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Reflections on 2015 and thoughts on what 2016 may bring
I have just re read my letter of December 2014 to see how close or far off the mark my thoughts for 2015 turned out to be!!
2015 certainly did not live up to our expectations of an improved property market but other sectors of our economy showed signs of improvement. When looking at what we can expect in 2016 I found my mind tracking back to what I think are the fundamental drivers that will impact our region. I make it clear from the outset that I am not an economist so at best these are my musings to consider or reject as the reader sees fit!! Whatever you do please do not rely on my thoughts for your investment decisions, seek detailed specific advice for anything you plan to do!!
The World economy generally changed forever in September 2008 with the GFC. It appears that the economic centre of gravity has shifted from the total dominance of the US with Europe in support to now include China with Asian economies in support. The US is still the largest economy but the gap has closed significantly.
Over the last seven years since the GFC the Western economies have been on a roller coaster ride but it appears that they are beginning to level out with the last one to address its budgetary shortcomings being Greece. Up until this year every time we thought that things were beginning to move forward something would come in from left field and stall the progress. Over the last few several years the news has been full of reports of national economies in trouble including those of Iceland, Ireland, Spain, Portugal, Italy and Greece. Apart from Greece there has been a marked drop off in these confidence sapping headlines and now that the Greek Parliament has bitten the bullet on its austerity measures that too should recede into the background whilst they travel down the hard road of implementation.
People largely respond to confidence and in an environment of constant negative news that confidence, which is necessary to encourage people to loosen their purse strings and start investing, has been severely lacking. The effect of this at an international level is a reduction of consumer discretionary spending which affects international trade such as Chinese manufactured goods exports into the US and Europe. At a local level it makes capital raising for exploration companies and junior miners very difficult, as recent reports of the number of junior ASX listed companies with less than $500,000 in cash attests.
I then started to look at the effect all of this has had on commodity prices. In the four years prior to the 2008 Beijing Olympics there was a frenetic dash to increase the supply of iron ore, oil, gas and base metals to meet what appeared to be an insatiable demand for steel and other product in China as it moved from a poor rural agrarian economy to a wealthier urban manufacturing economy.
The pressure on materials saw unprecedented prices for iron ore and a soaring nickel price as demand outstripped supply. As is always the case when prices are high anyone with a deposit wants to get in on the act and supply began to catch up with demand. Nickel stockpiles on the LME bottomed in September 2011 at just under 100,000 tons and the price at that time was about US$13 per lb. which equates to over US$29,000 per ton. Supply then began to outstrip demand and the LME stockpiles more than quadrupled reaching a high of 470,000 tons in June this year with a corresponding nickel price of US$4.30 per lb at the end of August ’15, which was just US$9,632 per ton! (There is generally a lag time between stock pile movements and price.) As at the time of typing the LME stockpile sits at 435,000 tons so it has dropped 35,000 tons in about four months and the down trend appears to be consistent and established. The latest price is US$4.68 per lb or US$10,443 per ton and a similar upward price trend is emerging albeit the period is shorter at just two months. Logic says that if the stock piles are dropping the nickel price will continue to improve. It will reach a point where production once again increases and the supply demand balance will be restored. The price at which this will occur is subjective but again logic suggests a figure of around US$7-8 per lb or US$17,000 per ton would be reasonable and with the A$ at US$0.72c that equates to a local nickel price of $23-24,000 per ton. Mincor are on record as predicting an improving nickel price in the last quarter of 2015 so it appears they are on the money. The company laid off a number of its workforce a few months ago with the expectation of reemployment in the last quarter of 2015 so this is now imminent and potentially very good news for Kambalda.
China had economic growth rates in double digits for a number of years but it’s interesting to note that as the growth rates eased back to 8% and 7% there was talk of a stalling Chinese economy. What seems to have been overlooked by many is that 7% on the current size of the Chinese economy is substantially greater in dollar terms than 11% on the economy in 2008! What is apparent is that the Chinese economy has progressed from growth driven by infrastructure construction to supporting a growing domestic consumer market.
As the US and European economies continue to put the turmoil of the GFC behind them and steadily improve we will see a gradual improvement in confidence, provided there are no more pieces of unexpected negative economic news from the respective countries.
So what does this mean to us? With an improvement in the US and European economies and therefore in confidence this should be reflected in increased consumer spending which means a boost to Chinese exports. This in turn should herald a pickup in Chinese manufacturing and an increase in consumption of raw materials and of particular interest to us in Nickel.
The Reserve Bank seems intent on keeping the $A low at US$0.70c or even lower so at this exchange rate both Gold and Nickel will fare well. On Gold there have been a series of encouraging reports on new finds in our region, the headline of an article in the financial pages of the West on Wednesday 21st October ‘Gold dust finally rubs off at the junior end’ making the point that gold has been the flavour of the month for most of the year, a sentiment echoed at this year’s Diggers and Dealers.
Whilst it is still early days there are other signs that things are improving. Drilling rigs are once again on the move and tenders are being sought for new drilling programs whereas this time last year there was no such activity.
There have been a number of mergers and acquisitions of mainly gold projects with companies like Evolution Mining increasing their presence in the area. Evolution has good cash flows and so the capacity to maximise the potential of their assets. The Nickel market has also been active with Sirius and Independence Group merging. These two are well known but there have been many more throughout 2015.
It appears that the Eastern Goldfields is at last emerging from out of the shadows of the Pilbara and its Iron ore and gas projects which will mean a long overdue refocus on what this area has to offer.
On matters other than direct mining I was interested to hear that the Shire of Wiluna had extracted a commitment from the WA Government to seal the Wiluna Meekatharra Rd but there is no funding allocation! This road is a critical part of the long term development of our region and our continued push to expand its economic base.
We are also entering a new era for both the Federal and local Kalgoorlie Boulder Governments. We hope that the new CEO of the City of Kalgoorlie Boulder is a go getter, the region desperately needs a strong visionary person at the helm as the City is by far the largest local government authority in the region and needs to take a leadership role bringing the smaller Shires in the region along with it to really drive the development of the whole Eastern and Northern Goldfields area of WA.
As I said last year no market is ever for ever so the parlous market we have been in for the last three to four years will pass and hopefully we will see some positive moves in this direction in 2016.
With the rapidly approaching Christmas New Year holiday season I take this opportunity to thank you for your business in 2015 and wish you all the very best for Christmas and the New Year and a far more positive and prosperous 2016.