan situation is resolved and oil production resumes.
“The world is a bit different than it was a month ago,” he said.
Along these lines, Saudi Arabia announced a $36 billion package of new programs and benefits for its citizens Thursday and Algeria officially lifted political restrictions imposed in 1992.
Saudi leaders’ decision to commit to spending on housing, education and social welfare will “buy the government some more breathing space,” said economists at Capital Economics.
In any event, “most of Saudi Arabia’s population is conservative and appears to favor political and economic stability rather more than reform,” they added.
For Algeria, the country’s experience of civil war in the 1990s “makes people there even more wary of a descent into the chaos now seen in neighboring Libya,” Capital Economics told clients.
By Claudia Assis and William L. Watts, MarketWatch
Claudia Assis is a San Francisco-based reporter for MarketWatch. William L. Watts is a reporter for MarketWatch in London. Sarah Turner in Sydney contributed to this report.
Goldcorp announced Thursday that it expects to mine between 2.65 million and 2.75 million ounces of gold. For that, the company's board has approved full-scale development of Goldcorp's two major Canadian gold projects, Éléonore in Quebec and Cochenour in Red Lake Ontario.
The Éléonore Project is expected to mine an average of 600,000 ounces of gold annually over a 15-year mine life. The $1.4 billion project is expected to begin mining gold in the fourth quarter of 2014.
Located near Goldcorp's flagship Red Lake mine, the $420 million Cochenour Gold Project is expected to average annual gold production of between 250,000 to 275,000 ounces over a 20-year mine life. Initial gold production is planned for the fourth quarter of 2014.
In a news release, Goldcorp said Éléonore has achieved several important milestones this year, including the declaration of a proven and probable gold reserve in excess of 3 million ounces and a signed Collaboration Agreement with the Cree Nation of Wemindji, the Grand Council of the Crees, and the Cree Regional Authority.
Meanwhile, Goldcorp reported record gold production of 2,520,300 ounces for 2010, up from 2,421,300 ounces mined in 2009. Gold production for the fourth-quarter 2010 was 689,600 ounces, up from 601,300 ounces for the same period of 2009. Gold production was higher during the fourth-quarter 2010, mainly due to record production at Marlin and Los Filos.
Goldcorp noted that operations at its controversial Marlin Mine in Guatemala continue normally "while the administrative process by the Guatemalan Government is underway."
The process is in response to a declaration by the Inter-American Commission on Human Rights (IACHR) that operations should be suspended at Marlin by the Guatemalan Government. "Goldcorp strongly believes that the IACHR's action is based on environmental allegations that are demonstrable without merit," the company declared.
Adjusted net earnings of $1 billion or $1.37 per share were reported in 2010, up from net earnings of $588.2 million or 80-cents per share reported for 2009. Net earnings for 2010 were a record $1.6 billion or $2.14 per share, compared to net earnings of $240.2 million or 33-cents/sh reported for 2009.
Goldcorp reported adjusted net earnings of $417.1 million or 57-cents per share in the fourth-quarter 2010, up from $182.7 million or 25-cents/sh reported in the fourth-quarter 2009. Net earnings in the fourth quarter of 2010 were $331.8 million, compared to $66.7 million in the fourth-quarter 2009.
Excluding the Pueblo Viejo operation, capital expenditures for 2011 are forecast to be $1.5 billion including $300 million each for Éléonore and El Morro, $200 million for Red Lake and $200 million for Cerro Negro.
Exploration expenditures are expected to be $170 million this year, of which one-half will be expensed, with efforts focused on replacing reserves mined throughout the year and on extending existing told zones at all of Goldcorp's prospective mines and projects.
Gold on the Comex division of the New York Mercantile Exchange regained some of its footing on Friday after slipping overnight due to easing oil prices, benefitting when US fourth-quarter GDP revision came in below expectations.
Gold futures for April delivery were recently trading down $8.20 at $1,407.60 per ounce in New York.
But it had fallen as low as $1,400.10 in electronic after-hours trade soon after oil dropped by $3 per barrel based on news that Saudi Arabia will make up for any shortages resulting from civil unrest in Libya.
"Gold is lacking direction as traders are navigating some strong cross-currents," a US-based fund manager said.
