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Today's Market View Including KEFI Minerals, Anglo Asian Mining, Paragon Diamonds, Petropavlovsk and others

Published: 10:52 16 Mar 2015 GMT

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Economic News

US – The FOMC is holding its monetary policy meeting this week with the announcement expected on Wednesday.

While a number of economists said the first rate hike may come as early as Jun, Bloomberg median estimates are currently for a 0.25pp increase in Q3/15.

Economic new due this week: 

o Tuesday: Feb housing starts (-2.4%mom v -2.0%mom in Jan), Feb building permits (+0.5%mom v +0.0%mom in Jan)

o Wednesday: FOMC rate decision

o Thursday: Weekly jobless claims (292k v 289k in the previous week), Mar Philly Fed manufacturing index (+7.0 v 5.2 in Feb) 

China – The government is prepared to step up simulative action should the economy slow down enough to risk the “around 7%” growth rate target, Premier Li Keqiang said over the weekend.

"If our growth speed comes close to the lower limit of its proper range and affects the employment and increase of people's incomes, we are prepared to step up targeted macroeconomic regulation to boost market confidence," he said.

China sends forces to Myanmar boarder after bombing in Yunnan province relating to Burmese rebel groups

China – is now the world’s third largest arms exporter with 5% of world exports  

China had overtaken France and Germany in the export of weapons

Pakistan, Bangladesh and Myanmar account for a third of Chinese arms exports

The US and Russia lead in export terms with 31% and 27% respectively 

Germany – Dax Index hit an all time high of 12,000 this morning supported by positive momentum of the ECB bond buying programme. 

Brazil – More than a million protesters marched on streets of Brazil on Sunday calling for the impeachment of President Dilma Rousseff.

The demonstrations come only three months into Rousseff’s second term.

Anti-government protests were targeted at recent plans to cut fiscal spending amid budget deficits and increasing corruption.

Last week, Supreme Court of Brazil said it would look into a Petrobras-related corruption case investigating speakers of both houses of Congress and more than 30 other congressmen and senators. 

India – Wholesale price index recorded a 4th consecutive annual decline in Feb on the back of lower fuel and power costs.

The index came in at -2.06%yoy, the biggest negative reading in a decade of data, v -0.8%yoy forecast.

While food prices climbed 7.7%yoy, energy inflation came in at -14.7%yoy.

Accelerating deflation is likely to see the RBI to continue with monetary easing moving forwards. 

US$1.0589/eur vs 1.0589/eur yesterday.   Yen 121.44/$ vs 121.44/$.   SAr 12.436/$ vs 12.436/$.   $1.483/gbp vs 1.483/gbp 

A$0.7669aud/usd vs 0.7669aud/usd. – Euro 

US and UK exporters will struggle to sell into the Eurozone as Euro falls.   

Commodity News

Precious metals:

Gold US$1,158/oz vs US$1,156/oz on Friday – South Africa NUM, the main gold mining union are preparing for new round of wage negotiation

Platinum US$1,115/oz vs US$1,123/oz yesterday

Palladium US$787/oz vs US$795/oz yesterday

Silver US$15.65/oz vs US$15.57/oz yesterday 

Base metals:

Copper US$5,874/t vs US$5,816/t yesterday –

Aluminium US$1,776/t vs US$1,751/t yesterday –

Nickel US$14,155/t vs US$13,920/t yesterday – Audley agrees to buy 85% of closed Talvivaara nickel mine in Finland

China orders shutdown of Nickel Pig Iron producers in Shandong province for environmental checks

Zinc US$2,015/t vs US$2,010/t yesterday –

Lead US$1,775/t vs US$1,796/t yesterday

Tin US$17,450/t vs US$17,305/t yesterday –  

Energy:

Oil US$54.4/bbl unch vs US$56.9/bbl yesterday –

Natural Gas US$2.724/mmbtu vs US$2.706/mmbtu yesterday

Uranium US$39.25/lb unch vs US$39.40/lb 

Bulk commodities:

Iron ore spot price index (62% fines Tianjin) $58.90/t unch vs $59.20/t –

Steel rebar prices fall on lower China GDP - Environmental crackdown in Shandong shuts 29 blast furnaces, finds problems in environmental protection

Thermal Coal (CFR European ARA price) $58.10/t vs $58.80/t Yesterday – China is to cut coal consumption over the next five years to limit pollution 

Vanadium pentoxide (98% V2O5) price falls further to 400c/lb from 450c/lb and 490c/lb last week

Ferrochrome - EU surcharge / benchmark price investigation not likely to have much impact due to 20% Chinese export tariff 

Speciality metals and alloys:

Tungsten APT European US$292.5/mtu unch vs US$292.5/mtu last week – tungsten prices edge up in China as traders buy for the new year 

Company News

Anglo Asian Mining* (LON:AAZ) – Encouraging gold production rates sustained through the Jan-Feb period

The State Statistics Committee released Azerbaijan’s precious metals production numbers for Feb which reflect Gedabek processing complex operational stats.

