Tim Williams Director: Global Metals and Mining, Ernst & Young

In this week's edition we take a look at the impact of the Chilean earthquake on copper markets, gold miners' never-ending search for new reserves, why Chinese interest in IMf gold became such a talking point and the re-emergence of bond financing

GEOFF CANDY:  Welcome to the Mineweb weekly news wrap podcast where we take a look at what's been making headlines in the mining sector over the past week.  Joining me on the line is Tim Williams, director in global metals and mining at Ernst & Young.  Tim I suppose the big news around the globe at the moment is the tragedy unfolding in Chile and because the country is such a bit producer of copper it's definitely had an effect on the market.

TIM WILLIAMS:  We saw, as it's happened before - Chile - the reason the copper deposits are there - we're in a mountain building part of the world and yes very sad to see such a massive earthquake - 8.8 - that's huge and really I suppose our sympathy goes to the people that have been hurt by this thing.  But yes the original reports - as soon as you get an earthquake in Chile, and they do happen, immediately people start pushing the copper price up.  Chile is far and away the biggest producer in the world - it produces more than five million tons in a year.  We consume about 18m tons of copper a year so it's pretty significant when you have an episode like this.  The initial reports were that a number of mines had closed straight away.  Most of the Chilean copper mines are big open pits, so thankfully the safety implications are not as severe as they are for underground mines.  But there are some underground mines - El Teniente - which are very important, significant producers - I imagine that what the first thing that happens is you have a major safety review to make sure that everything is OK for people to go into the pit again.  But clearly also they've had problems with electricity supply which is absolutely critical, obviously and they may be waiting till that's restored.

GEOFF CANDY:  Surely a lot of infrastructure will have been damaged as well...

TIM WILLIAMS: Absolutely - yes, the railways have been damaged - there are a whole variety of different infrastructure implications.  The ports and so on - you have to assume that everything is functioning... so almost certainly, there will be a lot of copper exports from Chile.  It's really a question of quantifying how much that is going to be.

GEOFF CANDY: How tight is the copper market and how will this disaster affect that, going forward?

TIM WILLIAMS: The international copper study group publishes their views - it's essentially an industry body.  According to them there's been a slight surplus this year, but that looked as though it was going to disappear in the next 12 months or so anyway.  Yes, of all of the metals, copper is really the one people are getting the most worried about because the demand side of it of course is very significant - it ranges from even things like moves to electric vehicles to the growth in India and China of their house building and general construction.  It's an absolute essential metal to advancing economies, so any disruption to the supply - and it's been a pretty tight supply/demand situation any way - disruptions to supply can have very significant implications for the copper price.

GEOFF CANDY: How much of that demand side is the result of the growth in China?

TIM WILLIAMS: Well copper is used a lot in things like domestic buildings as well as the major infrastructure projects.  I mean China in particular has had this enormous fiscal stimulus programme, which has been mainly focused on infrastructure and construction, but it's a lifestyle metal.  As people's individual circumstances improves, the annual consumption of copper increases considerably, and yes India's economy now looks as though it's going to grow 8% to 9% this year.  Don't forget India and with the Chinese economy steaming ahead at about 10% - that's 10% compound annual growth remember... yes imports of copper have been quite extraordinary in the last 12 months.  Remember the Chinese actually do smelt a lot of copper, so they tend to import concentrates from the mines, and then make them into finished metals in China now.

GEOFF CANDY: Moving from copper to gold now, but staying in China - there's a lot of talk around whether or not China would be buying up the rest of the IMFs 191 tons odd of gold.  That rumour has been quashed quite decisively, but why was there so much talk around that topic?

TIM WILLIAMS: What I thought was very interesting here was why the IMF felt it necessary to make that announcement at all.  Everybody has been watching the gold market and have been fully aware that they had about 400 tons to sell and they've done 200 tons odd now the central banks in India, Mauritius bought a little bit and Sri Lanka bought a little bit.  So yes I suppose what everybody would have liked to have heard is for another major central bank to have boosted its gold reserve, but then the IMF comes out with this announcement - and what they're essentially saying is "we've managed to find a buyer so we're going to put it into the market now" and I gather they're not actually allowed to just sell it straight forward on the market - they have some regulations stopping them doing that.  But yes, if you're looking to buy 191 tons of gold, I know where you can get it.