"There's now a clear consensus that [Libyan ruler] Kaddafi’s reign is far past its expiration date and should end before he has the opportunity to so something truly insane,” he said. “This, along with the Saudi's pledge to support the supply side, has allowed crude prices to stabilise and has coaxed some risk back into to the market.
But there is still some real concern that the protests could spread across the region so safe-haven is still alive and well, he added.
Additionally, Comex gold has rallied by about six percent this month and climbed within about 1.5 percent of the all-time contract high of $1,432.50, which was set on December 7.
"The air was getting pretty thin, so there's clearly some element of end-of-the-week profit-taking," the fund manager said. “We're going to experience a slight lull and may even see a mild correction before making a run towards the record in the coming days and weeks.”
Nevertheless, gold did find some support this morning after the US government revised its fourth-quarter GDP down to 2.8 percent - below a predicted 3.3 percent revision.
"Once news came out US GDP missed the mark, gold predictably firmed by a couple dollars. That news alone should allow the market to end the week above $1,400," the manager said.
In other precious metals, Comex silver for May delivery was down 32 cents at $32.86 per ounce. Trade has ranged from $32.06 to $33.13.
Platinum for April delivery on the Nymex was up $10.20 at $1,797.00 per ounce, while the March palladium contract was up $7.50 at $785.25.
BHP Billiton Ltd., the world’s biggest mining company, agreed to buy Chesapeake Energy Corp.’s Arkansas shale gas assets for $4.75 billion in cash, more than doubling its U.S. oil and gas reserves.
BHP will add more than 10 trillion cubic feet of gas resources through the purchase, J. Michael Yeager, chief executive officer of BHP’s petroleum division, said on a call with reporters today. The Fayetteville deal marks BHP’s first foray into U.S. shale gas.
“It’s a bet on long-term U.S. gas prices going higher,” said Prasad Patkar, who helps manage about $1.8 billion, including mining stocks, at Platypus Asset Management Ltd. in Sydney. “They’ve entered a new business, but have met the criteria that they have articulated for acquisitions, that is, tier-one, low-cost, long-life and expandable assets.”
Chief Executive Officer Marius Kloppers expands total oil and gas reserves by 45 percent with the purchase, BHP’s largest since it bought WMC Resources Ltd. for $7.6 billion in 2005. There have been 133 oil and gas deals done globally this year, worth $36.3 billion, according to data compiled by Bloomberg. Last year’s deals worth $285.3 billion were the second highest on record, behind 2007.
BHP rose as much as 3.4 percent to A$47.42 in Sydney trading, the most since Nov. 5, while the benchmark S&P/ASX 200 Index dropped 0.5 percent. BHP, whose shares traded at A$46.84 at 1:14 p.m. local time, today also announced a A$5 billion off- market share buyback as part of the $10 billion program unveiled Feb. 16.
The Chesapeake transaction helps the company become a “very, very powerful petroleum” producer with natural gas assets in Western Australia and stakes in U.S. Gulf of Mexico oil projects, Yeager said today.
Investor and regulator concern helped sink three investments proposed by Kloppers, 48, in the past four years worth more than $100 billion, including last year’s offer for Potash Corp. of Saskatchewan Inc. That, combined with record- first half profit, has left BHP with $16.1 billion of cash on hand.
Chesapeake agreed to sell all of its interests in about 487,000 net acres of properties in central Arkansas, the company said. Shale formations consist of dense rock that can be broken apart to release oil and gas. The transaction is expected to close in the first half of this year, Chesapeake said.
Fayetteville holds about 2.4 trillion cubic feet of gas, equivalent to 456 million barrels of oil, compared with BHP’s total proved U.S. reserves of 288 million barrels, according to its 2010 annual petroleum review.
BHP, Australia’s largest oil and gas company, paid about $1.98 for each thousand cubic feet of estimated proven reserves, Michael Bodino, an analyst in Fort Worth, Texas with Global Hunter Securities, said in an interview after the announcement. In December, Exxon Mobil Corp. paid $1.92 per MCF of reserves when it acquired property in the Fayetteville Shale from Petrohawk Energy Corp.
Deal premiums this year have been announced at an average 24 percent premium, compared with last year’s average 19 percent.
“The valuation looks full, but not over the top, especially if and when U.S. gas prices start firming again,” said Platypus Asset’s Patkar.
