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'Now Is The Time To Invest': Gold Needs $41 Billion By 2028 - Wood Mackenzie

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‘Now Is The Time To Invest’: Gold Needs $41 Billion By 2028 - Wood Mackenzie

(Kitco News) - With the mining industry finally entering its “good times” phase, the next major problem on the horizon is the increasing metal deficits, according to Wood Mackenzie’s research director Mike Sinden.

“The state of the mining industry is quite strong. Over the past few years we’ve seen financial discipline, return of dividends, shareholder buybacks, and a lot more scrutiny around sustaining CapEx. Today, we are back to good times. We returned to high-margins in the industry,” Sinden told Kitco News on the sidelines of The Prospectors & Developers Association of Canada (PDAC) held annually in Toronto.

But, looking ahead, the next big concern is the lack of investment in the mining industry due to years of cost-cutting measures, Wood Mackenzie’s research director pointed out.

“Because of this financial discipline, we’ve seen a lack of investment. We don’t see enough supply on the horizon, we see increasing market deficits and we are thinking that we are probably going to enter a period where we will need to see a lot more supply come online,” he noted.

For zinc, the industry is already seeing severe deficits. “We are down to 26 days of consumption in inventories, which is critically low for a market like zinc,” Sinden said.

Copper is in its third consecutive year of deficits, which is expected to continue unless there’s more mine supply. Nickel is also seeing deficits for a fifth year in a row, despite significant inventories, the research director added.

In terms of gold, Sinden highlighted a lack of new projects on the horizon. “We are going to see mine supply tailing off in gold. We do need to see more supply come on just to maintain where we are today.”

Deficits are of course good for prices, added Sinden, explaining that prices are likely to shoot up if the deficits are not addressed in time.

“Our price forecasts across the board are pretty constructive and are backed up by these deficits. Our zinc price will hit $3,700 a ton by the end of the year. Copper as well, we expect prices to get above $3.30 a pound this year. For nickel, fundamentals point to prices going up as well,” he said.

The actual amount of investment needed just to sustain the current levels of output in mining equals to about $200 billion, with copper requiring $115 billion, gold needing $41 billion, and nickel short of $23 billion.

“Overall, the industry will need about $200 billion of CapEx that is currently not-committed over the next decade to meet deficits,” Sinden explained.

From a historical perspective, these levels are not unusually high, but the mining industry is really behind in terms of new projects, warned Sinden.

“The difference this time is that we are not seeing enough investment for where we are in the cycle. We are seeing a lot of deficits right now and not seeing nearly enough positive signs,” he said.

As an advice to mining investors, Sinden suggested to take a long-term view and look past the cycles.

“Now is the time to invest to meet all these deficits that we are expecting. The problem with investors and miners is that they haven’t looked through the cycles. They’ve been investing at the wrong time,” he said. “The main mistake here is market timing and getting caught up in short-term sentiment.”

This is especially relevant now, when investors are getting spooked by the U.S.-China trade war as well as other geopolitical uncertainties, such as Brexit.

“Last year we got into this tit-for-tat trade war with China and the U.S. and that undermined confidence in the sector in general. We also had Brexit, and sanctions on aluminum and steel. That trend undermined confidence in general and people got caught up in what is the short-term,” Sinden stated.

The problem is not with lack of good deposits, but rather with getting the right type of funding, which is why the mining industry has been seeing increased M&A activity, added the research director.

“There is no lack of deposits, there is a lot of gold out there. But, the issue in the Western world for gold is that a lot of these deposits are generally in the hands of small producers. And it is very tough for these small mining companies to raise capital. That’s why we are starting to see some M&A activity in order to shore up balance sheets and get scale in order to begin a new cycle of growth,” he pointed out. “It will probably go further down the chain to mid-tiers and maybe even smaller mines.”

But, the capital and opportunities are out there, according to Sinden. “We’ve got all kinds of money out there — traditional lenders, such as the banks, non-traditional investors like mine finance companies, credit investors. There is money out there looking for a place to invest,” he said.

The minerals to keep on your radar this year are nickel and metallurgical coal, Sinden added.

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