Archives for May 2012

Stopping the helium fire sale

A quick sell down of the US Government’s stockpiles of helium in the 90s crowded out the private sector and left the US with dangerously low levels of a key industrial material.

Early this month the U.S. Senate Committee on Energy & Natural Resources started considering changes to the way the government manages helium.

Helium is not only being used in party balloons, but it is also a key component in medical devices, industrial welding and high tech manufacturing. And don’t forget scientific research to launch all those weather balloons.

The National Helium Reserve, the world’s only underground helium storage facility, is a depleted gas field located 19km northwest of Amarillo, Texas. Unrefined or crude helium sales from the reserve supply roughly half of all domestic helium needs and one third of global helium demand each year.

The reserve is close to gas fields in southwest Kansas, Oklahoma and the Texas panhandle that contain high amounts of helium, which is separated from natural gas as a byproduct. Helium is collected, piped and injected underground.

Back in 1925 when airships were considered leading flight technology, the reserve was established by the US government as a strategic supply of gas. Later in the 1950s, the helium reserve became important to the US space program.

By the mid-90s a billion cubic metres of gas had been collected but the reserve was also deeply in debt. Congress passed the Helium Privatization Act of 1996 directing the government to start liquidating the reserve to payoff a US$1.4 billion debt.

The committee believes that the current sales structure distorts the private helium market and is creating uncertainty for commercial, Federal, medical and scientific users of helium.

“The proposed legislation would remove this market distortion for the benefit of industry, private, and Federal users. Additionally, the debt will be paid off prior to the mandated final sell off date, which may result in the expiration of the funding mechanism that provides the operating expenses for the reserve. According to the BLM, this may occur as early as mid-year 2013,” said the committee in a statement.

Proposed legislation would extend authorization of the reserve beyond 2015 when the operation was set to expire. The Bureau of Land Management would set helium prices at fair market value. Selling at market rates will also hopefully spur the development of private sources of helium.

via Stopping the helium fire sale |

Molycorp stock is following rare earth prices over a cliff

Strong revenue growth and a production ramp-up failed to give Molycorp a boost on Friday with the stock falling almost 2% by the close.

The Colorado company, in the process of restarting full-scale mining and processing at Mountain Pass in California, after the close on Thursday announced Q1 revenues tripled to $84.5 million despite a drop in average rare-earth oxide selling prices.

Average prices were significantly up compared to Q1 2011 but fell 20% to $95 a kilogram from $120 a kilogram in the final quarter of last year.

In a conference call Molycorp CEO, Mark Smith said margins are expected to face further “headwinds” this year, particularly during the first half.

Molycorp also said it is on track to achieve its Phase 1 annual production rate of 19,050 tonnes by the end of Q3. Its ultimate production target is 40,000 tonnes.

Friday’s share price slide brings Molycorp’s losses over the past 12 months to 60.1%. The counter was changing hands in New York for $24.93 down 1.97% on Friday affording it a $2.45 billion market capitalization. Molycorp shares were worth $34.71 a month ago and hit a high of $77.54 on May 3 2011.

Molycorp remains on track to become the largest rare-earth miner outside China which accounts for more than 90% of rare earth production in the world, and is also the biggest consumer.

Molycorp’s mould-breaking deal with Neo Material Technologies in March gave Molycorp access to advanced rare earth processing capabilities, specifically the Toronto company’s patented magnet technology, and a sales channel into China for the 17 elements.

Some analysts believe the vertical integration achieved by a Molycorp-Neo Material tie-up is an industry game changer that will kick-start demand after a period where REE consumers in the automotive, high tech and green energy industries scrambled to find alternatives.

Others have in the past pointed to the fact that China’s total dominance of production means that they can change market dynamics easily and quickly.

Rather than easing the pressure on manufacturers who need rare earths or stimulating the market, China’s strategic decisions on quotas and industry consolidation are aimed at cutting off at the knees development of mining projects outside its borders.

The declines in rare earth oxide prices have accelerated this year with some more abundant rare earth elements such as lanthanum crashing by more than 70%. While heavy and scarcer REEs such as dysprosium have generally held up better, many have also experienced price declines of 50% or more.

via Molycorp stock is following rare earth prices over a cliff |

Qatar plonks $4 billion on Xstrata and hands Glasenberg another victory

The Financial Times reports that the oil and natural gas rich nation of Qatar has plans to up its stake in Xstrata, currently negotiating a $90 billion merger with Glencore International, to over 10%, which would make the country’s sovereign wealth fund the diversified miner’s second largest shareholder.

