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Today's Market View Including Beacon Hill Resources, Coal of Africa, Discovery Metals, Anglo Pacific Group and others

February 01 2013, 11:02am

 

Anglo Pacific (LON:APF) – Rio Tinto declare force majeure at Kestrel coking coal mine.

Beacon Hill Resource (LON:BHR) – Leases Signed for Rolling Stock Good Sign

Coal of Africa (LON:CZA) – Receipt of US$80m from Beijing Haohua Energy

Discovery Metals (ASX:DML) - Target Price Under Review – Chinese Bid looks likely to Lapse

Petropavlovsk (LON:POG) – Russian selling activity makes vulnerable for potential bid

South Africa - Eskom has applied to the National Energy Regulator of South Africa for annual increases of 16% for the next vie year period starting from Apr this year. It should take prices from 61c/kWh to 128c/kWh in nominal terms by 2018.

Business lobby said further power price increases following a 3 times gain between 2007 and 2012 may severely disrupt the mining and metals sector, that accounted for 60% of South Africa’s export earnings. It advised a maximum increase of 10.8% should be enacted.

The Chamber of Mines President Mark Cutifani said proposed power cost increases will lead to further restructuring within the nation’s platinum and gold sectors.

Solar panels – we always they had a proper commercial use

Normally alternative energies (renewable resources) need state subsidies for economic instillation.

But the highly innovative narcotics industry has embraced solar power in a move few would have anticipated.

Police have discovered a cannabis factory heated by power from 115 solar panels in an industrial estate in Sussex.

Goes to show the free market will always find uses for new technology.

Economic View

US - Congress approved a three-months suspension on the US debt limit until May 19 as lawmakers enter another round of debates on the US budget.

This eliminates the risk of default in the mean time as the government is now given green light to surpass its US$16.4tn borrowing limit.

Non-farm payrolls are due later today. Estimates are for an increase to 165,000 in Jan, the highest since Aug and up from a 155,000 increase recorded in Dec. The unemployment rate is expected to hold at 7.8%. 

China - Manufacturing expanded for a fourth month in Jan with factory PMI coming in at 50.4, down from 50.6 in Dec and 51.0 forecast. (National Bureau of Statistics)

A private estimate prepared by HSBC/Markit climbed to a two-year high of 52.3 from 51.5.

The statistics bureau said the PMI fell for small and medium sized businesses, while large enterprises recorded an increase.

Export orders contracted, today’s report showed. Infrastructure investment stimulus is believed to drive the activity.

A separate report showed new house prices grew 1%mom in Jan, the biggest increase in two year, as the government refrained from imposing additional property curbs.

Japan - Jobs in manufacturing fell to below 10m in Dec for the first time in more than 50 years.

Factory payrolls dropped to 9.98m, contracting 350,000 from last year.

Producers have cut stuff amid falling economic growth and moved operations overseas to fight a strong yen and higher energy costs after the nuclear shutdowns.

Cony, Panasonic and Sharp all have announced a total of more than 29,800 dismissals for the year ending Mar 31. Chipmaker Renesas Electronics is cutting 10,500 jobs, a quarter of its staff.

Indonesia - Inflation accelerated to 4.57%yoy in Jan from 4.3%yoy recorded in Dec and beating estimates for a 4.47%yoy increase.

Prices grew on the back of higher power tariffs and minimum wages and increases in food prices on floods.

The central bank won’t need to react to an inflation pick up as the effects are believed to be temporary, Deputy Governor said.

A separate report showed exports dropped 9.8%yoy on slowing global economic growth. FY2012 exports fell 5.6%yoy while imports increased 8.0%yoy taking the trade deficit to US$1.63bn.

South Korea - Exports climbed the most in 11 months as the timing of a Lunar New Year distorted calculations. Shipments grew 11.8yoy in Jan, up from a revised 5.7%yoy in Dec.

Exports are likely to come under pressure moving forwards on the back of depreciating currency of its trading rival, Japan.

The trade surplus stood at US$874 in Jan, down from a US$1.9bn excess in Dec. 

India - Manufacturing growth slowed in Jan according to a private survey.

Manufacturing PMI fell to 53.2 from 54.7 in Dec. (HSBC/Markit estimates)

Power cuts affected production growth and new orders expanded at a slower pace.

The Finance Ministry forecasts economic growth to total 5.7% in the year through Mar 2013, the weakest pace in a decade.

