Bloomberg News - From Bitcoin to Trump: Mining Giants Identify 2018's Challenges

By 

Danielle Bochove

In 2017, miners finally got some tailwinds from their commodities as unsavory supply pressures -- from lower ore grades to worker strikes -- bolstered prices.

What’s ahead for 2018?  We asked six top executives from companies including Newmont Mining Corp., Barrick Gold Corp. and Teck Resources Ltd. for their outlooks.

With depleting reserves top of mind, they expect more focus on exploration and inter-company collaboration to develop assets. There’s consensus that large-scale mergers and acquisitions are a thing of the past and the rising interest in bitcoin poses no threat to gold. But opinion is split on whether miners will be able to grow, or even maintain production, without letting the hard-won cost discipline of past years fly out the window.

Gary Goldberg, Newmont Mining

“Most of the companies out there are pretty healthy. So to make M&A happen, either there’s got to be some other form of value that people see, or they’re going to pay some pretty hefty premiums.”

Gary Goldberg

Photographer: Matthew Staver/Bloomberg

MARKET:

• Gold should stay in the $1,200 to $1,300 an ounce range, with large breakouts unlikely
• Long-term prices should be supported by strong demand from China, India, interest in gold ETFs and tightening supply
  • “We still see gold supply over the next five or six years dropping off from the 103 million ounce range into the mid-90 million ounce range.”

SECTOR:

• Industry must address depleting reserves while maintaining cost discipline
• Blockchain is “pretty cool technology,” but Goldberg has no interest in cryptocurrencies
• Sees no signs bitcoin is hurting gold demand

COMPANY:

• Will hike dividend at least 50 percent, details in February
• Watching U.S. tax revamp for final corporate rate and clarity on how the alternative minimum tax, and especially depletion allowance, will shake out
• Focus on advancing internal projects/exploration while keeping costs down
  • “We’re still out there competing for talent, competing for access to finances, and competing for access to resources”
• No need to pay down any debt early or buy and sell assets
• Still interested in buying Barrick’s stake in Kalgoorlie at the right value

On moving ahead of Barrick by market cap -- and closing production gap:

• “It’s one of the many metrics that we keep track of along the way in terms of our performance.”

Kelvin Dushnisky, Barrick Gold

“Looking into 2018 and beyond, the focus is going to be returning more capital to shareholders when we can. We’ll do that through dividends or possibly share buybacks.”

Kelvin Dushnisky

Photographer: Matthew Staver/Bloomberg

MARKETS:

• Sees gold in $1,200-1,300 range in 2018, with higher prices beyond
• Demand from gold ETF investors, China and India, plus potential U.S. equity pull-back good for gold
• Falling global reserve grades also support gold price
• Biggest risk would be “an unexpected strengthening in the U.S. currency”
• Copper market will be balanced in 2018 with demand exceeding supply further out

SECTOR:

• Industry to stay focused on costs
• Large-scale M&A unlikely as “mega-deals” of past failed to deliver value
  • “Shareholders are justifiably skeptical of large-scale M&A in the sector, so I don’t think you’ll see a return to that kind of activity any time soon”
• Some consolidation possible through medium-sized “bolt-on acquisitions”
• Hard to see cryptocurrencies replacing physical gold, which has finite supply
• Bitcoin correction would offer “helpful reminder” of role of gold as store of value

COMPANY:

• Plans to balance need to reinvest, cut debt, with shareholder returns
• Increased focus on reserves through mine exploration and project-pipeline investment
• Will maintain focus on Nevada digitization
• Sees three “levers” to cut total debt to $5 billion by end of 2018
  • “It will be a combination of cash flow from the operations, cash on the balance sheet, and potentially divestments or other partnerships”
• Still open to selling non-core assets including copper assets or remaining 50 percent stake in Porgera or Kalgoorlie
  • That said, stresses “non-core” copper assets are making meaningful contribution to cash flow
  • Not looking to add copper but doesn’t rule it out in future
• Sale of Acacia Mining Plc stake also possible once dispute settled
• Watching U.S. tax reform closely, believes initial concerns about AMT will be resolved
  • “ If that’s the case, I think we’ll be in a very good position in terms of U.S. tax”

On widening gap with Newmont:

• Expects share price to improve after company provides more clarity at investor day in February around project pipeline, mine exploration and contribution of copper assets to cash flow, all of which may be undervalued by market

Don Lindsay, Teck Resources

“When the positive steelmaking-coal demand picture is combined with a supply side which is prone to significant disruptions, we see prices staying well above analyst consensus forecasts.”

