It has been a hectic year so far for the world's largest mining companies. We have recently seen a drop in copper stockpiles. Silver futures are now trading in China. Additionally, gold producers across the board have been missing revenue expectations. In the following article, I will focus on six mining companies that are reacting to changes in the market. Freeport-McMoRan (FCX), BHP Billiton (BHP), Goldcorp (GG), Silver Wheaton (SLW), Barrick (ABX), and Vale (VALE) are all facing the possibility of lower copper prices, which could hurt margins, profitability, and ultimately stock performance.
Chile's copper exports were up for the first quarter, but down for the month of April. Reuters reported that copper exports from the world's largest producer total were $3.583 billion for April, which is down 8% from April 2011. April was the first month in 2012 in which Chilean copper exports fell.
The New York Daily News contradicted Reuters and reported that copper exports in April were actually 57.3% higher than they were in April 2011. Both news organizations cited the same source for this information , Chile's Central Bank. Interestingly enough, they both gave the same dollar figure for the production, $3.58 billion. The reason for the contradiction may be that Reuters did not report Chile's total mining exports, which were down 7.5% from $3.95 billion in April 2011.
The Daily News also reported that Chile's total mining exports for the first quarter (January to April 2012) totaled $15.56 billion, which is up from $11.61 billion in the same period last year. This means that Chile's mineral production seems to be decreasing despite reports that ore depletion and power shortages are hobbling production.
These contradictory figures and claims are likely to have a dampening effect on mining stocks. Demand for some minerals, such as copper, seems to be down, yet overall exports seem to be up. The increase in exports could be fueled by all the expansion occurring in Chile's mining industry in recent years.
This expansion could be bad news for copper producers, such as Freeport-McMoRan, because it could lower the cost of copper. Chinese copper demand has now fallen to such low levels that some Chinese producers are planning to sell their surpluses on the international market. The glut will undoubtedly lead to short-term falls in mining stocks.
If the drop in Chilean production continues, it could be good long-term news for companies like Freeport, Vale, and BHP Billiton, which have large reserves and big mines under development outside of Chile. This could signal that Chile's days as the world's No. 1 copper producer are over.
It could also mean that Codelco (the Chilean government's copper company) may no longer be the largest copper supplier at some point. If that happens, the value of Freeport-McMoRan, which is the world's largest private company, could soar.
Copper Stockpiles Dropping
The amount of copper in stockpiles monitored by the London Metals Exchange (LME) has dropped by 38% in 2012, Bloomberg reported. The current level of the metal in the stockpiles is around 230,625 metric tons, the lowest level since October 2008.
This development is interesting because demand for copper in the largest market, China, has fallen dramatically. Bloomberg said analysts at the Macquire Group Ltd. believed the copper was being diverted to other warehouses so it could be used as collateral in financing deals.
Ryan Belshaw, a Macauire Group expert, told Bloomberg that he thinks traders are selling copper at premium prices which exceed the LME price. Belshaw also thinks the traders are able to buy back later at a lower price.
This news is interesting because it seems to indicate that the demand for copper is actually higher than what the market indicates. It could also mean that the market is facing the beginning of a copper surplus. When a commodity metal is in surplus and selling at lower prices, traders will buy it up and horde it until prices rise again. That could mean that a copper surplus is developing.
A copper surplus will mean lower prices, and it could definitely mean lower profit margins for major producers. Particularly hurt will be companies like Billiton and Goldcorp, which have spent huge amounts of money developing new copper mines at a time when mining costs are rising. Sooner or later, the combination of increased development costs and lower prices is going to start eating into companies profit margins.
Silver Futures Trading to Begin in China
A new market for silver futures started Thursday, May 10, called the Shanghai Futures Exchange. This marks the first time in modern history that silver futures have been traded in China.
Interestingly enough, China is the world's largest producer of silver and the world's largest market for the metal. Yet it has not had a future market for the metal locally. Currently, the commodity price for silver is set by the LME and the COMEX in New York. Experts think the Chinese government allowed futures trading to give their nation more control over the price.
The Chinese Security Regulatory Commission (China's equivalent of the SEC) expects allowing futures trading to reduce volatility in silver prices. That could mean lower or at least more stable silver prices. That could definitely mean lower profits and stock prices for non-Chinese silver producers, such as Barrick Gold and Goldcorp, and silver buyers such as Silver Wheaton.
A steadier and more stable market could also mean stable long-term profits for silver producers. Chinese futures trading could also lead to increased demand for silver, particularly if the Chinese start seeing the metal as an investment. It should be noted here that increased trading could lead to increased volatility and even higher prices for silver. That would lead to even more speculation, which could make the market and prices even more unstable. So the Chinese government may get the opposite of what it is trying to accomplish. The effect on silver mining companies could be higher demand and prices, so this move could help silver stocks.
Gold Companies Not Meeting Revenue Expectations
Rising production costs seem to be eating into revenue at gold companies. Barrick Gold still made a lot of money in the first quarter, but it missed analysts' expectations on earnings per share. Barrick's revenue was a respectable $3.64 billion, but this was less than the $3.76 billion expected by seven unidentified analysts polled by S&P Capital IQ. Barrick's revenue was still up from the same period last year when it was just $3.09 billion.
The moral of the story here is obvious. Predicting revenue for mining companies is next to impossible. Miners face a wide variety of unpredictable costs, such as fuel. The nature of the industry also makes for all sorts of nasty surprises, such as strikes, political turmoil, and accidents that can lower costs.
Barrick seems to be doing well, but its stock price will undoubtedly be hurt by falling gold prices. Gold futures hit a four month low on the Comex on Tuesday, May 8, 2012, at $1,607.80 a troy ounce. Experts blamed the ongoing debt crisis and political developments in Europe for the low price. This lowered the cost of the euro and the price of the dollar, which makes it more expensive for Europeans to buy gold futures in New York.
It looks like a lot of the gold producers will not be hitting their revenue projections in the coming months, and that could lead to a sell-off in gold stocks. This could be good news for value investors because it could lower the price of gold companies such as Barrick and Goldcorp.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.