Gold around $1,100 likely early next year - JP Morgan
JPMorgan (JPM.N) lifted its 2009 price forecasts for gold and silver on Friday and said new record highs for gold at $1,050-1,100 were likely in early 2010. In a research note, the bank said it has revised its 2009 price view for gold XAU= up to $948 an ounce from $939 an ounce predicted in July. It said it now sees silver XAG= at $14.30 an ounce, against a previous forecast of $13.90. For next year, it lifted its gold and silver forecasts to $1,006 an ounce from $950 and $15.80 an ounce from $13.40 respectively -- a rise of nearly 18% in silver’s case. "Overall we are looking for gold to average around $1,000 an ounce in the fourth quarter... but new highs between $1,050 and $1,100 look likely for early 2010," it said. The bank said, however, that investors may currently be paying too high a price for gold as an inflation hedge. "We do remain concerned that gold as an ’inflation trade’ is both expensive and premature," it said. "But the flows speak for themselves, as gold has been the overwhelming beneficiary of investment allocations to commodities all year." Spot gold hit record highs on three successive sessions this week, peaking at $1,061.20 an ounce on Thursday. At 1012 GMT on Friday it was at $1,048.10 an ounce. The bank also lifted its forecasts for base metals copper, aluminium, nickel, zinc and lead for 2009 and 2010, though it said it expects 2010 to be "a year of consolidation in the base metals, as opposed to a year of new highs or lows in price". JPMorgan said it now sees copper averaging $4,998 a tonne this year, up from a previous forecast of $4,775, and raised its price view for aluminium to $1,647 a tonne in 2009 from $1,608. Next year it sees copper at $5,950, against a former view of $5,563, and aluminium at $1,844, up from $1,775. "All of the base metals markets are in surpluses, not just in 2009 but also in 2010," JPMorgan said. "While the expected restocking activity will deliver a significant fillip to prices and allow a solid Q1 price recovery relative to an expected soggy Q4 performance, we are not confident that rallies can be sustained." Lead saw the largest percentage rise in forecast, however. The bank lifted its 2009 price forecast for the battery material by 10.7% to $1,658 a tonne, and its 2010 price view by 22.1% to $1,863 a tonne.
Tenke on tenterhooks
It seems that some time on Monday will mark the final deadline for Freeport-McMoRan to finally resolve - or otherwise - a number of contentious issues with the government of the Democratic Republic of the Congo over Tenke Fungurume, representing the country’s biggest private sector investment of the modern era.Lawyers and other officials from both sides have been deadlocked for more than two weeks over Tenke’s future; neither side has issued communiqués on the subject, or ventured into the pubic domain to give their versions of an increasingly junky story. Tenke, in the southern Katanga Province, started up production earlier this year.Freeport, the world’s biggest traded copper miner, is operator and holder of 58.8% of Tenke’s equity; Lundin holds 24.8% and DRC parastatal Gécamines (La Générale des Carrières et des Mines) the balance of 17.5%. The first phase at Tenke cost US$1.8bn to build, and produces copper cathode; the mine also ranks as one of the world’s most important producers of cobalt.The DRC is arguing for a bigger equity stake for itself, via Gécamines, and increased royalties. While some may see it as a technicality, the DRC is effectively accusing Freeport of playing foul in its refusal to agree to altering its Mining Convention, signed in 2003, in order to fully conform with the DRC’s Mining Code, effective at a later date.The Mining Code has its origins in a blueprint provided by the World Bank; as such, the Code is widely seen as conforming to international mining regulatory standards. At the same time, a good portion of the capital investment in Tenke was financed by debt with covenants tied to the mine’s Mining Convention. Whether Tenke’s compliance issue is technical or not, Freeport is clearly standing its ground on the basis that good law is law that is certain, not law that whipsaws according to which politician is playing a new jangled tune.But with certain politicians and officials mumbling that some mining companies in the DRC think that they’re "above the law", there is more bad blood. There are also rumours that the DRC is threatening to audit Freeport’s entire investment in Tenke, an irksome idea given the somewhat strange way that business is sometimes done in the DRC.At least one senior DRC politician has described Freeport’s stance as "arrogant". There is trouble on another front was well, revolving around one of Freeport’s expatriate managers, Dirk van Hoeymissen, a former manager with Lundin. He is currently incarcerated in Kinshasa’s Makala prison, where a trial is underway over charges of abusing DRC immigration processes.Freeport has already paid US$16m in fees and penalties, but is apparently being investigated over why the fine was reduced from an initial US$74m. There are rumours that the attorney general is asking for Van Hoeymissen to be awarded a 10-year sentence, and further rumours that he will have to be satisfied with five.So far, most mining companies in the DRC have adapted their stances to comply with the Mining Code. Apart from Freeport, First Quantum, the biggest miner in the central African copperbelt, is also technically delinquent, as seen in last month’s announcement that it had suspended work at the 65%-complete US$600m Kolwezi tailings project.First Quantum acquired its stake in Kolwezi tailings in 2006, when it acquired 100% of Adastra for US$273m. The Kipushi project, under the Adastra umbrella, was subsequently uplifted and awarded by the DRC in 2007 to Swiss-based United Resources, which was given an extension until December 2009 to submit a feasibility study. It is unlikely to meet the new deadline.Where First Quantum holds 65% of Kolwezi, Gécamines holds 12.5%, the Industrial Development Corporation (IDC) of South Africa 10%, the International Finance Corporation (IFC) 7.5%, and the government of the DRC, 5%. When commitments were made in November 2007 to proceed with the development of the Kolwezi tailings project, First Quantum, the IDC and IFC were left alone to raise finance or procure third party debt project financing for Kolwezi.It is generally seen as highly unlikely, given a worst case scenario, that Tenke will be shuttered, after the public relations catastrophe that followed the Kolwezi tailings debacle. Katanga Province, which hosts some of the world’s biggest and highest grade copper deposits (with cobalt as byproduct) employs a general prosecutor, who sealed Kolwezi tailings, an action described by First Quantum as "illegal".Early in August this year, First Quantum received a letter from the DRC’ prime minister, which loosely translated from the French, referred to the "impossibility to pursue this partnership". The sealing of Kolwezi tailings directly impacted more than 700 jobs; the number at Tenke exceeds 3,000.Gécamines enjoys an undilutable carried interest in Tenke and is not responsible for funding a cent of project costs, in line with the convention at Kolwezi tailings. In accordance with the terms of the underlying agreement, Gécamines is to receive asset transfer payments of US$100m, which had been paid down by 70% during 2008.In February 2008, the DRC’s mining minister sent a letter to Freeport McMoRan seeking comment on proposed "material modifications" to the mining contracts for the Tenke Fungurume concession, including the amount of transfer payments due to the government, the government’s percentage ownership and involvement in the management of the mine, regularization of certain matters under Congolese law and the implementation of social plans.Freeport responded to the letter, indicating, in its own words, that "its mining contracts were negotiated transparently and approved by the government of the DRC following extended negotiations, and Freeport believes they are fair and equitable, comply with Congolese law and are enforceable without modifications. Freeport is continuing to work cooperatively with the government to resolve these matters while continuing with its project development activities".For now, it seems that Kolwezi tailing is lost to First Quantum. It is said that a new operator is being sought. If Tenke suffers a similar fate, it will take years for the DRC to regain momentum as a potentially attractive destination for substantial mining investments. For now, Tenke remains deadlocked in a mouldy stalemate, surrounded by crazed politicians snorting around with hunched shoulders.