Big Trouble Ahead For These 7 Miners

 |  Includes: ABX, GG, NEM, PAAS, VALE
by: Vatalyst

China's supposedly insatiable demand for gold could be stagnating, and that's a development that could send gold stocks tumbling. Bloomberg reported that Chinese investors and consumers are increasingly staying away from the precious metal. The report was based on a series of interviews the news service did with jewelers in Shanghai and Hong Kong.

Chinese jewelers think that the steady price decline in gold since September has been the main reason for the fall in the demand. This seems to indicate that Chinese consumers and investors are more investigated and in tune with the world. They're seeing that traditional beliefs about gold as an economic security may not hold water in today's world.

It should be noted that there is no statistical evidence to show an actual fall in Chinese gold demand. Instead, the report is based on anecdotes gathered from jewelers. Still, it doesn't bode well for the stock prices of companies like GoldCorp (NYSE:GG), Newmont Mining (NYSE:NEM) and Barrick Gold Corporation (NYSE:ABX).

Particularly hard hit could be producers who have been part of a wave of massive expansion in recent years in the belief that China's thirst for gold could never be quenched. Another problem is that the economic slowdown in China seems to have stopped the almost limitless growth in consumer spending in that country.

It is unclear if the Chinese lack of demand is a permanent trend or not. Some experts note that the Chinese tend to stay away from precious metals when prices are falling, just like everybody else. It should also be noted that some Chinese jewelers have seen an increased demand because it is the Year of the Dragon, which is associated with power and wealth in China.

Any reports of a Chinese slowdown will be sure to hit at least some gold mining stocks. The gold miners' best hope for higher stock prices will be if the lack of interest in gold doesn't spread to the world's other big consumer gold market, India.

Interestingly enough, the statistical department of the Hong Kong government released some numbers that show a different story. Bloomberg noted that the department reported that gold exports from Hong Kong to the People's Republic of China increased by 59% in March. The problem with these statistics is that the shipments may not reflect actual sales.

Argentina Hits Gold Producers with Protectionist Regulations

Argentina is the latest country to hit metal miners with stringent regulations that could hurt the bottom line and bring down stock prices. Bloomberg reported that on May 11, 2012, the country's Ministry of Production ordered three gold miners to buy more Argentine-made products, or else.

Barrick, Xstrata Plc (XTA) and Vale SA (NYSE:VALE) have 15 days to present new business plans that show an increased consumption of Argentine products. News stories don't show what penalties the companies would face if they failed to comply, nor do they say what Argentine products the companies are supposed to buy.

The reason for the action is clear: Argentina is trying to reduce its trade surplus. The Argentine government could also be trying to score political points with its people by attacking foreign mining companies. Bloomberg noted that the government plan requires the companies to buy more Argentine products and develop new equipment and refining processes to increase value. That means it could be trying to force them to do their refining in Argentina, as the Indonesian government is trying to do to the foreign miners that operate in its territory.

This kind of nationalist restriction is sure to drive up the cost of gold mining, which is also extremely high. It is also likely to dampen gold exploration in Argentina and future values for stocks. It could really hurt companies like Barrick and Xstrata, which have been trying to aggressively develop new gold properties in the Andes.

Two other foreign miners were apparently given the warning by Argentina's minister of production, but not ordered to comply. They were Pan American Silver Corp (NASDAQ:PAAS) and AngloGold Ashanti Limited (ANG).

It looks like mining companies just can't get a break from any government. The political climate seems to be turning against them just as costs are rising and metals prices are falling. It is hard to see how mining companies can keep paying out high dividends if they keep getting hit with expensive new regulations.

Newmont Could Change Its Mind About $4.8 billion Project

The increasingly hostile political climate in South America is forcing at least one major miner to change its plans. News reports indicate that Newmont has ordered a complete review of its massive Minas Conga copper and gold mine in Peru. The review is supposed to take about three weeks, so it would presumably be available in early June.

Newmont and its partners have already invested $4.8 billion in Minas, but haven't been able to dig a single ounce of metal there because of political pressure. Protests over water and other environmental issues caused the Peruvian government to suspend the project, pending the outcome of a review by foreign consultants.

Newmont's review of the project is supposed to take three weeks, and there's no indication what action the miner will take. If Newmont abandons the project, it will definitely send its stock value plummeting.

The big question we have to ask here is how would news of the abandonment of a major gold project affect gold stocks in general? The most likely outcome would be an across-the-board fall in all gold stocks and mining stocks. Obviously, news or even speculation of decreased demand in China would only hasten the fall.

Newmont only owns about 51.35% of Minas, but it is widely seen as a Newmont project. The collapse of such a project would definitely hurt the mining industry, because it would show that even industry leaders lack the political clout to overcome political difficulties in developing countries. It could also embolden other activists and politicians to go after mining companies that have a reputation for caving into pressure.

Vale Suspends New Caledonia Nickel Project

Vale has apparently suspended shipments from its giant Goro Nickel mine on the island of New Caledonia. Reuters reported that the company notified customers on May 10 that it will not be able to fill orders of nickel from the mine for the foreseeable future.

The reason given for the action was some sort of accident at the mine's sulfuric acid plant. The nature of the accident wasn't disclosed, but it was serious enough to shut down the entire mine. It is not clear when Goro will be able to go back into production.

Goro produced around 4,000 tons of nickel this year until the accident shut it down. The accident would seem to throw a monkey wrench into Vale's ambitions to become the world's No. 1 nickel producer in the near future. It could definitely hurt Vale's stock.

It is too early to tell if this incident will have an effect on nickel prices or not. Something else that could hurt Vale's stock value is the cause of the accident. If it was caused by some sort of sabotage, it could indicate that the political climate on New Caledonia is unstable and Goro is vulnerable to violence. The project was delayed for years by protests by natives of the French-controlled Pacific island and is still not that popular there.

It that's the case, Vale's stock could be in for a fall, because it would look as if the company was not in a position to fulfill its promises. It definitely calls the judgment of the Brazilian company's management into question, which would undoubtedly scare investors off.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.