logo-loader

Today's Market View Including Randgold Resources and Rio Tinto

Published: 10:42 06 Aug 2015 BST

no_picture_pai

Crisis – The economic crisis which started in 2007/8 when the banks stopped lending to each other and the Sub-Prime crisis unfolded rumbles on
• China bailed out the world as it pumped >$500bn of stimulus into its markets to avoid the contagion.
• The effect was for ongoing strong growth in China at a time when the economy should have been naturally reigning in its excesses.
• Today, there is no Sub Prime crisis but China is now cutting its growth rates in an effort to better manage its economy.
• Chinese imports are slowing faster than Chinese exports and producers have been told to export surplus metal.  China is no longer Mr-nice guy in the global economy
• Chinese consumption is still growing in many areas but a slowing of consumption growth has led to a collapse in many areas due to overproduction in many areas.
• The collapse in metals prices should now cause mines to close while a new wave of production issues is also causing buyers to look for new production.
• Metals demand was driven for some time by ‘financing demand’ where metal was used as collateral for loans or other financial exercises.
• Higher interest rates are drawing money back to the US to the cost of metal demand and currencies but this migration of money from East to West may give new life to manufacturers which had been struggling to compete in a weaker dollar/renminbi environment.
• The IMF have cast doubt on the renminbi as a potential reserve currency.  Reserve status may be conferred if China undertakes reforms to allow the currency to become more freely usable

Cyprus – if you are in Cyprus you probably already know that temperatures hit 57C yesterday
• Car thermometers recorded 63C in the capital and one brit is already reported to have died cycling in the heat.
• The heatwave which has spread across the middle east is sure to create new power demand for air-conditioning

Economic News

US – ADP employment numbers showed the economy added 185k jobs, down from 229k in Jun and 215k forecast.
• The report saw the US dollar fall against the euro and yen.
• NFP numbers are due tomorrow with forecasts for a 225k increase, up from in Jun.
• On a more positive note, services sector ISM PMI climbed to 60.3, the highest reading in a decade, in Jul v 56.0 in Jun and 56.2 forecast.
• In a property market, lower mortgage rate fuel an increase in housing loan application.
• The volume of application climbed 4.7% from the previous week to Jul 31 as many homeowners refinanced outstanding loans amid lower rates.
• 30-year fixed mortgage rate fell 4.13% in the week, the lowest since May/15.
• Economic news due today:
• Weekly jobless claims (272k v 267k in the previous week)

China – Equities continue to slide with the decline exacerbated by the news that banks’ bad debts surged 35.7%yoy to US$289.9bn as of Jun/15 on China’s banking regulator numbers.
• The ratio of non-performing loans at Chinese banks hit the highest level since 2010.
• This marks an acceleration in the amount of bad debts since last year when the metric climbed 22%yoy through the end of 2014.

Germany – Factory orders post the second best reading YTD in Jun beating market estimates.
• Factory orders: 2.0%mom v -0.3%mom in May and +0.3%mom forecast.

UK – “Super Thursday” BoE economic data to start flowing at 11am as the Bank will release the minutes of the MPC meeting together with the monthly rate decision.
• In addition to those two reports, the BoE will publish its quarterly inflation report.
• Expectations are for 2-3 members to have voted for a rate increase this month.
• In Jul, all MPC members voted to leave rates unchanged at record low of 0.5%.

Australia – Employment growth beats forecasts in Jul while the composition of the increase disappoints with fewer full-time roles added compared to May and Jun.
• The economy added 38.5k jobs last month compared with a 10k increase forecast.
• However, full-time jobs accounted for 12.4k, nearly twice less than 24.9k gained in Jun.
• Unemployment rate ticked up 0.2pp to 6.3%, the highest since Jan/15.

Greece – The equity index opened higher today following three consecutive days of losses, although, the banking sector continued to fall.