Oklahoma City-based Chesapeake said Feb. 7 it intends to raise $5 billion this year by selling its Fayetteville shale holdings and its stakes in two companies. It will use the money to cut debt.
The purchase “makes good strategic sense and is capable of delivering BHP some very good growth and returns over the medium to longer term,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. in Melbourne. “The deal is not risking the company, shouldn’t run into regulatory hurdles, and adds another leg for growth within the petroleum division.”
BP Plc paid $1.9 billion for a 25 percent stake in Chesapeake’s Fayetteville shale in 2008, a month after buying all of the company’s operations in the Woodford Shale of Oklahoma’s Arkoma Basin for $1.75 billion. Chevron Corp. agreed to buy Atlas Energy Inc. to add acreage in the gas-rich Marcellus Shale in the U.S. East. Exxon acquired XTO Energy Inc., a shale-gas producer, for $34.8 billion in stock and debt in June.
Cnooc Ltd., China’s largest offshore energy producer, in January agreed to pay $570 million in cash for a one-third stake in Chesapeake’s Niobrara shale project in Colorado and Wyoming.
BHP will take over the running of the asset through the purchase, which also includes pipelines, and plans to spend as much as $1 billion a year developing shale resources, Yeager said on the call.
BHP expects to invest as much as $30 billion developing Western Australian gas assets, which include the proposed Browse LNG project led by Woodside Petroleum Ltd. and the Scarborough venture with Exxon Mobil Corp., Yeager said.
“This will do nothing to our Gulf of Mexico focus, nor will it do anything to our WA LNG focus,” he said. “This gives us an instant, credible avenue to go do more of this.”
Chesapeake said Jan. 6 that it wanted to cut its debt 25 percent in two years by selling assets, while increasing production by 25 percent. Bodino said. This announcement is a sign that Chesapeake is following through.
“It’s like turning a big tanker in the ocean,” said Bodino, who rates Chesapeake’s shares a “buy” and owns none. “You know it’s going to be a big, wide turn, but once it picks up steam it’s very powerful.”
Bank of Nova Scotia is advising BHP on the transaction, and Jefferies Group Inc. is working with Chesapeake.
Any investors willing to bet that the commodities boom is running out of steam may need both courage and patience: major miners have wagered more than $110 billion on the opposite view.
BHP Billiton (BHP.AX), Rio Tinto (RIO.AX) and Xstrata (XTA.L) have committed themselves in the last two weeks to spending vast sums on expanding production of iron ore, copper, coal and other raw materials over the next five years.
In decades past, that would signal the beginning of the end, the exuberance that leads to oversupply and tumbling prices, but this time the miners say it’s different — and, for once, commodity markets are inclined to believe them.
“The growth fundamentals certainly support these big expansion projects,” said John Robinson, chairman of investment vehicle Global Mining Investments (GMI.AX) whose funds are managed by BlackRock (BLK.N), the world’s biggest asset manager.
The difference this time can be summed up in a word: China. Or maybe two: China, India.
Industrialization and urbanization on the scale of China are unprecedented: in three decades, the proportion of its people living in cities has more than doubled to 45 percent, creating record demand for steel and its raw materials.
China boasts around 170 cities with more than one million residents, compared to Europe with about 35, and there are still 300 to 400 million people expected to move from the countryside to the city over the next 20 years, most of whom will live in the country’s rapidly expanding forests of apartment blocks.
A typical 90-square-meter (970-square-foot) apartment in China needs six tonnes of steel and each tonne of steel requires 1.7 tonnes of iron ore. And every new building needs to be wired with copper and powered mostly by coal-fired electricity.
Add a fast-urbanizing India to the mix and it’s not hard to see why billions are being spent to dig more iron ore, the primary ingredient in steel-making.
Outright pessimists are hard to find in commodities markets, but doubts are growing, especially over the near-term outlook, with traded iron ore prices and copper at record highs and steel-making coal prices up more than 30 percent in 12 months.
Some analysts say inflationary concerns and rising interest rates in China, coupled with forecasts for slowing growth in emerging markets overall, could take the polish off commodities.
“We have seen record highs…but you can clearly see that demand is cooling down a little on the current high prices,” Commerzbank analyst Daniel Briesemann said.
Though iron ore and coal prices have yet to show signs of softening, copper is off its peaks, touching a three-week low on Thursday, and aluminum has seesawed as London Metals Exchange inventories near record highs.
