Mining: Polarized by Cash

High metal prices of the past few years resulted in expanded production in the mining and metals industries, but as with almost all of industry, the economic meltdown changed that situation, according to Brian Fitzgerald, U.S. Mining and Metals Sector Resident, Ernest and Young.

Most recently, prices for most commodities and metal in the industry have fallen dramatically and the industry has gone into oversupply. There has been a sharp devaluation in stocks for the companies involved—from $2 trillion to $800 billion mostly in the second half of 2008, Fitzgerald reported, and the industry has been polarized by those that have cash and those without.

In the coal industry, coking coal has fallen as steel production plummeted and thermal coal has dropped in response to the fall in electricity use, he added. In metals, zinc, nickel and copper have been hardest hit. Events have affected the entire industry, but the smaller mining and mineral development companies have suffered the most, he said.

“Some junior mining companies lost up to 90% of their value trying to stay afloat,” Fitzgerald said.

One exception in mining when it comes to prices is gold, which tends to do well when the dollar is weakest, and going forward, “gold prices are likely to remain high supported by a low interest rate environment and skittish equity markets,” he said. Demand for gold rose 38% year on year in the first quarter of this year, fueled by fear of future inflation and ongoing financial uncertainties.

For everyone in the industry, cash management “is by far one of the biggest focuses in companies,” he said. As cash conservation becomes a key priority for mining and metal companies, and financing gets tight, smaller companies are cancelling projects and larger companies are deferring initiatives, restricting exploration and delaying expansion projects.

FORECAST: Gold prices will remain at around the $905/ounce mark this year. Some vertical integration may occur in the industry: for example, steel companies trying to purchase coking coal companies to provide the coal they need.