US$1.0891/eur vs 1.0867/eur last week.   Yen 124.87/$ vs 124.38/$.   SAr 12.778/$ vs 12.747/$.   $1.560/gbp vs 1.558/gbp
US$0.732/aud unch vs0.737/aud.   South African Rand continues to weaken

Commodity News
Precious metals:

Gold US$1,085/oz vs US$1,086/oz yesterday -
Platinum US$953/oz vs US$952/oz –
Palladium US$600/oz vs US$593/oz  – 
Silver US$14.56/oz vs US$14.53/oz  –

Base metals:
Copper US$ 5,200/t vs  US$5,239/t –
Aluminium US$ 1,598/t vs US$1,612/t –
•  US carmakers report stronger sales in Jul with some setting new records for the month led by increased truck demand offsetting weaker orders for smaller passenger cars.
• Honda, Nissan and Hyundai division in the US posted best Jul sales.
• Ford recorded the best Jul performance in nine years with GM sales at the their highs since 2007.
Nickel US$ 10,895/t unch vs US$10,895/t
Zinc US$ 1,894/t vs US$1,924/t –
Lead US$ 1,715/t vs US$1,715/t  –
Tin US$ 15,400/t vs US$16,050/t   –

Energy:
Oil US$49.70/bbl vs US$50.10/bbl
Natural Gas US$2.765/mmbtu vs US$2.782/mmbtu
Uranium US$35.95/lb vs US$35.25/lb – prices going up as Japan prepares to restart reactors

Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$55.30/t unch vs US$53.60t –
Thermal Coal $55.9 vs $55.9 cif ARA Europe –
Tungsten - APT European prices price $215.0/mtu unch vs $220/mtu – Price range pulls back to $210-220/mtu vs $210-230/mtu previously

Lithium – Flux Power forecasts lithium battery sales to rise by 300% to $3m in 2016
• Flux Power which makes lithium battery packs for electric forklifts reckons sales of its lithium battery packs should rise by 300% next year to $3m.
• Customers now recognise the benefits of lithium over lead-acid battery packs
• We can significant benefits for truck mounted fork lifts where weight and fuel storage is an issue.

Company News
Barrick Gold US$6.5, Mkt Cap US$7.6bn – Focus is firmly on the balance sheet
Barrick Gold reported a net loss of $9m for the 2nd quarter however with free cash flow generation of $26m during the quarter there has been a significant improvement on Q2 2014 where the company consumed $128m of free cash.
• The focus has been squarely on the balance sheet where the company reports debt reduction of $250m in H1 and a reduction in capex of $240m in Q2 alone.
• We estimate that the company’s net debt amounts to approximately $10.7bn or around 46% of capital employed (netdebt:equity + net debt)
• Capital expenditure forecasts for 2015 are now expected to be around 20% lower than in 2014 in the range $1-6-1.9bn
Barrick Gold is well on the way to achieving its objective of $3bn of assets sales in 2015 and realised $2.45bn in H1 through asset sales comprising:
o Sale of the Cowal mine in Australia for $298m in cash
o Sale of 50% interest in Barrick (Niugini) for $298m in cash
o Sale of a 50% stake in the Zaldivar copper mine for $1,005m and
o Streaming of Barrick’s share of gold and silver production from Pueblo Viejo for $610m
o Other assets are still for sale, including the Bald Mountain mine; a 50% interest in the Mountain mine; a 70% interest in Spring Valley as well as Ruby Hill, Hilltop and Golden Sunlight.
o Exploration expenditure is being further reduced by 17% over original estimates for 2015 to $180-220m with a focus on near mine exploration though the commitment to the new discovery at Alturas is retained.
o Reflecting the assets sales, the company has reduced its production and cost guidance for 2015 to production of 6.1 to 6.4m o of gold at a cash cost in the range $600 to $640/oz.

Randgold Resources (LON:RRS) 3873 pence, Mkt Cap £3.6bn – Exceeds 300,000 oz of quarterly gold production for the first time
Randgold Resources reports a new quarterly production record for the quarter to June 2105 with gold production rising by 7% from the March quarter to 300,039 oz. Production is also some 9% above the level reported in June 2014.
• The Loulo/Gounkoto complex in Mali, which is the group’s largest producer, improved head grades by around 12% to 4.8g/t and lifted gold production by 21% compared to the March quarter to 155,989 oz..
• Production at Kibali (167,174 oz) beat its targets and completed the vertical shaft ahead of schedule while output at Morila was on plan although some 30% lower than the March quarter at 35,341 oz.
• At Morila, plans to mine the satellite Domba deposit are being finalised. Tongon continued to suffer power supply problems but contained production losses to 5% (54,685 oz) albeit at the cost of a rise in cash costs of almost 20% to $905/oz making it the group’s highest cost operation.
• Cash costs fell by 3% to $684/oz across the group, helping to drive a 15% improvement in profit to $59.2m for the quarter.
• Exploration and corporate expenses of $13m delivered potentially significant progress in Senegal where the identification of non-refractory mineralisation at the Sophia project approximately 10km west of Massawa could enhance the feed to Massawa to the point where “the project would meet Randgold’s development criteria”. Exploration close to the existing mines at Gounkoto/Loulo is yielding encouraging results south of Yalea and three new targets have been identified in Cote d’Ivoire at Gbongogo, Faphoa North and Fonondera.
• After generating $173m in operating cashflow and $72m of free cashflow after investment during the quarter, the company retains a  strong balance sheet with cash balances of $109m after dividend payments of $38.6m.
Conclusion: Randgold Resources has delivered a robust performance and despite the current commodity price weakness continues to explore, invest in its mines and pay dividends to investors. As the flagship gold stock in London with a strong balance sheet, it is well placed to acquire additional assets which become available from its weaker competitors