Citigroup does not expect copper prices to go much above current levels of around $10,000 a tonne and it forecasts iron ore to top out a current levels of $190 a tonne, then fall to $160 mid-year and by 2015 cost only $80 a tonne.
Australia & New Zealand Bank forecasts a nearly across-the-board decline in commodities prices through to the end of 2013.
“The biggest headwind for all these companies is the macro- environment, which they have very little control over,” UBS commodities analyst Glyn Lawcock said.
NO DOUBTS DOWN UNDER
But try selling that story in a place like Australia, one of the world’s top exporters of everything from nickel and copper to iron ore, natural gas and coal.
Big resources projects Down Under, either underway or firmly committed, totaled some A$133 billion ($134.5 billion) by late 2010, representing 10 percent of total gross domestic product, the Australian Bureau of Statistics says.
BHP Billiton, Rio Tinto and Xstrata account for a chunk of that spending, but are also spending big worldwide.
BHP Billiton, alone, plans to spend $80 billion over the next five years, focusing on iron ore and its Olympic Dam copper-uranium project in Australia and potash in Canada. Rio Tinto is focusing on iron ore and Xstrata on copper and coal.
Other miners are racing to cash in on the boom: Grupo Mexico (GMEXICOB.MX) is spending $1.9 billion in “coming years” to boost copper output, and Kazakhstan’s Kazakhmys KAZ.L. plans to spend $6 billion in four years on energy and mining projects.
Africa is also gearing up sharply: Mozambique, for one, expects to take its annual coal exports from one million tonnes a year to 10 million in 5-6 years.
Normally, that kind of supply-side response would sound alarm bells for commodities markets, but BHP Billiton chief Marius Kloppers isn’t buying a boom-to-bust scenario.
“While we expect a slowdown in the growth rate of global commodity demand in calendar year 2011, the economic environment still underpins a robust near-term outlook for our products,” Kloppers said, after the company announced a record $10.7 billion half-year profit this week.
“We expect markets to be volatile and event driven; however the continuing urbanization and industrialization of emerging economies, which is still in its early stages, should provide strong structural support over the long term,” he added.
Miners are born optimists, but commodity investors are a much more skeptical breed — and they also see some encouraging signs that miners are being disciplined with their investment.
Eagle Mining Research analyst Keith Goode highlighted the fact that the major miners say they are now backing off from mega-sized mergers and acquisitions and are instead plowing their profits straight back into the ground.
“Expansion through organic growth is more of a sign in faith in the longer term picture,” Goode said. ($1=0.988 Australian dollars)
It looks like it was a solid week on the ASX, with gold leading the way.
That’s a reasonable summary, though the 4.2 per cent rise in the gold index that we enjoyed this week was driven largely by one company, Newcrest (NCM). Because it is easily Australia’s biggest gold miner, Newcrest dominates the index. Last week’s five per cent rise to A$39.02 put the rest of the gold sector in the shade, and re-kindled speculation of a bid for Newcrest by one of the global gold majors. That talk has been aided by the sudden resignation earlier this month of Newcrest’s chief executive, Ian Smith, a departure which was not accompanied by a satisfactory explanation.
Meaning there might be a boardroom struggle underway?
It’s possible, and that makes Newcrest a company to watch closely over the next few weeks. As for the rest of the Australian market, it fell well short of gold. The all ordinaries rose a modest 1.1 per cent, and the broad metals and mining index rose a slightly less modest 1.4 per cent.
Index rises which indicate minimal share price movements.
That’s true if you look primarily at the market leaders and usual suspects. A different and more interesting picture emerges when you look behind the well-known names and follow the trail of the hot money on the ASX, something we’ve been doing in recent weeks to highlight some fresh names for our London readers. This week we’ll start with a company exploring for a mineral we don’t often hear about, graphite. Shares in Archer Exploration (AXE) doubled on Friday, putting in an upward run of A16 cents to A32 cents, before easing to close at A21 cents, for an overall a gain of A8.5 cents for the week. Interest in the project was sparked by an encouraging report on the company’s Sugarloaf project on the Eyre Peninsula of South Australia, which was a source of graphite in the 19th century. And interest in the material has been raised as supplies diminish. Graphite has uses as a lubricant and in lithium-ion batteries.