Don Lindsay

Photographer: Daniel Acker/Bloomberg

MARKETS:

• Steelmaking coal, zinc and copper prices all expected to be strong
• Sees zinc inventories, already at low levels, continuing to fall
  • Production not seen filling structural supply gap 
• Steelmaking coal supported by healthy steel industry and improving global output
  • Sees strong demand from India, Europe, Vietnam, Brazil, less dependence on China
• Copper supply will peak in 2019 and then move into structural deficit
• Clean energy creating significant new copper demand, especially in China and India
  • “Current targets by China and India for solar and wind power installation could add over 10 million tons of new cumulative demand by 2030”

SECTOR:

• Mining industry likely to focus on growth 
• For senior companies, “we think that M&A will be extremely limited”
  • Even distressed selling of past years was done at “very full valuations” and there are limited attractive opportunities
• Some consolidation of mid-sized to small companies may be possible
• Biggest challenge is maintaining discipline over costs, productivity and capital allocation

COMPANY: 

• Teck will focus on optimizing operations, advancing priority projects and balancing capital expenditures with shareholder returns
  • Notes supplemental dividend and share buyback in fourth quarter of 2017
  • Internal pipeline and strong markets “will make 2018 an exciting year for Teck”

David Garofalo, Goldcorp Inc.

“Given that the general equity markets seem to be achieving new highs every two weeks, and that nominal rates are going up, I think gold has held in like a champion.”

David Garofalo

Photographer: Norm Betts/Bloomberg

MARKET:

• Expects strong year for gold on inflationary pressures
• Real interest rates likely to fall even with Fed hikes; if Trump policies slow Fed tightening cycle gold could benefit more
• China’s gold demand will continue to exceed India’s, supply will stay tight
  • “I don’t know that there’s any shocks to the system that would really drive the gold price downwards in any significant way”
• Physical aspect of gold will insulate it from bitcoin competition

SECTOR:

• 4Q 2016 was the “tipping point” for mine supply, reserves likely to fall for at least five more years
  • “The next challenge for us as an industry is to start to grow reserves again”
  • Sees more collaboration on projects to replenish pipelines
• Cost efficiencies getting harder to find
• History has shown “large scale M&A tends to be quite value destructive”
• Miners must provide “leverage” to gold price to compete with gold ETFs which challenge producers while creating market liquidity

COMPANY:

• No significant capital expenditures for new initiatives planned until 2022
  • “In the meantime we’re just going to harvest as much cash flow out of the existing operations, and make them as efficient as possible, and drive down our debt levels to effectively zero”
• Company is preparing for next capital investment cycle beyond 2021
  • After that the company can start to “look at increasing the dividend over time”
• Not interested in buying or selling assets
  • “The portfolio re-positioning is done. We’re very very comfortable with what we’ve bought”

Sean Boyd, Agnico Eagle Mines Ltd.

“Maybe it’s taken some demand away at the margins, but I actually think you can build a much stronger case for gold in an environment where bitcoin is drawing this kind of investor interest.”

