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Today's Market View Including Metals Exploration, Ortac Resources and Sierra Rutile

Published: 10:50 24 Sep 2015 BST

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Metals – hold steady as miners fall on worsening outlook for demand
• Indicators for a recovery in metals demand turned negative this week with yesterday’s China PMI figures worse than expected
• Figures and statements out of construction machinery manufacturers also indicate further worsening of new construction activity in China, Brazil and Russia.
• Commentary suggests that an uncertain outlook is holding back new construction and infrastructure projects with machinery orders for new projects being delayed till the very last moment to mitigate risk

Economic News

US – Manufacturing PMI was unchanged this month at lowest level since Oct/13 with producer prices posting the first decline in over three years.
• “Manufacturers cited lower prices for a range of raw materials, particularly metals, alongside decreased oil-related costs”.
• “The survey is indicating the weakest manufacturing growth for almost two years, meaning the sector will have acted as a drag on the economy in the third quarter”.
• Growth in payroll numbers as measured by the Markit survey increase only marginally and the weakest pace since Jul/14.
• “A number of firms commented on the non-replacement to departing staff and efforts to boost productivity at their plants”.
• General new orders climbed at the weakest pace since Jan/14 on the back of respondents’ concern over business outlook and greater caution among clients.
• Surprisingly new export orders picked up despite many respondents’ comments over the strengthening dollar weighing on demand from abroad.
• Manufacturing PMI: 53.0 v 53.0 in Aug and 52.8 forecast.
• Economic news due today:
Date Announcement Period Expected (Bloomberg) Prev month
Thursday Durable Goods Orders/ex Transport Aug -2.3%mom/+0.1%mom +2.2%mom/+0.4%mom
Non-defence Capial Goods Orders ex Air Aug -0.2%mom +2.1%mom
  New Home Sales Aug 515k/+1.6%mom 507k/+5.4%mom


UK – Citi economists forecast first BoE rate rise for Q4 2016 due to downgrade in outlook for China and its impact on the rest of the world
UBS economists reckon uncertainty over the EU referendum, possibly next October, could also delay plans for a rate rise.

Japan – Manufacturing expanded but at a slower rate in Aug driven by poor new export orders amid an economic slowdown in China.
• “Underpinning the slowdown in total new order growth was a sharp reduction in international demand as new export orders dropped to the greatest extent for 31 months”.
• “Employment levels declined for the first time since Mar”.
• Manufacturing PMI: 50.9 in Sep v 51.7 in Aug and 51.2 forecast.

Germany – Consumer sentiment for Oct came off slightly but continued to hover  around the highest level in more than a decade (10.2 hit in Jun/15).
• GfK consumer confidence: 9.6 v 9.9 in Sep and 9.8 forecast.
• On the business front, IFO activity index exceeded expectations climbing to 108.5 this month v 108.4 in Aug and 107.9 forecast.
• Business outlook index has also climbed to beat estimates (103.3 v 102.2 in Aug and 101.4 forecast).

Norway – The central bank surprisingly cuts the benchmark rate saying a further easing is possible to support the economy amid falling oil prices.
• The overnight deposit rate was cut 25bp to 0.75%.
• “Growth prospects for the Norwegian economy have weakened, and inflation is projected to abate further out,” the bank said.
• “We expect mainland GDP growth to increase, but at a much slower pace than we’ve seen previously. It won’t be enough to absorb all of the labor supply, so unemployment will slowly increase.”

US - Washington withdraws threat of sanctions for Chinese cyber crimes
• China’s President Xi pledges commitment to deal with cyber crime (espionage) from within China.
• Only time will tell on how solid or hollow these pledges might be

Currencies

US$1.1187/eur vs 1.1109/eur yesterday.   Yen 120.08/$ vs 120.25/$.   SAr 13.905/$ vs 13.658/$.   $1.527/gbp vs 1.534/gbp
0.696/aud unch vs 0.705/aud

Commodity News

Precious metals:

Gold US$1,136/oz vs US$1,127/oz yesterday
Platinum US$945/oz vs US$942/oz yesterday – Platinum appears to be lagging palladium on repercussions of Volkswagen scandal
Palladium US$648/oz vs US$622/oz yesterday – Traders and investors may be buying palladium in preference to platinum on lower expectations for diesel auto catalyst demand
• Palladium ETFs have seen net outflows in recent weeks hitting a five year low last month but this may change as investors prefer to focus on demand for gasoline autocatalysts
• The further discreditation of diesel emissions as VW is forced to apologise for its manipulation of emissions results is likely to cause consumers to prefer gasoline over diesel and to push demand towards hybridisation.  Even Range Rover is producing a new hybrid drive
Silver US$14.85/oz vs US$14.79/oz yesterday

Base metals:

Copper US$ 5,078/t vs  US$5,110/t yesterday – Global market was largely in balance through Jun, on ICSG numbers.
• Refined demand was little change yoy at 1.92mt with production up 3.5%mom with the surplus of 2,000t recorded.
• This takes the balance in H1/15 to a small surplus of 20,000t v 576,000t deficit during the same period last year.
• Chinese demand fell 1% in the first half of the year while consumption exChina contracted 3%yoy on softer numbers from Russia, Japan and the EU.
• On production side, secondary output climbed 7.9%yoy in H1/15 with primary supply up 2.3%yoy driven by China, the Philippines, Indonesia and the DRC.
• A separate report shows the Energy and Mines Ministry in Peru expects the nation’s copper production to grow 15-20% this year. This translates into 0.2-0.3mt in incremental production on 1.38mt supplied through 2014.
• The increase to be driven by the ramp-up of Chinalco’s Toromocho project and the expansion of Cerro Verde operated by Freeport McMoRan.
• Peru produced 896kt of copper, up 11.2%yoy, in the first seven months of the year.

Aluminium US$ 1,581/t vs US$1,590/t yesterday –
Nickel US$ 9,345/t vs  US$9,800/t yesterday –
Zinc US$ 1,670/t vs US$1,667/t yesterday –
Lead US$ 1,702/t vs US$1,699/t yesterday
Tin US$ 15,050/t vs US$14,850/t yesterday

Energy:
Oil US$48.00/bbl vs US$49.50/bbl yesterday -
Natural Gas US$2.557/mmbtu vs US$2.586/mmbtu yesterday
Uranium US$37.25/lb unch vs US$37.25/lb yesterday –

Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$56.6/t vs US$56.6/t
Thermal coal (1st year forward cif ARA) US$49.80/t vs US$50.10/t yesterday

Other:
Tungsten - APT European prices unchanged at the spectacularly low price of $180/190 per mtu.  This is entirely unhelpful for Wolf Minerals which shipped first concentrate recently from the Hemerdon Mine in the UK

Company News
Metals Exploration* (LON:MTL) 3.375 pence, Mkt Cap £46.4m – Interims
Metals Exploration have largely completed the construction of the process plant for the Runruno Mine.
• The process plant was 99.5% completed as at the 8th September with minor work outstanding.
• The Tailings facility is close to completion with the tailings return pipe 90% complete and the tailings discharge pipe 70% complete.
• Stage 2 completion of the tailings facility has been delayed due to rain but is expected to be completed shortly.
• As previously reported staged commissioning started in July with completion contingent on achieving occupancy and operating permits.
• The commissioning phase has been successful to date.
• Several occupancy and operating permits are required based on areas and structures identified in “as built” drawings.
• The company is going through the process to acquire these permits from both local authorities for occupancy permits and regional authorities for operating permits..
• The company do not see any impediments to getting permits bar the time to go through the process.
• The tailings pipeline construction and permitting remains a critical path for the project.
• To provide for the working capital gap now created by the delays, the company have recently announced a share placement for US$5m with an open offer of a further 100m shares at 3 pence a share.
• As at the end of August the company had spent US$184,130,996m against a budget of US$182,764,000 including project contingency of US$12,311,102.
• Cash held at the end of August stood at £10.7m including £1.5m to cover the Debt Service Reserve Account for the project finance facility.
• A further £3.9m was for the Opex reserve account and US$4.69m for VAT contingency – these cover payments currently being challenged by the company.
• Delays have also impacted the timing of interest and capital payments due on the project finance.
• The banks have agreed to restructure capital repayments due with the first payment of US$13m due in Dec 2015 shifted out with a payment now due in March 2016 of US$2m and the June 2016 payment increased to US$15m from US$13m with further capital payments as set out in the repayment schedule.
• The cost of rescheduling and the covenant breach penalty has been capped at US$1.25m.
• The lenders have also agreed to make the company’s opex reserve account available if required.
• The opex account is currently funded to its maximum of US$6m and if funds are drawn from this account, this needs to be topped up from the share proceeds.
Conclusion: The permits continue to hold up operations and it is good to see that the company have secured a term sheet to re-structure debt payments and have commitments by existing shareholders to support the share placement to cover the funding gap. In the meanwhile the company continue to work on securing operating and occupancy permits which are normally a matter of course in other jurisdictions.
*SP Angel act as broker to Metals Exploration

