View Full Version : Here Comes the Supply Contraction...
Note that this mine closure is in the USA, which currently has the advantage of a comparatively weak currency which generally favours operating costs of resource extraction. Just imagine what the margins for zinc look like for those mines paying opex in high value currencies compared to the US$ (Loonie, Aussie, etc).
The current period of high prices has not (yet) been long enough to completely erase the memories of the two decade long bear market in raw materials that started with Volcker's anti-inflation policies. For now the corporate response to falling prices and rapidly inflating inputs will be much, much faster than we witnessed in the early 1980's.
Low prices prompt HudBay to shut Balmat zinc mine
Thu Aug 21, 2008 6:26pm EDT
CALGARY, Alberta, Aug 21 (Reuters) - HudBay Minerals Inc. said on Thursday it is closing the Balmat, New York, zinc mine and concentrator because of low prices for the metal, cutting about 200 jobs.
The company said the mine will close on Friday, with just a small group of employees kept on to maintain the facility.
"As a result of lower prices for zinc metal, continued high operating costs associated with the geology of the Balmat mine and general inflationary pressures, HudBay has determined that its Balmat operation is not economically viable given current market conditions," the company said in a statement...
...Zinc prices have dropped more than 25 percent since the start of the year...
More... (http://www.reuters.com/article/rbssMiningMetalsSpecialty/idUSN2130051320080821)
More:
Tight copper concentrate to force smelter cutbacks
Mon Aug 18, 2008 11:02am EDT
LONDON, Aug 18 (Reuters) - Copper processing fees are nearing a floor and are expected to stay low as smelters cut capacity and the global raw materials market remains tight into 2010, industry sources said...
...The market saw a 120,000-tonne deficit in the first quarter following a deficit of 300,000 in 2007, but maintenance closures returned it to balance in the second quarter, Meilton said.
"We think there will be smelter cutbacks to balance the market in the second half ... we hear talk that some of the Chinese smelters will be cutting back,"...
...In 2009 the raw materials market could see a shortfall of 1 million tonnes that it would have to adjust to, Meilton said...
...Last year a 165,000-tonne smelter in Thailand shut its operations and in Canada, HudBay Minerals is under pressure with high costs and expenses in Canadian dollar.
Its 80,000-tonne Flin Flon smelter was first expected to shut by 2015 due to environmental regulations, but in May this year the company said it would have to close already next year.
"We cancelled contracts going forward because we couldn't get economic charges," said Alan Hair, vice president of metallurgy at HudBay.
HudBay has decided not to enter into agreements to process third-party concentrate beyond 2008, unless fees improve...
Article... (http://www.reuters.com/article/rbssSteel/idUSLI3464820080818)
Note that this mine closure is in the USA, which currently has the advantage of a comparatively weak currency which generally favours operating costs of resource extraction. Just imagine what the margins for zinc look like for those mines paying opex in high value currencies compared to the US$ (Loonie, Aussie, etc).
The current period of high prices has not (yet) been long enough to completely erase the memories of the two decade long bear market in raw materials that started with Volcker's anti-inflation policies. For now the corporate response to falling prices and rapidly inflating inputs will be much, much faster than we witnessed in the early 1980's.
Low prices prompt HudBay to shut Balmat zinc mine
More examples [that I missed when first announced - no inet on the boat :)]:
Teck to close Lennard Shelf mine in August
Mon Jul 14, 2008 7:04pm EDT
VANCOUVER, British Columbia, July 14 (Reuters) - Teck Cominco Ltd will close its Lennard Shelf zinc mine next month, saying on Monday that rising costs, lower prices and a stronger Australian dollar had made it uneconomical.
The facility in western Australia had been scheduled to remain in operation until 2011, but Teck warned in April that it might close it sooner. The mine had been restarted in 2007 after a three-year shutdown...
...The mine was producing less than expected and its profitability had been hurt by a sharp drop in zinc and lead prices at the same time the Australian dollar was increasing and energy and labor costs rose, the company said...
More... (http://www.reuters.com/article/rbssMiningMetalsSpecialty/idUSN1447505720080714)
Low zinc price sinks Burkina Faso mine project
Wed Jul 16, 2008 11:28pm EDT
(Reuters) - Plans to dig West Africa's first zinc mine in impoverished Burkina Faso have been scrapped due to funding problems linked to depressed zinc prices, the project's Australian owner, Aim Resources, said on Thursday...
