Mining’s “stealth bulls” yet to vanquish bears in 2014

As the global mining business ushers in another new year, it seems that the “stealth bulls”, conjured by some leading industry figures at the end of 2013, are still treading too softly to be felt in what remains a distinctly bearish market.

Figures illustrating the performance of mining company shares on global stock exchanges have made for a subdued start to the new year for mineral companies (Source: Mike Baehr).

“A lot of early stage projects have simply been put on hold with only minimum licence commitments being met,” Alexander Keepin, global co-head of mining at international law firm, Berwin Leighton Paisner, told the Financial Times (FT).

“The companies feeling the pinch the most are those which are looking to move to production and need to finance substantial investment in the project and related infrastructure. They are struggling the most and having to be very creative about using a combination of all types of funding,” he added.

Keepin’s assessment underscored recently released stock exchange figures illustrating the persistently difficult financial conditions for junior mining companies.

Between January and November last year, just 62 mining companies listed on Canada’s Toronto Stock Exchange and TSX Venture Exchange, the world’s largest market for mining stocks, compared to 129 listings during the same period in 2012, and more than 200 in each of the preceding two years.

The amount of equity raised on the TSX markets also fell from $10.3bn in 2012 to $6.5bn by the end of November 2013, with almost half that total coming from a single equity raising of $3.1bn in new cash by Canada-headquartered gold producer, Barrick Gold Corp.

Elsewhere, mining companies continue to face adverse conditions on the Australian Stock Exchange, with mining stocks, notably those of Anglo-Australian resource giants Rio Tinto and BHP Billiton, repeatedly dragging down overall daily trading in early January.

Weak Australian mining-related construction figures, meanwhile, led to a 6.4 point dip in the country’s engineering construction sub index in December, placing the industry in the <50 point contraction territory at 46.1.

In London, a report by the UK newspaper, The Telegraph, showed that funds connected with natural resources made up nine of the 10 worst performing funds in 2013, including the gold investment arms of Investec, BlackRock and JP Morgan.

Bridled optimism

Despite these downbeat signals, the final months of last year saw a handful of predictions that the worst of mining’s capital-related aches and pains are behind it and that the sector could look forward to a more prosperous 2014.

“I believe we are in a stealth bull market. Charts are flattening and beginning to rise. I believe we are in a period of bifurcation,” chairman of Sprott US Holdings, Rick Rule, told delegates at Mines and Money London 2013 in early December.

His plea to investors who had “endured the pain” to “stay around for the gain” in 2014 was echoed, more hopefully than decisively, by other industry commentators in the industrial minerals sphere.

Reviewing issues discussed at the third IM Graphite and Graphene Conference in New York last November, Chris Berry, founder of House Mountain Partners LLC, said that despite its financing difficulties, the junior graphite industry maintained a “firm belief” that its market is set to expand in the coming months and years.

“The ubiquity of graphite in the global economy all but assures this,” added Berry, who has also hinted at House Mountain’s tentative confidence in the recovery of the global rare earths sector.

Others have suggested that, as long as mining companies can maintain the discipline in capital spending implemented across much of the business in 2013, investors may be minded to regain some trust in mining and exploration company stocks.

“We still need to see [miners] sticking to the disciplined message,” Evy Hambro, co-manager of the BlackRock World Mining Trust, told the FT in December.

“If investors are to be attracted in, they need to be confident about the fundamentals of supply and demand, but they also need to believe that management are not going to repeat the mistakes of the past,” he added.

Additionally, the decline in the price of gold, which fell by 28% in 2013, is not necessarily bad news for the industrial minerals sector, since many economists link lower gold prices with economic strength, the latter being a more positive fundamental for minerals used in industries such as manufacturing, construction, chemicals and agriculture.

Junior survival

Junior miners too, unsurprisingly, have sought to persuade investors that there is sufficient market potential to support new projects, pointing to medium and long term demand forecasts from existing and new applications.

Graphite juniors in particular were buoyed by a prediction from SGL Group’s vice president Americas, Tom Burkett, who said that demand from green energy applications could accommodate up to five new production sources.

The beleaguered rare earths sector, meanwhile, saw out 2013 on an even keel, and early market indications suggest that rare earths prices improved slightly in January.

Last week’s significant Chinese resource policy announcements regarding the consolidation of its rare earths industry could also reduce global supply of the minerals, which may help to support prices.

Nevertheless, most agree that the rare earths business remains top heavy with juniors, and that this, coupled with the present weak state of downstream demand and lacklustre investor interest, will lead to a significant reduction in the number of active rare earths projects in the near future.

In other industrial mineral markets, uncertainty continues to afflict potash following the acrimonious divorce of Uralkali and Belaruskali last August, while mineral sands companies continue to struggle against weak prices and low consumption.

Producers of refractory, construction and chemical minerals are also watching anxiously as an apparent uptick in worldwide manufacturing and building activity in late 2013, indicated by last week’s PMI results for December, has been slow to translate into raw materials orders and higher prices.

Indeed, the fate of existing and prospective mineral producers is indelibly tied to the variable price of what they extract from the ground, something over which they have no control.

In this context of uncertainty, shareholders look to company executives to take a tough approach to financial aspects they do have power over – namely, spending and productivity.