The Reserve Bank cut the repurchase rate by 0.25pp to 7.75% on Jan 29 for the first time since Apr to help boost growth.

Peru - Consumer prices climbed less than expected in Dec. Inflation came in at 0.12%mom and 2.87%yoy compared to analysts estimates for a 0.19mom and 2.94%yoy increase.

The central bank is expected to leave benchmark lending rate unchanged at 4.25% for a 21st consecutive month during its next board meeting on Feb 7.

The economy will grow 6.3% in 2013, below the nation’s potential growth rate, and the bank does not see inflationary pressures, central bank President said.

Russia - GDP growth slowed to 3.4% in 2012,down from 4.3 in 2011with the Central Bank is now under pressure to cut rates to kickstart the economy.

President Vladimir Putin told its cabinet yesterday that interest rates “substantially” higher than inflation is a concern.

The economy has potential to grow at 4-5% should the central bank ease its monetary stance, Deputy Economy Minister said. The economy will grow a little more than 2% in the first six months of the year and just over 4% in the second half, he said.

The central bank may cut rates if inflation decelerates, Bank Rossii Chairman Sergey Ignatiev said yesterday.

Consumer prices gained 6.6% in 2012. The bank set a target of 5% for 2013.

South Africa - The government is considering to curb scrap metal exports to ensure steady supply at price that supports local industry.

US$1.3619/eur vs 1.3560/eur yesterday. Yen 92.07/$ vs 90.96/$. SAr 8.968/$ vs 9.058/$. $1.585/gbp vs 1.582/gbp

Commodity News

Precious:

Gold US$1,665/oz vs US$1,676/oz yesterday - Gold fell yesterday after traders booked profits following a jump in price on weak US GDP numbers. Prices are little changed this morning ahead of he US non-farm payroll data due later today.

India raised benchmark gold price to US$545/10g (US$1,695/oz) from US$542/10g that is used to calculate tax on imports.

Manfra, Tordella & Brookes, a precious metals dealer, sued the owner of the Manhattan property over damage to hundreds of millions of dollars’ worth of gold inventories following superstorm Sandy.

SPDR gold holdings remained at 1,328t (42,670koz) valued at US$71.1bn yesterday. 

Platinum US$1,672/oz vs US$1,683/oz yesterday

Palladium US$745/oz vs US$747/oz yesterday

Silver US$31.37/oz vs US$32.02/oz yesterday

Base metals:

Copper US$ 8,200/t vs US$8,278/t yesterday - Prices are well supported above US$8,200 level amid weaerk US dollar and positive economic data from China. 

Aluminium US$ 2,089/t vs US$2,117/t yesterday

Nickel US$ 18,378/t vs US$18,493/t yesterday

Zinc US$ 2,140/t vs US$2,169/t yesterday

Lead US$ 2,432/t vs US$2,466/t yesterday

Tin US$ 24,825/t vs US$25,025/t yesterday

Energy:

Oil US$115.7/bbl vs US$114.8/bbl yesterday

Natural Gas US$3.309/mmbtu vs US$3.328/mmbtu yesterday

Uranium US$43.75 (close 31/01/13) unchanged on the previous close

Company News

Anglo Pacific (LON:APF) – Rio Tinto declare force majeure at Kestrel coking coal mine.

Rio Tinto have declared force majeure on coking coal production out of the Kestrel coking coal mine.

The mine will be offline for seven to ten days according to the report.

Heavy tropical rain has cut rail lines, shut mines, shafts and ports through the region.

Kestrel produces some 4mtpa of coking and thermal coal.

Anglo Pacific earns a royalty off coal produced from certain license blocks at the mine.

The mineral rights holders are entitled to earns a 7% revenue royalty on coal sold from these blocks below A$100/t and a 10% royalty on coal sold above A$100/t.

AngloPacific have a half share in certain mining and mineral rights giving it 3.5% and 5% revenue royalties respectively

It has been suggested that Rio Tinto may look to mine blocks going forward which are not subject to the AngloPacific royalty.

Beacon Hill Resource (LON:BHR) – Leases Signed for Rolling Stock Good Sign

The company has signed a lease agreement for 5 new locomotives for a term of 10 years with Thelo Rolling Stock Leasing Prop Ltd.

Thelo  will also lease 90 new Gondola-type coal wagons to the company.

