Summary: Swiss Mining Institute’s “Mining Investment Conference”

We participated in Swiss Mining Institute’s “Mining Investment Conference” held during March in Zurich, Switzerland. We’re delighted to share with you the key insights gathered from the conference.

The Conference Summary offers an in-depth analysis of the prevailing factors influencing the global metals and mining markets. Furthermore, we took advantage of the opportunity to engage with several companies and have spotlighted significant developments.

Highlights

• At the conference, there was an evident sense of optimism as gold finally broke out of the range it had been confined since the early part of the decade, soaring to a record $2’200/oz this month
• Strategic moves by foreign central banks, particularly China, to diversify reserves into gold highlight a broader trend
• Gold equities have decoupled from historically high gold prices and are trading at a record discount
• Industrial metals, notably copper, anticipate significant price surges driven by demand dynamics and limited new discoveries, underscoring the critical role of mining in meeting evolving global infrastructure needs
• Participants expect the mining industry to consolidate

Find out more in the PDF

Summary: Scotiabank’s 52nd Annual Energy & Power Conference

We participated in Scotiabank’s 52nd annual Energy & Power Conference held at the end of February in Miami, Florida. We’re delighted to share with you the key insights gathered from the conference.

The Conference Summary offers an in-depth analysis of the prevailing factors influencing the global energy and power markets. Furthermore, we took advantage of the opportunity to engage with several companies and have spotlighted significant developments.

Highlights

• M&A activity was one of the prominent themes of the conference
• The industry is actively seeking to regain the interest of general investors
• Participants view natural gas as crucial to the energy transition. Especially LNG demand is forecasted to grow at ~4% CAGR during 2023-2030. During the same time, North America’s LNG capacity is projected to grow from 91mtpa to 280mtpa by 2030
• Electricity demand driven by data centers, AI, EVs and electrification of industrial processes is expected to surge significantly

Find out more in the PDF

ICG Commodity Update – February 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Crude oil has seen a gradual but steady upward trend this year. The widening time spreads indicate a tightening of physical conditions influenced by various disruptions, such as attacks on ships in the Red Sea. Hedge funds have also reduced their short positions. Nevertheless, delayed expectations of a Federal Reserve rate cut, robust production from non-OPEC+ sources and an uncertain Chinese demand outlook have limited gains. OPEC+ extended its oil production cuts until the middle of the year, totalling around 2mboe/d. This extension had been widely expected by traders and analysts. Surprisingly, Russia pledged to strengthen its role by focusing more on production cuts than exports. Russia announced an additional 471 kboe/d cut for Q2/24. If these cuts are implemented in full, the oil market is likely to tighten further, according to UBS analysis. The earnings season for international oil companies (IOCs) has come to a close in Q4, with EPS results beating expectations by an average of 7% after missing by 6% in Q3. De-risked balance sheets enabled the sector to beat forecasts, with distributions now averaging 45% of operating cash flow, according to Jefferies. Consolidation in the US shale industry pushed the value of global mergers and acquisitions in the oil and gas exploration sector to its highest level in seven years in the first quarter. Deals worth over $55bn were announced in the first two months of 2024. In particular, the acquisition of Endeavor Energy Resources by Diamondback Energy, both of which focus on the Permian Basin, attracted a lot of attention. Woodmac reports that the ten largest producers in the Permian Basin will now account for 53% of production in the basin. M&A’s have the potential to lower the break-even point through cost synergies and encourage a move away from short-term thinking in terms of investment and growth, making companies less vulnerable to price volatility. It is worth noting that such acquisitions are often preceded by a slowdown in oil and natural gas production growth. Therefore, this series of follow-on deals could also support global crude oil and natural gas prices.

Industrial Metals

As reporting season kicked-off, the recent declines in profits reported by major mining companies, including Rio Tinto, BHP, and Glencore, reflect a retreat from the extraordinary gains witnessed in the aftermath of Russia’s invasion of Ukraine. It is essential to consider the context of the preceding period marked by price spikes and wild swings, which led to blockbuster earnings. Rio Tinto, despite a 12% fall in profits attributed to weaker commodity prices and rising costs, maintained resilience by paying a higher dividend, reflecting its overall financial strength. BHP, undergoing significant restructuring to enhance efficiency, faced a hit in profits primarily due to a write-down in its nickel business. However, the company’s half-year underlying profit exceeded expectations, and cautious optimism was expressed about a demand recovery in 2024. Glencore, despite a steep drop in annual profit, still achieved impressive earnings of $17.1 billion. As the mining industry anticipates a more balanced global economy in 2024, these profit declines should be viewed in the context of a return to normalized conditions following a period of exceptional highs. Looking at lithium, Albemarle, the leading lithium supplier, has voiced concerns about the sustainability of current prices, deeming them insufficient to spur the necessary supply investments for long-term demand growth. Global lithium companies scaling back expenditures and curtailing production as demand slowed precisely when new mines ramped-up. This sudden shift has resulted in a market oscillating from shortages to oversupply. Contrasting this trend, SQM, the world’s second-largest lithium producer, has adopted a distinctive strategy. Despite operating in an oversupplied market, SQM is forging ahead with expansions and stockpiling of the battery metal, positioning itself for a potential resurgence in demand. This approach carries a dual impact on the market dynamics. On one hand, the continued increase in output during a period when buyers are depleting inventories may extend the glut. On the other hand, it reflects a calculated wager on the return of buyers, aligning with the sustained growth in EV demand. According to SQM, the next decade is poised to witness a fourfold surge in lithium demand. This strategic perspective underscores SQM’s readiness to navigate the evolving market dynamics, balancing the present challenges with a forward-looking optimism anchored in the transformative trajectory of electric-vehicle adoption.

