Industry Trend Analysis - Weekly Mining & Projects Roundup - NOV 2014

We expect the Bloomberg World Mining Index to trade within the 200-250 range over Q414. Persistent oversupply in the coal, iron ore and copper markets will continue to anchor mineral prices following significant declines over recent quarters. For instance, Newcastle steam coal prices have fallen 25% in the year-to-date, while iron ore prices collapsed 40% over the same period.

Looking longer-term, we expect mining equities to remain capped and undergo a multi-quarter basing pattern. Cooling Chinese economic growth will underpin price weakness in the industrial metals complex and drive greater consolidation in the mining space. We forecast Chinese real GDP growth to average 6.7% in 2015, compared with 7.3% in 2014 ( see 'Economy To Cool Further Despite GDP Outperformance', October 21).

Range Bound For Coming Months
Bloomberg World Mining Index (Weekly)

We see growing headwinds for coal miners, despite our already below consensus forecast for thermal coal prices ( see 'Thermal Coal To Average USD74/tonne In 2015', August 19). Crucially, recent policy revision in China's coal sector could further drag on growth in Chinese thermal coal imports (down 7.1% between January and August) over the coming quarters. Beijing's move to implement a 6% tariff on seaborne thermal coal from October 2014 onwards will place strain on Australian miners, many of which are battling to cope with dwindling profit margins.

Growing Headwinds For Coal Miners
Select Mining Indices - % chg. Over Past Month (LHS) & Past 12 Months (RHS)

In terms of iron ore, we expect the carnage in the junior mining space to continue in the coming quarters. Junior miners including London Mining and Termite Resources have been put into administration due to the slump in iron ore prices. In contrast, the low-cost majors including BHP Billiton (BHP) and Rio Tinto (Rio) are looking to further cement their dominance by boosting production. In October 2014, BHP outlined plans to lift its iron ore capacity by 30% in order to overtake Rio as the world's lowest-cost producer. We expect the iron ore sector to become increasingly consolidated over the coming years, with the majors securing a larger share of global production.

Key Developments: Asia

China: Coal Policy Revision More Than Just Tackling Pollution - While the recent wave of regulatory changes in China's coal sector have been primarily lauded as an effort to tackle air pollution, we believe there are other more significant drivers ( see 'Shedding Light On China Coal Policies', October 23). Significantly, employment concerns are forcing the Chinese government to revert to old-fashioned protectionism in the coal sector. Beijing's move to levy tariffs on coal imports came following a year of intense lobbying by China's National Coal Association to restrict imports and boost weak local prices that had plunged to a six-year low. More than 70% of Chinese coal miners are currently unprofitable, with producers in land-locked Inner Mongolia bearing the brunt due to the high costs of delivery to coastal buyers.

Eroding Margins
China - Qinhuangdao 5,800kc NAR fob Steam Coal Spot Price (USD/tonne, LHS) & Miners' Coal Sales (% chg y-o-y, RHS)

India: Privatisation Catching Up With Coal Sector - We expect the liberalisation of India's coal sector to attract foreign investment over the coming quarters. In a bid to improve power supply to domestic consumers, Indian Prime Minister Narendra Modi announced this week that the country could allow commercial coal mining by foreign players in a sector dominated by state-owned miner Coal India Ltd (CIL). At present, only Indian power, steel and cement firms can mine coal for their own consumption. An increase in private sector participation in the coal sector would introduce greater competition and boost production over the medium term. With coal-based generation accounting for two-thirds of the country's energy portfolio, rising coal output will help to alleviate the power crisis in India.

Liberalisation To Further Increase Output
India - Coal Production

Key Developments: Americas

United States: Caterpillar Earnings Confirm BMI Views - US-based heavy-machinery maker Caterpillar's Q314 revenue, which grew y-o-y to USD13.5bn from USD13.4bn, further confirm our long-held views towards both the firm and the wider mining sector. We previously stated that the global construction sector will be the primary source of revenue and growth for Caterpillar, while the firm's mining segment will continue to suffer ( see ' Global Company Strategy - Caterpillar ,' August 19). Regarding the latter segment, we recently stated that subdued metal prices will keep pressure on mining firms to cut costs and control capital expenditure (capex) through 2016 ( see ' Unearthing The Key Mining Themes In 2015 ,' October 15), with negative effects for mining services firms. Indeed, while Caterpillar's Energy & Transportation's sales grew 13% y-o-y, with particular support coming from North American construction and oil and gas sales, its Resource Industries' sales declined 19%. Within the latter segment, Latin America registered the largest y-o-y sales drop on a regional basis, at 31%, followed by EAME (Europe, Africa, & the Middle East) at 25%.

