2008 Marked The End Of The Commodity Boom, But Modest Rebound Predicted in 2009
Our Canadian Correspondent
minesite.com
The past year was a very nasty one for investors in general and resource players in particular. The Canadian Markets however started 2008 off in fine form with many commodity prices hitting historic highs but an abrupt drop in economic activities sparked a sell-off of unprecedented magnitude. The falling prices left many leveraged resource players on the brink of economic disaster.
In a nut shell, 2008 will be remembered for the end of a remarkable commodity market boom that started in 2001-2002. The surprise in not that the resource cycle ended, it always does, but at the speed in which it occurred. The abrupt nature caught many resource companies off guard and the price that could be paid in 2009 has yet to be played out.
A poster child for 2008 has got to be Teck Cominco. Over the past few years, Teck rode the commodity boom by posting double or triple digit gains in profits and paying out a reliable dividend to shareholders. Then came its $14-billion bet on metallurgical coal. In July, Teck made a takeover bid to acquire the remaining 60% it did not already own of Fording Canadian Coal Trust. Initially the offer was seen favourably with Teck’s share price hitting C$43 and with coal hitting a new record price of $300 per tonne in 2008 the move appeared prudent. Then the bottom fell out on coal, copper, and zinc prices putting Teck in the unenviable position of having a debt load that will likely be greater than its near term cash flow. The diversified miner paid US$12.4 billion for the coal company, of which US$4-billion is a three year term loan facility and US$5.8-billion is a 364-day bridge loan facility that comes due in the third quarter of 2009. Not good for a company with a market capitalization under C$3 billion.
Moving ahead, the pundits see coal prices averaging from US$120 to US$150 per tonne in 2009. For its part, Teck sees the price at US$250 per tonne. The coal price will be the key as to whether Teck survives 2009 as it ended 2008 or whether a white knight will be required to bail Teck out of its debt quandary. In the meantime, Teck has been selling assets to raise cash and trimming projected capital costs. Poor long time shareholders of Teck have seen their value disintegrate from a high of C$52.90 to a low of C$3.35 in 2008.
Another base metal miner that neared its brink in 2008 but has been tentatively saved is Lundin Mining. Cash rich Hudbay Minerals stepped up to the plate and offered up an all share deal worth US$569 million to take out Lundin. This prompted a jolt of anger from investors who felt Hudbay was paying too much for the financially troubled company. Shares of Lundin traded as high as C$9.67 in 2008 with a low of C$0.77, while Hudbay fared little better hitting a high of C$20.77 with a low of C$2.70 coming after the merger announcement. Despite some irate shareholders seeking to remove the current Hudbay Board of Directors, the deal is slated to close by the end of January.
Having rebuffed Barrick Gold’s $16 per share takeover bid in late 2006, NovaGold also ran into debt problems in 2008. The company announced the suspension of development at the Rock Creek gold project in Alaska, is facing uncertainty at its part owned Donlin Creek project in Alaska and the Galore Creek project in British Columbia. The biggest problem is NovaGold’s US$20 million loan due by 29th December that has been extended to March 13, 2009. NovaGold only has around C$10 million in the bank. Here, shareholders have seen their value drop from a high of C$12.38 to a low of C$0.475 before the loan extension boosted the price to around C$1.81 per share.
These are just a few of the higher profile melt downs of 2008. Now what do the soothsayers say will happen in 2009.
Well, the phenomenal growth in China’s economic prowess that led to growth in metal demand clearly fell off the rails in 2008. This metal demand is expected to stabilize in 2009 with the TD Bank predicting a rebound in the commodities markets in the second half of 2009, followed by bigger price increases in 2010. According to TD, the U.S. economy will shrink by 2 per cent, and growth in the Chinese economy will slow to 7.6 per cent in 2009 producing a bottom in commodity prices in the first half of the year. TD projects that oil will come in at US$45 per barrel in December 2009, silver will be US$9.60 per ounce, aluminium will be at US$0.75 per pound, copper will be US$1.50 per pound, nickel will sit at US$5.15 per pound, zinc will struggle in at US$0.48 per pound and uranium oxide will fetch US$52 per pound.
Who knows? The World Bank has a less rosy picture with metal prices expected to remain well off their historic highs and only modestly stronger than their late 1990s lows. World Bank or not, it is only just another shot in the dark.
As for gold, the soothsayers are all over the map. TD forecasts that fears about deflation and disinflation could put downward pressure on prices in the near term, but a drop in the U.S. dollar in 2009 will support the gold price with an envisioned price of US$815 per ounce. Others are predicting that the gold price will soar as inflation kicks in thanks to the massive injection of dollars from around the globe and some say the bullish indicators for gold suggests that the price will be substantially lower in 2009.
So there you have it, a brief look at the year past and the year forward. Rest assured that most of the economists missed the credit crisis of 2008, so take their mystical powers for 2009 with a grain of salt. For me 2009 will be driven by the unemployment numbers coming out of the United States. Until, consumers feel confident about their household incomes, commodity prices will be under pressure due to a lack of demand. My crystal ball tells me that 2009 will be a traders market with wild swings and the overall trend being lower. Like 2008, the only exception will be the price of bullion, which is once again set to outperform in 2009. |