Thelo is 50% owned by Thelo Rolling Stock Partnership and 50% by the IDC.

The leasing agreement is seen as a pre-requisite to getting final rail allocations on the Sena Line with rail operations starting in Q3 2013.

Conclusion: The company is anticipating a rail allocation of 0.5 Mt which is how much export production the company is targeting in the first phase. With the focus on higher value coking coal and offer almost halving of transport costs from $55/t to $25/t which is a meaningful number for 0.5 Mt of $15m before leasing costs. Good progress is being made at this project with the company targeting 2.8 Mtpa ROM by the end of 2013. There is unlikely to be a further allocation of rail capacity for further production at this stage with a constraint in place till new capacity/infrastructure is available on the rails.

Coal of Africa (LON:CZA) – Receipt of US$80m from Beijing Haohua Energy

Following regulatory and shareholder approval the company is now in receipt of $80m from Haohua Energy International.

This is in addition to the $20m received so far of the $100m investment from HEI.

Discovery Metals (ASX:DML) – Chinese Bid looks likely to Lapse

Discovery Metals have written to shareholders explaining reasons why Cathay Fortune Investment Ltd (CFI) might allow their bid to lapse

CFI look likely to let the bid lapse citing an inability to do extensive due diligence on the Boseto project and other material concerns.

The hostile and conditional nature of the bid and the cap on the offer at $1.70/s placed by CFI meant there was little incentive for Discovery to open their books to CFI making completion of the offer difficult for the Chinese group.

CFI made a number of conditions to the bid which the Discovery team saw as unrealistic such as the waiving of the requirement for the bidder to repay project debt on change of control.

Conclusion:  We are not surprised to see the outcome to this bid – the company’s expectations on a take out valuation were some way from the bidder’s offer at A$702m which they expected to revise down following some of the issues Discovery have had during commissioning of the Boseto mine.  The bid has been a significant distraction to management at the time when they needed to focus on getting operations right at the mine at a time when things can go wrong.  With the bidder now walking away the company will now have to focus on improving the supply of ore to the concentrator and ensuring that the concentrator continues to run smoothly.  The last update showed an improvement in both mining and processing with some of the operational problems being fixed. Infill drilling at Zeta also showed potential for high grades which would help with establishing a reserve at Zeta NE.  We note that if Discovery had maintained its London listing and the company had adopted UK takeover protection then CFI or any other bidder would have been subject to UK Takeover Panel rules then CFI would have been subject to a more formal and stringent bid process.

Petropavlovsk (LON:POG) – Russian selling activity makes vulnerable for potential bid

Petropavlovsk shares have suffered a disappointing time in recent years.

The market has effectively expressed concerns over the potential to continue to meet production targets along with the level of capital investment being spent on new mines and on the development of the new pressure oxidisation (POX) plant in recent years.

Some have suggested that the company could run short of cash and facilities to meet its high level of expenditure and may have sold stock accordingly.  

But, analysis suggests the company should sufficiently cover its capital commitments even if gold prices fall to significantly lower levels

While we do not know the details and significant dates relating to the company’s borrowing facilities we do feel the business should remain able to meet its cash commitments and to replace debt facilities if necessary.

A major US investment bank recently worried the market by posting a $1,200/oz forecast for gold by 2018 with a comment on growing downside risk.

While it is entirely possible for the market to shake the gold price down to $1,200/oz over the next few years we think central banks are likely to continue to support near current  price levels and that on-going buying in China and elsewhere should provide additional demand to soak up potential ETF sales.

The lower forecast may persuade a number of higher cost gold miners to sell their gold production forward depressing market prices.  

If significant gold production is sold forward into the market over the next few months then a lower gold price forecast could become a self fulfilling prophesy.

Petropavlovsk recently reported gold production ahead of targets for last year in a positive Q4 and full year trading update statement.

IRC has also announced the potential investment of $238m into its iron ore and illmenite mining business effectively allowing Petropavolvsk to deconsolidate IRC from its statements and reducing the company’s apparent debt commitments.

Conclusion:  POGs shares appear to have been pushed lower on reports of trades out of Russia and sentiment over its cash position.  It is our view that the company is being unfairly punished for its aggressive capital investment program.  We believe the new POX plant should be a valuable and profitable addition to the company’s facilities and the company is now able to better meet its production forecasts on an ongoing basis.  We feel there is much unrecognised value within the group. 

 

 

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

 

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