Capital Discipline Among Miners To Persist
Top 10 Miners - Capex

Brazil: Vale To Face Headwinds Despite Record Output - We expect Brazilian iron ore miner Vale will continue to face headwinds to its revenue growth and share price in the quarters ahead despite its record Q314 iron ore output of 87.5mnt. Vale's production results mirrored those of BHP Billiton and Rio Tinto, both of whom reported significant y-o-y gains in iron ore output for the three months ending on September 30. Nevertheless, we maintain that Vale's strategy of growing revenue and market share by consolidating operations, reducing costs, and expanding iron ore output will face challenges ( see ' Vale: Multi-Year Strategy To Face Headwinds ,' July 24). This view is predicated on our expectation that Chinese demand growth for iron ore will slow on account of both lower annual steel production growth and falling commodity-backed financing demand. Combined with rising global iron ore production, we expect a multi-year global supply glut to persist, leading to average iron ore prices of USD90/tonne in 2015 and y-o-y declines thereafter to 2018. Furthermore, we believe Vale's strategy is unlikely to catalyze a longer-term recovery in its share price ( see aforementioned article and ' Vale: No Sign Yet Of Share Price Turnaround ,' September 9). Indeed, as of October 23, Vale's share price was trading at BRL23.28, its lowest level since Q408.

Continued Weakness Likely
Brazil - Vale Share Price, BRL (Monthly)

Key Developments: EMEA

Democratic Republic of Congo: Regulatory Environment To Become Less Competitive - We expect a more challenging regulatory environment to take hold in the Democratic Republic of Congo after the government has signalled a greater likelihood of implementing a revision to the mining code. Since the start of the year we have flagged the possibility for DRC's mining code to be overhauled, ushering in a windfall tax, a larger government stake in mines and higher royalties. These measures will allow the government to extract greater revenue from the sector and are particularly worrying for mining companies currently operating in the sector, including Randgold Resources which operates the giant Kibali gold mine. We highlight that the new code could deter a significant amount of new investment as the country already suffers from elevated political risk, weak infrastructure and major security risk.

Africa - Mining Regulatory Outlook
Country Change On Last Quarter Index Comment
Botswana Neutral 82 The government cut taxes in 2012 and maintains a pro-business approach to mining taxation. Plans are underway to enhance the minerals legislative framework to attract non-diamond miners into the sector.
Burkina Faso Positive 70 The government has implemented a modern mining code, attracting a multitude of new players into the mining space. Major effort at tackling corruption.
Angola Neutral 65 In Q113 the Angolan government announced a reduction in mine taxes to 25% to attract more investment into the sector.
Mauritania Neutral 62 Favourable tax regime designed to provide incentives for direct investment into the mining sector.
C?te d'Ivoire Positive 61 The government has implemented a new mining code representing a consensus of the mining community, mining ministry, and other stakeholders. A key feature of the new code is its provision for tax stability.
Mali Neutral 57 The new government is conducting a complete inventory of the mining sector and will review all contracts. However the government is keen to reduce corruption and attract foreign investment into the mining sector.
Ghana Negative 56 In Q413 the government announced plans to introduce a windfall tax on miners' profits. Since then, this proposal has met with fierce opposition from miners operating in the country. For the moment the tax is on hold but could be implemented in the future.
Mozambique Negative 56 The government seeks to raise its stake in new mining projects and has stated its intention for citizens to gain more from the extraction of the country's mineral resources. The government has ruled out tax breaks for mining companies despite weak global coking coal prices.
Liberia Positive 55 The government is keen to attract FDI to develop the country's vast iron ore reserves.
South Africa Neutral 54 The long-awaited amendment to the Mineral and Petroleum Resources Development Act was ratified by Parliament in Q114 and was welcomed by mining companies as significantly improved from its first draft. The government has delayed implementation of a carbon tax until 2016. Nevertheless, the government is planning levies on acid mine water.
Sierra Leone Neutral 54 Conducting a review of mining revenue and contracts. The government is in talks to harmonize mining regulation with the other West African countries.
Guinea Neutral 53 Government has reduced taxes and royalties on the sector but now takes a 15% stake in projects with option to purchase up to 35%. The government is in talks to harmonize mining regulation with the other West African producing countries.
Zambia Negative 52 In Q413 the government announced a 10% export duty on semi-processed base metals. The government has also intervened with firms' intentions to cut jobs. The government will look to increase taxation and tighten regulation in the wake of alleged tax evasion by mining companies in the country.
Namibia Neutral 52 The government scrapped plans for a tax hike to 44% but lack of clarity over the potential implementation of a 'super tax' has scared away potential investors.
Tanzania Neutral 45 Tax hikes and royalty increases have compelled miners to appeal to the government for greater prudence in regulating the mining sector.
Congo, Dem Rep Negative 32 Government is mulling revising the mining code to extract more revenue from the sector. Proposals include a windfall tax, taking a 10% stake in mining projects and tripling copper royalties to 6%.
Zimbabwe Neutral 30 Miners operating here will meet with stringent indigenisation policy, high levels of government involvement in the mining sector & government commitment to boost its revenue through taxation and beneficiation.
Correct as of October 23. Source: BMI

