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Fairfax Marketing Report including Shanta Gold and Polyus Gold

Morning View

JP Morgan - $2bn loss by CIO office shakes markets 

The news shows that despite all regulation and credit controls banks can still make whopping losses on investment and trading.

Markets are soft as investors look to protect value ahead and banks prepare for the return of the Drachma.  

We wonder how many zeros will be on the first notes?

Vale declares force majeure at New Caledonia nickel smelter

The company is suspending sales and purchase agreements at its Goro project as a result

China – steel export / dumping into Europe threat

Mittal has called for a "Buy European" policy after week results in Europe 

ArcelorMittal have now shut down some parts of about six plants in Europe. 

Their North American division is showing stronger signs of recovery. 

We suspect that China is overproducing steel and that European steel producers are preparing for a potential flood of Chinese steel into European markets.  However China’s steel exports fell 7.2% month-on-month in April (a 2.3% decline yoy) as buyers failed to take up Chinese offers (Metal Bulletin)

Element Electronics is bringing back a small TV operation from Asia back to the US

The reason for the shift was not rising Chinese labour cost but high US import duties on larger and more expensive TVs and freight costs. 

The company says the economics of onshoring ie bringing back production from China more compelling for large electronics such as TV because of higher impact of freight costs.

Glencore / Xstrata – Qatar fund plan to buy 10% of Xstrata 

It is odd for funds to announce plans to buy something before the purchase is made.

It seems even stranger for normally secretive sovereign wealth funds to make such statements.

Economic News

China – A barrage of data emerged from China this morning. 

Consumer prices year on year in April rose 3.4% - down from 3.6% in March and in line with expectations. 

Producer prices year on year declined by 0.7%, more than the 0.5% decline forecast. 

Less optimistically, Industrial production figures declined in April. The year to date figure came in below forecasts at 11%. 

Year on Year production increased 9.3% compared to forecasts of 12.2% 

Retail sales also failed to reach estimates, rising 14.1% in April but below the 15.1% previously expected. Sales figures have generally trended down since January 2011. 

Unsurprisingly the level of urban investment was below that expected. Year on year in April urban investment increased by 20.2% - down from 20.9% in March. Investment has been declining since June 2011.   

Overall the data released today, coupled with the poor trade figures yesterday, will help support the case for a more supportive economic policy. Slowing industrial production and easing inflationary concerns will increase pressure on policy officials to do more to support the economy as it tries to move from export driven growth to domestic consumption driven expansion. 

Europe - CPI figures for Germany rose in April. 

Month on Month the CPI rose to 0.2% above estimates of a 0.1% increase. 

Germany is incredibly sensitive to inflationary concerns. Rising inflationary concerns do not help those arguing for a more accommodative growth policy in the Euro area.   

Moody’s has reiterated a warning to the global banking sector stating that moves to avoid new capital requirement rules and increases in the amount of debt held will reduce their credit worthiness. Stating the obvious?

Japan – Japanese stocks reacted to the news of a slowdown in retail sales and factory activity in China predictably, falling for a third day. 

The impact that a slowing China has on Japanese exports would be considerable. 

China is the country’s largest export market accounting for roughly 20% of all exports. 

The country’s Central Bank today pledged to deploy FX assets to counter any international emergencies as a result of the ongoing debt crisis. 

UK – Unsurprisingly, the BOE maintained interest rates at historic lows yesterday. 

BOE yesterday indicated that inflation concerns were rising within the monetary policy committee but that the door was still open for further QE if the economy required it. No official statement on further QE was given. 

The UK economy is facing growing headwinds as a result of the recent strengthening of the pound. Exports need a weak pound to thrive and the recent development of £ as a relative “safe haven” is proving detrimental to domestic businesses looking to export. 

Figures released this morning, yet again painted a less than pretty picture of the UK market place. 

Consumer confidence dropped last month, falling to 44 from 53 in March. 

IndiaSenior officials have indicated that the country is set to reintroduce a number of incentives to the export sector in an attempt to reignite the slowing economy and boost trade. 

The plan will reintroduce and expand previously phased out subsidies to boost overseas sales of textiles and engineering goods – according to the FT. 

The country’s deficit increased to $13.4bn in April against $8.9bn last year. 