..."Current zinc prices and forecasts have made funding difficult for zinc projects and a downturn in both debt and equity markets has also significantly reduced financing opportunities," Aim said in a statement.
Construction work started more than a year ago on the mine, which was tipped to become the single-largest contributor of gross domestic product to Burkina Faso...
More... (http://www.reuters.com/article/rbssPreciousMetalsMinerals/idUSSYD22858220080717)
Kagara Australia zinc find to yield 300,000 a year
Thu Aug 21, 2008 11:18pm EDT
...In the shorter term, Oz Minerals and other Australian zinc miners have signalled a tough second half ahead as falling prices raise questions over the rationale for keeping mines open.
Several zinc mines have already curtailed activities and if metals prices continue to fall the pace could accelerate, according to analysts.
Perilya Ltd on Thursday cut production by half to 55,000 tonnes a year to preserve ore at its eastern Australian mine until the market turns.
CBH Resources Ltd has laid off more than a third of its work force at its nearby Endeavor Mine, while closer to Admiral Bay, Canada's Teck Cominco Ltd is closing its Lennard Shelf mine, which last year produced 42,100 tonnes of zinc. ($1=A$1.14)
More... (http://www.reuters.com/article/rbssPreciousMetalsMinerals/idUSSYD12907320080822)
GRG,
Mines (and wells) shut down for all sorts of reasons.
I guess my question is whether overall production of the various commodities in question is going down or up.
Even in a climate where commodity prices are significantly up vs. 10 years ago, there are forces such as monopoly/oligopoly pricing which could also account for closures.
Mines for example require years to ramp up. I can easily see how a de-facto oligopoly of producers of a given commodity would agree to shut down the less profitable mines since the resulting price effects would be kept in house.
GRG,
Mines (and wells) shut down for all sorts of reasons.
I guess my question is whether overall production of the various commodities in question is going down or up.
Even in a climate where commodity prices are significantly up vs. 10 years ago, there are forces such as monopoly/oligopoly pricing which could also account for closures.
Mines for example require years to ramp up. I can easily see how a de-facto oligopoly of producers of a given commodity would agree to shut down the less profitable mines since the resulting price effects would be kept in house.
Each of these companies has its own group of shareholders. How would they collectively come to agreement as to which company's shareholders take the financial hit, to the benefit of the others?
I doubt very, very much that anything like that is going on at present. What you describe is usually the result of years of relentless decline in commodities when company managements finally start to face up to their profligate overinvestment during the preceeding boom. We are no where near that situation today. IMO resource companies, coming off several years of decent cash flows after a long, long drought, are acting quickly (and independently) to preserve their balance sheet capital in the face of precipitous declines in the price of select commodities.
"Mines close for all sorts of reasons". Correct. But in this case the overwhelming majority of them are closing for the same reason. Marginally profitable mines, and much proposed new mine development is no longer an acceptable use of added capital.
Finally, the oligopolies that have been created in certain commodities, such as iron ore, are going to be broken for the same reason the IOCs (International Oil Companies) are in trouble...nationalization of assets and the eventual rise of state owned mining companies. The major mining companies already face greater restrictions and more scrutiny from NGOs for their projects than the IOCs do.
GRG,
I understand your point.
I'm not necessarily disagreeing with you - merely asking for the overall commodity production background context behind the closures as a better way to gauge the real impact.
As for shareholders - I don't know about you but I consider shareholders, especially minority shareholders, as my personal bag men.
When times are tough, under the truck they go.
When times are good, ratchet up the salary and options machine!
I'm only half joking.
Seriously though - one of the ways a company is examined under today's analysis routines is efficiency of capital use. I can see how a mine which is profitable could in fact hurt the stock if it drags down the overall capital efficiency of the entire corporation. Then there is the timing issue: a commodity price spike is the perfect time to close down production; profits from other ongoing operations can easily pay for the costs of shutdown. In bad times, corporations would have to dig into their own pockets to free up the cash to do this.
I am, of course, assuming modern mines require some type of work force payoff and mine site remediation. In the old days people probably just walked.
GRG,
I understand your point.
I'm not necessarily disagreeing with you - merely asking for the overall commodity production background context behind the closures as a better way to gauge the real impact.
As for shareholders - I don't know about you but I consider shareholders, especially minority shareholders, as my personal bag men.
When times are tough, under the truck they go.
When times are good, ratchet up the salary and options machine!
I'm only half joking.
