Emerging market currencies come under pressure against the US$
• Currencies in emerging markets came under pressure yesterday following a strengthening $ after good US payroll data last week.
• The Indian Rupee fell to a record low of Rs 58.15.
• Asian currencies saw pressure after growing concerns about the slowing Chinese economy.
• The US$ rose across the board against the Philippine peso, Malaysian ringgit by 1% and against the South African rand by 1.3%.
• Weakness in the rand will start making a difference to costs South African and should alleviate some of the margin pressure.
• The strength of the US$ continues at this stage, to have a negative impact on commodities, as it is being associated with a strengthening of the US economy and an easing off on QE by the FED.
• Should the strength of the US$ be associated with more robust economic expectations, there is scope for commodities to start performing.
Euro zone - German top court will begin a two-day hearing today with regards to the constitutionality of the ECB’s Outright Monetary Transactions (OMT) policy.
• The programme was announced last year amid growing confidence concerns over the state of the single currency region.
• The OMT which has not been used yet permits the ECB to purchase potentially unlimited amounts of debt of troubled nations in the Euro zone that sign up for the programme.
Japan - The Bank of Japan said it will keep its policy unchanged and not extend the maturity of loans to banks after tapping its one-year fixed rate loan facility seven times.
• Equity markets fell led by property companies, consumer lenders and steelmakers on the news. Yen gained.
• A decline in machine tool orders slowed down last month to 7.4%yoy compared to a 23.6%yoy fall recorded in Apr on the back of fiscal and monetary easing and weaker yen.
UK - Industrial production growth slowed down to 0.1%mom (-0.6%yoy) in Apr compared with a 0.7%mom (-1.4%yoy) increase in Mar. Estimates were for no change.
• Output is reported to have been boosted by production at mines and water companies.
• Manufacturing fell 0.2%mom (-0.5%yoy) in Apr, in line with expectations.
• House prices climbed to a three year high in May supported by state credit-easing programmes such as Funding for Lending and Help to Buy initiatives, according to the Royal Institution of Chartered Surveyors (RICS).
• The price index gained to 5 from 1 in Apr. A positive reading indicates the numbed of respondents who recorded an increase in property values outweigh those who saw declines.
• The market for mortgages is still reported to be long way off inflated pre-crisis levels with approvals around half of levels seen 2007.
US$1.3262/eur vs 1.3190/eur yesterday. Yen 98.19/$ vs 98.43/$. SAr 10.245/$ vs 10.197/$. $1.557/gbp vs 1.550/gbp
Gold US$1,378/oz vs US$1,381/oz yesterday - Prices are off this morning as S&P revised upwards the US credit outlook to stable from negative fuelling speculation the Fed might slow down its rate of monthly bond purchases soon.
• SPDR gold holdings climbed to 1,010t (32,468koz) valued at US$44.885bn from 1,007t (32,381koz) yesterday.
Platinum US$1,496/oz vs US$1,492/oz yesterday
Palladium US$765/oz vs US$756/oz yesterday
Silver US$21.76/oz vs US$21.64/oz yesterday
Copper US$ 7,124/t vs US$7,161/t yesterday - Copper fell slightly today as the market weighs the possibility the Fed will slow down its monetary stimulus as early as this September.
• Rio Tinto is set to ship first copper concentrate this week.
• Production is estimated to average 330,000t of copper and 495,000oz of gold in the first ten years. By 2020 the operations is forecast to account for a third of Mongolia’s GDP.
• The company is close to secure a US$5bn financing for underground expansion.
Aluminium US$ 1,913/t vs US$1,933/t yesterday
Nickel US$ 14,825/t vs US$14,946/t yesterday
Zinc US$ 1,876/t vs US$1,876/t yesterday
• Italian tax authorities are reviewing intercompany transactions between Glencore Xstrata and its wholly owned smelter Portovesme on the islanad of Sardinia on allegations of tax evasion totalling more than €120m.
• The parent company is said to have sold raw materials at inflated prices which contributed to the “heavy losses” of the smelter.
