Unwilling copper miners and iron ore prices in China

In the first edition of the podcast we look at why gold companies are sometimes reluctant copper miners and look briefly at some of the background to the iron ore price negotiations that are hotting up in China

GEOFF CANDY:  Hello and welcome to the first edition of Mineweb.com's beyond the headlines podcast where, every week Barry Sergeant and I will be looking at the mining sector's big stories in a little bit more detail. And, to kick off the show, Barry, I want to chat a little bit about iron ore and, in particular, the high drama unfolding in regard to the price negotiations.

BARRY SERGEANT: Yes, Geoff it is very much an annual thing.  It used to be with the Japanese steel mills and of course China for some years, has been the world's number one steel producer.  So the theatre, so to speak, has moved to China and this year's negotiations, which by the way, have always been theatrical - there's a lot of intrigue and speculation and leaks and all the normal sort of stuff that you'd expect to find in a tabloid - which of course, we are most certainly not - but the one big difference this year is of course that last year a number of Rio Tinto executives were arrested in China and still face trial there in connection with their role in the iron ore pricing.  So this year has a particularly sensitive side to it.

GEOFF CANDY:  And of course, China Iron and Steel Association (CISA), the Chinese body that usually handles the negotiations - seems to have lost a little bit of face in the last year's ones - then Baoshan Iron & Steel (Baosteel) came in and revolted - it's definitely been a bit of a soap opera.

BARRY SERGEANT:  Absolutely, and at the bottom line, the amount of money involved is just absolutely huge - if you look at commodities broadly, iron ore is the single biggest import in value terms into China.  So there are billions upon billions of dollars at stake here as to how the contracts are actually going to end up.

GEOFF CANDY Moving from iron ore to gold, you wrote a story about Yamana gold's results and the benefit they have seen from copper production recently, and one of the things you point out is that it is actually rather difficult to find those numbers, why is that the case?

BARRY SERGEANT: It's understandable that some gold companies - they really like gold and they want to be seen to be gold producers - and some companies really take it to the extreme.  Take Yamana that also produces substantial copper and its very difficult to find in today's release, the kind of numbers that you'd expect as to detail on what Yamana does in copper production, what the revenues are and so on.  You've actually got to start doing some of those calculations yourself and the reason for that is that Yamana treats their copper production as if its gold.  They call it gold equivalent ounces - GEO - which like I say, is understandable, but it doesn't really give the investor a feel as to what's going on because all the metals - and there's silver as well and down the line, zinc, molybdenum and so on - Yamana treats all of those as if they are gold.  So you've got to break out the numbers and if you look at the 2009 turnover for Yamana, it's about $1.2bn and not by any means is all of that gold.  There is roughly $500m from what I could calculate which is coming in from copper.  But as I say it's really not easy to figure that out.  And the other interesting thing about Yamana's figures is that the 2009 operating cash flow was substantially higher - $528m than 2008, and working with the numbers that are available - a fair contribution to the substantial increase in 2009 would have come by way of copper - where gold did certain things in 2009 which are very well known - but copper started the year at about $1.28/lb and ended up well above $3/lb - so it was rising right across the year and it has done great things for some of the big gold companies of which the two biggest - Barrick and Newmont - are included.

GEOFF CANDY Barry, one of the themes that are coming through from the gold miners is the need to replace reserves and, indeed the scarcity of pure deposits. Are we going to see more and more crossover into other metals as companies look to replace their reserves, especially given the profits to be made in metals like copper?

BARRY SERGEANT:  Yes very much so - at the end of 2008 when copper went to $1.28/lb, even though that was a multi-year low there were very few genuine, bona fide copper miners anywhere in the world who weren't making good money at the cash level at least.  So when the price went up as it has now, well above $3/lb, the copper miners are making fantastic cash flow at these prices.  The same thing is not happening with gold.  You're not getting the same kind of margins out of gold mining in general - and that's right across the industry.  So yes, going back to deposits - some of the biggest deposits out there - Olympic Dam for example, BHP Billiton - that's primarily copper but it also happens to be the world's number one uranium deposit and one of the top 10 gold deposits.  Look at Pebble in Alaska, which is Northern Dynasty and Anglo American - that is absolutely gigantic.  Again, you can regard the gold there as secondary, and so on.  There's no reason why gold companies, especially when copper given its net import status in China is making these very good margins, should not be brought out in front.  Take Freeport McMahan - their story is quite simple.  They don't mix up the gold and the copper.  Last year it was about 4.1bn pounds of copper and 2.6m ounces of gold - it's a numbers game.  You do multiplications there - you're going to get turnover of US$15bn - that was for 2009 compared to the say $1.2bn for Yamana or the $8bn for Barrick.  So copper can just do great things for a gold company and when you're producing stuff, why try and make it look like its gold.  Metal is metal, a dollar is a dollar and profit is profit.

GEOFF CANDY Surely there will be some analysts who will grumble about such a development?

BARRY SERGEANT:  Yes, very much so and what's very much a theme this year so far, is to follow the cash, and there's no issue that the cash is going into iron ore stocks - we're seeing the portfolio flows - and we know from prior records that the iron ore companies, the big three in particular, have made absolute fortunes out of this business - Seaborne iron ore.  We're getting the same theme developing in coking coal, which is a much smaller market, but it does have listed producers, and we're seeing a very good recovery in nickel stocks that is a play downstream in stainless steel.  So that whole complex is moving forward and it's drawing cash away from areas like gold stocks and silver stocks, which have literally been running for years.  So investors are looking at stocks, which are generating good cash on the information we have available at this stage.

GEOFF CANDY:  Well that's it from this week's edition of the podcast... join me again next week when I chat to Barry and we go ‘Beyond the Headlines'.

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