Sean Boyd

Photographer: Joshua Prezant/Bloomberg

MARKET:

• Sees strong demand for physical gold from China/India but little new supply
• Gold could surpass $1,300 an ounce if real interest rates stay low and/or Fed tightening slows
• Large generalist investors poised to buy top producers if gold price rises
  • “They’re only talking to the highest quality gold mining businesses out there and it’s our sense that it’s for positioning”
• Trump increases desire of China and Russia to diversify away from the U.S. dollar, helping gold
• Collapse of cryptocurrencies would benefit gold
  • “We’re going to get to a world where it’s going to become increasingly more important to know where your investments are, and that you can feel them and touch them and understand them”

SECTOR:

• Biggest industry challenge is depleting reserves
  • $1,400 to $1,500 an ounce needed to fuel significant exploration and development
• ETF threat to miners lessened as most no longer trade at high multiples to NAV
• Miners likely to focus on optimizing operations and developing pipelines
• Industry needs consolidation but at current gold price “everybody can muddle along”
  • Gold at $1,050 an ounce or lower required to “tidy” the industry

COMPANY:

• Rocky Nafta negotiations could benefit Agnico by weakening Canadian dollar
  • “We would look at that as an opportunity to lock in some weakness in the Canadian dollar”
• Further dividend increases unlikely until 2019 as spending focuses on Nunavut projects
• Expects to reward shareholders onward from 2019
  • From 2019, cash generated from mines expected to rise by 25 percent while capex falls to roughly $700 million from $1 billion in 2017 and 2018
  • “That leaves us room to reduce debt and also increase the dividend as we move on out, once the Nunavut platform is up and running”
• Focus on executing expansions and exploring existing land holdings
  • “We’re not needing to buy something to fix a problem”

Clive Newall, First Quantum Minerals Ltd.

“Demand itself is very strong but supply isn’t. And so it looks like we’re in for a significant period of higher prices while there is a substantial deficit.”

Clive Newall

Photographer: Morten Andersen/Bloomberg

MARKET:

• Copper likely to trade between $3 and $4 a pound long-term given shortfall between supply and demand
• Electric-vehicle industry is a major driver for copper growth
• Duration of bull market “depends on the speed with which the industry can respond”

SECTOR:

• Focus of industry likely to remain on costs after lessons learned in downturn
• Rising delivery costs for capital equipment may pressure some producers and presage brewing inflation
• Sees few policy threats to industry
  • “Copper is a very international commodity and none of the major powers are over-endowed with it, so there’s unlikely to be any protectionism going forward”
• Expects some miners will rebalance their asset portfolios
  • “Thermal coal is less appealing” compared with copper

COMPANY:

• 2018 is a “huge year” with ramp up of Cobre Panama
• If copper prices stay strong, he expects to come under pressure from shareholders to keep building
  • “We certainly intend to be fairly conservative”
• Need to reduce net debt, provide “a more appropriate competitive dividend” and still continue to grow
• Will look for more internal and external opportunities to boost production
• Says takeover interest in First Quantum possible given tightness of copper market
  • “Some companies would like a lot more copper production, so it’s inevitable that there is interest being shown, and particularly interest in Cobre Panama”
  • “We want to remain independent and continue to grow the company”

BBC News - IPPR proposes creation of ‘shared market’ for UK and EU

A think tank is proposing a post-Brexit trading deal based on the UK and the EU sharing each other's markets.

It would see the UK and EU continuing the regulatory alignment that exists today, and the formation of a new customs union similar to the existing one, the centre-left IPPR said.

It would allow tariff-free trade, and the UK to benefit from EU trade deals.

IPPR director Tom Kibasi said it "honours the referendum result" while securing Britain's economic interests.

The group said that the EU would also benefit from the scale of the UK's economy in future trade negotiations.

The group believes that a new shared market model would aim to keep the benefits of single market while allowing divergence from EU rules over time

The proposal would mean no interruption to the UK's trade with the EU and avoid a hard border between Northern Ireland and the Republic of Ireland, the report says.

Reality Check: Where next for Brexit talks?

'Breakthrough' deal in Brexit talks

The think tank says the plan is more ambitious than that demanded by Remain campaigners for the UK to enter the European Economic Area (EEA).

The shared market would include agriculture, fisheries and a customs union, and thereby eliminate the need for customs and compliance checks that exist between EEA countries and the EU. It cited the number of border checks between Norway and Sweden - about 229,000 in 2016 alone.