Swiss commodities giant Glencore already owns 34% of Xstrata. Glencore is offering 2.8 shares for every one of Xstrata, but aside from second largest shareholder BlackRock, other institutional investors have threatened to block the deal.

The Qatari fund has been responsible for almost 40% of all the trade in Xstrata since February and has built up an 8% stake. London-listed Xstrata is worth over $52 billion.

Qatari support should provide Glencore CEO Ivan Glasenberg the necessary backing he needs to push through the deal. Glasenberg and Xstrata CEO Mick Davis have embarked on a roadshow to sell the deal over the summer.

The FT reports 75% of shareholders must vote in favour of the deal with Glencore prevented from voting:

People familiar with the matter said that Qatar Holding, the investment arm of the Qatar Investment Authority, first met Ivan Glasenberg, Glencore’s chief executive, in late 2010 to discuss an investment but the two sides failed to reach agreement.

Instead, the people added, Qatar Holding decided to replicate a strategy it had used in the past, buying a stake in Xstrata – of which Glencore owns 34 per cent. This offered a way to gain exposure to the mining sector and the prospect of a holding in Glencore when, as expected, the two agreed to combine.

Qatar is expected to continue building its stake to 10 per cent and could go higher, the people said.

via Qatar plonks $4 billion on Xstrata and hands Glasenberg another victory |

Mongolia backtracks on state ownership of mining companies

Mongolian elections are set for the end of June and in the run-up draft legislation put forward new provisions to cap foreign ownership of domestic companies at 49%, rules similar to Zimbabwe’s indigenization policy.

Fearing a backlash by foreign investors in the mining sector – the foundation of the country’s economy – Mongolian legislators on Tuesday watered down many of the provisions, reports Reuters, “although mining, media and banking projects will still be subject to stringent restrictions.”

“A provision saying that projects worth more than 100 billion tugrik ($80 million) should be subject to majority Mongolian ownership has also been removed,” the news agency reported adding that many believe the proposed new law will be toned down further before it is enacted.

Last year gross domestic product in the nation of fewer than 3 million people expanded by 17.3% and this year it should easily top 20% thanks to billions of dollars of foreign investment in the country’s coal, copper and gold mining industry.

The unhappiness about foreign involvement in the resource industry seems to have been sparked by a takeover bid by Chalco, China’s largest aluminum firm, of SouthGobi Resources, a coking coal producer.

That $925 million deal is now on ice pending a government review and the suspension of some of SouthGobi’s licences. SouthGobi is majority owned by Canada’s Ivanhoe Mines.

The SouthGobi fiasco is not the first time Mongolian politicians have interfered in the mining industry.

After a shambolic bidding process that stretched as far back as 2007, Mongolia struck a deal with US giant Peabody Energy, China’s Shenhua and a Russian-Mongolian consortium in July last year to develop the western block of Tavan Tolgoi, the world’s largest coking coal deposit.

Barely two months later the country’s National Security Council threw out the agreement after losing bidders complained and in March stopped talks with foreign miners altogether.

West Tsankhi alone holds 1.2 billion tonnes of high-quality coal used for steelmaking and Shenhua, the world’s largest coal miner with 53 operating mines, said in March it is still confident of signing a deal post elections.

Given the reaction to Chalco and calls by some politicians that Mongolia develop West Tsankhi itself, that optimism may be misplaced.

Mongolia also still hopes to privatize its Erdenes-TT mining company which controls the remainder of the 6 billion tonne Tavan Tolgoi resource.

The government was hoping to raise as much as $3 billion through a listing in London, Ulan Bator and Hong Kong, but that process has also been thrown into disarray by the upcoming elections.

Tavan Tolgoi is not even the largest mining investment in Mongolia. That honour goes to Oyu Tolgoi, a $13 billion copper-gold-silver-project.

In October Ivanhoe and partner Rio Tinto dodged a bullet when the Mongolian government said it was rethinking a 2009 deal that gave Ivanhoe and Rio Tinto a 66% stake in Oyu Tolgoi and that it wanted half of the mine, already three-quarters built.

via Mongolia backtracks on state ownership of mining companies |

China gold imports up sharply, country set to become world’s biggest user of bullion |

Gold imports to China from Hong Kong were up 59% in March, according to the Hong Kong Census and Statistics Department.

