Standard and Poor’s Negative US Outlook Puts Pressure on Copper

By Leia Michele Toovey- Exclusive to Copper Investing News

London Metal Exchange Copper prices rose on Tuesday, up for the first time in six sessions. Monday marked coppers sixth straight daily loss, and its longest losing streak in since June, after Standard & Poor’s put a “negative” outlook on the AAA credit rating for the United States, the world’s largest economy, and the second-largest consumer of the metal.  Copper’s downside was limited by expectations of a supply deficit this year and an optimistic long-term demand outlook.

Standard & Poor’s threatened on Monday to downgrade the U.S. AAA credit rating, citing a “material risk” that U.S. leaders will fail to deal with rising budget deficits and debt. Equity benchmarks in the country fell, and the difference in yields between 2- and 30-year Treasuries widened to the most in five weeks.

Further negative support for copper came as China once again raised banks’ reserve requirements, and U.S. homebuilder’s confidence in the housing market took a hit. Builder sentiment slipped to 16 on a scale of 100 this month from 17 in March, according to the National Association of Homebuilders. Economists had expected the index to remain at 17. Construction accounts for a quarter of copper demand, according to the Copper Development Association. The People’s Bank of China announced yesterday that it will raise reserve requirements by half a point as of April 21^st. The reserve-requirement increase was the fourth this year. Authorities are moving to cool inflation, which is running above the government’s target.

Chinese stocks of copper continued to disrupt the market, with Shanghai copper trading at a discount of around 1,300 Yuan to LME prices. In a research note, Macquarie estimated there were around 550,000 tonnes of copper in bonded warehouses, all but unchanged from mid-March. “More than half of the material sitting in the bonded warehouses belongs to trading houses using copper imports as a method to get cheaper sources of finance under the terms of a letter of credit,” according to Macquarie. “The rest of the copper is bought directly by domestic consumers from overseas suppliers.” The bank added that government efforts to crack down on the practice would be largely unsuccessful.

Increasing copper inventories have sparked concerns that there may be a short-term demand weakness from top consumer China. Inventories of copper on the London Metal Exchange rose 175 tonnes to 451,950 tonnes, its highest since June, latest data showed.  Copper was in a $21.50 contango, a discount for cash over three-month material, from December’s $70 backwardation, a premium for cash over three-month copper, according to the latest LME data.

Company news

The Democratic Republic of Congo has approved changes in the mining contracts for Tenke Fungurume, a copper project owned 56 percent by Freeport McMoRan (NYSE:FCX), 24 percent by Lundin Mining Corp. (TSX:LUN), and 20 percent by DRC state mining company Gecamines. The final approval could have major ramifications for Lundin, which is currently attempting to attract a white knight and fend off a $4.8 billion hostile bid from rival base metal miner Equinox Minerals (ASX:EQN). The government of the DRC has now issued a Presidential Decree approving the amendments to the Tenke Fungurume mining contracts, confirming that the contracts are in good standing.

Kalimantan Gold Corporation has entered into a joint venture agreement with a wholly owned subsidiary of Freeport-McMoRan Exploration Corporation. The agreement is for Kalimantan Gold Corporation’s KSK contract of work copper project in Kalimantan, Indonesia. According to the agreement, Freeport can earn a 51 percent joint venture interest in the KSK CoW by spending a minimum of $7 million on a substantial exploration program over three years and then a further 24 percent by sole funding the completion of a feasibility study within 10 years.

Capstone Mining Corp. (TSX:CS) announced on Sunday that it has agreed to acquire exploration company Far West Mining Ltd. (TSX:FWM) in a cash-and-stock deal worth C$685 million ($713 million). The bid is being backed by South Korea’s state-owned Korea Resources Corp (KORES), which will acquire a 30 percent stake in Far West’s flagship asset the Santo Domingo copper project in Chile for C$210 million, following the close of the deal. KORES will also separately acquire an 11 percent stake in Capstone for C$170 million. Under the terms of the offer, Capstone is offering 1.825 shares of Capstone and C$1 in cash for each share of Far West. This implies an offer price of C$8.68 a share, or a 13 percent premium to Friday’s close.