metals are in for a nice, long ride

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    Wallace Street Journal
    Metals are in for a nice, long ride
    David Bond
    Editor, Silver Valley Mining Journal
    December 7, 2004

    LONDON, 4 December, 2004 -Industrial demand both from the West and from China will continue to fuel higher base metals prices, although nickel has likely reached a plateau and could fall slightly, analysts at the London Mining Journal's Mines and Money conference at the Hammersmith Novotel in King Street said this week.

    Even the "soft landing" being engineered by China government officials likely will result in a sustained GDP growth rate of 9 percent per year in the near future, about on par with Q3 2004, said Bob Kwauk of the Toronto-Beijing law firm of Blake Cassels. That's down just slightly from a 10 percent growth rate in Q1, he said. Long-term, China's GDP will grow 8-9 percent per year for the next two decades, Kwauk said.

    China has throttled back credit in its steel and real estate sectors and raised internal interest rates, but will rely increasingly on imports for steel, lead, zinc, nickel and copper. "There is a dire need for China to lock down huge offtake agreements in those metals" from miners in the Western hemisphere and Australia, he said. China is now consuming 20 percent of world aluminum production and 33 percent of its steel output and has made purchase commitments throughout South America for alumina, iron and steel. As an example of China's continuing growth, Kwauk noted that at decade's beginning Beijing sported 800,000 automobiles; now 2.1 million Beijing cars traverse the city's "automobile-unfriendly" streets. "You guys went through this, what, 100 years ago?" he quipped. Two factors are influencing demand; a drastic fall in import tariffs for automobiles and a rise in the size of China's middle class and its discretionary income.

    But China's growth numbers do not fully explain global metal use, because much of China's consumption is a mere relocation - up to perhaps 30 percent - of the world manufacturing base from Europe and the Americas to Asia, said Stephen Briggs of Societe Generale.

    "China's growth somewhat is displacing demand elsewhere," Briggs said. Rising U.S. demand for industrial metals also is a factor in the worldwide price game. Fundamentals for all but nickel remain good through the end of 2005, largely because mines and smelting capacity are still catching up with demand. Nickel has, or will, become the first of the base metals to reach a market equilibrium, he said. "Demand for nickel is sensitive to price. With the price increase has come a shift to stainless steel scrap or to forms of stainless steel that use less nickel."

    Copper production also is catching up to demand, he said. However, brighter days are ahead for zinc and aluminum. Available aluminum scrap has kept the bulls at bay, but most scrap is being channeled into China now and the pressure is on for raw alumina. "The best for aluminum is yet to come," he said. Ditto zinc, he said, if for no other reason than funds will be that is comparatively lackluster performance is bound to improve.

    Whether fund buying is the cause of rising metal prices or merely a reaction to it is a "chicken and the egg" question, he said.

    Mitsui's Andy Smith, who played his characteristic gleeful Falstaff to gold's bulls, alleged that precious metals and PGMs are hugely overpriced. Illustrating his case with overhead projector graphs superimposed upon the décolletage of well-endowed women. "Are precious metals top-heavy? Yes," Smith said. Precious metals aren't getting their boost from fundamentals but from a weak dollar and a reaction to the re-election of U.S. President George W. Bush.

    "The U.S. election is still being fought out in the currency markets, and they won't get over it," he said. Gold has remained fairly flat relative to the Rand, the Euro and the Australian dollar, Smith said.

    A reduction in the global hedge books for gold also has fueled the dollar price increase for the metal, he said. "A mining company buys another mining company and liquidates its hedge book. The metal price goes up, the merger looks good, and it's a nice, virtuous ponzi scheme. Even war talk isn't beneficial, he said: Starbucks and McDonald's have done better since the start of the Iraq war than the HUI gold bug index," Smith said. "There's a broken gear somewhere."

    But Smith's perennial role as the nabob of naysaying for precious metals, albeit comic, is wearing thin, fund managers and bankers in attendance said. "Good God, we're looking at a $2 (USD) pound by Christmas," said a London banker. "Am I the only one worried?"

    Precious metal mining's emergence as a world-class player was best stated, and understated, by the presence of a prince and London's Lord High mayor at this week's confab, only the Mining Journal's third since 1890.

    Some 800 delegates paid 675 quid apiece to attend this Hammersmith event. The Mining Journal's first such congress was convened here in 1890 - the second one was held last year. Noted Prince HRH Prince Michael of Kent in his kick-off address, the Journal's annual congress is lately occurring with "rather more frequency." Attendance is up 200 from 600 a year ago.

    The prince, who in addition to his English royal blood is a relative of Russia's Czar Nicholas II, frequents the old Soviet Union, is fluent in Russian and most other European languages, chairs the Russo-British Chamber of Commerce, and has worked to facilitate mining deals between English operators and Federation enterprises.

    "I have heard it said in the mining industry, that if it can't be grown it has to be mined," he said - words from a bumper sticker created by Wallace, Idaho's own late Lovon Fausett of Wallace Diamond Drilling and Atlas Mining.

    While Toronto has at last bested London as the principal source of equity capital for new mining projects, the prince said London still leaves its mark on the world mining scene, first with its universities - the Cornwall School of Mines and the Imperial School of Mines - and by the fact that most international mining deals are governed by English law and courts. "The countries that dominate the mining industry are English-speaking countries," he said, including Canada, South Africa, Australia and the United States. (What England's official language is anymore, the prince didn't say.) Technology will be of great aid in helping to reduce mining's footprint on the environment, he said. Biological agents may some day replace chemical reagents such as cyanide in the extraction of minerals, he said. Lord Mayor Michael Savory, who is also chairman of stockbroker services for HSBC and a licensed broker, said mining is the "heart of London's financial cluster. It is the Leviathan."

    London, in turn, is not just British but an "international brand for all financial and business services." While Toronto leads the mining world in equity financing these days, he said, London is still very much the source for mining debt financing.

    What impressed us most about the scene here in Old Blighty is the prevalence of both sources of funding - equity and debt - for the mining industry, their checkbooks out. Snap the cap off a cold one and consider this: two years ago you couldn't have drug a dead dog to a mining conference, even to Rio and drinks were on the house. Now not only a prince, and the mayor of Planet Earth's only real city, but the big-bucks boys are buying us dinner in Mayfair and circling the chairs. They are scared to death of the US dollar and don't want to be left standing when the music stops. In times like this, only silver will suffice.

    Ninety percent of the time, mining money is a losing proposition. Welcome to the 10 percent that ain't.

    David Bond
    Editor: Silver Valley Mining Journal

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