Cape Town Calling

In Insight by Tavistock Resources

So, here we are again, Africa’s mining fraternity heads down to Cape Town for its annual road trip including ‘site’ seeing, important face-to-face meetings, panel discussions, networking and sentiment gauging on what the year ahead may hold for this important sector.

Unfortunately, we head into the event with China taking the headlines for all the wrong reasons: The Coronavirus, which as things stand is not showing signs of containment with new cases being reported daily beyond the confines of China. Hopefully aggressive measures being taken by the powers that be will nip it in the bud sooner rather than later.

On the plus side, and also leading up to the event, a couple of the unresolved issues that have been causing unease in markets over three years of uncertainty, have finally been settled: Brexit and Nafta’s replacement agreement, (and maybe the China-US Phase 1 deal counts too. More below).

South Africa itself continues to plod along, the ‘Ramaphoria’ that came with the initial taking over of the Presidency by Cyril Ramaphosa has faded as the problems of the past have popped up again, most notably loadshedding by the country’s power utility, Eskom.

On the plus side, prices of PGMs have spiked (Palladium being a star performer). It is therefore no surprise to see the recent trading updates from local producers with bumper financial numbers now expected on the horizon.

Thank Goodness for Gold

Talking of price spikes, gold has also had a good period of late, rising since the middle of last year. Suddenly, because right up until its recent jump, there wasn’t many predicting this.

In May last year, a contributing writer at Forbes asked: Why Is There No Shine in the Gold Price? in a wide-ranging piece discussing the historic catalysts for gold and concluding, like most of his market watching peers at the time: “…one thing is for certain, [US] economic data isn’t falling off the cliff and this means that the upside for the gold price may be limited.”

At that point gold was trading at just over US$1,270/oz, not much higher than its average price for the previous three years running. Fast forward less than a year later and the price is currently sitting pretty at above US$1,500/oz, finally living up to the ‘safe haven’ title that it is so well known for.

Whatever the reason for this price rise, the contribution that each dollar makes to producers’ bottom lines is enormous. And, given we have averaged well over US$1,500/oz in 2020, this year could be even more cash generative for the sector.

With that additional free cash flow usually comes the things the market so desperately needs: increased share prices and access to equity markets, money for exploration, and of course M&A. And boy, that’s what happened.

On the fundraising side, things also started to liven up, helped in part by Eric Sprott using part of his Kirkland Lake winnings to inject capital in the numerous opportunities he had been paying attention to.

Using the Canadian market as an example reveals how things really started to take off in the second half of the year. At end-June C$1.57 billion had been raised by the mining companies on the TSX and TSX-V combined. For the second half, twice as much had been raised with C$3.25 billion raised (excluding the C$7.7 billion, Katanga rights issue).

So, will we see an overflow into the rest of the commodity space and the underlying equities, well, let’s see…

‘Beautiful Monster’ or a Bump in the Night?

In June 2018, when the China-U.S. trade tensions first emerged, copper prices on the LME plunged 20 percent from a June 2018 peak of near $7,350 per tonne, to less than $6,000/t in August that year.

Then, over a year later, on a Friday in September, President Trump said he would consider doing an “interim deal” with China after suggestions that his team were pitching the idea to reduce tensions with Beijing. Copper soon hit its highest level in one and a half months as investors hoped an easing of trade tensions between the two economic powerhouses might eventually reinvigorate metals demand.

By January this year, this ‘Phase One; deal, which Trump described as a “big, beautiful monster” was by no means a standard trade agreement, according to a Bloomberg article which described its 86 pages as “thinner than most on substance and commitments.” An optimist would say: “At least it’s progress.”

While tariffs are expected to remain on almost two-thirds of US imports from China until at least November’s election, US officials have suggested a phase two deal will see these eradicated.

Interestingly, the US President’s tweets on topics such as China, trade and the Federal Reserve have become so frequent that analysts at JP Morgan Chase have created an index to measure what impact these are having on the bond market.

The analysts at the Wall Street investment bank have named it the Volfefe Index, a mix of the word “volatility” and a famous tweet from Mr Trump in 2017 in which he wrote “covfefe” in an apparent typing error.

JP Morgan is not the only institution looking into the impact of the President’s tweets on markets.

Analysts at Bank of America Merrill Lynch showed that days when Mr Trump tweeted regularly were associated with negative stock market returns of nine basis points on average. Whereas days with fewer tweets tended to go hand in hand with positive returns of five basis points on average.

So, the question remains, will the phase one deal between the US and China cause as rapid a reversal in the other metals as we have seen in gold? Time will tell. For now, it is all eyes on Trump, and the Coronavirus.

Our team have another busy week in store, chairing panels in the conference, assisting site visits and hosting meetings in and around the conferences.

We look forward to seeing you at our new venue on Monday night for a drink. Enjoy Cape Town!