Exports increased 3.2% while imports rose 3.8% 

Argentina – Figures released yesterday indicate that consumer prices rose 2.2 percent in April. 

Prices rose 23.5% from a year earlier. 

Peru – The country’s central bank announced that it would hold borrowing costs unchanged for a 12 month after boosting reserve requirements. 

The overnight rate was held at 4.25% 

The country is experiencing an uptick in growth as the government increases infrastructure spending. 

The Country’s Central Bank is expected to raise its 2012 growth forecast to as much at 6.2% 

South Africa – “Our current tax system is competitive and working well,” the Mines Minister told reporters ahead of her budget speech in Parliament.

A report on the effects of Section 54 work stoppages on production was completed and would be announced in due course, the Ministry said.

The Ministry’s comments were made after the 600-page “State intervention mining study” prepared by the ruling African National Congress suggested an introduction of a resources rent tax increasing levies on the mining industry.

South Sudan- The East African nation is struggling to avoid its economy from diving into disarray since it halted oil production over a dispute with Sudan which is tearing the recently seceded countries economies to pieces.

Reports suggest that a line of credit has been secured worth $100m with the Qatar National Bank 

South Sudan will receive a $500m loan within a month from an unidentified provider, Deputy Finance Minister Marial Awou Yol said in an interview. 

Other loans are being sought from countries such as China secured by oil in the ground. 

South Sudan accused the Khartoum government of stealing $815m worth of its crude. 

The World Bank has said it is “deeply concerned with the economic and development impact of the unresolved oil issues”. 

It is in the interests of both sides to resume talks and resolve issues urgently. 

South Sudan are using funding to build two refineries to meet domestic demand and trucking excess through neighbouring countries for export, with a long term plan to build a pipeline. 

That will result in starving the North of major revenue will almost certainly result in an increase in armed conflict. 

So far other mining activities such as La Mancha’s flagship Hassai gold mine said that production has not been effected. 

Currency – The pound has weakened today against the Euro as speculation increases that the BOE will add more stimulus over the summer as the UK economy flat lines. 

The USD has strengthened against Euro as concerns remerge today over Europe and whether Greek leaders will be able to form a government. 

US$1.2919/eur vs 1.2955/eur yesterday. Yen 79.79/$ vs 79.69/$. SAr 8.091/$ vs 7.984/$. $1.612/gbp vs 1.614/gbp

Commodity News

Precious:

Gold US$1,583/oz vs US$1,594/oz yesterday – Gold is heading for the worst weekly performance since Mar as Greece is trying to form new government and the market fears the Euro zone sovereign debt crisis may worsen.

Chinese jewellers say it has been the worst start of the year since the financial crisis in 2008 as falling prices weakened investment demand and slower economic growth affected retail sales.

Turkish banks may be increasing rates on deposits made in gold to boost the lowest savings rate in major emerging markets.

Turks are estimated to hold around 5,000t of gold which is equivalent to around $260bn, more than a third of the nation’s US$772bn GDP, the Istanbul Gold Exchange said.

Local banks have to overcome people mistrust in the financial system as the latest financial crisis in 2001 led 20 lenders into receivership.

Currently the ratio of people holding savings in a deposit and those who are favouring gold and cash stands at 1-to-3, according to a MasterCard WorldWide estimates.

Turkey is central to the nation’s commercial side of things. Apparently, rents at Istanbul’s 6-century old Grand Bazar are still paid in gold, Bloomberg reports. 

South African gold production declined for an 11th month in Mar, the Statistics South Africa said.

SPDR gold trust holdings increased to 1,277t (41.060moz) value US$65.600bn from 1,275t (40.992moz).

Platinum US$1,477/oz vs US$1,507/oz yesterday

Palladium US$610/oz vs US$616/oz yesterday

Silver US$28.76/oz vs US$29.29/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,054/t vs US$8,107/t yesterday – Copper is downbeat today on weaker-than-expected Chinese industrial production in Apr.

Chinalco, China’s biggest aluminum producer, may be seeking US$0.8-1bn in IPO on the Hong Kong stock exchange of its Peruvian copper mining unit.

The company is developing the Toromocho project in Peru that was acquired in 2007 from the Canadian firm Peru Copper.

The deposit hosts 1.5bn tons of reserves of copper, molybdenum and silver with an estimated life of mine if 36 years.