Economic security

It says the shared market approach would address a key demand from Leave campaigners on national sovereignty. "It does this by allowing for the possibility of divergence over time - with clear and proportionate consequences for doing so - through a mechanism called 'reverse accession'," the report said.

Mr Kibasi, author of the report, added: "The shared market is a practical proposal that honours the referendum result while securing our economic interests. It is neither remaining in the EU nor crashing out in a hard Brexit.

"This isn't a proposal for the 15% of extremists on either side: it is a proposal for the 70% of people who want a sensible deal, built on precedents, that would work for the whole country."

The report also addresses the jurisdiction of the European Court of Justice which would cease after the transition.

In the shared market model, enforcement and adjudication would be carried out by a new UK surveillance authority and UK Court of Justice, which would include representatives from both the UK and the EU.

Reuters News - Republicans confident tax bill to become law this week

by Amanda Becker, Lindsay Dunsmuir

WASHINGTON (Reuters) - Top U.S. Republicans said on Sunday they expected Congress to pass a tax code overhaul this week, with a Senate vote as early as Tuesday and President Donald Trump aiming to sign the bill by week’s end.

John Cornyn, the No. 2 U.S. Senate Republican, said in an interview on ABC’s “This Week” that he was “confident” the Senate would pass the legislation, “probably on Tuesday.”

Republican Representative Kevin Brady said he believed his party had the votes to pass the bill.

“I think we are headed - the American people are headed - for a big win on Tuesday,” Brady, the House of Representatives’ top tax writer, said on Fox News’ “Sunday Morning Futures with Maria Bartiromo.”

“We’ve worked hard to make sure that those strange Senate rules don’t hang this up in any way,” Brady added. “I am confident that’s the case.”

If passed, the bill would be the biggest U.S. tax rewrite since 1986 and provide Republican lawmakers and Trump with their first major legislative victory since they took control of the White House in January in addition to Congress.

Republicans have a slim 52-48 Senate majority and cannot lose more than two votes and still pass tax legislation. Democrats are unified against the measure, calling it a giveaway to corporations and the rich that would drive up the federal deficit.

Last week, on-the-fence Republican Senators Marco Rubio and Bob Corker said they would support the tax overhaul. Senators Susan Collins and Mike Lee put out positive statements but did not explicitly say they would vote for it. Collins’ office said on Sunday that “she’s still reviewing the bill.”

Republican Senator Jeff Flake cast a vote for an earlier Senate version despite deficit concerns, but he is undecided on the final legislation, his office said on Sunday.

‘HISTORIC EVENT’

The tax bill is expected to add at least $1 trillion to the $20 trillion U.S. national debt over 10 years, even after accounting for the economic growth it might spur, according to independent government analyses.

The bill would cut the corporate income tax rate to 21 percent from 35 percent and create a 20 percent income tax deduction for owners of “pass-through” businesses, such as partnerships and sole proprietorships.

It would offer a mixed bag for individuals, including middle-class workers, by roughly doubling a standard deduction that does not require itemization, but eliminating or scaling back other popular itemized deductions and exemptions.

The bill would maintain seven individual and family income tax brackets but cut rates. Highest-earning Americans would pay 37 percent, down from 39.6 percent.

Most individual provisions, including the lower tax rates, are temporary and would expire, while the corporate rate cut and other business provisions would be permanent.

Stock markets have been rallying for months in anticipation of sharply lower tax rates for corporations, with Wall Street’s three major equities indexes closing at record highs on Friday.

Treasury Secretary Steven Mnuchin told CBS News’ “Face the Nation” on Sunday that Trump expected to realize his goal of signing the tax bill before Christmas.

“This is a historic event,” Mnuchin said. “People said we wouldn’t get this done; we’re on the verge of getting this done.”

Additional reporting by Sarah N. Lynch and Pete Schroeder; Editing by Lisa Von Ahn and Peter Cooney

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