Ortac Resources* (LON:OTC) 0.06p, Mkt Cap £2.1m – Annual results and project update
Ortac Resources has reported a 25% reduction in losses for the year ending 31st March 2015. The company generated a loss of £1.33m compared to £1.77m in the year to March 2014.
• The result reflects a 10% reduction in administration expenses to £1.39m and a sharp decline in non-cash share based payments to £19,000 from the prior year figure of £258,000 and overall “cash savings of more than 30% relative to the prior year.”
• Cash balances at the year end amounted to £498,000 and the company has sUBSequently raised an additional £600,000 via an issues of shares at 0.085 pence per share.
• The wholly owned Sturec project in Slovakia has been the subject of a campaign by a local residents’ group opposed to the recommencement of mining in this historic mining area. The company is confident that “Our proposals meet the highest standards of environmental protection as established at EU level and we feel that ultimately this will convince the key responsible organisations that this is a sensible project and one that will generate jobs and revenue for the region and re-establish this core industry for the decades ahead.”
• In the meantime, however, following the extraction of sample material from Sturec for testing of non-cyanide processing technologies, trial mining remains suspended. The company has, however, reviewed the 2013 pre-feasibility study by SRK to reflect recent changes in commodity prices and exchange rates. The review has identified capital and operating cost savings of around 3-5% which deliver a project IRR of 23% and an NPV of $111m at a discount rate of 8% using a $1200/oz gold price assumption.
• During the year, the company has increased its ownership in Andiamo Exploration from 18% to 25% at a cost of £305,000 and acquired an investment in Zamsort Limited, a private Zambian exploration and mining company with a small scale mining licence over an area of 4 sq km within a 999 sq km exploration licence at Kalaba approximately 40 km from First Quantum Minerals’ Trident Project.
• Since the end of the financial year, Ortac has invested a further $600,000 in Zamsort by way of a secured convertible loan note which increases Ortac’s rights on conversion to 19.35% of Zamsort’s equity. Metallurgical testing is underway at the Copperbelt University in Kitwe and the company has previously announced that it is working on plans for  additional drilling to gain increased confidence in the resource and is also assessing terms from a referred mining contactor
• The Chairman of Ortac Resources, Anthony Balme, commented “..we have broadened our portfolio of projects, to encompass minerals other than gold and to reduce our reliance on Slovakia. These are strategic decisions which we feel will strengthen the Company…”
Conclusion: Ortac has contained its costs while acquiring new assets which diversify its geographical and commodity exposure and reduce the company’s reliance on the Sturec project in Slovakia.
*SP Angel acts as Nomad and broker to Ortac Resources

Sierra Rutile (LON:SRX) 20.6 pence, Mkt Cap £107.7m – Update on Standby Facility
• A new standby facility from Nedbank of US$15m is to replace the facility provided by Pala Investments.
• The terms of the facility comes in at a lower cost with an interest rate of Libor plus 2% against the Pala facility at Libor plus 5.25%.
• There is no arrangement or commitment fee, however, any funds drawn from the Nedbank facility is to secured against an equivalent cash collateral from Pala.
• The company will also be able to access “restricted” cash from the current US$20m working capital facility from Nedbank again backed by cash collateral from Pala.
Sierra Rutile will pay an interest of 1% on any cash collateral from Pala.
Conclusion: This looks like an improvement in funding terms with the spread improvement of around 2.25% after netting out the 1% due on cash collateral to Pala.

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