Interesting. Let’s hear about a few more of the lesser-known companies before the call of the card.
The next significant mover worth mentioning is named after a company which set the mining world alight almost 40 years ago, Poseidon (POS). Back in 1969 and 1970, the original Poseidon triggered a nickel boom with its discovery at Mt Windara in Western Australia. The new Poseidon is re-working the same mine, though perhaps more scientifically. Last week’s 43 per cent rise in Poseidon’s share price to A34.5 cents was driven after the company awarded a contract to refurbish the original underground mine at Mt Windara.
Frontier Resources (FNT) was also generating plenty of interest, as its gold search in Papua New Guinea continues. Last week it added another A7.5 cents to A37.5 cents. And another explorer, Papillon Resources (PIR), a new Aussie player in the West African gold hunt, was the beneficiary of interest after a presentation at the Mining Indaba conference in Cape Town. It added A16.5 cents to A94.5 cents. Elsewhere, Cerro Resources (CJO), the old Kings Minerals, attracted interest in its Mexican silver exploration, adding A4 cents to A26 cents, while another silver stock, Cobar Consolidated (CCU) continued its upward run with a rise of A13 cents to A88 cents.
Thanks for that brief survey of the bigger moves. Let’s move through the sectors now, continuing with gold.
After Newcrest, the performance in the gold space was mixed, although the general trend was up. Ausgold (AUC) added A11 cents to A$1.65 after our report on its ambitious South Boddington exploration project. OceanaGold (OGC) recovered recently lost ground, with a rise of A31 cents to A$2.86, but did trade as high as A$3.03 on Friday. Ramelius (RMS) added A13 cents to A$1.20, and Tanami (TAM) continued its remarkable revival with a rise of A12 cents to A$1.05. Other gold companies that gained ground included Medusa (MML), up A29 cents to A$7.32, and Beadell (BDR), up A7 cents to A83.5 cents. Troy (TRY) was also better off, up A27 cents to A$3.82, as investors look past its commissioning setbacks at the new Casposo mine in Argentina. Offsetting the gains was a long list of companies that fell, including Gold Road (GOR), down A4 cents to A31.5 cents, Silver Lake (SLR), down A3 cents to A$1.89, Kingsrose (KRM), down A12 cents to A$1.33, Gryphon (GRY), down A3 cents to A$1.89, and Ampella (AMX), down A6 cents to A$2.69.
Base metals next, as copper’ still hot and there seems to be growing optimism in the nickel and zinc market.
There were a couple of copper stars, Hot Chili (HCH) and Sumatra Copper & Gold (SUM). Hot Chili, which we took a look at mid-week, added a sharp A13.5 cents to A63.5 cents, but did hit an all-time high of A70 cents on Thursday. Meanwhile, Sumatra is benefiting from its recent development decision on the Tembang gold project, and rose by A8.5 cents last week to A28 cents. The rest of the copper sector was more mixed. Companies on the rise included Discovery (DML), up A2 cents to A$1.37, Bougainville (BOC), up A7 cents to A$1.64, and Sabre (SBR), up A1.5 cents to A20 cents. Companies that fell included Equinox (ERN), down A7 cents to A$6.43, Sandfire (SFR), down A18 cents to A$7.26, and Rex (RXM), also down A18 cents to A$2.87.
Nickel companies performed reasonably well, with Poseidon in the lead. Other movers included Minara (MRE), up A3.5 cents to A90 cents, Mirabela (MBN), up A7 cents to A$2.35, Western Areas (WSA), up A64 cents to a 12 month high of A$6.90, and Panoramic (PAN), up A5 cents to A$2.47. Mincor (MCR) was also a riser, up A1.5 cents to A$1.74, but that was mainly due to a copper discovery at its Tottenham project in New South Wales.
Zinc companies also trended up, continuing a quiet recovery which has been evident for some weeks. Perilya (PEM) added A4 cents to A67 cents. Bass (BSM) rose an eye-catching A6.5 cents to A47 cents, and Prairie Downs (PDZ) put on A3.5 cents to A24.5 cents.
Iron ore and coal next, please.
