Atalaya Mining (LON:ATYM) – Expansion to 15mtpa approved - £39m placing proposed
Bacanora Minerals (LON:BCN) – President and director resigns
Galileo Resources (LON:GLR) – Drilling at Star Zinc Project
China’s ‘New Economy’ threatens commodity bull run
• Encouraging demand is expected to sustain buoyant commodities into 2019, lifted by growth across emerging markets as well as advanced economies. Interest in the commodity sector has flourished this year, as the Bloomberg Commodity Index surged almost 10% since June on improving market conditions, while raw material assets under management in the second half of 2017 were boosted by almost 20% to $417 billion through end-October, representing the highest level since 2014 (Citigroup).
• Tightening balances are expected to support the level of investment in the sector, however with significant risk from the slowing Chinese economy. Uncertainties surround the levels of sustained demand as the largest consumer of commodities transition from ‘Old Economy’ to ‘New Economy’. Growth in China is contracting as President Xi Jinping focuses on the quality of expansion rather than the pace of it.
• Incentives like the ‘One Road One Belt’ will continue to sustain commodity demand as the world’s second largest economy looks to increase its global footprint.
China’s 2018 steel output seen rising even after mill closures
• Crude steel output set to rise 3% to 832mt this year and a further 0.7% in 2018 as major mills ramp up operations offsetting impact of shutdown of outdated plants
• Growth comes after crackdown on illegal low grade steel products which were never included in statistics, supplies now filled in by legal steel mills
China complains about steel glut as nation continues to build capacity
• It’s amazing that the nation that has increased steel production and capacity far beyond any other is now complaining that the rest of the world is not doing its bit to cut capacity.
• The Global Steel Forum, a group of G20 and 13 other nations declared last week in Berlin an ambitious package of policy solutions to tackle global overcapacity.
• Press reports indicate that the US is not happy with the proposals as the forum does not tackle the root causes of excess capacity.
• China is not happy either and does not want to be the one going through the painful process of capacity reduction while the rest of the world just watches, which is faintly amusing since China is principally responsible for the overcapacity.
Electric car push drives premiums for greener metals
• Companies such as VW and BMW are reported to be starting to pay a premium for sustainable and traceable metals.
• Higher prices may also be paid for low carbon products as well as highly processed forms of metals for electric batteries as sustainability issues look set to play increasing focus in raw material procurement
Rio Tinto to develop ‘intelligent’ Australian iron ore mine
• Next year managers at Rio Tinto will seek board approval to develop their first intelligent iron ore mine at a cost of $2.2bn.
• The plan is to fully incorporate technologies such as robotics, driverless trains and trucks on a single site at the new Koodaideri iron ore mine in the Pilbara, Western Australia
• The iron ore mine is planned to produce 40mtpa by 2021 but this may eventually rise to 70mtpa
• The cost of employing and managing staff in this hot and remote region is the principal driver for Rio Tinto with truck drivers thought to be earning >A$100,000pa, supervisors on up to A$230,000 and train drivers on A$250,000 plus.
Dow Jones Industrials -0.17% at 24,232
Nikkei 225 -0.49% at 22,707
HK Hang Seng +0.36% at 29,179
Shanghai Composite -0.24% at 3,310
FTSE 350 Mining +0.27% at 16,576
AIM Basic Resources -1.06% at 2,607
US – US Senate narrowly voted through a tax overhaul on Saturday (51-49) with negotiations between the Senate and the House to begin this week with a view to agree the final version of the bill to go to President
• It is a non-farm payrolls week marking the last jobs report before the December monetary policy meeting.
• The report will provide a mostly clean gauge of labour activity following two months of hurricane distortions.
• Estimates are for the number of new jobs to come in at 199k compared to 261k in October or an average of 140k over two months of October/September.
• Economists are not unanimous on potential effects of tax cuts and infrastructure spending on the economy, according to the latest survey.
• Around half of economists see policy changes adding 0.2-0.4pp to growth in 2018, while 20% forecast a larger gaina dn 20% see no benefit to growth, according to the National Association for Business Economics.
• Despite a modest pick up in growth in 2018, a slight majority still forecasts a recession starting before the end of 2019 versus 48% seeing the expansion running through at least 2020.
UK – PM Theresa May is meeting Jean-Claude Juncker, the EC president, to iron out last disagreements ahead of the EU summit on Dec 14-15 in an effort to progress Brexit discussions further to trade terms.
• Two of the most important discussion points would be Norther Ireland border and the future of European courts in Britain, FT reports.
Turkey – Inflation hit the highest level in 14 years putting more pressure on the central bank to raise from current 12.25%.
• Consumer prices climbed 13.0%yoy in November compared with a 11.9%yoy increase recorded in the previous month.
• Turkish lira continued to weaken against the US$ currently trading close to the lowest level on record.
US$1.1861/eur vs 1.1927/eur yesterday. Yen 112.96/$ vs 112.59/$. SAr 13.775/$ vs 13.668/$. $1.344/gbp vs $1.352/gbp
0.759/aud vs 0.758/aud. CNY 6.619/$ vs 6.607/$.