The mine is set to come online in Oct 2013 producing 117kt of copper ore per day.

Aluminium US$ 2,039/t vs US$2,050/t yesterday

Nickel US$ 17,123/t vs US$17,305/t yesterday

Vale declared force majeure on nickel shipments from its New Caledonia smelter at the sulphuric plant, according to Metal Bulletin.

Zinc US$ 1,942/t vs US$1,955/t yesterday

Lead US$ 2,074/t vs US$2,080/t yesterday

Tin US$ 20,500/t vs US$20,600/t yesterday

Energy:

Oil US$111.76/bbl vs US$113.05bbl yesterday – Brent crude declines again most likely due a strategic rise in production from OPEC in an effort to bring down the cost of oil and stabilise demand.

The U.S. has had rising stockpiles for sometime, but it has had little effect on its own in brining oil down. 

Events in Europe have tipped the balance this week coupled with a four month low in China’s net crude import, prompting futures to decline amid investor concern over the long term prospects for EU nations and the future of the Euro. 

Brent the European benchmark must fall further towards $100/bbl and hold there if it is to have any effect on macroeconomics and ease pressure for consumer spending. 

WTI crude is at US$96.04bbl this morning  with US Crude at US$95.89/bbl 

Natural Gas US$2.556/btu vs US$2.559btu yesterday- Futures declined slightly after reports showed that stockpiles were lower than forecast.

Uranium US$51.50/lbs vs US$51.50/lbs yesterday- 

UX consulting weekly spot as of 7th May 2012 was at US$52.00/lb (+0.25). 

Coal $96.80/t Richards Bay, Newcastle $99.80/t, Rotterdam $91.80/t

New rules imposed on coal production could see as many as 25% of coal-fired plants close across the U.S.

As many as 200,000 miners are at risk of loosing their jobs.

Under a new rule from the EPA, Coal-fired plants must now release no-more than 1,000lbs of carbon-dioxide per megawatt hour.

For many older mines that means upgrading with carbon capture and storage technology making it capital intensive and not commercially viable.

Both Republican and Democrat governors have joined forces on fighting the EPA’s rule.  

Company News

Polyus Gold (PLGL) - Polyus Gold sells 5% of stock: 2.5% to Chengdong Investment Corp (a subsidiary of CIC International) and 2.5% to JSC VTB Bank.  Gross proceeds from the transaction were US$635.5m

Shanta Gold* (LON:SHG) Bauhinia Creek assay results.  First production due Q3 2012 

http://www.shantagold.com/

Shanta Gold have today released assay results from drilling at its Bauhinia Creek pit in Tanzania

Drilling has intersected mineralisation beyond the planned 120m depth open pit at Bauhinia Creek

A new pit shell should include these intersections into an extended mine plan extending the gold reserve and resource calculations.

The extension of the pit is good news but may also raise the waste to ore ratio along with the capital / working capital requirement for mining to increased depth.  Costs are now substantially beyond those stated when the mine was first funded in July 2011.  

First commissioning which had been expected at end 2011 should now be relatively close with an announcement on cold commissioning expected soon.  

First gold production is scheduled for Q3 this year but it will take some time for first gold production and sales to come following the cold and then hot commissioning periods.

The assay results include:

10m at 18.26g/t, 130-140m depth

10m at 3.8g/t, 160-170m 

5m at 3.21g/t, 200-210m 

The results look good but are seen at some depth and may account for the company’s apparent need to develop the mine to greater depth before the plant is commissioned.  

Bauhinia Creek mineralisation is also reported to extend to a new strike length of around 500m.  This is good news as it infers that the forthcoming resource update due this quarter should see a reasonable uplift in ounces contained.

Other results from the Luika licenses show: 

11m at 5.24g/t, 120-130m depth

6m at 9.02g/t, 160-165m 

9m at 9.94g/t, 130-140m 

10m at 4.04g/t, 145-155m 

These are good figures but while the statement does give a table of the drill assays it does not include plan or cross sections to show the placement of the drill holes.  