Exports to China were 135.53 tonnes for the first three months of this year, up from 19.7 tonnes a year ago.

Analysts use import data from Hong Kong census department to gauge overall gold demand in China.

World Gold Council is projecting that China may become the world’s biggest user of gold.

Lawrence Williams at Mineweb wonders if gold is being used by China to reduce its central bank’s overweighting of US dollars.

“If historical precedent is being followed, a significant proportion of Chinese government-held gold may be being held in a secondary account which is not reported in the official reserve figures,” writes Williams.

Gold has not had a good week. Since the leadership changes in Europe over the weekend, gold has been off 2.49% to $1,601.29/oz.

Gold has moved sideways since the start of the year. It spiked at $1,783.93/oz in late February but has since slid to about the same price it started in January.

via China gold imports up sharply, country set to become world’s biggest user of bullion |

China wants to take over the world’s largest undeveloped iron ore project

A private group of Chinese magnates is planning to take Guinea’s Simandou, the world’s largest undeveloped iron ore project, from Rio Tinto (NYSE:RIO), reports The Australian.

According to The Sunday Times, China International Fund (CIF) and Angola’s state oil company would propose to take ownership of Simandou from Rio by having the Chinese-controlled and London-listed Bellzone Mining Plc (LON:BZM) offer Guinea $700 million in cash. The amount is equivalent to the sum Rio paid the West African country under an agreement reached last year.

But the World Bank’s private sector development financing arm, International Finance Corporation, is coming to Rio’s recue.

The Washington-based IFC, which acquired its stake in Simandou in 2006, has announced today its plans to invest $150 million of equity in the highly wanted project, as the joint venture between Rio and China’s Chalco races towards first production.

Rio Tinto has been exploring in Guinea since 1996, but intensified its plans for building Africa’s biggest mining development at Simandou in 2007, when markets were thriving and BHP Billiton tried an unsuccessful hostile $135 billion purchase offer.

Although the Anglo-Australian miner intended to be in production by next year, financial difficulties and the previous Guinea government’s decision to strip half of Rio’s tenements, threatening the one that holds the Simandou deposit, have delayed it.

The company is developing a railway, a mine and a port in order to ship its first cargo of the steelmaking raw ingredient by mid-2015, increasing iron ore output to 95 million metric tons a year from Simandou in the future.

Simandou will turn Guinea into the world’s third-largest iron ore producer after Australia and Brazil.

via China wants to take over the world’s largest undeveloped iron ore project |

Copper price: There’s something happening here. What it is ain’t exactly clear

Due to its widespread use in construction, communication and transport copper is a bellwether for the global metals industry.

Talk that the copper market is being manipulated by traders and that dramatic changes to global stockpiles of the red metal are distorting prices have become louder recently.

Like all industrial metals copper’s fortunes are largely determined by Chinese consumption. The recent slide in the copper price – down 3% last week to $3.72 a pound – is being driven by news that China is getting rid of its excess inventory to alleviate shortfalls elsewhere in the world.

Jiangxi Copper, China’s largest copper producer and smelter, is gearing up to export large quantities of the metal and up to last week when it fell 4%, copper stockpiles in Shanghai had almost doubled this year.

CRU, a London-based researcher, estimate that “China may hold as much as three quarters of the “spare” stock that is actually available to the market.”

These figures are in stark contrast to copper inventories in the rest of the world.

London Metal Exchange copper stocks have fallen roughly 135,000 tonnes this year to 235,200 tonnes, the lowest levels since the 2008 recession.

The LME handles around 80% of global trade in metals futures and manages 600 metal warehouses around the world. The 134-year old exchange will accept official takeover bids next and is keen to expand into China.

With copper prices in backwardness since March, meaning stocks for delivery in three months are cheaper than for immediate delivery, the developments have not gone unnoticed by regulators and industry observers. From Reuters:

They [LME regulators] have since fine-tuned rules to deny “dominant holders” – defined as those controlling over half of stocks in any metal and cash positions – from profiting from that position. They are instead forced to give their metal away at scant profit.

