Slow 2012 but outlook is promising
Copper prices have roughly oscillated between $7,500 per tonne and $8,500 per tonne, near enough averaging where they greeted the New Year at $8,000 per tonne.
2012 saw Zambia – Africa’s biggest copper producer – grow its mining tax revenues a third from 3.3bn kwachas to 4.4bn kwachas ($830.19m), due to its doubling of royalties.
The introduction of a profits based tax on miners has so far had little effect since only two of the country’s mines are presently declaring profits. Deputy Finance Minister Miles Sampa says the government estimates tax avoidance to be costing Zambia around $1bn a year.
Sampa was seen as playing a vital role in the country’s first successful bond issuance, raising $750m in September. The 10-year dollar-denominated debt with a coupon of 5.625% (cheaper borrowing than for Portugal for instance) reflects investor confidence in Zambia’s economy which grew by 7.3% in 2012. Most of the money will be used to enhance energy, road and rail infrastructure; further improving the investment climate for miners.
Copper accounts for around 75% of Zambia’s export earnings. In October, the Chamber of Mines of Zambia announced that it expected copper production to rise to 1.5m tonnes by 2016/7 – a rise in export values from $5bn in 2011 to around $8bn.
In January Barrick Gold’s Lumwana mine said that it would implement a $125m expansion programme.
Production in Zambia fell in the first quarter, year-on-year, from 236,009 tonnes to 169,188 tonnes.
The Democratic Republic of Congo saw production for the first nine months of 2012 rise about a third, from 323,871 tonnes to 406,186 tonnes. This meant African production as a whole over this period rose by 30,000 tonnes, despite an apparently flat performance from Zambia.
Nevertheless, the Bank of Zambia claims output will be the highest in a decade when full year figures are published, estimating a figure of 976,733 tonnes. However, last year provisional figures in February for 2011 that suggested production was higher than in 2010 were later revised to a figure much lower than the previous year.
Africa’s largest copper mine, First Quantum owned Kansanshi in Solwezi, Zambia, saw production in the third quarter rise 42% from 50,179 tonnes to 71,484 tonnes, thanks to improved production and higher grades. Gold production at the mine also rose 32%. Profits were lower, compared to the same period, due to the higher royalties imposed.
Also in Zambia, the Glencore-owned Mopani mine in June completed a feasibility study further to investing another $1.5bn on top of the $2bn already committed to raising production.
Mopani and Kansanshi both closed for short periods in March due to environmental concerns and labour disputes respectively.
Last December saw Anglo American (who owned 16.8%) and Rio Tinto (57.7%) sell their stakes in South Africa’s largest copper mine, Palabora, to a consortium led by Industrial Development Corporation, a South African parastatal, and China’s Hebei Iron & Steel Group for a total of $476m.
January 2013 saw Zambia’s state energy utility, Zesco, urging mining companies to cut back their power consumption, due to problems with securing imports to fill its deficit from the DRC. A saving of 100MW is required pending a further of 180MW coming online in December this year.
Given the good data coming out of China and their commitment to renewed infrastructure building of power stations as well as houses, the outlook for copper is generally positive. However, stockpiles are relatively high in China and new supply is due to come online in Mongolia, Peru and Chile. Declining ore grades, power supply issues and labour disputes remain major factors affecting prices in both 2012 and 2013.
The Word Bureau of Metal Statistics announced that the first half of 2012 saw a copper deficit of 129,000 tonnes – meaning supply is unlikely to weigh on prices short of a major global slowdown. It also suggests any demand momentum will lead to a price spike.
Prices take a tumble
Coking coal, which is used alongside iron ore in the production of steel, has seen prices fall over 2012 but they have yet to rebound in line with iron ore prices.
In January this year, according to Vale, the company moved its 1,000th train load of coal from its mine in Moatize to the port at Beira. It expects to transport 4.5m tonnes of coal (or 1,700 train loads) in 2013.
Vanderlei Marques, Manager of Logistical Operations, said, “The target reached is a historic gain for Vale’s business in Mozambique, and vastly exceeds the figure reached in 2011, which was just 120 train loads of coal. This achievement is strengthening the name of Mozambique in the world market for coking coal.”
Beira’s coal terminal has capacity for 6m tonnes a year but Vale shares the facility with Rio Tinto leaving little room for expansion. Given that Vale’s production is set to exceed the limits set by current infrastructure, the company is building a new railway across Malawi to connect with the port at Nacala, where a new coal terminal is set to open in 2014.