Precious Metals

While gold is breaking out, it is frustrating to see how gold equities continue to underperform. Over the past year, while the metal itself has experienced a 12% increase, the gold equity index has declined by 8%. BMO attributes this underperformance to factors such as inflation, leading to elevated total costs, diminished margins, and constrained free cash flow. Additionally, the mining industry grapples with short mine lives, requiring constant reinvestment to replace depleted ore. A looming labor shortage compounds these challenges, driving up costs and hindering productivity. Although certain issues may persist, there is optimism regarding the impact of inflation diminishing. During the annual reporting of our portfolio companies, notable improvements in costs and margins have already been observed. Analysts anticipate a reduction in inflationary pressures as the economy slows down, labor constraints ease, and energy prices normalize in the industrial supply chain. Projections point towards a 5% annual unit cost deflation in 2025 and beyond. Traditionally, the gold sector’s cost curve aligns with fluctuations in gold prices, resulting in increased marginal supply. However, the current cycle demonstrates a sustained level of discipline among companies. There is a focus on adhering to cutoff grades and reserve price assumptions, with an emphasis on generating free cash flow over prioritizing revenue. Despite rising industry costs, these do not seem to stem from self-inflicted actions. Gold equities are currently undervalued, with historically low valuations, while expected increases in free cash flow yields and dividends lie ahead. Management teams have exhibited greater discipline in capital management, avoiding overpaying for mergers and acquisitions. This prudent approach has contributed to a still fragmented industry with numerous small companies. Examining key financial metrics, the precious metals champions fund’s portfolio boasts a weighted average P/B multiple of only 1.2x, a price-to-cash flow ratio of 5.4x, and a dividend yield exceeding 2.5%. The anticipated rise in free cash flow yield from 6% in 2024 to over 15% in 2025 aligns with the continued maintenance of healthy balance sheets among our portfolio companies, characterized by minimal to no debt.

ICG Commodity Update – January 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Oil prices have recently risen, with the Red Sea turmoil having the least impact. The surge is attributed to winter storms affecting U.S. oil production, particularly in North Dakota and Texas, causing a temporary 1mboe/d or 7.5% reduction in daily domestic output. However, this output is expected to fully recover soon. A week later, Saudi Aramco unexpectedly paused a 1mboe/d capacity expansion planned for 2027, without explanation. OPEC+ output cuts have left Saudi Aramco below its maximum output potential, pumping around 9mboe/d currently. The decision to abandon the capacity expansion reflects a longstanding trend in Saudi Arabia’s history of announcing substantial production expansions, only to backtrack on those plans later. The enduring reality is that the global shift away from Saudi crude is ongoing, with a growing preference for American oil. This transition extends beyond the United States, encompassing countries like Canada, Brazil, and Guyana as key players in the evolving landscape of the oil market. This will result in important geopolitical changes going forward. Therefore, not so surprisingly, Brent crude oil futures remained in the $70s for six weeks, disregarding geopolitical events like Houthi attacks in the Red Sea, oil tanker diversions, and tensions in Iran, and off the coast of Oman. Even oil options prices indicate market calm, with option-implied volatility decreasing from over 50% after the Hamas attack on Israel to around 36%. JP Morgan analysts concluded there was no geopolitical risk premium in petroleum prices currently. Big Oil’s prominence has diminished, comprising just 3.6% of the S&P 500, down from 5% a year ago. Microsoft’s market value now surpasses Exxon’s by 7 times and Shell’s by 14 times. Microsoft’s Free Cash Flow is on the other hand only 2 times bigger than Exxon’s and 2.3 times bigger than Shell’s in 2023. Nevertheless, Big Oil’s post-pandemic strategy involved taking cash from rising oil prices and returning it to shareholders. With a 20% crude decline in Q4 2023 and shrinking refining margins, analysts anticipate limited cash for stock buybacks this quarter, emphasizing the importance of operational performance. After $260bn of M&A in 2023, this trend is expected to continue, with notable deals in January, such as APA purchasing Callon Petroleum and Chesapeake, and Southwestern merging together.

Industrial Metals

Heightened macroeconomic concerns from elevated interest rates, high energy prices, a strong U.S. dollar, and a sputtering China, continue to stoke global recession fears. Although some analysts remain concerned with near-term consumption risks, several commodity markets appear surprisingly tight in 2024, driven by ongoing supplyside underperformance and remarkably resilient demand. Moreover, with visible inventories for some metals already at critically low levels, analysts anticipate a relatively attractive pricing environment this year, despite economic uncertainty. In the case of copper, several hedge funds are betting that copper stocks are significantly undervalued, as they position themselves for gains this year. Those bullish bets follow a supply setback, with key mines running into trouble at the end of last year. The upshot is that what had looked like a clear case of excess supply has now morphed into a likely deficit according to analysts. The development underscores the fragility of supply in markets where there has been very little capex for new projects, or where even sustaining and maintaining existing operations has been a challenge over the past decade. Overall, copper gained only 2% last year, following a 14% decline in 2022. So far this year, the base metal’s price is little changed, bullish bets for 2024, however, are continuing to mount. Robert Friedland, the billionaire founder of Ivanhoe Mines, said recently he wouldn’t be surprised if the price climbed to $9,500 a metric ton this year, as interest rates come down and demand from China heats up. For miners with existing operations, copper’s tight supply dynamics are good news. But given the long-term demand projections, there’s a conspicuous lack of investment in new supply. That gap is so big that some manufacturers even warn it may put the energy transition at risk. Battery metals such as lithium and cobalt on the other hand are having a tough time. Core Lithium said it would close one of its mines, cutting 150 jobs. The battery minerals sector could be on track for more mine closures as its quarterly reporting season gets under way – with several producers on track to report annual losses. It’s not surprising that lithium prices have sharply retreated, considering the substantial influx of new companies focusing on this metal in recent years. Therefore, it is crucial to consider only those companies that can remain profitable even during downturns, thanks to their leading cost profiles and streamlined balance sheets.