There were signs of weariness in both iron ore and coal last week. Most moves were modest either way, although the overall trend in iron ore was up a little. The trend in coal was down a little. Among the leaders in iron ore, Fortescue (FMG) rose A16 cents to A$6.88 after a strong profit, maiden dividend, and a fresh legal setback for its dominant shareholder, Andrew Forrest. Brockman (BRM) added A15 cents to A$5.10, and Atlas (AGO) put on A21 cents to A$3.97. After that the moves were mainly down. Cape Lambert (CFE) lost A3.5 cents to A64.5 cents amid reports of irregular share dealing. BC Iron (BCI) fell A11 cents to A$3.11, and Iron Ore Holdings (IOH) lost A12 cents to A$1.80. Coal companies on the slide included Coal of Africa (CZA), down A4 cents to A$1.46, Macarthur (MCC), down A9 cents lower to A$12.36, and Bathurst (BTU), down A5 cents to A$1.06.
Uranium and minor metals to close.
It was mostly down among the uranium stocks. Manhattan (MHC) led the way with a fall of A15 cents to A$1.16. Paladin (PDN) lost A24 cents to A$5.08 after reporting a surprise annual loss. Berkeley (BKY) fell A7 cents to A$1.59, and Uranex (UNX) dropped by A6.5 cents to A55.5 cents.
The minor metals were all over the shop. Rare earths did best. Lynas (LYC) rose A3 cents to A$1.93. Alkane (ALK) rose A13 cents to A$1.28. However, Arafura (ARU) slipped A2 cents to A$1.26. Tin companies were weaker, as were lithium companies. South Boulder (STB) was the best of the potash plays, adding A42 cents to close at A$4.60 after it hit an all-time high of A$4.82 in early Friday trade. Atlantic (ATI) added A3 cents to A$1.93 after announcing a big fundraising for its planned redevelopment of the ill-fated Windimurra vanadium project.
Top global miner BHP Billiton’s (BHP.AX)(BLT.L) chief executive sees iron ore prices staying strong for as long as two years, and is confident the company’s profit margins will remain robust, even as costs escalate.
Marius Kloppers was bullish on the near-term outlook for iron ore prices due to supply constraints, with India not exporting and rivals having held back investment in new capacity during the global financial crisis.
“But what I can say is there are certain products in our portfolio, particularly in iron ore…which looks very, very good over the next three, six and nine months,” Kloppers said on Australian television in an interview recorded after the company reported a record first-half profit of $10.7 billion.
“Simply put, over the next 12, 18 months, perhaps two years, there’s not a substantial amount of new capacity coming on, and it’s more an issue of the supply side rather than the demand side,” he said.
His counterpart at rival Rio Tinto (RIO.AX)(RIO.L) was more specific a week ago, forecasting that tight supplies would keep iron ore prices high in the near term, but prices would fall below $100 a metric ton from current record highs around $190 a metric ton when mine expansions are completed in 2014 and 2015.
BHP announced this week it would spend $80 billion on mine developments and expansions over the next five years, and Kloppers said based on expected returns on those projects, it should be able to post compound growth of 5-6 percent a year for “many many years.”
“For us it’s a question of where cost structures go, but I feel very comfortable that we’re going to have healthy margins going forward,” Kloppers said on Australian Broadcasting Corp’s Inside Business show, aired on Sunday.
BHP had a 44 percent profit margin in the first half of this financial year.
Kloppers played down talk that the company had put acquisitions on the backburner in favor of investing in its own projects, saying while takeover targets were expensive now based on lofty commodity prices, that may not last long.
Asked if mergers and acquisitions were off the agenda, he said: “No. Cycles change.”
“In six months’ time or a year’s time, something else may come up, the situation may change.”
After being forced to kill three mega-deals since 2008 due mainly to regulatory and political obstacles, Kloppers said the company would clearly run into problems if it chased an iron ore acquisition, like its abandoned bid for no.2 iron ore miner Rio Tinto.
But he saw no such obstacles for deals in products where BHP was less dominant, including potash, copper, and oil and gas, as industry experts have speculated.
“And obviously, the oil and gas market is a very large one where there may be opportunities going forward,” he said.
Speculation has focused on BHP chasing Anadarko Petroleum (APC.N) for its assets in the Gulf of Mexico.
Kloppers deflected questions about diplomatic cables released by WikiLeaks, which showed he had offered to trade intelligence on China with Washington, as he was concerned about Chinese spying on BHP.
“I certainly don’t remember offering anything,” he said.
Did he have any secrets to offer? “Not that I know of,” he said.