Seriously though - one of the ways a company is examined under today's analysis routines is efficiency of capital use. I can see how a mine which is profitable could in fact hurt the stock if it drags down the overall capital efficiency of the entire corporation. Then there is the timing issue: a commodity price spike is the perfect time to close down production; profits from other ongoing operations can easily pay for the costs of shutdown. In bad times, corporations would have to dig into their own pockets to free up the cash to do this.
I am, of course, assuming modern mines require some type of work force payoff and mine site remediation. In the old days people probably just walked.
I think the major motive to protect the balance sheet is because most mining company managements see that its generally more profitable to buy reserves than find and develop them (at a time of high and rising costs, NGO led objections to mine development, repeated project delays, etc). We went through one consolidation phase (Inco, Alcan, Falconbridge, Placer Dome, etc) just before the prices really started to run. Another is likely to start fairly soon now that prices have been clobbered in some sectors, and companies need a strong balance sheet to either launch a takeover, or defend against one.
metalman
08-22-08, 11:06 PM
I think the major motive to protect the balance sheet is because most mining company managements see that its generally more profitable to buy reserves than find and develop them (at a time of high and rising costs, NGO led objections to mine development, repeated project delays, etc). We went through one consolidation phase (Inco, Alcan, Falconbridge, Placer Dome, etc) just before the prices really started to run. Another is likely to start fairly soon now that prices have been clobbered in some sectors, and companies need a strong balance sheet to either launch a takeover, or defend against one.
man, you a friggin' wealth of info. you think all these guys will vut production ahead of falling demand? that'd be interesting.... instead of bankruptcies a controlled implosion. these days they got computers and with apps that help mgt to say on top of this, not like the last time in the 1970s.
IMO resource companies, coming off several years of decent cash flows after a long, long drought, are acting quickly (and independently) to preserve their balance sheet capital in the face of precipitous declines in the price of select commodities.
"Mines close for all sorts of reasons". Correct. But in this case the overwhelming majority of them are closing for the same reason. Marginally profitable mines, and much proposed new mine development is no longer an acceptable use of added capital.
Finally, the oligopolies that have been created in certain commodities, such as iron ore, are going to be broken for the same reason the IOCs (International Oil Companies) are in trouble...nationalization of assets and the eventual rise of state owned mining companies. The major mining companies already face greater restrictions and more scrutiny from NGOs for their projects than the IOCs do.
You are correct!
BiscayneSunrise
08-24-08, 08:11 AM
man, you a friggin' wealth of info. you think all these guys will vut production ahead of falling demand? that'd be interesting.... instead of bankruptcies a controlled implosion. these days they got computers and with apps that help mgt to say on top of this, not like the last time in the 1970s.
Metal, I can't speak for GRG, of course, but I think executives are much more savvy and proactive in this cycle than in the past. Witness the airline industry. In the past, airlines would maintain capacity and try to fly through a recession, red ink, be damned. This time, airlines are trying to maintain control of the market by reducing capacity even in the face of relatively strong demand. Less capacity (supply) in the face of same or lessening demand equals higher prices.
Now the reasons for reducing capacity may be slightly different in each industry but the point is that executives are much proactive in the past in trying to maintain pricing power, even using ruthless measures, if necessary.
...related to the supply contraction dynamic.
Watch for commodity producing companies to start announcing stock buy-backs. Given that many sectors are still generating good cashflows [including oil producers; although you wouldn't know it from all the hysteria about "crashing" oil prices :rolleyes:] and there is diminishing incentive to invest in new production, more of the cash will go into FIRE economy style stock purchases.
Who sez commodity producer management haven't learned anything in the past 25 years...;)
...related to the supply contraction dynamic.
Watch for commodity producing companies to start announcing stock buy-backs. Given that many sectors are still generating good cashflows [including oil producers; although you wouldn't know it from all the hysteria about "crashing" oil prices :rolleyes:] and there is diminishing incentive to invest in new production, more of the cash will go into FIRE economy style stock purchases.
Who sez commodity producer management haven't learned anything in the past 25 years...;)
Been thinking the same thing.
metalman
09-02-08, 10:48 AM
...related to the supply contraction dynamic.
Watch for commodity producing companies to start announcing stock buy-backs. Given that many sectors are still generating good cashflows [including oil producers; although you wouldn't know it from all the hysteria about "crashing" oil prices :rolleyes:] and there is diminishing incentive to invest in new production, more of the cash will go into FIRE economy style stock purchases.
Who sez commodity producer management haven't learned anything in the past 25 years...;)
"Governments never learn. Only people learn."
- Milton Friedman
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