Precious Metals

According to analysts, the resilience of gold can be attributed to geopolitical anxieties linked to escalating tensions in the Middle East, along with sustained robust demand for physical gold from central banks and China’s middle class striving to safeguard their diminishing wealth amid the property market crisis. Interestingly, with gold prices holding over $2,000/oz, it appears that the stage is set perfectly for a wave of M&A to sweep through the gold equities in 2024. While analysts note potential producer-buys-producer possibilities, valuation disparity and insights from management teams would indicate that there is also room for producer-buys-developer transactions, especially if the developer is fully permitted. More recently, exploration budgets have shown an uptick, but global reserves are still depleted, and senior gold company production is expected to decline – still, the number of transactions is lower than pre-COVID levels. According to BMO, tier one jurisdictions have, and are expected continue to, garner most of M&A interest in the space, with 41% of the mines acquired in the past 10 years being in Canada and the United States, and 25% in Australia in the same time frame. When examining transaction sizes, there is lower variability in value generation for the larger deals, and higher variability in ROI for the smaller deals. Logically, this can be attributed to the fact that smaller companies or assets generally have more opportunity for growth, especially on a relative basis. As demonstrated by the top 4 value generating deals, the most notable returns came from medium-large caps making smaller acquisitions. The precious metals champions fund’s portfolio prefers small to mid-cap companies, representing 84% of the equity exposure. The fund emphasizes the reserve valuation, calculated as the enterprise value divided by 2P reserves, and considers the cash costs of a company, among other factors. In essence, the focus is on evaluating how inexpensively a company or asset can be acquired and its ability to produce profitable ounces. Our analysis indicates that these factors are crucial in determining the attractiveness of a potential target. Currently, the weighted average EV/2P of the portfolio is at $280/oz (vs. universe at $346/oz) while the cash costs are at $1’100/oz (vs. universe at $1256/oz).

ICG Commodity Update – December 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Crude oil experienced its first annual decline since 2020, witnessing a drop of over 10% last year. Throughout December, the Brent futures curve displayed a bearish contango structure, with near-term barrel contracts trading at discounts compared to later ones. In 2023, speculators displayed the most bearish sentiment towards the commodity in over a decade. Non-commercial players’ net-long positions across major oil contracts reached the lowest levels on record, dating back to 2011. The diminishing confidence in OPEC’s ability to balance the market was exacerbated by the surge in algorithmic trading, accounting for nearly 80% of daily oil trades and causing price fluctuations independent of fundamentals. Despite this, supply remains a significant factor, with record production in the US reaching 13.3mboe/d last month. Increasing output from non-OPEC+ nations, such as Brazil and Guyana, has contributed to a global glut, despite OPEC’s efforts to curb supplies. OPEC recently released a statement affirming its commitment to “unity, full cohesion, and market stability”. On the demand side, there are varying expectations for 2024. According to the IEA, global consumption growth is expected to slow as economic activity weakens, with a forecasted demand increase of 1.1mboe/d for the year. While this is less than half of the 2023 growth rate, it remains high by historical standards. In contrast, OPEC maintained its demand growth forecast at 2.2mboe/d in its December report, which some analysts consider optimistic. Analysts continue to be cautious of geopolitical risks. Especially the recent attacks in the Red Sea by Yemen-based Houthi militants and the ongoing conflicts between Russia and Ukraine and the Middle East. The energy industry witnessed notable takeovers in 2023, with Exxon Mobil, Chevron, and Occidental Petroleum completing blockbuster deals, pushing the total value of announced M&A to $346.2bn. This marked an 80% increase from the previous year and ranked only below the values recorded in 2014 and 2018. Despite this, the S&P 500 Energy Index fell 4.8%, ranking as the second-worst performer among the 11 S&P 500 industry groups. In contrast, the Energy Champions Fund closed the year in positive territory, outperforming most of its peers once again.

Industrial Metals

In 2023, the commodities market experienced significant challenges, marked by a nearly 10% decline in the Bloomberg Commodities Index. Various commodities, including oil, gas, base metals, and grains, recorded declines, contributing to the overall downturn. However, copper prices saw a marginal increase during this period, driven by expectations of another deficit year. The market witnessed a deficit in 2023 due to robust demand and weaker-than-anticipated supply, contrary to initial projections of a surplus at the year’s outset. Forecasts indicate that these deficits are likely to expand in 2024 and 2025, primarily due to downgrades in several producer-related aspects. Fitch Ratings predicts a 2.7% increase in global copper consumption in 2024, attributing it to the metal’s role in the ongoing energy transition. Looking ahead to 2050, S&P anticipates annual copper demand surpassing the cumulative consumption from 1900 to 2022. Surprisingly, uranium emerged as the top-performing commodity in 2023, reaching a 16-year high of over $90/lb. Unlike previous spikes in 2007 and 2010 driven by specific market shocks, the current momentum is fueled by diverse factors, including climate change considerations, increasing acceptance of nuclear energy, advancements in reactor technologies, and geopolitical uncertainties affecting both demand and supply. A notable development is China’s decision to halt the export of certain rare-earth technologies, potentially complicating efforts by the US and other Western nations to secure strategic raw materials. Meanwhile, lithium faced a significant price decline, with spodumene prices plummeting by 80% over the past year, leading to the suspension of mining activities by an Australian producer. The lithium market struggled with a global supply glut in 2023, coupled with lackluster growth in battery demand and the impact of higher interest rates on global electric vehicle sales. In the realm of M&A, Nippon Steel announced its acquisition of United States Steel for $14.1bn. The acquisition price, at approximately 8 times US Steel’s 2024 EBITDA, exceeded the typical 4–6x valuations for major global blast furnaces. Additionally, it is said that Barrick Gold initiated discussions with First Quantum Minerals shareholders regarding a potential M&A transaction. According to S&P, the positive outlook for the mining industry is supported by the expected entry into production of at least 38 mines in 2024 all over the world.

