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About Commodity Insights
07 Jun 2022 | 18:32 UTC
By Diana Kinch
Highlights
Concern grows in mine sector over budgets
Central banks reportedly building gold reserves
ESG factors complicating mine insurance availability
The major credit contraction now foreseen in economies worldwide will hit the mine finance sector hard and force central banks increasingly to build up gold reserves as some currencies devalue, the head of a precious metals investment service told the Global Mining Finance Conference in London June 7.
Insurance availability is also becoming more restricted to miners, an insurer said.
Experts including investment bank JPMorgan Chase & Co. CEO Jamie Dimon believe that as much as nine-tenths of the bank credit and money in circulation is set to undergo a contraction in quantity terms, Alisdair Macleod, head of research at Goldmoney, told delegates at the conference. This "will make life very difficult for mining companies" seeking financing for new projects, Macleod said.
As interest rates rise to combat inflation, riskier projects such as mine exploration will find it more difficult to gain financing at reasonable rates, as available funds will be directed preferentially to existing operational or productive assets just to keep the economy going, he said.
"We are about to have a major, major credit crisis," he warned.
All fiat currencies -- typically paper currencies that have been issued by governments and that are not backed by a physical commodity such as gold and silver -- have declined in value in real terms since 2010, Macleod showed during a presentation at the event. However, gold -- the only metal which is used or priced as a money equivalent -- has retained a stable value in real terms since 1950, he said.
The London Bullion Market Association gold price stood at $1,852.15/oz at 1745 BST. It reached a high this year of $2,039.05/oz March 8, shortly after Russia's invasion of Ukraine Feb. 24, having risen from a low point of $1,788.15/oz Jan. 28.
However, when people talk about volatility in pricing, they forget that the volatility we see is actually in the fiat currencies more than in the commodities themselves such as oil or gold, Macleod said.
"We are entering a new era of commodity-backed currencies and the demise of Western fiat [currencies]; first the Japanese yen, then the euro and the US dollar," Macleod argued.
The situation has led central banks to increasingly stack up their gold reserves, and this has been very noticeable recently in Russia and China, Macleod said.
An increasing number of governments worldwide are also boosting their stocks of strategic or critical metals --including rare earths and lithium -- essential to help meet their climate targets.
Concern over metals exploration budgets has also been expressed in other quarters.
While global nonferrous exploration budgets jumped 35% in 2021 to $11.24 billion, according to an April report from S&P Global Market Intelligence, this continued below 2013 levels amid expectations that the economic situation may check further increases for this year.
"If metals prices remain elevated over the next several months, it is likely that the exploration budget recovery in 2022 will also be strong, possibly in the 15%-20% range," Robin Bhar, independent consultant at Robin Bhar Metals Consulting, said at a commodities forum in Paris last month. "However, a global recession or a significant slowdown in growth would hamper an ongoing recovery."
This could further jeopardize the availability of energy transition minerals including lithium, graphite, rare earths, copper, cobalt and nickel, for which demand is growing, Bhar said.
Project insurance rates have also hit miners particularly hard compared to some other sectors, according to Charles Emkes, management liability specialist with London insurance broker Protean Risk.
"There is [now] less available insurance on offer to miners: Supply and demand can be more expensive, and ESG has exacerbated the situation," Emkes said on the sidelines of the Global Mining Finance conference.
Concerns expressed during the event coincided with the June 7 publication of a new World Bank Global Economic Prospects report.
"Compounding the damage from COVID-19, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation," the bank said.
Other mine project developers speaking at the Mining Finance conference -- including from CleanTech Lithium and rare earths developer Pensana PLC -- spoke of their expectations of gaining financial support in the form of strategic partnerships and/or offtake arrangement with OEMs, other users or traders to help finance their projects.