But now some traders are suspected of shifting millions of tonnes of stocks around the world and taking some tonnages off warrant at the LME to ensure their positions, or holdings, meet regulators’ requirements while cornering the market. Often they own the warehouses storing the metal which helps the operation.

“It’s a fine line. Increasingly operators are a lot more sophisticated in how they keep on the right side (of market abuse regulations),” said analyst Robin Bhar at Societe Generale in London.

Reuters also reports that “many of those interviewed say commodity house Glencore has amassed a dominant position on the LME in copper. Glencore declined to comment.”

The Swiss firm currently has a merger offer for Xstrata before shareholders to create a $90 billion mining and trading powerhouse.

It’s not the first time the copper market has been the target of rogue traders.

In 1996, Japan’s Sumitomo Corporation lost $2.6 billion after the chief of the company’s copper trading arm attempted to corner the market over a ten-year period.

Yasuo Hamanaka became known as ‘Mr. Copper’ and ‘Mr. 5%’, believed to be the percentage of the global copper trade he was said to control. He left prison in 2005. The copper price has increased 4-fold since 1996.

Not only the base metals market is prone to manipulation. In the 1970s, the Hunt brothers at one stage controlled almost half the world’s trade able silver, before changes in regulations caused the market to collapse.

It’s not just traders that are being fingered for market distortion.

Over and above trading stocks, including ‘strategic’ government reserves, China is estimated to have as much as 3 million tonnes of refined copper stockpiled – 40% more than just six months ago.

That’s led some industry watchers to conclude that the country has managed to corner the market, be that deliberately or not.

via Copper price: There’s something happening here. What it is ain’t exactly clear |

TransCanada seeks Presidential approval for northern pipeline route

Four months after having its Keystone XL pipeline project rejected by the Obama Administration, TransCanada Corp. is taking another crack at the $7.6-billion project.

The Calgary-based company (TSX, NYSE:TRP) said today it has applied for a Presidential Permit allowing the pipeline to run from the Canadian border in Montana to Steele City, Nebraska. The application will also include an alternative route through Nebraska, where the line runs across an environmentally sensitive acquifer and where opposition to the project has been strongest.

Keystone XL is an extension to the existing 3,460-km line transporting Canadian crude oil from Alberta oilsands to a storage hub in Cushing, Oklahoma. Canada exports 2 million barrels of oil per day to the US and almost all of it ends up at Cushing – the pricing point for US crude – where inventories have been piling up and refining capacity is limited.

Two extensions to the route, a northern and a southern portion, are designed to carry 830,000 barrels a day through six US states, ending up at refineries on the US Gulf Coast.

Keystone XL has been approved by the Canadian National Energy Board and the US State Department has said the line would have limited environmental impacts.

But in January the US government, facing pressure from Nebraskans and other high-profile opposition, including celebrity activists, torpedoed the project. The pipeline has become a political football in the run-up to the US Presidential election, with Republican frontrunner Mitt Romney saying he would immediately approve the pipeline if elected and President Obama hedging his bets. Commentators say the President is being careful not to offend his liberal base opposed to the project and a final decision is unlikely before the outcome of the election in November.

However, in late February, TransCanada said it would go ahead with the construction of the $2.3 billion southern leg of the pipeline running from Cushing to Houston. A month later, President Obama announced the southern portion would be fast-tracked, meaning it could be operational by June-July next year.

As for the northern leg of the pipeline, Nebraska and TransCanada agreed back in November to reroute the line away from the Ogallala aquifer, a sprawling water table that provides water to local communities and farms. The new path would involve about 50 kilometres of pipeline.

The company had long resisted changing the route, having already spent some $1.4 billion securing right of ways and stockpiling material for the project.

Construction has already begun on the Canadian side of the pipeline route and the ground on the southern leg is expected to be broken this summer.

TransCanada CEO Russ Girling said today he hopes the US government will approve the project by early 2013, at which point the company would start building the controversial portion between the Canadian border and southern Nebraska.

TransCanada shares were down about 4c this morning in Toronto on another off day on the TSX, which had shed 165 points as the trading day wound to a close.

via TransCanada seeks Presidential approval for northern pipeline route |

What do Americans think about gold?

Precious metals have been relatively quiet this week. After posting its best weekly gain in two months, gold is trading slightly lower at about $1,650 per ounce. Meanwhile, silver is trading near $30.50 per ounce. Gold and silver are currently taking a pause, but have been in a bull market for more than a decade and apparently Americans are taking notice.