Precious Metals

Geopolitical risks have consistently fueled safe-haven demand for gold, resulting in the metal reaching a record high in early December and closing 2023 with a 13% gain. Despite facing four interest rate hikes, in addition to seven the previous year, gold demonstrated unexpected resilience. Recently, gold experienced a pullback following a late-month rally, driven by expectations of rapid monetary loosening in response to a cooling economy. Attention is now focused on U.S. data, which will guide the pace of the Federal Reserve’s rate cuts. As we venture into 2024, the outlook for gold seems increasingly favorable, primarily shaped by the anticipated shift in interest rates. On the flip side, platinum group metals (PGM) faced a challenging year. Platinum recorded an 8% loss, while palladium plummeted over 38% in 2023. Several factors contributed to the decline, triggering negative speculative investor sentiment. After years of existing in a structural deficit, the palladium market is now experiencing structural oversupply. This shift is primarily attributed to palladium’s heavy reliance on catalytic converters in gasoline-powered vehicles, constituting about 90% of total demand. While gold miners celebrated the precious metal’s historic high, they are redirecting much of their windfall into copper. Interestingly, copper, previously downplayed by gold-mining executives, is gaining importance as investors recognize the growing competition for copper supply amid the global shift towards electrification and away from fossil fuels. The traditional premium of gold stocks over companies mining various metals is evolving. Barrick Gold, for instance, aims to transform into a “major-league copper producer” as revealed by CEO Mark Bristow in November. There are now rumors that Barrick has initiated discussions with First Quantum shareholders for a potential M&A transaction. Another major gold producer, Newmont, anticipates an increase in its copper revenue from 10% to 20% or more, following the takeover of Newcrest and the development of planned projects. About 30% of Newmont’s reserves are now in copper. Analysts observe positive signs in the macro backdrop for miners. S&P supports this positive outlook, highlighting the expected commencement of production in at least 38 mines worldwide.

ICG Commodity Update – November 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Brent oil is at $78/bl amid sustained scepticism that the latest supply cuts by OPEC+ will turn the market’s tide. The retreat came even after a difficult OPEC+ meeting last week that saw internal wrangling as well as a delay. OPEC+ oil producers agreed to voluntary output cuts totalling about 2.2 million barrels per day (mboe/d) for early next year led by Saudi Arabia rolling over its current voluntary cut. The market wasn’t enthusiastic in part because the reductions were voluntary, and this implies that any additional cuts become increasingly difficult to implement. Indeed, there is confirmed disunity in the group, with Angola publicly rejecting their quota and stating that they would produce at 1.18mboe/d from 2024. Some investors also expected the additional cuts to be deeper because of the recent large upside surprises to inventories and supply. According to Goldman Sachs, the additional cut’s now lowers 1H24 supply be around 0.7mboe/d and ends in 3Q24, which in theory means we will get a 1.2mboe/d 1H24 deficit. However, Q4 expected deficit was also around 850kboe/d and we’re currently in surplus. While it is hard to measure demand in real time, frequency / mobility indicators have generally met expectations and generally demand has looked “ok” according to Jefferies, but supply was strong. Especially this year we saw strong oil production increases by the OPEC members Iran +430kboe/d, Venezuela +150kboe/d, Nigeria +110kboe/d, Angola +60kboe/d and Gabon +60kboe/d. Meanwhile, Brazil said it would join the OPEC+ alliance next year but won’t take part in any production cuts for now. Ultimately, it is hard to be too bearish on oil prices in the short and medium term given OPEC+’s willingness to actively manage oil markets. On the producer side, M&A activity in the shale patch somewhat slowed in November as operators reported their 3Q23 earnings amid the backdrop of the megadeal frenzy in the prior month. Companies seem intent to stick to their “capital discipline” mantra in 2024, with few producers showing willingness to increase volumes beyond the maintenance to single-digit percentage growth range. Companies instead plan on inorganic growth and gaining the scale necessary to be competitive in the longer-term, signalling that more large deals may be on the horizon.

Industrial Metals

There are signs of the macro backdrop turning more positive for the miners as markets could be heading into an environment of a weaker dollar, lower bond yields, Fed rate hold/cuts, demand strength in several emerging markets, stability in China, booming demand in India, ongoing energy transition demand for metals, and mine supply constraints. M&A is likely to be a factor in 2024 as well. A key indicator of supply in the global copper market sank to the lowest level since August last year, as the shutdown of a large mine in Panama cuts the availability of ore for next year. The closure of the $10 billion Cobre Panama mine leaves world copper smelters with less raw material than expected to support their rapid expansion in capacity. That’s reflected in the so-called treatment charges for converting concentrated ore into metal, which rise when supply of mined copper is plentiful and drop when it’s getting tighter. Spot fees paid by Chinese smelters have fallen below $70 a ton for the first time since August 2022, Fastmarkets data show. Some analysts have lowered their forecasts for copper demand related to the energy transition as renewable energy projects are being delayed and EV penetration may be slowing, in part due to high costs. A plan to close First Quantum’s major mine in Panama is threatening to upend the global copper market by whipsawing the industry back into a period of tighter supply though. Until recently, the broad consensus among forecasters was that copper would enjoy a comfortable surplus for the next few years, before tightening sharply later in the decade as supply struggles to keep up with surging demand for the energy transition. Now, the news that Panama intends to shut down one of the world’s biggest and newest copper mines threatens to disrupt that trajectory. Copper prices have risen about 6% since the protests erupted in Panama. In general, for the past five years in a row, the mine disruption rate has been above the average of this century – this shows how quickly a balanced market can swing into deficit and how important it is to be diversified – geographically as well as on a commodity basis. On the company side, Glencore will buy a majority stake in Teck Resources coal business, ending a months-long saga that transfixed the mining industry and setting the stage for the commodity giant to exit the coal business itself. Glencore will pay $6.93 billion for a 77% stake in Teck’s business, while Nippon Steel and Posco will hold the rest.

