Price Rallies Breed Confidence/Commodities

The Entry Points

Most modern day technical analysis is based on prices, so the moving averages going up gets people bullish. People always blindly follow prices with no context of any other factors. So a rally in prices will lead to “confidence” in higher prices, and a selloff will lead to “acceptance and belief” in lower prices. It’s called extrapolation, and it’s a lousy way to view markets. Mining executives are no different. You’d think they use moving averages themselves, maybe they do. Twelve months after the secular low, now the executives have decided it’s time to increase exploration budgets. An industry “adviser” claims “we are coming out of the bottom of the cycle”. Note to useless industry “adviser”, we’ve been out for over 12 months. The big one, crude oil, had already doubled into the recent highs. So now their business school education has allowed them to figure out that we’re coming out of the bottom, just as we’ve put in an interim top. Brilliant.

Bloomberg

A rebound in exploration by global miners could see spending hit $18 billion by 2025 with China the front runner in the search for a new generation of giant discoveries.

Exploration budgets are rising after they plunged to an 11-year low of about $10 billion last year as mining companies slashed costs in the wake of a collapse in prices, according to Richard Schodde, managing director of Melbourne-based MinEx Consulting Pty, an industry adviser.

“We are coming out of the bottom of the cycle. I actually see the opportunity for the exploration sector to regain its mojo and quickly deliver a pipeline of good discoveries,” Schodde said in an e-mailed response to questions. “It’s catch-up time for the industry.”

China, the top spender on exploration, is likely to continue to dominate in the hunt for new deposits, while Canada and Ecuador are currently among hot targets for more investment by miners, according to Schodde. The U.S. could be poised for a rise in exploration with President Donald Trump regarded as likely to be more favorable toward resource development, S&P Global Market Intelligence said in a report published in January.

Discoveries of so-called tier one projects, deposits with a net present value of more than $1 billion, have stalled. Only 12 were uncovered in the past decade compared to an average of two to three a year since 1950, according to MinEx. The average cost of finding a significant mineral deposit has tripled in the last 10 years to about $238 million, the consultancy said in a March 6 presentation.

China, the target of more than a quarter of global exploration spending in 2016, is yet to reap major rewards. An estimated $42 billion spent on the nation’s hunt for new mines since 2007 has seen only two large discoveries announced and found a total slate of projects worth about $13 billion, according to MinEx. Global exploration budgets peaked in 2012 at $33 billion, the data show.

Rio Tinto Group, the world’s second-largest miner, terminated a joint project to hunt for copper in China, its partner and largest shareholder Aluminum Corp. of China said in January. Rio increased spending on drilling in 2016 even as its overall exploration and evaluation budget declined, and as it cut the number of countries on its target list, Steve McIntosh, the executive in charge of exploration, told investors at a Dec. 6 seminar in London.

Spending on exploration in the mineral and energy sectors in Australia, the biggest exporter of iron ore and coking coal, slumped 40 percent to A$3.2 billion ($2.5 billion) in the year to June 30, the largest ever decline, according to the nation’s government.

Volatility in commodities prices has led companies globally to focus on adding value to existing operations and to undertake greenfield programs in less risky locations, S&P said in January. Budgets among the largest miners will rise slightly this year, the ratings’ company said in a separate report this month.

BHP Billiton Ltd., the world’s biggest miner, is raising spending on exploration, focusing on copper and conventional petroleum, according to a June presentation by head of geoscience Laura Tyler. Newcrest Mining Ltd., Australia’s largest gold producer, lifted its budget by 15 percent in the six months to Dec. 31 and expanded a portfolio of projects, it said last month.

Melbourne-based BHP advanced 0.4 percent to 1,260.5 pence by 8:43 a.m. in London trading on Friday, as Rio rose 0.8 percent.

Better Returns

Returns on exploration spending were eroded by profligacy during a commodities price boom through to 2012 as miners funded work on marginal prospects and drove up costs of drill rigs to geologists, according to Minex’s Schodde. New efforts to raise expenditure are likely to prove more successful, with costs now lower and funding set to be directed first to higher quality projects, he said.

“What would really propel the market forward would be a giant discovery, as the sizzle from this would encourage other companies,” Schodde said.

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About traderscott 1146 Articles
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day. Scott returned to markets over fifteen years ago where he continues as an independent trader.

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