David Hargreaves, mining consultant to XCAP Securities, talks about the longer term implications of Humala's election win in Peru, the mining tax in Australia and how much higher diamond prices can go in his interview posted on www.mineweb.com.
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Metals Weekly podcast and joining me on the line is David Hargreaves - he's a mining consultant to XCAP Securities. David it's been an interesting few weeks for miners on the political front - first and foremost you had the election in Peru - the election of Ollanta Humala as the president of Peru. On that news the stock exchange fell 12.5% or thereabouts before it was closed - clearly there's a lot of concern about nationalisation in the Peruvian mining sector. There have also been continued concerns around the promulgated mining tax in Australia as well as various general rumblings around Africa really. If we start with Peru, what is your take on that whole situation - the jury is still out, but what are we likely to expect?
DAVID HARGREAVES: Well he was voted in on a left wing ticket and therefore he's got to deliver some left wing promises - no question at all about it. Now were this some small developing country, it wouldn't matter. But look at Peru - it's the largest in silver, it's very big in copper, it's got a big spread in zinc - so it really matters to us all. There are a lot of companies entrenched there - I think two things will happen. It will deter future investment which Peru still needs and it will dampen the performance of some of those companies who are already entrenched there. Further it will mean that a lot of Peruvian sources could become that more attractive.
GEOFF CANDY: How left wing is it likely to get, do you think - or is it too early to tell?
DAVID HARGREAVES: It's a little bit too early to tell. The Peruvians have had a long record of being relatively peaceful - we've not seen major labour disruption and so on, and he might just eat his way into this. If he's wise, he'll take a sounding from the surrounding countries and look to see what mining means to his country and does he want it to grow, or at least be sustained - so he might be a little bit quiet.
GEOFF CANDY: Moving from Peru to Australia, we heard from Andrew Forrest, the CEO at Fortescue that that company is going to be much more heavily affected than its rivals - the likes of BHP Billiton and Rio Tinto - how is this likely to affect the Australian mining sector?
DAVID HARGREAVES: If you think about Australia you think largely about Western Australia where the bulk of the minerals come from, and you think about two products in particular without which India and China certainly cannot do and other parts of the world - and we speak of iron ore and coking coal. Now everything else over Australian majors in copper and silver and lots of other materials, right now iron ore and coking coal are the most vulnerable. I just saw a forecast from ArcelorMittal which says that between now and 2020, which isn't a long time, the growth in demand for iron ore will be 47%. That's a bit precise but almost 50% growth and if you look at where that's going to come from, not a lot is going to come from West Africa surprisingly because a lot of noise is made about that region but we have to look therefore at Chile and at Australia. There's not a lot of choices - and so the Australian thing really doesn't matter and it is time that they made their minds up about it all because what you will probably see is this ... in particular, Fortescue yes but it's much more of an Australian bias of course Fortescue, but Rio Tinto and BHP Billiton can still cast their net around and they can say we'll make a bigger play for instance in West Africa and still maintain our position in the market. So the Australians have to tread with great care. They do have almost a monopolistic position at the moment and you look at the numbers - and this applies to China and India, but it needn't last - the right price is always somewhere else.
GEOFF CANDY: Why isn't West Africa going to be a big source of competition?
DAVID HARGREAVES: Well it could be - the deposits are there but it so woefully lacks infrastructure and some of those deposits are fairly low grade. If you speak of a deposit for instance say being 750 miles from the sea, nothing to connect you - that means a railroad has got to be built - when you get to the sea you've got a port to be built and you need to upgrade that product - you only ship 35% to 38% iron ore all that distance so you're going to concentrate and palletise it. You've got a lack of trained labour and then of course you've got recent histories of military and political disruption all over that region. So it's not the most favoured region. People are in there of course and they will stay in there - and the big boys are in there - but they've come to play again in spreading their risks. Unfortunately what you would have said four or five years ago is that the almost non-risk areas - USA, Canada, Australia - and selected larger countries in Africa have all now taken something of a knock - the US and Canada having still pretty sound, although the US is tightening the environmental screw and Canada has first Asian rights on an enormous scale, and Australia of course is ducking around with its super tax. So if West Africa plays the game and is pragmatic, it could reap a much bigger benefit than its currently doing.
GEOFF CANDY: Just on the macro political side of things, moving from West Africa to South Africa - we had the chairman of De Beers saying that he thinks nationalisation is something that's not likely to continue as the world continues to globalise and that BEE was an unmitigated failure. How does that place South Africa, given the mining history it has and looking forward to what deposits it still has?
DAVID HARGREAVES: If you think about the position that South Africa in the entire minerals pot, it's clearly very strong. It has almost a monopoly on platinum, it's pretty large in vanadium, it still counts in diamonds, manganese certainly if it's very big, iron ore could expand and in coal it's powerful. So South Africa clearly matters to us. I'd go along with what the major companies are saying that nationalisation is highly unlikely - even the National Union of Mineworkers says it's a non-starter, so we'll have to put up I'm afraid with the noises that are being made about it, but I don't think that will come forward. How's it going to address black economic empowered or BEE is another matter, but all in all by declaring that in its present form, it hasn't worked, and that includes the Mining Minister Susan Shabangu - so they're really going to have to rethink this and what they're beginning to say is that 26% pre-carrot which is what they're aiming at - is not feasible. So it will be resubmitted and it will take time.
GEOFF CANDY: Just to close off with, the diamond sector seems to be doing a lot better than it was at the end of 2008 - has demand recovered now?
DAVID HARGREAVES: Yes - not only recovered, but it's going - it's fast-forwarding as well whereas, let's say the USA took 40% - an excessive percent of all diamonds and consumed most domestically - that could stay but overall demand is now being driven by the fact that the Chinese have got a taste for diamonds which they never had and India look at an increased taste for diamonds. When you look at say 40% almost of the world's population combined having an appetite - that creates a superb demand profile for it - it's a question from where will they come and should the world economy continue to grow as it is doing then the rise from those two countries in particular will be exponential. This is something we've not seen before.
GEOFF CANDY: What is that likely to mean for prices?
DAVID HARGREAVES: We could probably see, if the world economy continues to grow at the rate we saw in the recovery of 2007 and early 2011 certainly being realistic, another 25% on run of mine diamonds within the next couple of years.
