Introduction: Market Conditions for Mining Investment to Remain Subdued

Latin America is on the verge of recovering from economic recession, with moderate growth of 1.6% forecast for 2017. Whether the black cloud hanging over the mining industry also gives way to sunnier weather will depend only partly on the GDP trend. While a positive environment of economic growth in any given country is usually good for the overall business and investment climate, mining companies are sure to be watching metal prices much more closely to gauge when it is time to commit cash to new capacity.

Metals prices for 2017 are still anybody's game. Indeed, prices moved after the surprise election of Donald Trump to the US presidency, some up, some down - and often not in the direction that was expected. However, it is still too early to attribute commodity price moves to any fundamental "Trump effect" because the president-elect has not provided much clarity on policies.

There is one indicator, however, that could be meaningful, according to analysts with Barclays: the short-lived nature of the spike in gold prices immediately following the election "suggests that as with the Brexit vote, (Trump's) victory seems unlikely to be the risk-off event that many had least in the short term."

Meanwhile, a jump in copper prices in November probably has as much to do with positive housing data out of China than the prospect of economic stimulus in the US. If the US does push forward with protectionist policies, global economic growth could be negatively impacted, keeping copper below US$2.20/lb in 2017, according to Gustavo Lagos, a professor at the school of mines at Chile's Universidad Católica.

Copper cathode production. Credit: Antofagasta Minerals

What is certain is that prices will be starting the New Year significantly higher than they did in 2016. At end-November, copper was trading over US$2.60/lb, versus a level of around US$2.00/lb when the year started. Gold was trading at just under US$1,200/oz, having shed gains that pushed it over US$1,300/oz mid-2016 but still higher than its spot price of US$1,072/oz as 2016 opened. Silver has followed gold's up-then-down curve but is still trading 18% higher at US$16.54/oz. Meanwhile, iron ore prices rallied in November to as high as US$80/t, nearly twice their early-2016 level.

The question is, how sustainable are current price levels? Chile's copper commission Cochilco forecasts an average copper price for 2017 of US$2.20/lb. Credit Suisse is even more bearish with a forecast of US$2.00/lb, while Barclays predicts just US$1.90/lb. Capital Economics foresees US$2.18/lb at year-end.

As for gold, a number of experts believe that efforts to stimulate the US economy could lead to inflation and, in turn, rising gold prices, including Kitco, ICBC Standard Bank and Commerzbank. Capital Economics and Credit Suisse see gold rising above US$1,400 in 2017. Iron ore forecasts are falling around the US$45-50/t mark.

A majority of respondents so far to BNamericas' Mining Survey 2017, the full results of which will be published at the end of December, believe that copper and iron ore prices will stay close to current levels. Regarding gold and silver, the response is less clear but is leaning toward a belief that prices will rise. "I think we are at the bottom, but significant recovery will not occur until 2018," one respondent commented of metal prices in general.

"The mining industry has begun to accept that the period of low prices and big challenges is going to be longer than previously thought," says Juan Carlos Guajardo, director of Chilean consultancy PlusMining. "Next year has already been internalized as a difficult year in which there will not be recovery of any aspects of the market. The challenge, then, becomes (...) how to survive, how to approach the challenges related to low prices."

One of these is continued debt reduction. Major mining companies including Vale, Freeport McMoran, Coeur Mining, HudBay Minerals, Barrick Gold and Newmont Mining, to name a handful, have all made moves to improve their balance sheets, in some cases raising money to pay off creditors via mechanisms such as asset sales, equity raisings and streaming deals. Reducing debt will help the industry get back into a position where it can consider capital investment.

Yanacocha gold mine, Peru. Credit: Newmont Mining

Mining companies will also be focused on continued cost reduction, optimization of assets and productivity, though they will face the deep challenge of how to continue making progress, having already captured the quick wins. Eighty-nine percent of early respondents to our survey said they plan to take steps to increase productivity in 2017, while 43% said they believe mining sector costs will stay the same. In companies' favor, the external factors of weak local currencies against the US dollar and low oil prices that helped to drive costs down in 2016 look set to continue next year as well.

There is little hope, however, for a recovery of junior exploration. "With prices where they are, it is not sufficiently attractive yet," says Erika Manchego, an analyst with Scotiabank in Lima. "A copper price of US$2.50/lb is not bad, but the question is how sustainable that price is." Most exploration spending will continue to come from larger mining companies at brownfield targets rather than junior or greenfield projects.

Looking at generalized spending, 47% of our survey respondents so far say their companies will maintain spending levels in 2017 and another 32% said spending will decrease, while more than half of respondents believe that the availability of financing next year for mining projects in Latin America will also stay the same.

Meanwhile, almost half of respondents agree that political and legal uncertainty will deter mining investment in Latin America overall in 2017, though responses vary greatly regarding specific countries. There is greater worry in regards to the community relations in the region, with almost two-thirds agreeing they will negatively impact mining investment. Peru won the vote for the best mining investment climate for 2017 overall, followed by Chile.

Figure: Gold Prices

Figure: Copper Prices

Figure: Iron Ore Prices


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