Lead US$ 2,144/t vs US$2,129/t yesterday
Tin US$ 20,590/t vs US$20,849/t yesterday
Oil US$103.4/bbl vs US$104.4/bbl yesterday
Natural Gas US$3.796/mmbtu vs US$3.833/mmbtu yesterday
Uranium US$40.00 (close 10/06/13) vs US$39.90 (close 07/06/13)
Iron ore 62% Fe spot (cfr Tianjin) US$110.9/t (close 10/06/13) unchanged on the previous close
• The Medusa share price has been under pressure as gold and the sector falls out of favour.
• The company is in the process of commissioning the expansion at the Co-O mine which will give them 200,000 oz of production next year at full ramp up.
• The expansion is on schedule with the mill expansion from 1,000 to 2,500 tonnes per day on target.
• Mine production is increasing as most of the development work to meet mine expansion has been completed.
• Expansion of the mine has been self funded and the company has been able to meet capital requirements from internally generated funds.
Conclusion: The recent weakness in the share price provides a good entry point with long term investors seen to be increasing their holdings with the announcement of BlackRock Group increasing their holding to over 5.05% last week and Wellington becoming a substantial holder.
There has been some concern that with the gold price falling combined with previously announced downgrades in production for FY 2013 (June YE) that the company will not be able to meet the capital requirements to complete the Co-O mine expansion – we believe these concerns to be unfounded. For next year the target is for a significant uplift to 200,000 oz – even if the ramp up to achieve this is slower than expected the company should deliver significant value to shareholders with high free cash flow yields well above 10% even with low gold price assumptions and any production shortfall.
Medusa enjoys a low cash cost of $400/oz with costs such as maintenance capex and development and exploration spend. This puts them in an enviable position relative to the rest of the sector.
At the current share price, the stock is trading at 5.8x for FY 2013 and coming down to 2.0x to FY 2014 with an EV/EBITDA of 4.5x and 1.6x respectively.
*SP Angel acts as UK broker to Medusa
**SP Angel analysts have previously visited the Co-O gold mine in the Philippines.
Atlantic Coal (LON:ATC) – Stockton Mine Reserve Update
• The company has raised its reserve update by 29% at the Stockton anthracite mine to 1.777 Mt from 1.375 Mt.
• This re-assessment is post production of 161,659 tons in 2012.
• The increase is expected to extend the mine life at Stockton by 4 years from 2020 to 2024 based on 2012 production.
• The company have received results from remaining 15 holes of a 62 drill programme to test the grade and geological continuity at Weaju target.
• Weaju is within the Bea Mountain mining licence, 30 km north-east of the New Liberty project.
• Drilling has found multiple gold intercepts within three zones – the North and south limbs of the resource (North and Main Zones) and the fold closure(Creek and Ridge Zones).
• Results suggest a potential strike of mineralised rock over 1 km.
• The North zone has been defined east to west with a strike continuity of 400m and has been drilled to 150m and is still open in all directions.
• Gold intercepts vary in width within this zone of 1 to 18 m and a number of holes have multiple intercepts with grades ranging from over 2 g/t to up to 9.1 g/t gold.
• The best Main zone grades are within a shallow oxidized horizon.
• Exploration work has not stopped due to the rainy season.
• Once results are back from the repeat oxide drilling – geological modelling will be undertaken to establish a resource.
• Metallurgical test work is currently being undertaken.
Conclusion: These results look promising and give Aureus potential for another resource close to their existing New Liberty project which is currently under development.
Kinross Gold Corp (NYSE:KGC)– Decision to stop development of Fruta del Norte
• Kinross has decided to stop development of the Fruta del Norte mine in Ecuador.
• This follows a lack of agreement on economic and legal terms with the government.
• This will result in a charge of $720m in the second quarter.
• The Ecuadorian government have taken a hard line approach to negotiations and expect to develop the mine themselves.
Conclusion: This news is bad in terms of the perception of risk for mining companies operating in Ecuador. The result of these negotiations would suggest that the Ecuadorians are looking to develop this mine themselves – the reality is that this is not necessarily the best outcome for them as they have to find the capital and the expertise to do this. Projects that follow may be better positioned once the tasks of development of the mine become a reality.