Precious Metals

Gold touched an intraday record $2,135.39 an ounce thanks in part to its haven status as the more volatile the world gets, the better gold tends to do. Bullion has rallied almost 16% since early October, a surge that was initially sparked at the start of the Israel-Hamas conflict but has since been driven by bets on the Federal Reserve will shift to monetary loosening early next year. The Fed last week said the central bank’s policy rate is “well into restrictive territory” in comments that are being interpreted as largely dovish by markets. But the precious metal’s strength has been underpinned by a wider array of factors, from a wave of purchases by governments and central banks to geopolitical uncertainty, with 41% of the world’s population due to go to the polls next year. Gold has risen more than 600% since the turn of the millennium, though adjusted for inflation it remains below the high of $850 touched in January 1980, which would be equivalent to more than $3,000 in today’s dollars. Still, many investors have remained on the sidelines as gold has surged higher. Investors in gold via exchange-traded funds, a key driver of previous bull markets in the metal, have been sellers for much of this year, with holdings down by more than a fifth from a high in 2020. Looking at silver, industrial demand is well on track for a new record level, with the Silver Institute numbers showing 632 million ounces this year. Currently ~160Moz of silver is used in photovoltaics on an annual basis, equivalent to ~15% of global demand. BNEF has highlighted that in an effort to increase solar module capacity and efficiency, many Chinese solar companies are looking at new designs including heterojunction and TOPcon cells that are reported to use significantly more silver than incumbent designs. Analysts suggest that these new technologies could be 3 times more silver intensive. On the company side, Sibanye Stillwater, one of the largest PGM producers, said it plans to lay off 575 employees in South Africa following a review of its gold operations in the country. According to Northam Platinum CEO, large swathes of the South African PGM production base are currently loss-making. This is very concerning for the country. The typical miner in South Africa has around eight to 10 dependents, so layoffs will have a profound social and economic ripple effect.

ICG Commodity Update – October 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Crude has had a turbulent October, with prices swinging in a roughly $11/bl range. Oil started the month with a steep plunge on fears of a longer period of hawkish monetary policy. Then Hamas’s attack in Israel on Oct. 7 sent prices surging on the potential for disruptions in the region that accounts for a third of global flows. But with the war’s contagion fears subsiding, the economic concerns are again taking centre stage, sending oil prices to their first monthly declines since May. Signs of lacklustre demand have arisen in recent days, with manufacturing in China falling back into contraction this month and BP saying gasoline and diesel markets are oversupplied. Historically, the market has tended to value the reserve valuation of oil and gas companies with a relatively close correlation to the oil price. However, this relationship has dislocated with the implied value of barrels falling, despite the backdrop of higher oil prices. Therefore, we are not surprised to see M&A coming back so strongly. Chevron said it’s buying Hess for $53bn in stock. The announcement came just weeks after Exxon Mobil announced its purchase of Pioneer Natural Resources for $59bn in an all-stock deal. The two oil giants plan to continue pumping investments into fossil fuels as demand for crude remains strong, especially amid tightening global supplies fuelled by years of chronic underinvestment. Ironically, a day after Chevron announced its acquisition, the IEA released an exhaustive report concluding that demand for oil, gas and other fossil fuels would peak by 2030 as sales of electric cars and use of renewable energy surged. The disconnect between what oil companies and many energy experts think will happen in the coming years has never been quite this stark. In past decades, there were often calls of peak supply, and in more recent ones, peak demand, but evidently neither has materialized. OPEC noted that consistent and data-based forecasts do not support this assertion. The difference today, and what makes such predictions so dangerous, is that they are often accompanied by calls to stop investing in new oil and gas projects. OPEC’s Haitham Al Ghais said ”such narratives only set the global energy system up to fail spectacularly. It would lead to energy chaos on a potentially unprecedented scale, with dire consequences for economies and billions of people across the world.”

Industrial Metals

Metals had softened in October largely on concerns over fading demand outside China. Activity inside the world’s biggest buyer of industrial commodities has proved a relative bright spot, and further Chinese stimulus will support that dynamic. 2023 has seen a slowing in global trade, to which China has not been immune. However, the headline 6.2% y/y drop in both exports and imports in China’s September data is very different from those seen in industrial metal raw materials. China’s Q3 imports were up across the board, strongly in certain cases, with 2023 as a whole set to be another record import year for most. While many countries around the world ponder how to access increased metal volumes as global segmentation grows, the data shows China has just moved its traditional commodity model, honed over the past 20 years, up a gear. Adding to signs that President Xi Jinping is keen to shore up the economy and financial markets, he paid his first known visit to the headquarters of the People’s Bank of China in October. According to BlackRock, investors are missing a big opportunity to profit from the energy transition because they have an outdated view of the metals and mining industry. Industry executives, analysts and specialist investors have for several years been predicting a bull market as the shift to a lower-carbon economy drives a wave of demand for the metals needed for electricity grids, electric-vehicle batteries, and solar panels. Yet while prices rallied sharply in the rebound from the Covid pandemic, they have stagnated in the past year. Copper for example is down ~4% YTD and last traded at around ~$8’100/ton. In due course, the copper-hungry energy transition will underpin consumption in the years to come, while the mining industry faces difficulty bringing enough new pits online. That combo will usher in deficits. But for now, short-term concerns determine the price for most commodities. On the company side, First Quantum’s share plunged after Panama’s government said it would hold a referendum on the company’s flagship copper mine to address widespread civil unrest. Since the news, the company lost almost 50% of its market cap. Looking at the bright side, Rio Tinto has exceeded analyst expectations in terms of copper production growth. Additionally, BHP agreed to sell its coking coal mines to Whitehaven for $3.2 billion, and Vale has proposed a payout of $4 billion in dividends and buybacks for its investors.