Poland: Coal Sector In Trouble - Poland's coal sector will face increasing difficulties as the influx of cheap coal imports continues to undermine domestic producers. This week the Polish mining firm, JSW, which is the largest coking coal miner in the European Union, announced it had slashed its production target by 9% for 2014 in the face of weak coal prices and waning profitability. The Polish government announced at the start of October that it would split the country's profitable and unprofitable coal mines into two groups so that development of the viable mines would be focused on while many of the unviable mines would be forced to close. Trouble in the coal sector is likely to have implications for the broader Polish economy as the industry employs more than 100,000 people, many of whose jobs are increasingly at risk.

Subdued Prices To Put Pressure On Producers
Global Thermal Coal Benchmark - Average Price & Growth
Projects & Announcements This Week
Country Company Mine Commodity Update
Australia Northern Minerals Browns Range Heavy Rare Earths The Western Australian government has given environmental approval for the development of the project
Australia Havilah Resources Portia Gold Has been granted approval by the South Australian government to start mining at the project
Australia Anglo American Drayton South Coal The New South Wales Planning Assessment Commission has refused the company's application to develop the mine, claiming it would negatively affect the Coolmore and Dudley horse breeding studs
Australia Doray Minerals Andy Well Gold During three months to September 2014, gold production at the operation reached 18.3koz, which was slightly below the 18.8koz produced in the previous quarter
Australia Flinders Pilbara Iron Ore Based on a recent drilling campaign at Blackjack deposit at the mine, the deposit is now estimated to host some 86.2mnt of resource, grading 56.8% iron. This was a 93% increase over the previously estimated resource
Australia Talisman Mining, Glencore Sinclair Nickel Talisman has signed an agreement with Glencore to acquire the mine for a deal valued at USD8.8mn
Australia Phoenix Gold Castle Hill Gold Has poured its first gold from the Kintore West opencut operation, which forms part of the larger Castle Hill Stage 2 operation
Australia Sandfire Resources DeGrussa Copper Copper production decreased slightly from 16.4kt in the June quarter to 16.1kt in quarter ended September 2014, while gold production edged up from 8.6koz in the previous quarter to 8.7koz
Australia Cockatoo Coal, Japan Oil, Gas and Metals National Corporation (Jogmec) Dingo West Coal Cockatoo has signed an exploration joint venture agreement with Jogmec over the project
Australia Whitehaven Coal Maules Creek Coal Is looking to speed up construction of the project
Bolivia Prophecy Coal, Apogee Silver Pulacayo-Paca Silver, Lead, Zinc Prophecy has announced that it has agreed to buy two of Apogee Silver's subsidiaries in order to acquire the mine
Burkina Faso Nordgold, Goldrush Resources Ronguen Gold Nordgold has completed the acquisition of Goldrush's project
Cameroon West African Minerals South Sanaga Iron Ore A reconnaissance drilling programme at the licence has intersected multiple coarse-grained magnetite gneiss packages with grades and thicknesses sufficient to initiate a follow-up drill programme designed to deliver a maiden mineral resource estimate in early 2015
Canada Treasury Metals Goliath Gold Has filed the environmental impact assessment with the Canadian Environmental Assessment Agency for the project
Canada Chieftain Metals Tulsequah Chief Zinc, Gold, Silver, Copper, Lead The 2014 feasibility update reflects a project with lower capital costs resulting in enhanced projected investment returns, despite lower yearly output
Canada Atrum Coal Groundhog North Coal A supplementary prefeasibility study (PFS) for the project has increased the mine life by 138%, from 16 years to 38 years
