Wildcat Exploration Ltd

Brenda Bouw Mining Reporter,

Vancouver — Globe and Mail Update Published on Friday, Jun. 18, 2010 6:11PM EDT Last updated on Sunday, Jun. 20, 2010 8:11AM EDT

Fears of a sharp slowdown in the global economy have led to a pullback in demand for base metals as projects are put on hold, financing is squeezed and inventories aren’t being replenished.

The continued worries are the European debt crisis, a cooling of China’s economy and a new resources tax in Australia, all of which together are further adding to the market malaise.

Prices of commodities such as copper, zinc, aluminum and nickel have fallen between 20 and 30 per cent in recent weeks, from highs reached two months ago, with fewer calls for a recovery in the near future.

“You’d have to be a hero to try to go out and buy metals right now because of the tone of the market,” said Wayne Attwell, managing director at Casimir Capital LP.

The main metal benefiting from the unstable economy right now is gold, which continued its record-breaking run Friday.

Gold for August delivery closed at $1,258.30 an ounce (U.S.) in New York, up $9.60.

In a report released Friday, the World Gold Council predicted demand for the precious metal to remain strong this year, driven by jewellery demand in India and China and investment demand in Europe and the United States.

“Weak economic recovery in the U.S. and Europe is burdened by high and rising public debt levels in the wake of the financial crisis,” the report said. “As a result, the attraction of gold to investors as a liquid, reliable asset that is both a source of stability and a store of value is high.”

The latest example of the impact the commodities correction is having on miners came this week when a state-owned Chinese power company walked away from a billion-dollar joint-venture agreement with Canadian copper producer Quadra FNX Mining Ltd. to develop a project in Chile.

Three months after the memorandum of understanding was signed, and after copper prices dropped by about 20 per cent, China got cold feet when it came time to put up the initial cash payment.

The decision supported worries that metals demand could continue to weaken as a result of ongoing credit tightening in China, which could further slow growth in the world’s economic powerhouse. Worsening of the debt troubles in European countries such as Greece and Spain is also an issue for investors.

China consumes about 40 per cent of main base metals used in construction and manufacturing, with western economies such as Europe and the United States accounting for the bulk of the remaining supply.

“These are legitimate concerns and they could well overhang metal prices and mining company share prices through the summer or even through the end of this year,” TD Newcrest analyst Greg Barnes said in a report released Friday.

TD lowered its metal price forecast for this year by about 5 per cent, and said prices aren’t likely to peak until 2012-2013, which is a change from its earlier forecast of 2011.

“We believe that mining company management teams are still hesitant to commit to major capital expenditure programs,” TD said.

Construction firm SNC Lavalin said it has some mining clients waiting for prices to rebound before moving forward with planned projects.

“They are very, very cautious about going ahead with investments,” said Dale Clarke, general manager of the company’s mining division.

More clients are also asking for SNC Lavalin to take an equity stake in the projects, which is not a common practice for the company, particularly in mining. It shows the new routes miners are looking to take to try to secure financing in an unstable economy.

Projects are also being put off by miners operating in Australia, as a result of a proposed new tax on resources.

BHP Billiton Ltd.’s plans to expand its Olympic Dam uranium project could be put on hold if the new 40-per-cent tax is passed, according to Morgan Stanley, because it would have “no economic value.”

Unlike other miners, BHP hasn’t cancelled or delayed any developments, but a company spokesman said uncertainty around the proposed tax “makes it difficult to approve projects.”

Xstrata and Fortescue Metals have both halted spending on development of multi-billion dollar projects in Australia, while other miners have said they are considering shelving plans for development.