Mineweb: Monthly movers and shakers with Geoff Candy and Barry Sergeant - Tuesday 2 March 2010

Barry Sergeant looks at the major moves in the steel making complex and what has been happening in the gold sector after the quarterly reporting season.

GEOFF CANDY:  Welcome to this month's edition of the movers and shakers in the top 100 podcast.  Joining me on the line is our resident statistician and numbers cruncher, Barry sergeant.  We're going to be looking at what's been happening in the world of mining, and particularly in mining stocks over the month of February.  Barry what's the big theme that's come through over the month?

BARRY SERGEANT:  Looking at some of the rolling 12 months stock pricing figures - in other words looking at stock prices on a rolling basis as the 12-month performance, the group that's coming out top of the log are the tier two iron ore stocks.  Those are the developers - a lot of them are Australian, followed by nickel and then a very small sector, diamonds, followed in turn by copper, zinc and then the tier one coal stocks, but the ones outside Asia and specifically China.  Chinese stocks generally have been going sideways since July 2009.  and then the tier one iron ore stocks of which there are three - Vale, Rio Tinto and BHP Billiton.  So the steel story is a very strong theme here in the mining stocks where you've got very strong demand for iron ore, nickel which is a downstream metal for stainless steel and, of course, coal.  And the big leader there is coking coal.  We know from comments that have come our from results in the past month or so from big and small mining companies, that China last year turned into a net importer of coal and the very significant profit maker there is coking coal which is still a very big market in terms of tonnage, but it's quite a small specialised market to the extent that coking coal goes to the smelters that produce steel from iron ore.  That is a specialised market, also to the producers - so that rings a big mega trend that has developed over the past month or so, and it's picking up from a longer term mega trend where China, around seven years ago, turned into a net importer of iron ore.  They produced down the line what has become the world's most profitable mining franchise, Seaborne iron ore where about three quarters of the market is dominated by Vale, Rio Tinto and BHP Billiton.  It seems that that mega trend is now coming back except that this time round, we've got coking coal right next door to it.  And after the fundamental changes in the nickel market - which is a completely different story - nickel stocks are on the comeback as well.

GEOFF CANDY:  Let's talk about that nickel story a little bit.  What have been those fundamental changes?

BARRY SERGEANT:  There was a huge spike in nickel, which peaked round about the middle of 2007 when nickel made more or less $25/lb.  The price then completely collapsed to $5/lb or thereabouts - what had happened in the background is that a number of Chinese smelters had found that if they took home Luminite, which is lateritic ores from the tropics and Philippines, and Indonesia are good sources for that material.  It's really an iron ore oxide that also contains nickel - it's a lower grade iron ore oxide which contains nickel and also traces of cobalt and what some Chinese smelters started doing, was combine that - mixing it with a high grade iron ore and producing pig nickel iron, which was then going directly into processing of stainless steel materials.  Outside China, what then happened was that your more marginal nickel mines, suddenly became a larger of mines.  We saw even BHP Billiton closing down its relatively new Ravens Hill nickel mine in Australia and the impairment there was over US$3bn.  What's happened in the meantime is that along with other closures and rationalisations that the nickel price has come back quite strongly, especially over the past 12 months, and bearing in mind that the Luminite which the Chinese smelters will use, are marginal.  So the nickel price really has to get up to a certain level to attract a reactivation in that market - it's quite tenderly balanced, but at this stage it seems that those particular ores have been out of the markets for quite some time, and allowing the nickel miners outside China who survived, to come back into the equation.  We saw for example recently, very good results from Australia's western areas which has the fortune of owning two of the world's highest grade nickel mines, Flying Fox and Spotted Quoll.

GEOFF CANDY:  Sticking with this trend then, what have been the specific stocks that have stood out in this ‘steel making' if you will, sector?

BARRY SERGEANT:  Just in the last while there's been very good demand for BHP Billiton, which is the world's biggest coking coal producer.  That is specifically a joint venture called BHP Billiton Mitsubishi.  So it's not just BHP Billiton alone.  That joint venture is the biggest miner of Seaborne coking coal in the world and BHP Billiton is number three in global iron ore, so you've just got a wonderful mixture there, plus BHP Billiton's very high oil business.  So that stock is trading pretty much at a 12-month high at this stage in London - 23 quarter pounds - very good demand for BHP Billiton and one of the most demanded stocks in the world.  Likewise Rio Tinto - very strong demand there and to lesser extent, Vale.  There is some anticipation that Vale might come to the market - not so much with a rights issue, but it does need to maybe shore up its balance sheet - so the demand for Vale is not quite as strong as for Rio Tinto, which also, like BHP Billiton produces coking coal.  Then as indicated earlier, outside Asia, specifically China, there is very good demand for coal stocks and again in turn, especially for those coal stocks that are focused on coking coal.  And the one stock there, which is diversified of course, is Teck the number two in coking coal.  It also produces copper and zinc - there is very good demand for that stock.  Then there is some interesting demand coming in for potash stocks - agrium is doing very well indeed and we also have interesting but mixed demand coming in for other base metals, led by copper.

GEOFF CANDY:  And of course there was a bit of a scare earlier this week, and understandably so because of the massive and severe earthquake in Chile around copper supply - that's pushed up the price but on the news the price subsequently come down a little bit.  What are we likely to expect from the copper stock side of things, and particularly the market is in a relatively tight situation.

BARRY SERGEANT:  Yes an interesting question - when copper fell out of bed in 2008, it ended off the year at $1.28/lb compared to just over $4 in the middle of that year.  Since the beginning of 2009, copper has been rising very nicely - it's up at about $3.25/lb at the moment.  And even at 1.25/lb, the closing month of 2008 - a genuine copper miner was still making cash profits.  So what we've seen during 2009 is that copper miners have made absolutely fantastic profits and cash flows.  A good example is the biggest listed publicly tradable copper producer, Freeport-McMoRan that is also bulked up by substantial gold production.  Its cash flows during 2009 were absolutely fantastic and that continues with copper, depending on who you listen to, continuing to forge ahead, above $3.25/lb as we go forward into this year.

GEOFF CANDY:  Barry just to close of with, we saw a lot of the gold miners reporting last week and the week before that.  Was there much movement in the stock prices or the changing in rankings after those results?

BARRY SERGEANT:  Not really.  The results were particularly good in the fourth quarter of 2009 - that is when, of course, dollar gold bullion made over $1200/oz and also copper - back to copper - the gold miners that produce copper benefited particularly as gold rose fairly consistently across the year.  So the two biggest gold miners in the world, Barrick and Newmont both produced operating cash flow of plus minus US$3bn.  Those are all-time records and for the bigger gold miners as a whole, it was a very good year and absolutely excellent fourth quarter.  That's going to give the big gold miners some time to maybe focus on reorganising their strategies so that they're not so much trying to catch up with very substantial capital expenditure and delivering new projects, as they are going back to being - which you might call good old basic mining companies.  We've seen, over the past 18 months, the gold miners come to the market numerous times with huge rights issues.  The top gold miners in the past three years have raised way over US$15bn in rights issues. And that has kind of given investors a bit of a hold-off stance.  So maybe we are now going into a phase where the gold miners can concentrate on getting returns back to shareholders.

GEOFF CANDY:  Well we're going to have to wait and see what happens in March with those gold miners, and indeed everyone else that we've been speaking about as well...  Join us again next month when we take a look at the numbers behind the movers and shakers in the Top 100.

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