Dryblower on the accelerating currency effect on mining

PLAYING with spreadsheets and fiddling with graphs are two of the less interesting aspects of economics, meaning they are practices that do not come naturally to Dryblower and others with a preference for geology.
Dryblower on the accelerating currency effect on mining Dryblower on the accelerating currency effect on mining Dryblower on the accelerating currency effect on mining Dryblower on the accelerating currency effect on mining Dryblower on the accelerating currency effect on mining

 

Tim Treadgold

But, and this is an important but, last week saw a revival of interest in the art of bean-counting and line-drawing across the mining world because there was a genuine game-changing event.

Currencies started to shift, and shift rapidly. In the world’s primary mining countries of Australia, Canada, Brazil and South Africa there was a whiff of panic in air. In Argentina, there was more than a whiff as its peso plunged off a cliff.

What’s happening is the equivalent of a sea change, and while it might be mixing metaphors everyone understands what happens when the wind suddenly shifts from the east to the west and a light zephyr becomes a howling gale.

We are not yet in that howling gale but there are dramatic changes underway in the global economy that could produce one. It’s potential change that currency traders can sniff and miners ignore at their peril.

In simple terms, currency values are becoming more important to mining than commodity prices, and political uncertainties are becoming more important than share prices.

China, the great commodity sink of the past 20 years, is looking wobbly for the first time since starting its great experiment in mixing Marxism with capitalism.

The US on the other hand has not looked healthier in the past 20 years, with an economy built on a diet of pure capitalism roaring ahead thanks to a hearty feed of cheap energy and productive workforce.

Currency values reflect what’s happening and while that is an event occurring on a global scale, the local effects can be measured.

Gold miners are the first to enjoy the benefit of the changes thanks to the fact that they produce a metal that is both a commodity and a currency.

Over the past few weeks as the gold price, as measured in US dollars, has rebounded to top $US1260 an ounce, the currencies of most major gold producers have been falling.

In Australia, the currency has dipped to around 87c, a 17% fall in where it was about this time last year. The Canadian dollar is down by roughly the same amount and the South African rand is even lower.

For gold miners with costs in local currencies, the shift in the gold price and the exchange rate represents a pay rise of about 20%, and more, in a matter of months - with the Australian gold price up to $A1460/oz.

Over the next few months, as currencies continue to shift, the effect could become even more significant. It is why Blower started fiddling with an assortment of graphs and spreadsheets to try and see who’s winning, and who’s losing, in the mining world’s equivalent of a sea change.

Gold is the obvious winner, but when you consider that the lion’s share in the Australian-dollar gold price has come from a currency shift, you appreciate that other commodities will be enjoying exactly the same benefit, so long as they’re cost base is in the local currency and not US dollars.

Nickel miners, one of the hardest hit sectors, should be smiling for the first time in two years thanks to the currency effect and the foot-shooting exercise of the Indonesian government, which thinks it’s smart of kill a viable, albeit obnoxious, nickel-ore exporting business.

Over the past month, as the nickel price has risen by 8.3% from $US6.03/lb to $6.53/lb the price on conversion to Australian dollars has risen by 12% from $A6.70/lb to about $7.50/lb.

If certain members of the board of the Australian central bank have their way and the dollar is driven down to US80c, the nickel price will climb back to about $A8.16/lb.

The same sort of gee-whiz result can be obtained with any commodity sold in US dollars. Iron ore and coal, Australia’s most valuable exports, will enjoy a similar currency boost which, in the case of iron ore, may be important given the slide underway in the Chinese economy.

The tricky calculation for iron ore miners is judging the effect of a China slowdown on the iron price in US dollars and then offsetting that against the Australian dollar decline on the local price.

Because currency values are even more difficult to predict than commodity prices, it’s not easy to say where this game of playing with spreadsheets and graphs will end, or who will be the real winners and real losers.

However, what Blower can say is that the currency sea change will be causing a few late nights for company managers who have a new factor to play with, one that may also have the effect of sparking fresh interest in oversold sections of the stock market.

Gold stocks certainly started to move higher last week as the currency effect kicked in and as the change becomes a permanent feature of the market.

What will be particularly interesting to see is how long it will be before companies with mothballed projects take a fresh look at the financials under a changed currency environment.

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