According to a recent Gallup poll, gold leads four other types of investments when Americans were asked to pick the best long-term investment. The poll found that 28 percent of Americans view gold as the best investment vehicle for the long-term, compared to 20 percent selecting real estate. Paper assets such as stocks and savings accounts were tied for third place with 19 percent, as bonds finished last with only 8 percent. The new findings were part of Gallup’s April update of its annual Economy and Personal Finance poll.

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Although gold prices have declined from their nominal highs made last year, the safe-haven metal still remains the top pick. Gallup explains, “Investing in gold has gained in popularity in recent years as low interest rates have made traditional savings instruments less attractive, and instability in the stock and real estate markets has undermined the mass appeal of those options. Meanwhile, the rising trajectory of the price of gold over the past several years apparently offers more of the returns and stability investors seek. Although gold prices dipped in the last quarter of 2011 after hitting an all-time high of $1,924 per ounce in September, and have yet to fully recover, more Americans continue to consider gold the best long-term investment among the major options available to consumers.”

While the Gallup poll findings may raise red flags for contrarian investors, the percentage of Americans that viewed gold as the best investment actually declined 6 percent from last year. Furthermore, what Americans say and do are completely two different things. Gold ownership still remains low by historical standards and according to sales by the United States Mint, there is no rush to buy American Gold Eagles, the most popular bullion coin in the country. In April, the U.S. Mint sold 19,000 American Gold Eagles, the lowest monthly amount since 2008. For the first four months of 2012, the U.S. Mint sold 181,000 Gold Eagles, compared to 358,000 sold in 2011. Furthermore, gold held in the SPDR Gold Trust, the world’s largest gold backed ETF, recently fell to a three month low of 1,274.09 tonnes.

Even though short-term volatility and a lack of understanding may scare many Americans away from investing in gold and silver, the fundamental reasons for owning either precious metal have not changed. In a world of uncertainty, gold and silver can still be used to diversify and preserve wealth.

via What do Americans think about gold? |

Red mettle: Has China cornered the copper market?

Due to its widespread use in construction, communication and transport copper consumption is considered one of the best indicators of economic activity.

At best, what is going in the global copper market seems to be counterintuitive.

At worst, it looks like market manipulation with serious consequences for consumers of the red metal worldwide.

The metal is up 6% since Monday last week and now trades at over $8,500 a tonne ($3.84 per pound).

Better manufacturing data from China and the US out on Tuesday is one explanation for the recent rise (although two surveys do not make a trend).

So is the rate at which copper held in LME warehouses around the world is being drawn down. Yesterday inventories were down to just 250,000 tonnes, the lowest since October 2008 and at levels that can only be described as very tight.

In contrast Chinese warehouses are bulging as construction slows and economic growth tapers off.

Which is why the country’s number one producer is gearing up to export large quantities of the metal according to a Reuters report on Monday and bonded warehouses in Shanghai recently started re-exporting some of the 600,000 tonnes held there.

About a fortnight ago – before the latest numbers were released – China’s stockpiling was already drawing attention during Cesco, the copper industry’s annual talk shop.

Financial Times (sub required) quoted data from CRU, a London-based metals researcher, that shows “58 per cent of the world’s refined copper is now being held in China” and including strategic government stocks China now sits on some 3 million tonnes – 40% more than just six months ago.

On top of that “traders say that China may hold as much as three quarters of the “spare” stock that is actually available to the market.”

A further complicating factor in judging where the copper price is heading is supply.

Supplies in the industry have been largely flat for a number of years. But according to the International Copper Study Group based on existing plants and announced project developments, annual mine production capacity is expected to grow at a 6.6% a year clip to to reach 26.2 million tonnes in 2015.

That’s up 30% from last year’s levels and should, all things being equal, wipe out any market deficit.

But there are also those who are saying this promised new supply – mostly from South America – will never materialize.

Apart from rising labour and electricity costs, political problems (vide Argentina’s seizure of energy firm YPF), and a scarcity of project finance, acute engineering skills shortages and tough environmental regulation are also hampering the industry.

Unthinkable not very long ago, a situation could now arise where the rest of the world has to import copper from China at inflated prices to meet rising demand.

via Red mettle: Has China cornered the copper market? |