REFILE-PDAC-Rising costs expect to support metal prices

Mon Mar 5, 2012 10:20am EST

* Cost pressures likely to threaten new metal supply

* Strong outlook for gold, nickel and zinc

* Market surplus expected for copper, hurting prices

By Euan Rocha and Julie Gordon

TORONTO, March 5 (Reuters) - Rising costs may prove a blessing, not a curse, for the global mining industry, threatening fresh supply and all but assuring that metal prices will keep climbing even as companies scramble to protect profit margins.

While supply-demand fundamentals vary widely across various metals, experts speaking at the PDAC mining convention see the rise in both production and construction costs pushing strong metal prices ever higher. The prohibitive costs could crimp new mines from coming on stream.

"We're entering a period whereby things are going to get more expensive and the price of commodities has to reflect that," Terence Ortslan an analyst with TSO & Associates said on Sunday. Ortslan chaired a discussion on the outlook for metals on the opening day of PDAC in Toronto.

The outlook is particularly strong for gold, nickel and zinc, said experts at the four-day event organized by the Prospectors and Developers Association of Canada. Copper is a notable exception to the trend, they said.

PDAC, the industry's largest annual gathering, brings together thousands of executives, geologists, engineers, drillers, consultants and others with ties to the sector. It attracted more than 26,000 delegates last year, and organizers expect an even bigger turnout this year.

Rising costs was a dominant theme this year. In part, that reflects higher taxes and royalties as well as tougher environmental regulation across the world. Both could limit growth in metal supplies, which will in turn also support higher metal prices over the long term.

"The mining industry is exposed to regressive mineral policy regimes, in addition to higher costs, which they don't control," said Ortslan, referring to increased royalties, taxes and duties in Africa, Latin America and other regions.

The outlook for gold prices is especially rosy this year, said DundeeWealth economist Martin Murenbeeld. Ultra-low interest rates in North America, along with strong investment demand for gold and inflationary pressures in emerging economies, are bound to keep bullion prices strong, he said.

Murenbeeld said the huge sovereign debt burdens in the developed world have left governments with a scant list of options.

"The choices governments have are pretty straightforward - renege on promises, cut services or raise taxes - these are all real vote-getters, as you can," he said facetiously, arguing the only other option left on the table was for governments and central banks is to print money and inflate their way out of a structural deficit. That prospect should help gold, the traditional inflation hedge.

He sees gold prices averaging $1,825 an ounce in 2012, with bullion potentially ending the year around $1,950 an ounce and breaking the $2,000-an-ounce barrier in 2013.

The outlook for nickel and zinc is also positive, said Mark Selby, head of business development at Royal Nickel, and Andy Roebuck, market research manager at Teck Resources , as cost pressures in nickel and declining mine output for zinc bolster both base metals over the next few years.

Copper, an investor darling for much of the last decade, is now moving against the grain.

With large new mines coming into production soon, the market for the industrial metal is poised to go into a surplus over the medium term, said Glen Jones, executive director of Intierra Resource Intelligence.

"Given the excess of copper supply over demand, we forecast a growing market surplus in refined copper between 2013 and 2016. The market is expected to rebalance toward the end of the decade, but only if there is a sharp fall in incremental mine output," said Jones.

Still, Jones sees copper prices holding steady in 2012, with prices ranging from $8,000 to $9,000 per tonne, or $3.65 to $4.05 a pound.

"We forecast the average (2012) price to be around $8,550 a tonne or $3.80 to $3.90 per pound," he said.

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