Rio Tinto (LON:RIO) 2573 pence, Mkt Cap £46.9bn – Well done Sam
Rio Tinto delivered a market beating set of numbers this morning for the first half 2015 with $2.9bn of underlying vs consensus expectations for $2.5bn.
• The figures support Rio’s strategy of focussing on iron ore production growth while cutting costs throughout the business.
• The interim dividend is raised by 12% to $107.5c that’s US dollars and not Pacific Pesos as the Australian dollar used to be known
• Continuing investment into iron ore and core mines continues has helped to offset much of the collapse in margins which was expected.
• Net debt raises by $1.2bn taking the gearing to 21%.
• Iron ore production is Rio Tinto’s dominant business division by far contributing $4.1bn in sales and $2.1bn in underlying earnings.  .
• Aluminium added a surprising uplift in underlying earnings to $793m vs $373m yoy
• Copper and coal made $393m vs $658m yoy as prices for copper and coal fell by 14% and 28% yoy respectively
• Diamonds and Minerals came in at and lesser $75m vs $76m yoy.
• Rio’s refer to the ‘New Normal’ in their corporate presentation, a period of economic adjustment and recovery in developed markets with lower growth on a higher base.
• The schematic of ‘World real GDP growth’ looks positive but fails to address the key issue of commodity market surpluses caused by the rush to produce into higher prices which began around 10 years ago.
• Rio’s focus on costs, productivity and efficiency is working in iron ore and particularly in aluminium where earnings have more than doubled.
• Costs were cut by a massive $641m representing 85% of the year’s cost cutting target but you can be sure Sam Walsh the company’s ceo will not stop there.
• Rios are aiming for another $359m of cost savings through H1 but majors are always good at cost cutting when they get round to it and its normal to expect costs to be cut by another 50% or more on our recollection.
• Rios lost $3.6bn on the pull back in iron ore and other commodity prices, though Aluminium prices actually gained 0.3% yoy.
• The business gained $847m on exchange rates, $74m on energy and inflation, $79m on higher volumes, $460m on cost reductions = $1,460m
• Balance sheet gearing remains ok at 21% with $13.7bn of net debt though debt tripped Rios up in 2008 following the Alcan acquisition.  There is always potential for another banking crisis if banks become overextended.
• Margins:  Rios managed an impressive 38% in group EBITDA margins vs 41% yoy though this is likely to fall further through H2 on lower prices.
• Outlook:  sadly the environment is now tougher for Rio Tinto and its peers.  All the key commodity prices are lower and the offset of weaker producing currencies will only partially offset this impact.  Cost cutting will continue to deliver benefits but the quantum of this may slow through the second half, though miners are good at cost savings when the pressure is on.
• Mongolia: The construction of the first phase of Oyu Tolgoi was completed on schedule in less than 24 months and cost US$6bn.  The mine should start contributing to earnings soon.
Conclusion:  Sam Walsh and his team are doing a good job for shareholders.  These are impressive figures considering the fall in commodity prices and the need to place increasing volumes of iron ore into the market.  Rio’s results show the company to be best in class among the majors and a good place for investors in the sector through the commodity price downturn given the commitment to dividends and the share buyback program.

FTSE rises ahead of Easter weekend, JD Sport gains on upbeat outlook -...

The FTSE 100 gained on the final morning of this shortened Easter trading week. Festive cheer was limited though, as Thames Water confirmed shareholders would not provide it with a £500 million rescue package, prompting speculation over the London supplier’s future. On a more positive...

54 minutes ago