![copper retains the commodity crown](https://cruprod.blob.core.windows.net/media/3064/copper-retains-the-commodity-crown.jpg)
Our main takeaway from the conference was the industry is in good health, with the main themes being the positive outlook for copper, a meaningful response from the industry to the Brumadinho tailings dam failure, project development and cost control.
Commodity industry is positioned for growth
CRU presented, alongside Fitch, our view that prices will increase from 4Q 2018 lows. We are forecasting the industry to deliver another year of positive free cashflow in 2019 and the industry is well positioned, financially, should credit markets weaken.
In the meantime, miners have the cash, balance sheets and options to pursue disciplined growth options should they choose to.
M&A, projects, and capex high on the agenda
Unsurprisingly, Barrick’s takeover bid for Newmont featured high on the agenda and both presented at the BMO. Beyond this headline M&A, there were plenty of other positive signs from the mining presentations.
Significant airtime was given to discuss new project partners, updates on development progress and on highlighting options for future growth.
CRU believes development is now necessary to fill medium-term supply gaps in a number of commodity markets. Although CRU expects industry free cashflow to remain positive, these opportunities make balancing competing demands of dividend payments to shareholders, capital expenditure on development projects, and debt reduction more difficult. Future capital allocation decisions will be a real opportunity for miners to demonstrate their “value over volume” approach.
…but the focus on cost control has not been forgotten
A focus on cost control remains; automation, big data, remote working and ring-fenced capital for improving productivity were just some of the common themes. It appears that miners have learnt lessons and will not approve incremental tonnage at any cost. It is too early to be certain, but a culture of continuous innovation and relentless incremental savings appears to be embedding within the mining companies.
Miners will act following the Brumadinho tailings dam failure
All Tier 1 miners spoke of this terrible event during their presentations, providing clarity on their individual dam portfolios, their governance and management procedures and, most importantly, their resolve to significantly improve global mining industry standards. This was further strengthened by a release from the ICMM committing to create an international standard for tailings dams following a closed council meeting held at the BMO event.
We expect meaningful standards to be adopted by all ICMM members as soon as is practicable with significant shareholder and government pressure for non-members to also comply. This may result in short-term capital allocation decisions as remedial works are undertaken and additional long-term capex ‘inflation’ for mining projects as they adopt more stringent design and monitoring standards.
Copper retains the commodity crown
CEO’s spoke, throughout the event, of the positive medium-term copper story, the current low copper stocks, and tight market conditions while, of course, presenting their own copper projects and future growth options. In a poll, the BMO audience chose copper as its top commodity for 2019 and copper (alongside iron ore) dominated discussions in the 25+ one-to-one meetings CRU held. Everybody we spoke to believes there will be medium- term copper deficits.
There is real momentum behind copper. Optimists left the conference with media headlines supporting their case for higher prices. This may help to support copper prices further over the coming days and weeks. Beyond that, the market will need to see firm demand evidence to maintain the price optimism into Q2 2019. In the medium term, many miners are poised to benefit as their new mines boost volumes and profits. Given the scale of activity in the copper sector, miners should monitor rivals to ensure competitor neglect does not create an over-investment in supply.
If you would like a copy of the CRU / Fitch presentation from the BMO conference, “Demystifying Cost Curves and Credit Ratings” contact us via the form below.
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