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Base-Metal Miners For Sale

Where base-metal miners are beaten down, China is building its demand...
STEFAN IOANNOU has spent the last seven years as a mining analyst covering mid-cap base metal companies at Haywood Securities.
Prior to joining Haywood, Ioannou worked with a number of exploration and mining companies, as well as government agencies as a field geologist in Nevada and throughout the Canadian Shield in both the gold and base metal sectors.
Here in this interview with The Gold Report, Ioannou discusses how to benefit from the coming supply squeezes and China's role as both supplier and consumer of three industrial metals – copper, zinc and nickel.
The Gold Report: In January, Haywood Securities forecast a copper price above $3.60/pound ($3.60 per pound) for the remainder of 2013. Six months later, copper is struggling to remain above $3 per pound. What is causing the weakness?
Stefan Ioannou: A lot of it relates to uncertainty regarding the global economic situation. Early in the year, the price hovered around $3.25 to $3.50 per pound and recently nosedived to $3 per pound. That happened on the back of Federal Reserve Chairman Ben Bernanke's hints that quantitative easing in the United States may end in mid-2014, raising concerns that US demand for raw goods will decline. Because copper goes into a lot of raw goods, that supposes less demand. In addition, copper inventories are well over 600,000 tons, which is high on a historic basis.
China is the other big concern. Its manufacturing numbers are weakening. People are worried that China, which really drives a lot of the metal stories, is not growing as fast as expected.
TGR: Have you revised your price deck?
Stefan Ioannou: In early June we lowered copper's average price for 2013 to $3.35 per pound. Year to date, the average copper price is $3.43 per pound.
TGR: Is that why the landslide in early April at the Bingham Canyon copper mine in Utah has not had more of an impact on the copper price?
Stefan Ioannou: It is probably a combination of two things. One, investors are very focused on the global economic data and general market sentiment. Two, there have been a handful of mine-specific issues, Bingham Canyon being an important one.
Bingham Canyon was about a 165 million ton failure, which is quite large. It will take a long time to dig out and get the mine back up to steady, safe production. There has not been much disclosure into what the impact will be. 
There have been two other mine-specific issues in the copper space. Twenty-eight people were killed at the Grasberg mine in Indonesia in mid-May. The mine was shut down for several weeks and is just now ramping back up.
The third mine-specific issue happened in China in early June. One smelter declared force majeure due to a major equipment failure that prevented it from producing enough refined copper for its end users. Again, there is not a lot of information on that.
But, overall, I think most investors are focused on the global macroeconomic issues, not on specific issues at copper projects.
TGR: Some of the world's biggest miners have posted "for sale" signs on noncore assets. Some midtier base metals players have bought what might be considered bargains. Is this an investment thesis worth following?
Stefan Ioannou: There is definitely a shift in what the majors are including in their quarterly results, their management discussion and analyses, and the question periods during their conference calls.
They are shifting focus to their existing mines, emphasizing cost-cutting and efficiency measures. There is less talk about pursuing larger, capital-intensive development projects. These are being shelved or put up for sale, creating buying opportunities for midtiers.
TGR: Southeastern Europe is emerging as a copper district; some are comparing it to the Democratic Republic of the Congo (DRC). 
Stefan Ioannou: This is a historic copper mining district. There are two geologic targets, and each company has an interest that is slanted to one or the other. One company's intersect is in a high-sulphidation zone, which is usually a complex zone above a larger copper porphyry deposit. The geophysics suggest a significantly larger copper porphyry target beneath the high-sulphidation target. 
You have to drill through the high-sulphidation zone to get into the copper porphyry, which means you get drill results from both zones. We do not know the size of the high-sulphidation zone, but it could, at the least, be interesting to a midtier producer. If the porphyry target at depth pans out, it would likely interest a major.
TGR: In your last interview with Streetwise Reports, you said that all-in costs for copper miners averaged $2 to $2.50 per pound. What is the average, all-in cost-per-pound among your top three picks in the copper space?