GEOFF CANDY: Do you have a view of where the gold price is going?

TIM WILLIAMS: Well if you know where the gold price is going - a whole new career opening up for you.  There are more people who gaze at this metal than all the rest combined.  Goodness knows - the jewellery demand remember - this isn't purely for adornment - particularly in India, this is jewellery for saving - a form of investment.  Again I'm not really an expert on this, but I almost get the impression that what happens is that buyers wait to see when the price goes up and there have been some significant increases recently - they wait for a while to see whether it's going to fall down again and they buy at lower levels.  And if it bounces off particular level - it seems to be bouncing off $1100/oz at the moment, they say "well, that's it we're not going to get it cheaper, lets buy it now".  But the supply side of the gold industry - the mines - to my mind, is not looking too clever at all and it's extraordinary how many of the big gold mining companies - their reserves and resources actually don't give the mine lives of more than about 10 years.  So unless somebody finds some more giant gold deposits in Ecuador, or whatever or Colombia - another good place to look - there's going to be a supply shortage.  But gold is funny stuff - the demand side of it is not really - it's not an industrial metal - it's not consumed in the same way that copper for example is - it is largely sentiment driven.  It behaves a little bit as a currency, as much as anything else.  So if you know where the gold price is going, please let me know...

GEOFF CANDY: Speaking of the gold miners themselves, we have seen strong results out of Newmont last week and before that from most of the gold majors. Now have you taken any particular trends away from those numbers?

TIM WILLIAMS:  Well you know, I really enjoy reading Barry Sergeant's articles because he points out the blindingly obvious which is a lot of these gold companies - you invest in the companies and basically you never see your money again because if they start making a decent cash flow from their operations, all they do is spend it on buying more reserves, or buying up more companies or spending it on exploration.  So the idea of actually giving the investor a decent return on their capital - that's an old fashioned view, isnt it...

GEOFF CANDY: I suppose there's also a need to find new reserves because they don't get replaced...

TIM WILLIAMS: Well that's right - gold has this wonderful ability not to corrode and a certain amount does get lost in industrial uses - microcircuitry and so on and glass manufacture - but most of the gold that gets mined, sits there somewhere on the surface of the earth, treasured by somebody for whatever reason.  And again it all depends, I suppose, on the price - doesn't it because the higher the gold price goes, more attractive e it becomes to go and find new stuff.  But it is becoming more difficult to find and certainly decent grade deposits.  I always find it very amusing, particularly - not to point any fingers - but in the North American markets gold producers tend to talk about the number of ounces they've got.   What they don't tell you is the grade because that's what affects the cost of getting the stuff out.  The other thing that the industry tends to do and again Barry Sergeant is a bit of a pioneer - is they tend to forget about the capital costs.  Everybody talks about their cash costs, production - what exactly that is tends to vary but they don't talk about the total costs and whether you're actually going to get a return on your investment by building these new mines.  So yes, we need to find some more decent sized gold deposits, otherwise it's really going to become a by-product of copper mining, isnt it.

GEOFF CANDY: Just to close off with - we also saw talk of the possibility of BHP Billiton issuing a bond in Australia for the first time in nine years.  Are we likely to see more corporate bond issues, given that bank funding seems to have dried up quite a lot?

TIM WILLIAMS: Oh definitely - this has been very much a theme Ernst & Young have been pursuing over the last year or so.  The banks really don't want to lend to mining projects any more and not only that, they also want the money back that they've already lent. Now that really creates a major problem for financing mine expansions or financing new mines because it limits your options enormously.  Now remember these bond issues - only credit rated companies can issue bonds generally speaking and there aren't that many around.  We saw some big bond issues last year from Anglo American for example.  There is a limit to how much you can do of this.  Now of all the companies, BHP Billiton actually doesn't need cash so there's a lot of rumours flying around as to what are they going to do with this money... now it may well be that it is for expanding and growing the business organically, now that you cant get bank debt - or they may have something up their sleeve - who knows.  This difficulty of project financing and raising loans for new mining projects really is a very significant move.  It's a major change in the industry and it means now that the mining companies either have to look to those shareholders for equity financing, or they have to do these deals essentially with the customers or the sovereign wealth funds which very often amount to the same thing, in order to get the new projects built.  We're in a slightly new era here and it is going to constrain supply of quite a few of the metals you know...

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