I didn't make it down to Cape Town, South Africa, this month, for the annual mining "Indaba." Sad to say, because Cape Town is wonderful, and Indaba is one of the world's premier mining events; but it's also a long haul to get there. Still, I followed accounts of Indaba in the trade press. Plus, several friends attended and sent personal notes.
Three big Indaba takeaways are: 1) A consensus that the boom-boom "China years" are behind us; 2) It's tough to raise mining cash; and 3) Gold/silver prices are still heading up over time. Let's drill down with these points.
Miners Come to Terms
China is and remains a large consumer for pretty much everything; but fast growth has vanished. That, and Chinese buyers are demanding steep discounts, driving a global slump in prices and cash flow for many basic resources.
In essence, there's a new supply-demand dynamic as China decelerates, with no other large market in position to fill the void. "There's no new China," as one wag noted. So what does that mean for miners and investors?
Miners must adjust, of course—investors, too. Mining is by nature a long-term, capital intensive business. It's cyclical. There are good years and lean years. Unfortunately, most people outside the mining biz don't quite get that critical point.
For example, Wall Street and mainstream business media usually focus on miners in the mid- to late-stages of a boom, watching the run-ups, smelling big money and trying to get in on the lucrative action. Meanwhile, governments everywhere tend only to see dollar-signs and fixed, immovable assets, and hence look for every opportunity to raise taxes and fees.
On another angle, there's the fact that mining impacts the environment. No one can deny that; although it's a question of degree and timing. After all, nobody opens a new mine, anymore, without a cradle-to-grave plan to include closure and remediation.
Still, the tendency is for so-called "Green" players of the world constantly to oppose everything at every stage; this despite the fact that, if Greens had their way, the global economy would collapse in short order, absent primary resources.
Flinty Bankers, "Safe" Miners
Then there are the flinty bankers. In view of waning Chinese demand growth and no other new demand-drivers, money-lenders are tightening valves. It's difficult for most miners to raise capital for new projects; even to borrow to expand and improve existing facilities. "I can't effectively or efficiently convert my resources into cash," said one executive.
There's a funding drought just now. Many management teams have down-shifted from touring London, New York and such, to raise cash; to buckling down in the field, and improving operating margins and profit guidance.
One long-time mining geologist told me, "Every dollar I spend has to deliver more than a dollar's worth of return. If I drill a hole, that hole needs to increase the resource enough to pay for the effort. I can't afford to experiment. I'm playing it safe, which forecloses a lot of potential for surprises on the upside."
Another long-time mining veteran had this to say: "It's all about production and efficiency anymore; beating the cost curve down under the price curve. That's good and bad. Sure, I dig more high-grade rock to improve my numbers. But that means I pass over low-grade ore. That 'strangles' the resource, in a sense. I'll never dig that low-grade material, because now I can't blend it with anything; not enough to make it pay. Overall, this reduces the life of the mine."
One might say that we're watching a lot of old chickens come home to roost. Long-time OI readers likely understand that the mining industry must overcome its bad reputation for over-promising and over-spending in good times, and under-delivering in general.
Volatility Fatigue
Along these lines, two key complaints from the financing side include out of control costs, and bizarre price and cash flow fluctuations. These alone are major deterrents to investors.
"I'm suffering from volatility fatigue," said one Toronto fund-manager. "All I hear is that prices for steel, energy, concrete and more are rising, which drives up miners' costs. Yet right now, we're in the midst of a price collapse for oil, steel and concrete; so where's the announcement about how things are getting cheaper?"
There's a general sense, among the funding-community, that the mining industry needs to throttle back its long-term price expectations. From raw resources, to defined reserves to above-ground inventories of minerals and metals, bankers are ready to live with lower norms.
"I wouldn't mind seeing gold prices go higher," said one Indaba attendee. "But for now, don't plan your mine around a speculative price level."
New Sources of Funding
While traditional debt and equity funding sources remain on the sidelines, a few other new sources of cash have surfaced for niche applications, and/or uniquely attractive projects. These ideas include mineral and metal trading houses, as well as private and "quasi-private" equity.
It's hard to get a feel for how many of these fund-raising deals are out there. They tend to be "private treaty"-type efforts, and often not publicly announced. The first anyone on the outside notices is when trucks begin to show up at a mine with materials and equipment.
Meanwhile, according to one Canadian mining veteran, "Canadian exchanges are holding their own, even in the worst of the mess. It's not pretty. It's not the best of times, but it's a market that works. In other words, we're not perfect, but people understand Canada; Canada offers a strong banking and legal system which you won't find in many other places."
The Elusive Recovery
It's impossible to predict when markets will recover. "I hope it's sooner rather than later," said one South African contact. "But it might be later. We just have to hang tough for a while."
Pessimism is rampant for mineral products like iron ore and steam coal—used in power plants. Global capacity is large, and price forecasts are bearish.
One U.S.-based steel maker told me, "The global energy price collapse is terrible for my business." We see evidence of that with plant closures by the likes of U.S. Steel, and Tenaris (TS: NYSE), whose market for drill pipe and well casing is tightening.
Are Shiny Metals Beginning to Shine?
Still, it's not all gloom and doom. One copper miner told me that he's bullish for the red metal. "Lower energy prices for oil—at least, in the $60, $70 range—look like they're here for a while. It cuts my operating costs at the mine. And it means that people in the developing world have extra money to spend on things that use electricity, like indoor appliances, air conditioners and such."
Several precious metals miners told me much the same thing. Lower oil prices are bullish for gold and silver. It translates into lower costs per ounce at the mine. Plus, lower energy prices, and associated world tensions, are beefing-up demand for physical metal.
"I hate the fact that the price for my product is set by 'paper' markets," said one gold miner. "I feel like, when I sell my output, I'm giving something away at a steep discount. Thing is, whatever the 'paper' markets do in gold and silver, I NEVER lack for a taker for the mine output!"
Thus, all in all, and for all the many problems facing the global mining industry, the best-run of the bunch will make it through, to prosper whenever the markets turn up again. Meanwhile, gold and silver exhibit strength on the trading floor.
That's all for now. Stay warm.
Byron King
The Daily Reckoning