Stefan Ioannou: It is fair to say most copper companies, even the higher cost ones, are still producing copper at below $2.50 per pound.
TGR: Zinc is another metal with weak prices, but you believe higher zinc prices are not that far off. Why is that?
Stefan Ioannou: Zinc is our choice for a base metal to be bullish on in the medium term. Inventory on the London Metals Exchange has been very high for more than 12 months, topping 1.2 million tons not too long ago. Now, it stands at just over one million tons.
The interesting dynamic here is the recent closure of several very large zinc mines. There is nothing fundamentally wrong operationally with these mines; they have simply run their course. 
The zinc market differs from the copper market in that smaller mines predominate. New advanced-stage zinc projects cannot meet that supply loss, let alone additional demand growth. Despite today's high inventories, mines closing in 2014 and 2015 and the lack of new projects will squeeze the supply side and drive the price higher.
You can count the number of good zinc mines on one hand. Anyone who has any reasonable exposure to zinc stands to do well when the zinc price runs.
TGR: Finally, let's touch on nickel. Nickel prices peaked near $50,000 per metric tonne in 2007 and are hovering at around $14,000 today. That is mostly due to nickel pig iron, a crude substitute for refined nickel, made from low-grade nickel laterite ore. Is there any relief in sight for nickel investors?
Stefan Ioannou: Obviously, people are focused on the current spot price, which is $6.15 per pound and dropping daily.
Pig iron has put a cap on the upside to the nickel price. The high prices in 2007 prompted a flood of nickel pig iron onto the market. At the time, a lot of the laterite ores being mined for pig iron were relatively high grade: 3 to 4% or better nickel. Since then, that ore has been displaced by lower-grade ore: below 2% nickel, even below 1%. That increases the intrinsic cost of producing nickel from that ore.
Producing pig iron from laterite ore is energy intensive. Much of the processing happens in China, where power costs have gone up. When you couple lower-grade input feed with higher energy costs, the result is a higher cost base for pig iron production. Companies – and they are mostly small, mom-and-pop operations – whose start-up and capital costs are sunk, continue to make money at $6-7 per pound nickel. But we do not expect to see any significant new nickel pig iron producers come onstream until nickel gets up to $10-plus per pound.
TGR: Yet, according to the International Nickel Study Group, the surplus of refined nickel at the end of April was close to 33,000 tons and it forecasts a 90,000 tons surplus this year. Do institutional investors have any appetite to bring more nickel projects into production?
Stefan Ioannou: In the near term, there is a lack of interest in the nickel space. It is probably the longest term base metal to get excited about.
The numbers to support nickel on a long-term basis start with China, which continues to build out infrastructure. Historically speaking, the initial infrastructure in emerging economies is built on low-grade iron work. As a country's infrastructure and general wealth increase on a per-capita basis, the amount of high-grade steel consumption increases on a per-capita basis. China is still building out. As it moves into higher standards of living, coupled with the size of the population, you can make a bullish case for significantly higher nickel demand. The same will happen in India a decade or two later.
There are three basic sources of nickel globally. Sulphide is the most traditional, and is our favorite. A nickel concentrate is made and shipped to a smelter to produce finished nickel. The second is laterite ore. Here, weathered sulphide material is mined, essentially in the form of semi-consolidated dirt. There are a lot of processing challenges, capital costs and risks associated with these projects. Most laterite deposits in the last 20 years have had high capital cost escalations and technical problems. We see these as high risk and generally avoid them. The third one is pig iron, which we already talked about.
TGR: Any parting thoughts, Stefan?
Stefan Ioannou: We think zinc is a very interesting thesis in the next 12 months.
It is important to do your homework. Look for good projects in safe jurisdictions, led by good management teams. All three of these ingredients are essential, especially given the market's negative sentiment right now. Companies that require near-term financing will be challenged.
TGR: Stefan, we appreciate your insights.

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