The previously published gold resource of 9.7mt at 3.12g/t should rise to comfortably over 1moz on these results but will cutback on the reserve calculation.

http://www.shantagold.com/investors-and-media/company-releases/2012/SHG-2012-05-11-completion-of-drilling-programme-at-new-luika-gold-mine

Conclusion:  The grades and the news of further mineralisation at Bauhinia Creek look good.  We await positive news on a resource upgrade in the next few weeks and look forward to seeing the modeled pit shells and drill intersection plans in this release.  However, the lack of information on cold and hot commissioning suggests that first gold production is still some months away.  

* Fairfax analysts have previously visited the New Luika gold mine site

05/04/12 

Shanta Gold* (LON:SHG

Shanta Gold raised £9.5m through the issue of new equity yesterday at 20p. 

The company is today placing $25m worth of convertible notes with conversion in the range of 29.53p to 32.0p.  

The issue appears targeted at managers managing private client funds and we see this as a popular issue. 

Shareholders should note that convertible notes rank ahead of ordinary shares and that in the event of unforeseen events bond holders get preferential treatment. 

The 8.5% coupon appears highly attractive and the pricing range, which is substantially lower than the 41p closing on the 23rd of February, again appears attractive in this light. 

We expect a number of investors to trade their ordinary shares for convertible stock in order to receive the benefit of the 8.5% coupon while retaining the option of convertibility.  We see the volatility of this and many other mining shares as highly attractive for convertible note holders as any recovery in the stock should increase the option value of the convertible note. 

Use of proceeds:  The convertible proceeds are stated to be “used primarily to fund the Company’s working capital requirements to bring the New Luika Gold Mine in Tanzania into production by Q3 2012”.  The statement implies a substantially larger proportion of working capital than we might expect for this size of mine.  Some of this may be due to the ongoing mining contract and “as well as the stockpiling of important chemicals to avoid possible disruptions once gold production commences.”  We are not sure why this was not included in the company’s initial capital requirements but it may be due to issues relating to the importation of materials through the import of materials into Tanzania. 

Liquidity of the convertible notes is an issue in the secondary market for smaller company note issues.  Application will be made to the Channel Islands Stock Exchange, LBG (CISX) for the notes to be listed on the Official List of the CISX. 

Warrants:  in addition to normal market fees 2.65m warrants are being issued to Liberum Capital at 17.72p.  This has an immediate intrinsic value of around £87,000. 

Dilution:  We expect the convertible to effectively issue around 52.4 million new shares on conversion.  Adding this to the 47,258,980 new shares issued in yesterday’s £9.5m equity raising and the 2.65m warrants issued to Liberum then the company are effectively adding some 102.3m shares through these issues.  This brings the total new number of shares in the company to around 372.2m shares. 

Valuation:  applying this dilution to our financial model reduces our valuation on a per share basis to 36 pence assuming a 12% discount rate based on a relatively beneficial long term gold price of $1,450/oz. 

Management hope to access a higher grade zone in the Bunhya Creek pit which may well change our cash flow forecasts and valuation.  However details are not publically available on the scheduling of grade and tonnage for this part of the mine and therefore can not be incorporated into our forecasts and valuation. 

Conclusion:  We recommend the convertible notes for their intrinsic value but note that the very substantial dilution incurred in the issuance of the new ordinary shares, convertible notes and new warrants does reduce our valuation on the ordinary equity.  Management need to highlight the benefit of the additional funds in accelerating access into the higher grade gold zones to show new value.

Mining this week:

Alcoa (NYSE:AA.) is to buy more residential properties in Western Australia to aid expansion of its Wagerup alumina refinery.

EMED Mining* (LON:EMED) Detva Gold Progress and Feedback from site visit

Anglo Asian Mining* (LON:AAZ) Agitation leach to enhance recovery rates at Gedabek

African Minerals (LON:AML)

London Mining (LON:LOND)  

Sierra Leone – former junta leader who handed over power looks to stand again as a civilian president

Centamin Mining (LON:CEY) Q1 gold production 

Glencore (LON:GLEN) Group under pressure to reveal links to Israeli Billionaire 

Petra Diamonds (LON:PDL) Q3 production shows team is on target for 2m cts this year  

Frontier Mining (LON:FML) Benkala copper mine hits 8,000tpd target

Metals Exploration (LON:MTL) Q1 report shows debt funding progress for Runruno mine


 

+SP Angel employees may have previously held, or currently hold, shares in the companies mentioned in this note.

 

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