Congo (DRC) Tiger Resources, Soci?t? d'Exploitation de Kipoi Kipoi Copper Tiger Resources has completed the acquisition of the remaining 40% shareholding in Soci?t? d'Exploitation de Kipoi (SEK), the owner of the project
Cote dIvoire Amara Mining Yaoure Gold The 2014 drilling programme at the project has confirmed the presence of high-grade areas in the Yaoure central zone and demonstrated strong continuity in the high-grade CMA zone
Guinea Anglo African Minerals Far Bauxite Is looking to fast-track its 43mnt project into production by 2016
Guyana Troy Resources Karouni Gold Has moved a step closer to production at the project, after signing a minerals agreement with the state government.
Mongolia Turquoise Hill Resources Oyu Tolgoi Gold, Copper Expects the mine to produce between 550-600koz of gold in concentrates in 2014, down from the 600-700koz it had forecast in August 2014. Has reduced its expectation for copper concentrate output to 135-150kt this year, down from 135-160kt before
Mozambique Baobab Resources Tete Iron Ore Bench and pilot scale metallurgical testwork has confirmed the chosen technology route for the project
Namibia Paladin Langer Heinrich Uranium Produced 1.02mn pounds of uranium oxide during the quarter ended September 2014, compared with the 1.33mn pounds U3O8 produced during the June quarter
Papua New Guinea Newcrest Wafi-Golpu Gold, Copper, Silver Is hoping to complete an updated prefeasibility study for the project by the end of 2014
Peru Buenaventura Chucapaca Gold Will now invest USD700mn in the project instead of an earlier estimate of USD2bn, and expects annual output of between 200koz/y and 300koz/y of gold, down from an earlier projection of some 500koz/y
Peru MMG Las Bambas Copper Will slightly delay the start of production to the first quarter of 2016
Poland Balamara Resources, Carbon Investment Mariola Coal - Thermal Has announced USD11.4mn deal to consolidate the ownership of the project. Under the terms of the transaction, Balamara would issue 200mn of its shares to acquire the remaining 85% of Carbon Investment, which owns the rights to the project
Russia Tigers Realm Coal Amaam North Coal Has reported a 170% increase in the resource to 72.3mnt of coal at the project
Senegal Mineral Deposits Limited Grande C?te Mineral Sands Mining operations are back in ramp-up mode at the project, after being interrupted in August 2014 following impellor failures of the main dredge pump
South Africa Royal Bafokeng Platinum Styldrift I Platinum The project is now expected to reach steady-state production during the first quarter of 2019
South Africa Norilsk Nickel, BCL Nkomati Nickel Announced the conclusion of definitive transaction agreements that would see the transfer of Norilsk's 50% participation interest in the mine to BCL
South Africa Universal Coal Kangala Coal Delivered 580kt run-of-mine coal during quarter ended September 2014, up from the planned 572.4kt
Tanzania Shanta Gold New Luika Gold Has reported a Joint Ore Reserves Committee-compliant mineral resource estimate and ore reserve increase from 456koz in January to 690koz across the Bauhinia Creek, Luika and Ilunga targets of the mine
Tanzania Tembo Gold Corporation Tembo Gold Has completed its 2014 drilling programme on the project
Togo Ferrex Nayega Manganese Exploration results from pit sampling at the project have confirmed a number of targets with the potential to increase the project's current Joint Ore Reserves Committee-compliant resource of 11mnt
Turkey Stratex International Muratdere Copper, Gold, Silver, Molybdenum Flotation testwork of supergene material at the project has yielded sulphide copper recoveries averaging 79.76% copper, together with some recoveries of gold, silver and molybdenum
Zimbabwe Mwana Africa Freda Rebecca Gold Has increased gold production at the mine by 23% to 16.6koz in the quarter ended September 2014, owing to improvements in feed grade, recovery and tons milled
Source: Company Announcements, BMI