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Posts Tagged ‘dollar’

Lonmin to invest $2bln to boost production

May 10, 2011 Comments off

“Lonmin, one of three South African companies that mine most of the world’s platinum, plans to invest $2bn to restore its production to historic levels of about 1m ounces a year by 2015. In the six months to March, the London-listed miner raised earnings from a low base. Pre-tax profit doubled to $159m despite bigger pay packages for workers, rising electricity costs and the stronger rand which has been eating away at many South African miners’ profits.

Lonmin’s output has declined steadily over recent years, with the miner selling 706,000 ounces of platinum in its year to September compared to over 900,000 ounces in 2004 and 2005.”

Source: Financial Times, May 10 2011

Observations:

  • Lonmin currently depends on the Marikana mine for its entire production. The production increase to 2015 should come from this mine. The Limpopo mine currently is under care and maintenance, while the most company’s most promising growth opportunity is the Akanani deposit with just over 10 Moz platinum reserves. Global platinum production is concentrated in South Africa’s Bushveld complex and Russia’s Norilsk region, while demand mainly comes from car manufacturers in Asia and North America.
  • Lonmin is suffering from quickly increasing employment costs (8% increase over the year) and electricity costs (24% increase). Furthermore the appreciation of the South African rand makes costs increase while revenues (in dollars) are not equally increasing.

Implications:

  • Foreign exchange cost pressures are hurting miners with operations in both developing countries and developed countries in which currencies are not linked to the dollar when the dollar is weakening. With an increasing portion of production shifting to developing countries with high inflation rates exchange rates are becoming more and more important for business evaluation.
  • Several large diversified miners are hesitant to take a stronger position in platinum because of safety issues. Most existing projects have poor safety track records, making acquisition of producing assets a CSR-risk, while development of new projects would require significant capital expenditure and result in long lead times.

©2011 | Wilfred Visser | thebusinessofmining.com

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Copper Falls as China Moves to Tame Inflation

March 18, 2011 Comments off

“Copper fell on the London Metal Exchange Friday on renewed fears that continued measures to curb inflation in China will ultimately curtail demand for industrial metals. Investors were reacting to a move by the People’s Bank of China to raise the reserve-requirement ratio for banks for the third time this year, by 0.5 percentage point, in a bid to tame inflation. China is the world’s largest consumer of base metals, and attempts to slow inflation could affect development and the demand for metals.

Other base metals, however, were trading higher, supported by a further weakness in the U.S. dollar. Interest in the dollar-denominated metals often rises as the greenback weakens, as it makes them cheaper to other currency holders.”

Source: Wall Street Journal, March 18 2011

Observations:

  • China’s central Bank, the People’s Bank of China, is increasing the reserve ratio for banks in an attempt to make banks hoard more cash and lend less, thus curtailing consumption and inflation. China’s government and banking system are in a continuous struggle to adjust currency rate, interest rates and other financial parameters to stabilize growth around 8-10%.
  • Copper is going through a period of unstable prices as there is a production shortage, many new large scale projects are under development, and high prices trigger a wave of industry consolidation.

Implications:

  • Wall Street Journal’s conclusion that the lower copper price is caused by China’s reserve rate increase might be a bit farfetched, as this increase should have the same effect on other commodities. The increase in the reserve rates does however give a signal that China is still struggling with controlling growth, as discussed in the ‘Red Wave’ industry scenario for the mining industry presented last week.
  • A large part of copper production takes place in areas were the currency is pegged, strongly linked, or correlated to the dollar. As a result the copper price is relatively insensitive to changes in the strength of the dollar.

©2011 | Wilfred Visser | thebusinessofmining.com