7 Min Read
* Optimism returning after rough patch for the sector
* Positive indicators from U.S., China boost sentiment
* Pace of capital cost increases on projects causes concern
By Euan Rocha
TORONTO, March 2 (Reuters) - Detour Gold last month sold C$277 million of equity to investors willing to bet on its promising gold project - a hefty sum that bankers say the Canadian company would have struggled to raise barely two months earlier.
Detour's success in raising funds is one of many small signs that the malaise that gripped miners, explorers and investors in late 2011 is easing. A brighter economic outlook has brought a ray of optimism back to the global mining sector, which gathers next week in Toronto for its biggest convention of the year.
While stresses still weigh heavily on the world financial system, a batch of decent U.S. economic data and easing concerns about a slowdown in China have breathed fresh life into mining stocks that tumbled last year.
"If I compare right now to, let's say, the latter part of 2011, generally executives are more positive now," said Egizio Bianchini, co-head of metals and mining at BMO Capital Markets.
"The often overused phrase 'cautiously optimistic' is probably one that can be used now, and I think that's where people are at," Bianchini said in an interview before the annual Prospectors and Developers Association of Canada convention. The event, known simply as PDAC, opens Sunday in Toronto.
The Dow Jones Basic Resources Titans Index, which reflects the performance of a basket of the world's top mining and steelmaking stocks, dropped to a two-and-a-half year low in early October as the euro zone debt crisis spread.
It has risen nearly 30 percent since then, helped by rallies in both gold and copper prices.
Base metal and steel prices are usually strong indicators of the health of the global economy. Industry analysts, economists and government officials pay close attention to developments within the mining sector to guide their strategies and policies.
The more confident outlook is setting the tone for PDAC, as hundreds of exploration companies prepare to tout their projects to outside investors and to large, established mining companies.
With few exceptions, the juniors hope one day to either be swallowed up by a larger player or evolve into a powerhouse, following in the path of such industry giants as Barrick Gold or Teck Resources.
"PDAC is really about the explorers," said Charles Oliver, a portfolio manager with Sprott Asset Management. "PDAC is where dreams are made or crushed."
In early 2011, the mood at PDAC was bullish as well. Metal prices were on a tear, and many of the 26,000-plus delegates were decidedly upbeat. But the mood soured during the summer as equity markets turned choppy, volatility hit metal prices and the European debt crisis went from bad to worse.
"At the beginning of 2011, I think everybody was optimistic that we were going to see a full-blown recovery. That didn't happen in the way that people expected, though it looks like we may be seeing some nascent signs of that now," said Kevin Loughrey, chief executive of Thompson Creek , a diversified miner listed in both Canada and the United States.
To be sure, the new sense of optimism is not without its caveats. The industry's persistent tussle with rising fuel, material and labor costs has muddled even the most detailed of project plans.
Ten months ago, Thompson Creek raised the cost estimate for its Mt. Milligan copper-gold project in the western Canadian province of British Columbia by nearly 40 percent to C$1.27 billion ($1.29 billon). Last month the miner warned that the estimated costs had climbed to a range of C$1.4 billion to C$1.5 billion.
Loughrey is one of many top executives who spoke a BMO mining conference in Florida last month, where capital cost overruns on projects emerged as an central theme.
"We all sit around and bemoan the fact that a number we came up with a year ago, and did a lot of work on ... is 20 or 30 percent wrong today," Loughrey said. "I don't know what to say about it, except that that's the world we are living in today."
Still, cost increases are not all bad news. There is a silver lining in that project delays and deferrals are likely to tighten markets.
"The good news is certainly that the higher costs are really going to have to translate into higher sustained metal prices to be able to justify development of these projects," said Gordon Bell, head of RBC Capital Markets' global mining and metals group.
The fear of a sharp slowdown in China was another reason behind the late 2011 slump, but recent policy moves by the Chinese government and positive signs from Asia's largest economy have eased those concerns.
Teck Resources believes strongly that worries about China are overblown. The Vancouver-based diversified miner is a large exporter of coal, copper and zinc, much of it to China, the world's top commodities importer.
"We are often asked about our view of the Chinese economy and whether we expect a hard landing or a soft landing. Judging by the recent economic data and the Chinese government's recent actions on bank reserve ratios, we think neither will occur," Teck's CEO Don Lindsay said at the BMO conference.
Last month, China announced its second cut in bank reserve requirements in three months as it moved to ease credit strains and shore up economic growth.
China has become the most powerful force driving world economic growth, even as the weak U.S. housing market and the sovereign debt crisis in Europe stymied growth in those regions.
Patricia Mohr, a commodities specialist at Scotia Capital, said an improving U.S. economic climate and ultra-low interest rates are also building the mining sector's confidence.
"You've got a very accommodative monetary policy in the United States and some Asian countries have also eased monetary policy," she said. "Their easing remains quite cautious, but at least it's moving in the right direction."
The U.S. Federal Reserve cut its overnight interest rates to near zero in 2008 and has bought $2.3 trillion in bonds in an effort to keep interest rates low and boost economic activity.
"I think all of these factors have lifted the sentiment and in fact a lot of the hedge funds and investment funds actually went long again in base metals in January," she said, referring to bets, known as long positions, that a commodity will rise.