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Posts Tagged ‘copper and gold’



   Posted by: Mr. Gold    in Uncategorized

It is hard to fathom the rationale behind Barrick’s juicy premium for EQN. It was only 18 months ago that Barrick, with much fanfare, “left Africa”, leaving behind a limping offshoot (African Barrick), unloved by the London market, deprived of any growth story, plagued with 70% overhang on the stock, hemorrhaging talent and serving few fund managers except those seeking a proxy for “Tanzania risk”.

So now, Barrick is back on the black continent and in search of copper (well, much is being said about copper, but there is uranium there too). Barrick’s Zaldivar and Cerro Casale projects provide a significant copper element to the stable, even though the impact is less visible than in the case of, say, Newcrest or even Newmont. But Lumwana? Granted, EQN will increase production from its flagship operation by about 100kt of copper between now and 2014, but the new owner will have to throw in $0.5bn in capex over and above the $7bn plus in cash splurged on the Australian/Canadian listed producer. Barrick also gets access to the dubious charms of Jabal Sayid – a 60ktpa early stage development project in Saudi Arabia. One wonders if Barrick’s portfolio risk is not getting a little too exposed to a region plagued by uncertainty and (at least perceptions of) instability. The company is already involved in Reko Diq project in Pakistan – sharing the burden with the most unlikely of guests, Chile’s Antofagasta.

True, EQN will spit out $1.3bn in Ebitda as early as 2013, assuming the nominal copper prices around $4/lb. Should the USD continue on its trajectory post FOMC meeting in June, this looks like a great USD hedge, but the real value of the red metal may not shine so brightly for anyone whose wealth is denominated in stronger currencies than the USD.

This rationale is probably the only common thread between the gold and copper markets. The red metal is driven by a completely different set of drivers, some of which are of discretionary, administrative nature. One could even argue that after years of guesswork on central banks’ intentions regarding gold reserves, it is now copper that suffers from increased opacity. Any attempts to penetrate the great wall of secrecy regarding copper hoarding at China’s State Reserve Bureau are bound to be frustrated. And even the estimates of unregistered stocks in bonded warehouses range from 0.5mt to over a million tonnes – a significant range in a 19mtpa market. Barrick’s move represents therefore a leap of faith, as no meaningful due diligence can be made regarding the distant future of the copper market, beside the well worn (and still valid) argument of China’s copper deficiency. But industrial metal demand growth rates could be past their peak and it is illustrative that no base metal producer tried to dislodge Minmetals’ original bid.

Andrew Michelmore – Minmetals’ CEO had seen worse times at OZ Minerals and it is difficult to disagree that walking away was the most rational of options. But from a broader perspective, this adventure amounts to yet another failure of a Chinese-funded entity to secure a stake in a Western-operated mining venture. In certain quarters of Chinese metal value chain, belligerent calls intensify. China’s steel association’s vociferous attacks on Western governments’ (!) monopoly in iron ore production is an unfortunate example of just how political the quest for “equity” participation in offshore commodity production has become. Chinese entities are still light years behind the hugely successful, long-term metal bets Mitsubishi and other Japanese shosha companies engineered in Australia and South America four decades ago.

This leaves us with the Barrick’s murky rationale (the sale could not possible premeditated on doing in the hapless African Barrick, there are cheaper ways to do this). The company’s speedy due diligence may reflect as much its nimble approach to growth as an unwelcome rashness. Or maybe Peter Tomsett – EQN’s chairman had ulterior motives? Here’s the guy to six years ago successfully brought Placer Dome’s history to its end. When Barrick made the initial approach, Tomsett remained open to an alternative bid. Newmont and AngloGold Ashanti embarked on an in-depth due diligence of PDG’s assets, until AngloGold’s visit to Porgera went badly wrong. Barrick digested Placer Dome awright and has thrived since.

Smell a revenge?

