A weak national currency is bad news for importers and consumers but good news for exporters, such as miners. According to Australian analyst Duncan Hughes of GMP Securities, the 24% drop in the value of the Aussie versus the U.S. dollar means that local gold producers can produce big margins even at US$1,200/ounce gold. In this interview with The Gold Report, Hughes names two Aussie gold miners with great cash flow, as well as several with projects in Africa, and he highlights nickel and copper companies that can expect to flourish when prices rise, as he expects they will.
The Gold Report: Where do you see the price of gold going this year?
Duncan Hughes: Gold should remain fairly flat, probably around US$1,225 per ounce [US$1,225/oz], due to the strength of the U.S. dollar. In U.S. dollar terms, gold has underperformed, but when valued in other currencies, gold has actually performed pretty well.
TGR: How about nickel and copper?
DH: Current spot prices just don't look sustainable to us. The price of nickel is depressed now because there are 400,000 tons stockpiled in the London Metal Exchange [LME], and the global market is about 2 million tons [2 Mt]. The expected increase in the price of nickel following Indonesia's ban on the export of unprocessed ore has been delayed because of ore coming from the Philippines. But this substitute ore is a lower-quality product, and stockpiles will eventually fall in China. So the supply crunch that was forecast for early 2015 will now occur later in the year.
At the current price of around US$2.75/pound [US$2.75/lb], a fair amount of the copper industry is underwater. So we expect price increases beginning in the second half of 2015.
TGR: Canadian mining companies have benefited greatly from the strength of the U.S. dollar. How great has the benefit been to Australian miners?
DH: It's huge. The Aussie dollar has fallen from parity last year to US$0.76 today. So, for example, gold at US$1,200/oz translates to AU$1,570/oz, and nickel at US$5.70/lb means AU$7.50/lb. Without this currency premium, we'd see many Australian mine closures.
TGR: So are Australian miners now dependent on this currency premium in order to maintain margins?
DH: There are some high-cost assets that are producing only because of the Aussie gold price. This effect is even greater with nickel miners, as the price of nickel has really surprised to the downside. A number of Australian nickel producers are in trouble even with the weak local currency. Fortunately, they saved cash from the good times, but if it weren't for the exchange rate, half of Australian nickel production would be underwater.
TGR: How has mining risk in Africa changed?
DH: I think it's pretty much the same as it's always been. Africa is always going to have problems with corruption and mismanagement. The big challenge for the continent will be transportation infrastructure, with a major challenge also being power.
There are still issues with terrorism, which we've seen in Kenya and West Africa, but the risk of nationalization seems to have fallen. A lot of things happen slowly in Africa, but sudden political and social changes often happen quite quickly: a new taxation regime or regime change itself, which we saw in Burkina Faso, one of my favorite jurisdictions.
TGR: How would you assess the situation in Zambia and the Democratic Republic of the Congo [DRC]?
DH: Zambia instituted, in my opinion, ridiculously high royalties, and now it seems it will have to step back from that.
The DRC is proposing a new mining code that could be the same mistake Zambia made, but the DRC has a long history of uncertainty. It is a difficult place to operate, and you need to follow events very closely in that country, not only nationally but regionally as well. For instance, Katanga province, where most of the copper miners are, suffers less risk than other parts of the country. The DRC is a classic risk/reward situation. There is just so much potential there. I mean, you don't get 7% copper outcropping in many parts of the world, but you do in the DRC.
TGR: Let's talk about Australian nickel juniors.
DH: This is a subject close to my heart. As I mentioned above, the nickel price will rise, and this will benefit especially Australian producers, not merely because of the weak Aussie dollar but because these are high-quality, nickel-sulfide projects rather than lower-quality, laterite projects.
TGR: Which nickel juniors do you like best?
DH: I'll mention a few. Although I don't cover it, Western Areas Ltd. (OTCPK:WNARF) looks good. This is a pure nickel play with a low cash cost from high-grade deposits. The future looks pretty strong for it.
TGR: What about the nickel exploration and development pipeline?
DH: Sirius Resources NL (OTC:SRQUF) [SIR:ASX]. I recently visited its Nova-Bollinger nickel-copper mine in Western Australia. This has a AU$443M capex, but it is fully funded through equity and debt, and the company has a cash balance well in excess of AU$200M.
This mine will be one of the lowest-cost nickel producers around: perhaps US$2.50/lb after the copper credit. The exciting thing is that the management team has a great background in exploration, and is already finding other resources. Sirius recently drilled a gold project called Baloo and published assays of 9 g/t over 10m and 6 g/t over 10m, right next to an operating mine. Even if Baloo doesn't meet the potential for a standalone mine, it certainly looks like it's got a customer on its doorstep.
TGR: What's your view of the state of the graphite market?
DH: This is a developing story. Traditional supply has come largely from China, so there's uncertainty about those numbers. We know that the traditional market is currently quite small, about 1 Mt per annum or thereabouts. Many companies are developing potential new supply, which could overwhelm the market. I think the trick in the graphite market is the availability of different types of product.
TGR: How should investors react to current metal prices?
DH: I would look to accumulate base metal producers toward the end of 2015 in anticipation of higher prices. Gold investors should seek out high-quality, low-cost operations which provide certainty of profit. And investing in Australian-domiciled projects provides exposure to a highly favorable exchange rate.
TGR: Duncan, thank you for your time and your insights.
This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.
Duncan Hughes joined GMP Securities Australia as a mining analyst in 2014. Prior to joining GMP, Hughes was head of research for RFC Ambrian Ltd. in Perth, Australia, beginning in 2010. A geologist, he has more than 15 years of experience in the resources industry and managed the discovery and development of the Prospero, Tapinos and Alec Mairs ore bodies for Jubilee Mines/Xstrata. He worked previously for CD Capital and Linq Capital. He holds a Bachelor of Science [Honours] from Oxford Brookes University and a Master of Business Administration from Imperial College London.
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