In Feb, AAZ produced 164.3kg (5.3koz) of gold and 5.7kg (0.2koz) of silver.

Through Jan-Feb, the company is estimated to have poured 10.8koz of gold and 0.4koz of silver.

This equates to an annualised 64.8kozpa rate of gold production for 2015 compared to 60.2koz recorded in 2014.

*SP Angel acts as Nomad & Broker to Anglo Asian Mining.  SP Angel analysts have visited the Gedabek and Gosha mine sites 

ARM Resources – Interims show 56% drop in earnings

(African Rainbow Minerals) not to be confused with ARM Holdings

ARM Ferrous saw the big drop in earnings down 61% to R 833m.

Ferrous earnings were impacted by a 45% fall in export iron ore prices and a 17% fall in manganese prices.

Iron ore and manganese earnings fell by 68% and 28% respectively with the chrome division up by 51%.

ARM Copper was down 91% to R 233m was impacted by the ramp up in the Lubambe mine which has been slower than planned.

As a result of grade dilution changes to the mine plan are being considered.

ARM Platinum was down 24% to R 277m.

Platinum Group Metals was down 15% to R 176m and Nickel down 36% to R 101m.

ARM coal saw a reduced loss of R10m with reduction in losses at PCB operation.

Net debt at the end of the period was R 1,944m. 

Black Mountain Resources (LON:BMZ) – Interim results

Black Mountain Resources has reported a loss of A$7.2m for the six months ending 31st December 2014. The bulk of the loss (A$6.6m) was incurred in the United States where the company is working towards developing a mine plan for reopening the historic New Departure mine in Montana.

Work to date on the Blue Dot level indicates the “greatest potential for hosting a mineral resource in the downward and northwest plunging remainder of the ore body, and extended the silver mineralisation at the main zone.”

“Further work during the half year targeted a strategy of initially developing 13,000-15,000 tonnes at the upper Coppin Level at a targeted diluted mining grade of approximately 30oz/t Ag before focussing on the Blue Dot Level.”

The company is continuing to seek financing to advance the project but has found progress slower than anticipated as a result of the current market environment in the junior resources sector. Black Mountain Resources is confident that “funding for New Departure will be secured in the second half of the 2015 financial year.” 

Kefi Minerals* (LON:KEFI) – Ethiopian Ministry of Mines approves Tulu Kapi gold project in Ethiopia

The Ethiopian Ministry of Mines has approved the Tulu Kapi gold project in Ethiopia. 

The project will go before the Council of Ministers for approval to execute a Mining Agreement for a Mining Licence and full permitting and development.

Capital expenditure is estimated at around $120m based on initial bids received from mining contractors and offers for a suitable process plant.

Funding:  is planned to be via a combination of debt and equity finance with around $100m of project debt with around $20m to potentially come from contractor finance or equity.

Production:  The mine plan is targeting 86,000ozpa gold production with 1.2 mtpa throughput at a grade of 2.4 g/t

Cash costs are forecast at US$626/oz with an all-in-cost of US$844/oz.

Management expect to break ground for the full development within months with production to start in 2017.

Resource: The Tulu Kapi gold project hosts an estimated 18.8mt JORC 2012 compliant resource with an average grade of 2.67 g/t containing 1.62 moz of gold.

This is based on 722 drillholes (118,738m), including 298 diamond drill holes (72,033m).

Around 88% of the revised resource estimate, 17.7mt grading 2.49 g/t gold - 1.42moz lies within the planned open pit mining area.

The balance amounts to 1.0mt at an average grade of 5.6g/t gold represents a future underground mining opportunity just beneath the planned open-pit.

Conclusion:  We are confident Kefi Minerals will gain its full mining permits over the next few months and we are hopeful the company will negotiate suitable concessions to enable the economic development of the project.  Construction should start in the second half.  There appears to be significant finance available for near-production mining projects where the cost of production is significantly below the relevant commodity price.

 *SP Angel act as Nomad to Kefi Minerals 

Nord Gold  – Progress of buy-back programme

Nord Gold has provided an update on the progress of its share/GDR buy-back programme which was first announced on 24th February.

To date the company has purchased a total of 774,530 GDRs for US$1,858,040 or an average of US$2.40/GDR.

Today’s announcement refers specifically to purchases of 135,000 GDRs for an aggregate of US$ 366 363 (US$2.71) which took place on 10th,11th and 12th March.

The company’s programme is to purchase a maximum of 19 million shares to a maximum value of US$30m. The programme will end on 31st December 2015 if the other targets are not exceeded first. 

Paragon Diamonds (LON:PRG) – Update with management

The company appear to be close to being fully funded and on their way to trial mining at Lemphane.

Trial mining is seen as the best option to establish the valuation and resource at Lemphane.