Precious Metals

Gold saw a series of sharp gains in October as investors sought to hedge against a spillover in the Hamas-Israel conflict which could have implications for global energy markets. The metal was up around 8% in October and even surpassed the $ 2’000/oz mark briefly. While the war has so far remained contained, bullion has retained most of its war-risk premium. The World Gold Council published gold demand trends, where the organization highlighted that the year-to-date central bank net buying of gold is 14% ahead of 2022. Central banks have bought a net 800t of gold so far this year, the highest on record for that nine-month period. The council also stated that jewelry demand softened slightly in the face of high gold prices. More recently, the Federal Reserve hinted it may be finished with its most aggressive tightening cycle in four decades. Lower rates are typically positive for bullion, which doesn’t offer any interest. Looking at PGMs, Sibanye-Stillwater said that more than 4’000 employees and contractors could potentially be affected by the proposed restructuring of four shafts at its South Africa platinum group metal operations, and that it will consult with unions and non-unionized employees. PGM miners having a tough year fighting with low commodity prices even though the World Platinum Investment Council forecasts a deficit of over 1 million ounces in 2023, as automotive and industrial demand is expected to grow 27% while total supply should remain flat. It is worth noting the link between platinum and the hydrogen economy. Green hydrogen produced by platinum-containing electrolysers has a significant role to play in the energy transition. While hydrogen-related platinum demand is relatively small in 2023 it is expected to grow substantially in the medium term and could become a proxy for investors looking for exposure to global decarbonization. On the company side, Egyptian billionaire Naguib Sawiris, is eyeing an investment in Barrick Gold’s $7 billion Reko Diq copper-gold project. Reko Diq, in the Balochistan region that borders Afghanistan and Iran, is one the world’s largest undeveloped copper and gold deposits, capable of producing 200kt of copper and 250koz of gold a year for more than half a century. The project is jointly owned by Barrick and Pakistan.

ICG Commodity Update – September 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Crude oil prices posted its largest quarterly rally since the initial shock caused by the conflict in Ukraine. The markets are currently grappling with the impact of OPEC+ production cuts, which are resulting in tightening conditions for the foreseeable future. In fact, Russia is selling its oil to India at $80/bl, which is roughly $20 higher than the Western price cap. This price premium can be attributed to the tight global oil market dynamics, as reported by Reuters. In the United States, stockpiles at the Cushing hub have dwindled to critically low levels, particularly affecting refinery markets. This tight supply situation is having a direct impact on consumers at the gas pump. Indeed, oil demand growth has outpaced the increase in refinery capacity since 2021, and this will continue through 2027, according FGE. Global refinery processing rates this year are near record highs. Russia just decided to halt diesel exports next month in order to reduce domestic prices. The move sent European diesel futures prices higher again. Although some analysts say oil prices could soon hit $100/bl, US shale companies are not rushing to increase drilling activities. In the Permian Basin the number of rigs drilling for crude declined by about 12% to 314 since the end of April, according to Baker Hughes. Exxon cut its working US drilling rigs down about two this year to 17, well below the 65 it had running before a pandemic-induced oil downturn in 2020. Many oil executives anticipate that most shale companies will continue with their current strategies, even as global oil prices rise. These companies have committed to returning their profits from high energy prices to investors through share buybacks and dividends, all while facing challenges from inflation and high interest rates. Nonetheless, the US remains an oil and gas superpower. Rystad forecasts that American crude production is on track to hit a record 13mboe/d in September. However, the industry’s recovery from the pandemic was relatively slow as it last achieved this production level in November 2019. On another note, there are reports suggesting that Saudi Aramco is planning on a secondary offering to raise as much as $50bn by the end of this year. While this is speculative, such a move could put pressure on the nation to support higher oil prices for an extended period to bolster the success of the offering.

Industrial Metals

Recently, industrial metals from copper to iron ore slumped as investors reacted to the ongoing weakness in China’s property sector and inflationary pressures that could keep global monetary policy tighter for longer. With some of the Chinese economic uncertainty concerns that dominated in the third quarter of 2024 easing, analysts have seen some signs of improving sentiment returning to the base metals sector. Looking at China’s renewable generation capacity installed to date, a trend which could replace or exceed potential demand weakness in real estate, installed solar and wind capacity is up 134% year-over-year in the first eight months, representing 71% of the 200GW targeted for the full year – China appears to be on a good track to achieve or even surpass its renewable energy targets this year. Looking at Copper, prices have been under pressure since they peaked in January as global monetary tightening hurt the outlook for demand. Copper stockpiles immediately available to withdraw from the world’s top metals bourse hit the highest in almost two years – that’s a sharp turnaround from just three months ago when stocks fell to critically low levels. China’s CMOC Group shipment of its previously stranded copper stockpiles in the DRC has contributed to rising supply on the market, according to market participants. For mining companies, the last two quarters of the year are typically a stronger period for production. Analysts are seeing an even more exaggerated than usual H2 weighting this year for many miners – achieving expectations for the second half of the year should help underpin stronger financial results and could provide a tailwind into year-end. Further, companies have strong balance sheets and continue to prefer pursuing selective and generally lower-risk growth options with strong cash flow for shareholder returns. All in all, Bloomberg calculates that mining majors are currently pricing in a 5-10% pullback in commodity prices, despite having rallied about 7% off a mid-August low. This may provide some protection if prices cool for raw materials. More recently, the union of supervisors at Chile’s Escondida copper mine, the world’s largest, rejected a contract offer from mine owner BHP, paving the way for another strike. The proposed contract was rejected with 99% of the vote according to the union which counts over 900 members.

Precious Metals

Investment demand for gold waned as SPDR Gold ETF holdings, the world’s largest gold-backed ETF, plummeted to their lowest levels in four years. High US yields and a strong Dollar continue to act as headwinds against the metal as investors see the US Federal Reserve sticking to its high-rate regime for a duration longer than previously expected. Gold and the U.S. dollar often have an inverse relationship. When the dollar strengthens, the price of gold in dollars typically falls, and vice versa. This inverse correlation is because gold is priced in U.S. dollars worldwide. When the dollar rises in value, it takes fewer dollars to buy the same amount of gold, leading to a decrease in the gold price. There are hopes of significant physical demand from key market drivers like India and China though. Due to anxiety over the economy, there are reports of a surge in gold demand from China. Although gold has been under pressure in recent weeks, cash flows from precious metals producers remains strong as metals prices remain elevated – historically speaking. Adding to the optimism, inflation brought on by the pandemic appears to have peaked. Amongst smaller producers and developers, the removal of logistic challenges has expedited project advancement and is helping to reduce the backlog of maintenance. This has resulted in a progressive increase in production coupled with lower operating costs. This trend is expected to continue into 2024. In general, the industry has had a lower-than-expected appetite for M&A, with investors preferring companies looking to streamline current portfolio or divestment of non-core assets. Looking at PGM equities, the sector has had an underwhelming 2023 so far. Given that South Africa is a major player in the PGM market, most PGM producers have been impacted by several operational challenges including power supply disruption, strikes, and logistical challenges. However, the biggest impact to PGM producers’ performance has been driven by the collapse in palladium and rhodium prices. Continuing PGM supply challenges from South Africa and Russia (due to sanctions) are expected to be supportive of PGM prices alongside stronger than-expected light vehicle production data so far. Some analysts see a potential rebound in PGM prices, but the market hasn’t seen a sustained move upwards yet.