Gold US$1,273/oz vs US$1,276/oz last week
• Spot gold price fell under pressure from an improving dollar as the US Senate passed its tax reform bill over the weekend. The House-Senate conference committee will now be responsible for resolving the difference between the proposed House and Senate tax bills, with expectations for the bill to assist with sustaining corporate capital investment and [merger and acquisition] activities as both bill call for a reduction in the corporate tax rate to 20%.
• The dollar rebounded to a two-week high after falling on the news that Michael Flynn, former national security adviser to Trump, pleaded guilty to lying to the US Federal Bureau of Investigations about alleged contact with Russia.
• A potentially higher yield trajectory on US Federal Reserve’s interest rates across 2018 have renewed market interest in the dollar, harming precious metal prices.
• Geopolitical tensions could be on the rise as a week-long joint US and South Korea air exercise, called Vigilant Ace, has received condemnation from the North who state the US are “begging for nuclear war”. The drill is expected to involve some 230 aircraft, including two dozen stealth jets and tens of thousands of military personnel which could be at threat from North Korea as it would “seriously consider” counter-measures.
Gold ETFs 71.9moz vs US$71.5moz last week
Platinum US$934/oz vs US$943/oz last week
Palladium US$1,023/oz vs US$1,015/oz last week
Silver US$16.33/oz vs US$16.44/oz last week
Copper US$ 6,834/t vs US$6,789/t last week
• Base metal prices have been broadly supported by Chinese Purchasing Managers’ Index (PMI) readings, which continued to show expanding activity to rise to 51.8. Higher than expected data maintains a positive short-term outlook, while strike concerns at Southern Peru Copper Corp and Teck’s Quebrada Blanca copper mine give underlying supply doubt as unions attempt to renegotiate higher wages on elevated metal prices. Copper stocks dropped 4.1% in November to 460,000 tonnes across Shanghai-bonded warehouses.
Aluminium US$ 2,072/t vs US$2,056/t last week
Nickel US$ 11,400/t vs US$11,135/t last week
Zinc US$ 3,224/t vs US$3,170/t last week
Lead US$ 2,541/t vs US$2,488/t last week
Tin US$ 19,510/t vs US$19,520/t last week
Oil US$63.4/bbl vs US$63.1/bbl last week
• Despite hedge funds hiking bullish bets on US production, US shale oil producers appear to have followed suit with OPEC’s decision to extend the global output cuts until the end of 2018. Money managers boosted bullish wagers on US crude last week to the highest on record since 2009, raising its combined futures and options position by 51,853 contracts to 451,877.
Natural Gas US$3.110/mmbtu vs US$3.092/mmbtu last week
Uranium US$23.00/lb vs US$23.25/lb last week
Iron ore 62% Fe spot (cfr Tianjin) US$70.5/t vs US$68.2/t
• Spot iron ore surged up almost 20% from late October lows to climb beyond the $70/t level, as China’s crackdown on steel output over the winter emission period runs down inventories and builds demand for high-grade ore supply. The initiative to reduce harmful levels of pollutants across key producing provinces has effectively diminished inventories, with “the rally expected to be driven by a further tightening of the Chinese steel market, Chinese steel mills’ active restocking of high-grade iron ore, seasonally weak seaborne supply, and a recognition that iron ore supply growth passes its peak during the first quarter of 2018”, according to Citi analysis.
• The push toward improved environmental conditions has also prompted an increased demand for higher-grade ore which causes less pollution and more efficient energy, boosting the premium on higher-quality ore.
Chinese steel rebar 25mm US$755.4/t vs US$742.4/t
• Despite extensive mill closures, China’s steel output is expected to continue rising, increasing a further 3% to 832 million tonnes this year. The impact of closures of outdated plants and winter capacity cuts are being offset by major mills ramping up operations, with output growth extending 0.7% into 2018.
Thermal coal (1st year forward cif ARA) US$85.6/t vs US$85.2/t
Premium hard coking coal Aus fob US$215.7/t vs US$211.3/t
Tungsten APT European US$291-300/mtu vs US$275-285/mtu last week
Cobalt LME 3m US$66250/t vs US$66750/t last week
Atalaya Mining (LON:ATYM) 174 pence, Mkt Cap £203m – Expansion to 15mtpa approved - £39m placing proposed
• Atalaya Mining has announced that it intends to proceed with a previously announced proposal to increase throughput at its Proyecto Riotinto from the current 9.5mtpa to 15mtpa increasing average copper output by around 40% or 15,000 tpa to 55-55,000 tpa of copper in concentrate.
• Subject to financing and permitting issues, the company plans to start construction work during Q1 2018 with commissioning of the expansion expected to take place during the second half of 2019 and a ramp up to full production during H1 2020.
• The project, which is forecast to cost €80.4m, is expected to reduce “cash costs and all-in sustaining costs by approximately 7% … based on maintenance and processing efficiencies”.