Stage 1 of trial mining will be for 0.5 mtpa for a period of 18 months to 2 years.

The current grade is 2 cpht and around US$1,000 per carat based on a 300 carat package

A US$6m 75 tph plant has been approved with total start up capex of US$7.5 to US$8m.

Trial mining is expected to start next quarter once the plant is in place.

Mining costs are expected to around US$11/t for stage 1.

Trial mining will inform a second stage full mining operation.

Funding is to come from ITGT a Dubai partner with US$8m of equity at 5.5 pence with US$4m of debt at 10%.

There is an offtake agreement in place on favourable terms with a slight discount to market price but with a 50% profit share on polishing and cutting.

They expect the second phase of full mining once trial mining is completed.

Capex for full mining is expected to be reasonable as a result of benefits such as electrical infrastructure being put into place by Firestone Diamonds.

The current funders of the company are also advancing discussions for a second asset which is thought to be a producing asset.

Conclusion: With investment in place from ITGT the company is in place to progress Stage 1 of trial mining. This will establish the longer term potential at Lemphane. We also will watch with interest the proposed acquisition of a producing asset which could establish a bigger player depending on the type and quality of asset being acquired. 

Petropavlovsk (LON:POG) – Investors take up 35.35% rights issue shares.  ML to offer remaining 2bn shares to investors

Investors have elected to take up just 35.35% of Petropavlovsk shares representing 1.1bn new shares in the company’s mammoth rights issue. 

The underwriters Merrill Lynch International are now looking to place some 2,005,898,145 new shares with institutions and other investors.

The rights issue has been underwritten by Peter Hambro, Pavel Maslovskiy and certain bond holders.

The new shares should be tradable from today.

Valuation: We updated the market on our revised valuation for Petropavlovsk on Friday taking account of our updated production forecast based on company guidance, rouble devaluation and lower capital expenditure.

Our valuation of 11p/s includes the heavy dilution to the shares created in the company’s refinancing.

The Cash Flow table below indicates the potential for strong cash flow from operations on our gold price assumptions below.  But we also see potential for a $30m cash deficit in 2017 (on the  assumption of a flat US$1,200/oz gold price).

Our modelling shows >US$200m in leveraged free cash flow in 2015, assuming a dollar / rouble exchange rate of 1:60 and gold price of US$1,234/oz this year subject to the company meeting its production and operating costs guidance.  

We assume cost inflation accelerates to 15% through the 2015-18E period to reflect the estimated 40% depreciation in Rouble (USDRUB 2014: 39; 2015: 60; 2016: 65)

Applying a more conservative US$1,200/oz gold price forecast from 2015 onwards, leveraged FCF generation declines with a potential cash deficit emerging in 2017/18 assuming our production estimates (less than 600kozpa guided by the Company) and debt repayments schedule kept unchanged.

Following a successful completion of the refinancing deal and having accumulated significant cash buffer in 2015, we expect the Company to generate near sufficient cash to meet its debt repayment schedule moving forwards (see debt repayment schedule below).

*Cost inflation is assumed to accelerate to 15% through the 2015-18E period to reflect an estimated 40% depreciation in Rouble (39 to 65).

POG debt repayment schedule 2015e-2020e

Source: SP Angel

2015 assumptions: 

o Production:  680-700koz (POG) v 690koz (SP Angel)

o Total Cash Costs: US$700/oz (POG) v US$698/oz (SP Angel) 

§ Low operating costs compared to estimated US$890/oz in 2014 is a result of stronger gold sales (690koz v 617koz) and weaker US dollar Rouble exchange rate (60 v 39).

Capex: $35m=$25m(exploration)+$10m(development) (POG), $42m=$25m(exploration)+$17m(development)

Our capex numbers are slightly higher than guided by the Company; however, 2015 levels, in general, highlight significantly reduced capital expenditures compared to historical numbers.

While the Company’s outstanding debt is serviceable on our estimates, the outstanding guarantee for the ICBC loan to IRC for construction of the K&S I project is under risk should IRC miss its interest/amortization payments.

The IRC facility stands at US$267m as of Dec/14 with IRC having agreed with ICBC the release of the remaining US$52m following successful completion of the POG’s refinancing.

With iron ore prices currently trading sub-$60/t ore c. 60% down on levels seen at the start of 2014 and ilmenite prices in downward trend since 2012, IRC earnings are under significant pressure as the new plant is going through a commissioning phase and ICBC debt amortization coming in at $43m in 2015.

Conclusion:  Petropavlovsk continues to offer value for investors despite the hefty dilution from the rights and convertible issues.  Our calculations indicate the company generates sufficient cash flow to cover debt repayments on our gold price assumptions and lower costs, a weaker rouble, higher gold production and better capital control.

We also highlight the current low gold price if rolled forwards at US$1,200/oz may see the Company recording a cash shortfall in 2017/18 given present debt repayment schedule.

 

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