In December, Exxaro Resources of South Africa set forth its plans to become a $20bn company by 2020. The company already produces 40m tonnes of coal and is Eskom’s largest supplier. Its Grootegeluk colliery is one of the most efficient in the world. Last year saw the company receive the Standard of Excellence Award in the 2012 Deloitte’s Best Company to Work For survey.
Coal of Africa Limited (COAL) shares fell 70% over 2012 as coal prices fell. The outlook in 2012 is more positive but proposed government regulations may hamper the investment climate.
However, COAL shares rose 12% this January when an eight-year marketing deal was announced with Vitol, one of the world’s largest coal traders, to expand it thermal and coking coal exports.
The new year also saw Chinese regulatory authorities approve the purchase of $100m of COAL shares by Haohua Energy International, a 23.6% stake. COAL will use the funds to upgrade its Vele colliery in Limpopo.
South Africa is the fifth-largest hard coal producer in the world, mining 253m tonnes in 2011. Coal is used to generate about 75% of the country’s energy requirements.
Deutsche Bank estimates South African coal will average $93 per tonne (consistent with last year), slightly above estimated (and more stable) costs of $89-93 per tonne.
Metallurgical coal is currently trading at $165 per tonne, its lowest in three years and around half its post-Queensland-disaster peak of $330 per tonne in 2011.
According to the International Energy Agency, coal is set to rival oil as the world’s pre-eminent source of energy by 2017, as India overtakes the US to become the world’s second biggest consumer of coal. Coal consumption for 2017 is forecast at 4.3bn tonnes of oil equivalent, against 4.4bn tonnes of actual oil.
Lower demand hits prices
Certified polished diamond prices fell 12.5% over the course of 2012, according to the Rapaport Group. Meanwhile rough diamond prices fell 16%, according to International Diamond Consultants Ltd.
The market grew by a modest 3-4% over the course of last year.
Botswana, it is estimated, may have only 20 years of diamond production left – a daunting thought given that revenues from the sector account for most of government income and export earnings. Diamond revenues have helped the country grow its GDP per capita from $70 upon independence in 1966 to $7,470 in 2011.
In July, De Beers announced first half figures showing total sales decreased 14% to $3.3bn. Earnings were half that of the same period of 2011 but 16% ahead of the second half of 2011. Lower demand, especially from India, hampered profits but the US and China proved resilient markets. Prices remained steady. Growth is expected to come from the later regions, as well as the Gulf and Japan, whilst Europe and India continue to lag.
De Beers production for the whole of 2012 fell around 16% to 27m carats, the lowest since 2009 when it cut production 50% to maintain prices in the wake of the Western financial crisis.
The outlook for the sector is one of modest growth, given the prevailing state of the global economy, which should equal or exceed last year’s. Long term the trend for prices will be positive, according to De Beers, who say that demand will continue to outstrip supply.
Bain & Co concur, saying that a growing middle class in India and China will mean the rate of growth in demand for diamonds will be double the rate of growth in supply, between now and 2020. China and India’s share of demand will grow from 20% to 28% by 2016.
Group Metals Marikana ripples continue
Platinum prices rose 8% over the year from $1,415 per oz to $1,533 per oz but were volatile, with a trading range of $1,388-$1,727 per oz. However, the industry was rocked by the wildcat strike at Marikana, which resulted in the tragic deaths of 34 mine workers.
Some 80% of platinum production is based in South Africa. With rising labour and energy costs, and the labour unrest that disrupted production, output is likely to be lower than in 2012 and may well continue to fall. Limited demand for diesel catalytic converters in Europe and the increasing substitution of palladium (also used in petrol catalytic converters) for platinum are not helping the sector.
In fact, palladium was the best performing metal last quarter, rising 12.5%. The market will see an estimated supply deficit of 511,000 oz this year. This has led some to suggest record prices are ahead. Prices had been weighed down by sales of stocks by Russia, which have fallen to 200,000 oz this year from over a million in 2010.
Platinum is in surplus currently, by around 500,000 oz in 2011 but is expected to move into deficit by 400,000 by 2013 as South African production falls by 300,000 oz.
Rhodium fell from over $1,400 per oz to below $1,100 per oz over 2012.
Unsurprisingly, Lonmin shares fell 68% over the year, whilst Aquarius Platinum lost 63%. The industry leader Anglo Platinum also fell, by 16% but Northam Platinum, which avoided the unrest, saw shares rise 27%. The other major, Impala Platinum, saw a more modest decline of 0.8%.
New player IvanPlats has raised $308m in a Canadian IPO in December. The company has copper and zinc assets in the DRC and PGM assets in the Bushveld Complex. Costs are likely to continue to rise significantly in 2013.
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