• “Management expects that the expansion project will result in an incremental post-tax net present value (NPV) of approximately US$113 million (assuming an 8% discount rate) and a post-tax internal rate of return (IRR) of approximately 43%, when assuming a US$3.00/lb copper price, US$18.00/oz silver price, and USD:EUR of 1.15.”
• Major elements of the expansion programme are a new primary crushing system and SAG mill, and additional flotation cells and concentrate handling capacity.
• In order to finance the expansion, Atalaya Mining proposes to raise £39m by the issue of approximately 23.3m new shares at £1.67/share. Based on the current issued share capital disclosed on the company’s website we estimate that, if issued in full, the new shares represent around 17% of the enlarged company.
• We note that “The four largest existing shareholders ("Key Shareholders") have already committed to participate in the Placing, in accordance with their pre-existing contractual entitlement rights”. Trafigura, (22%), Yanggu Xiangguang Copper (21.9%) and Liberty Metals & Mining Holdings (13.98%) have all agreed to maintain their current stakes and Orion Mine Finance (14.56%) has agreed to take a further 1.8m shares or 8% of the proposed placing.
• Atalaya Mining’s team achieved commercial production at Proyecto Riotinto on 1st February 2016 at an initial 5mtpa capacity and leapfrogged the planned incremental expansion to 7.5mtpa moving straight to the current 9.5mtpa rate by July 2016. We interpret this as a demonstration of the technical and operational proficiency of the management which bodes well for the efficient delivery of the new expansion to 15mtpa.
Conclusion: Atalaya Mining’s plan to increase the capacity of its Riotinto operation is a relatively low-risk incremental expansion of an existing operating mine where management has already delivered previous expansion projects smoothly. The company’s economic case focuses on reduction of unit costs and sustaining capital requirements to deliver an attractive incremental post-tax IRR of 43% for the expansion. The proposed £39m financing has received the backing of the main shareholders representing over 70% of the current share capital.
Bacanora Minerals (LON:BCN) 95.5p, Mkt Cap £127m – President and director resigns
• Bacanora Minerals report the resignation of the Martin Vidal, President and director of the company as of 30 November.
• No explanation has been given as to the resignation though we note that Mr Vidal is to remain with the company in an advisory / consultancy capacity.
• We wonder if Mr Vidal has disagreed with the board’s filing of a statement of claim with the Court of Queen's Bench in Alberta striking out the 3% over-riding royalty held by the Estate of Colin Orr-Ewing.
• We also wonder why Bacanora did not announce the news of Mr Vidal’s departure on Friday?
• Last week Bacanora reported its first quarter financial results:
• Expenses were C$1.26m for the quarter but this rises to C$2.2m when including stock-based compensation. Adding in other adjustments takes the total loss to C$2.7m which adds up to an annualized C$10.8m for a full year though much will change if the company moves into the construction phase.
• Bacanora reports it is fully financed with approximately US$24m in the bank and is fully funded through to the initial development of Sonora and the start of the construction stages.
• The company expects to report on its new Feasibility Study this year and appears to be updating its lithium carbonate pricing assumptions in the feasibility study based on prices published on https://seekingalpha.com/article/4117788-lithium-miner-news-month-october-2017
Conclusion: we conclude that all is not well with the board of Bacanora Minerals. We expect Bacanora will look to finance the construction of the Sonora project shortly after publication of the Feasibility Study.
*SP Angel is completely independent of Bacanora Minerals and the Orr-Ewing Family estate. The above text represents the author’s independent and personal views as a mining analyst and an observer of the company over many years. Note, we are not advising investors to buy or sell this stock.
Galileo Resources (LON:GLR) 1.375 pence, Mkt Cap £3.5m – Drilling at Star Zinc Project
• The company reports plans to start drilling an initial 1750m this week at the recently acquired Star Zinc Project in Zambia where Galileo Resources holds a 51% interest and may earn up to 85% via the completion of a preliminary economic assessment.
• Galileo Resources has engaged the consultants, CSA Global to prepare a JORC (2012) compliant mineral resource estimate along with the Zambian based GeoQuest who will manage the drilling programme and provide geological support.
• Commenting on the fast-tracking of the drilling, and the soil sampling programme which is expected to be reported shortly, CEO, Colin Bird, said “This imminent drilling programme is designed to confirm a regulatory JORC code resource and to test the potential of other nearby areas considered to be prospective. On completion of this drilling programme, we intend to commence a preliminary economic assessment.”
Conclusion: Previous reports and non-JORC compliant mineral resource estimates have indicated that the Star deposit is a small but high grade deposit with zinc grades of around 20% zinc at a cut-off grade, higher than the resource grade of many deposits, of 14% zinc. With its long history in mining, we consider Zambia to be a relatively attractive area for mining and exploration and look forward to the results of the drilling and the subsequent resource estimate and preliminary economics and to any indications of expansion potential for the Star deposit.