ICG Commodity Update – August 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Driven by OPEC+ production cuts and lower crude exports, oil inventories have declined sharply in recent weeks and supported prices. Options markets have seen a flurry of bullish activity in recent weeks, with call volumes on the US oil futures rising to the highest since May. Gloomy narratives about China’s economic prospects are failing to capture the true dynamics of energy demand in the world’s largest crude oil importer, as indicated by numerous executives representing leading oil trading firms during a significant conference in Asia. World oil demand hit a record 103mboe/d in June and August could see yet another peak according to the IEA. World oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity. Global oil demand is set to expand by 2.2mboe/d to 102.2mboe/d in 2023, with China accounting for more than 70% of growth the IEA said. Over the coming days, Saudi Arabia is likely to provide guidance on whether it will extend the 1mboe/d extra voluntary production cut, which is in place from July to September. Saudi crude exports (excluding flows from the Neutral Zone) were estimated at 5.47mboe/d in the first 27 days of August, down more than 0.9mboe/d MoM and at the lowest level since April 2021, according to Petro-Logistics. Saudi Arabia is widely expected by traders to follow suit by pushing its voluntary curbs into October. Russia has already agreed with OPEC+ partners to cut oil exports next month, Deputy Prime Minister of Russia Alexander Novak said last week. Oil and gas equities had a strong start into 2H23 making up a lot of ground vs the broader market driven by spot price increases in oil and natural gas. Most analysts think that costs are a tailwind for the group, but they will be for everyone. Nevertheless, the market has been increasingly rewarding those with stronger financial and operating leverage in the improving commodity price environment. M&A was once again a topic in the sector after Permian Resources decided to acquire Earthstone Energy in an all-stock deal valued at $4.5bn to boost its position in the Delaware Basin.

Industrial Metals

In August, China’s economic outlook has showed little signs of improvement. On the contrary, the domestic property crisis seems to have deepened with two of the country’s major real estate developers, Evergrande and Country Garden, facing severe financial difficulties. Evergrande has filed for chapter 15 bankruptcy protection and Country Garden last week reported a $6.7bn loss for H1 2023, adding to worries of a disastrous default in the coming weeks. This has sent waves through China and the global economy. The rating agency Fitch expects Chinese GDP momentum to slow and has downgraded its China 2023 GDP Forecast from 5.6% to 4.8%. The ongoing worries about demand from the world’s most significant commodity buyer have weighed on base metal prices. BHP announced that its full-year profits fell as much as 37% as China’s metal demand wanes. Nevertheless, analysts have signalled that the slump might be bottoming out. One such sign was China’s manufacturing contraction which slightly eased in August. The manufacturing PMI rose to 49.7, topping estimates and nearing the 50 level that would signal activity has stopped contracting. The Caixin PMI rose to 51.0 in August vs. 49.2 in June. Firms reported increases in output and new order intakes, despite a continued downturn in new export orders, indicating domestic demand was the main source of growth. This has raised hopes that the governments efforts to boost the economy are starting to bear fruits. Last week, the Chinese government announced it is further ramping up its campaign to boost the economy. What impact do the recent developments in China have on industrial metals? Looking at copper for example, it seems as if the metal is stuck between a new energy transition super-cycle and the gravitational pull of the old Chinese super-cycle. We explore the current and future dynamics of the copper market in quite some detail in our recently published research report “Copper – What Else?”. Speaking about copper but on the company side, Aurubis warned it may face losses in the hundreds of millions of euros after being hit by a massive scam involving shipments of scrap metal that it uses in its recycling business. Australian lithium miner Liontown Resources said it’s willing to back a new AUD 6.6bn takeover offer from Albemarle. Glencore has a new rival in its bid to acquire Teck Resources coal division. India’s biggest steel producer JSW Steel is looking to snap up a major stake in Teck’s coal unit according to its chairman.

Precious Metals

The rising chance of a “soft landing” for the US economy and subsequently higher nominal and real US yields have resulted in a stronger US dollar and weaker gold price lately. In addition to the macro headwinds, recent World Gold Council demand data showed a normalization. Total demand fell 19% QoQ and 2.5% YoY in 2Q23, and it dropped 5.6% YoY in 1H23 versus 1H22. Central bank buying slowed in Q2 but remained resolutely positive. Net purchases slowed to around 102 metric tons (mt) in 2Q23 driven by sales from the Turkish central bank of around 132mt. Nevertheless, the 1H23 central bank buying was around 387mt, which was a record “half year” amount. UBS expects central banks to buy 700 metric tons in 2023. If achieved, it would be the second highest number of purchases for a year since the mid-1960s – following the 1’110 metric tons purchased in 2022. A step-up in official sector buying was crucial to the strength of gold prices amid rising real interest rates in 2022. This, combined with healthy investment and resilient jewelry demand, may create a supportive environment for gold prices. On the company side at 2Q23 conference calls, management teams generally noted stabilizing input costs and/or initial signs of easing inflationary pressures, but no meaningful improvements to the overall cost structure yet. Consumables prices have started to soften a little (e.g., diesel) while elevated labor costs remain a challenge, particularly for Canadian operations. Interestingly, the two big gold producers Newmont and Barrick guided to a second half weighted production. Production will have to pick up meaningfully to meet annual production guidance. Interestingly, that according to the WSJ, Saudi Arabia is interesting in acquiring Barrick’s 25% stake in Reko Diq copper-gold mine project in Pakistan. On the gepolitical side, Mali’s interim President Assimi Goita signed into law a new mining code that allows the government and local investors to take up to a 35% stake in mining projects vs. 20% currently. However, it is unclear if the new mining code affects existing projects.