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   Posted by: Mr. Gold    in Uncategorized

On a day when Freeport announces its quarterly results, it is probably a good opportunity to reflect on the question I have recently received from a successful option trader in the city. It came with an anaphora (“gold is a bubble and copper has real demand”), and so “isn’t it time to short gold and go long copper”. Indeed, this week again, copper hit an all-time high in dollar terms, leaving gold behind with its most recent record notched several weeks ago now.

Freeport’s numbers later today may serve as a good starting point to discuss this issue. After all, we know from the company’s guidance that as copper volumes would have fallen in 4Q, while its gold production would now return to annualized 1.5moz. In other words, Grasberg remains, by far, the largest gold mine in the world and nothing on the horizon appears to challenge the Indonesian producer’s leadership (the biggest upcoming kid on the gold block is Barrick/Goldcorp’s Pueblo Viejo in the Dominican Republic, which expects 1.2moz p.a. production). Grasberg represents the stunning 2% of the entire global gold mining production and since it is not mined specifically for its yellow by-product, its sizable swings in the precious metal’s output have a considerable impact on total gold supply data.

Despite Grasberg’s pit widening and the impending transition to block caving, Freeport remains one of the key players in the copper universe, which in 2010 experienced again multiple disruptions and production disappointments. In the last 5 years, despite comfortable margins, the global copper mining production has increased barely by 1% per annum. By comparison, provisional data for 2010 point to a nearly 10% increase in global gold mining production. Global copper deficit estimates for 2011 range between 400kt to 650kt. So the question returns – is this the time to long the red and short the yellow?

The story of copper, however fundamentally sound, has been with us for several years now: tight elasticity of supply, deep BRIC deficiency, falling grades, few new SXEW finds, slow decay of the largest producers (e.g. Escondida). The fact that China’s secretive Strategic Reserve Bureau considers copper a “strategic asset” has added to the allure. SRB, whose only officially confirmed purchase goes back almost two years now, is believed to be holding between 0.5mt and 1.5mt of copper and is rumored to have targeted a 2mt worth of copper war shield by 2015. There is no denying that the underlying demand – from the power sector and construction – is sound, even though most analysts have now learned to infer China’s restocking and de-stocking cycles from the discrepancy between end-user data and the so-called apparent demand (production plus net imports +/- change in Shanghai stocks).

Yet, in the short term, there are some clouds over the red horizon.

First, after significant restocking in the rest of the world throughout 2010, in the near term the market will be over-dependent on one crucial market – i.e. China, increasing the concentration risk.

Secondly with changes to VAT regime for bonded warehouses in China, it is now entirely plausible that the arbitrage between London and Shanghai prices may function both ways – including shorting LME and long SME.

Third, with the new copper ETF products coming on line this year, it is entirely imaginable as these new products gain liquidity, arbitrage opportunity could emerge between copper futures and ETFs whenever the forward curve goes into backwardation.

Fourth, a seasonal increase in Chinese imports in 1Q may reflect more the record liquidity conditions generated by Chinese banks this month and some delayed delivery of last year’s orders than the actual demand growth in this key market, sending a misleadingly bullish signal to overseas traders.

Finally, if the LME curve flattens into contango, it is not entirely impossible that some producers may engage in selective locking in of the current record prices.

Some other market indicators also invite caution. Copper’s 3m implied volatility lies in low stasis, diverging from the spot metal price and forming a spread from where the underlying usually corrects. Bizarrely, near term 25 delta puts have recently had a volatility premium vis-à-vis at-the-money option. And last but not least, the copper/gold spread has turned positive.

This has only happened for the second time since the heyday of June 2008 commodity peak, and when it did (in April 2010), it did not last. Indeed, such is the precariousness of the global order that any glitch – EFSF discord in Europe, more forceful inflation-busting in China, another flare-up in North Korea – may quickly reverse the new trend. Any volatility inducing event will lead to losses in red copper/short gold trade. In fact, the opposite trade could be treated as debit spread betting on volatility returning to both metals, yet in an asymmetric fashion.

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