ICG Commodity Update – July 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Crude soared last month after OPEC and its allies cut supplies in a bid to lift prices. According to analysts, the visible tightness has convinced the market that announced cuts are not just empty rhetoric – market optimism that we are nearing the end of a rate tightening cycle also helped oil prices gain. Widely-watched metrics are also strengthening, with the gap between the US benchmark’s two nearest contracts at the widest backwardation since November. Berkshire Hathaway is using this year’s dip in commodity prices to load up on some of Buffett’s favorite oil and gas investments, showing that the famous investor sees opportunity in a sector long disfavored due to its volatility and effects on the climate. Berkshire agreed to spend $3.3 billion to boost its stake in an LNG export terminal. This year it has also increased its holding in Occidental Petroleum by 15% and bought more stock in five Japanese commodity traders. Meanwhile, Berkshire’s energy division is lobbying hard for a bill that would see Texas spend at least $10 billion on natural gas-fired power plants to back up its grid. TotalEnergies on the other hand agreed to buy the remaining shares in French clean-power developer Total Eren for $1.66bn from Eren Groupe SA and a group of financial investors, boosting the oil major’s foray into renewable energy. The CEO has pledged to spend $5 billion this year on low-carbon energies, almost a third of total capital expenditure, as the company reduces its exposure to petroleum with ongoing sales of Canadian oil-sands assets and some of its European service stations. By buying out the 71% in Total Eren it doesn’t already own, TotalEnergies gains full control of a firm that has 3.5GW of operating solar, wind and hydropower assets, with a project pipeline of more than 10GW. The world’s thirst for energy, both fossil fuels and renewables, is insatiable, even as the climate crisis accelerates. Both temperatures and oil demand are hitting record highs this year and are poised to keep rising through the rest of this decade. Environmental concerns may have prompted some investors to shun energy, but they may also have left the door open for others to profit. Energy trades at the lowest price-to-earnings valuation of any sector in the S&P 500 Index, according to data compiled by Bloomberg. But it also generates the most cash flow per share.

Industrial Metals

In July, metals rose as China stepped up relief measures for property developers, although there was skepticism on whether they were enough to support a sustained rally. Financial regulators asked banks to ease loan terms for companies in the real estate sector, which accounts for about 1/3 of China’s steel demand and is important for the likes of copper, aluminum, and zinc. Several newspapers also ran reports suggesting more measures to support property were coming. According to analysts, China will likely release a flurry of policies soon to stabilize the economy, including more financing for infrastructure investment. Looking into the future, many industry participants highlight the potential for exponential growth in material demand from the energy transition, while overlaying meagre growth projections for mine supply. Currently, most metals markets seem to be balanced though. Recently, the IEA released a new report tracking a surge of investment into the mining sector. Investment in the industry has jumped 50% over the past two years, driven mainly by increases in lithium projects, which indicates that supply is catching up with an anticipated boom in demand through the end of the decade – however, while this might be true for lithium, the investment in mining hasn’t been evenly distributed and more traditional metals such as copper could still face shortages unless spending picks up. While some project developments happen at glacial speed toward commissioning, there are those that remain stalled in the exploration phase. The lack of success progressing from defined deposit through to operating mine is evidenced by the length of time most of these assets have sat on the shelf. Notably 69% and 67% of the projects (by tonnage) in the zinc and copper incentive price curves, respectively, were included within the project populations almost a decade ago. In fact, only 5% and 6% of zinc and copper projects, respectively, were discovered in the last 15 years. Given spot prices have comfortably surpassed the so-called project incentive price in the interim and swathes of these projects were not incentivized, this would suggest many of these projects are at least to some degree price inelastic. Looking at companies, Anglo American and Teck Resources became the latest mining behemoths to post steep falls in profit as China’s economic slowdown dampens earnings. Same for Rio Tinto, the No. 2 miner saw both its profit and payout fall by about a third.

Precious Metals

Gold prices closed above $1’960/oz in July as cooling US inflation spurred hopes that interest rates have peaked. The metal largely traded above $1,950/oz in the 2nd half of July after surging earlier in the month on weaker-than-expected price-growth data. US economic data showed a gauge of employment costs rising less than forecasted, cementing bets that the Fed is finished tightening. Still traders are divided on the outcome of the central bank’s next meeting, with the market seeing a roughly 20% chance of another hike in September. According to the Financial Times, demand for gold by wealthy individuals and corporates kept prices elevated in 2Q despite a slowdown in central bank buying. Gold demand rose 7% to 1’255t in the 3 months to June on an annualised basis, according to a report by the World Gold Council. Despite record central bank buying in the first half of 2023, the pace of purchases slowed 35% year-on-year to 103t in the second quarter, as the Turkish central bank sold gold to satisfy domestic investment demand. The People’s Bank of China, at 103t, was the largest buyer in 1H of the year, extending its buying streak to 8 consecutive months. Looking at gold-backed ETFs, investors are about to return after shunning them for months, as consensus grows that US interest rates are approaching a peak, according to UBS. The bank expects inflows into ETFs will turn positive in the 4th quarter and forecasts gold will climb toward a record high in 2024 as the bank sees the Fed relieving markets with a 25bp rate cut in December. Sustained ETF buying is usually a key driver for bullion, yet the metal itself has avoided tracking the sharp downturn seen in the investment vehicles. As gold has performed as well as it has without the support from ETF buying, market participants imply that bullion has further to rally when those investors return to the market. On the company side, Barrick wants to expand and extend the life of its copper mine in Zambia and explore for more copper deposits in Congo as it seeks to grow its presence on the continent according to the CEO. Also, Hochschild said an environmental permit for its flagship mine was approved by the Peruvian government for an additional 20 years – good for the company and a good sign to the markets.