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Today's Market View In DiamondCorp, Kodal Minerals, Papillon Resources, Bellzone Mining and others

Last updated: 11:50 04 Jun 2014 BST, First published: 10:50 04 Jun 2014 BST

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Costs – cost cutting hits miners where it most hurts according to Bloomberg

Miners have a reputation for working in rough, tough environments, living in camps which make your average concentration camp look positively palatial.

But cost cutting in the sector is now forcing miners to give up their last creature comforts.

Kinross Gold are reported to be losing their Nespresso coffee machines and caffeine capsules – we suspect productivity will fall dramatically.

Not to be outdone, Rio Tinto are cutting back on meat pies.  We all remember what happened when British Rail gave up on selling pork pies, it was the end of the line for BR!

Rio Tinto are also said to have saved $60,000 last year by reducing servings of hot meat pies and sausage rolls.

We wonder where the next cost cuts will come?  Will we see directors flying in economy, or might companies stop giving out tins of mints to investors.

There has been a noticeable decline in the number of freebies given out at conferences with less mouse mats and branded pens now on offer.

Perhaps some miners might even consider other board room expenses.

Miners use higher nickel prices to sell off nickel assets

The major miners continue to look to streamline their operations to focus more on bulk commodities where margins currently offer better returns.

Nickel, copper and other metals are more complex and challenging to produce than iron ore with generally lower returns on offer right now and higher risk profiles.

While Chinese economic growth caused metals prices to rise nearly 10 years ago, We believe China has been doing its best to supress prices where it is able to exercise some leverage.  Every year we see Chinese traders hold back from the market for a period to cause prices to fall and every year we see miners forced to sell metal into lower price levels.

The Indonesians are no strangers to Chinese negotiating tactics and are beating the Chinese at their own game with an effective ban on non-beneficiated ores.  The ban has been far more effective than any trader would have dared imagine.

Indonesia is also effectively manipulating tin prices higher with its recent rules on price fixing on the local tin exchange.  All Indonesian tin is required to be sold through this exchange with local rules setting minimum prices for sales on a weekly basis.  If that’s not price fixing then I don’t know what price fixing is? 

Perhaps the Americans can fine China Inc and Indonesia for price fixing rather than picking on poor old BNP and causing the Frogs to throw their toys out of the proverbial pram.

So we wonder if Indonesia’s next move might be to fix minimum prices for nickel in nickel pig iron ‘NPI’.  New smelters are set to restart production of NPI in Indonesia over the next few years and the success of Indonesia’s tin fixing may persuade local policy makers to force NPI to be traded in the same way.

In the meantime BHP and Anglo American are reported to be in talks to sell off some $9bn and $5bn of nickel assets respectively.

Economic View

US – Auto sales climbed to 16.7m in May, the strongest reading since Feb/07, with a number of major auto makers beating analysts’ expectations.

Estimates were for a an increase to 16.10m units from 15.98m recorded in Apr.

YTD sales growth accelerated to 4.1%yoy building up momentum following weak performance recorded in Jan and Feb.

Chrysler sales climbed 17% (v +14% forecast), GM sales up 12.6% (+6.4%), Ford sales increased 3.0% (-0.2%) with Toyota up 17% (+8.1%).

Factory orders advanced for a third consecutive month in Apr (+0.7% v +1.5% in Mar (revised from +1.1%) and +0.5% forecast).

The ISM will check all data manually following the software problem seen yesterday when the agency had to revise released manufacturing PMI twice.

Yesterday, first reading of the PMI came in at 53.2 suggesting a fall in the expansion pace in May. The number has been later revised to 56.0 which was then changed again to 55.4.

Economic news due today: Wednesday: May ADP NFPs (+210k v +220k in Apr), May ISM non-manufacturing PMI (55.5 v 55.2 in Apr), Apr trade balance (-US$40.8bn v –US$40.4bn in Mar)

Eurozone – Inflation slowed more than forecast in May prompting the ECB to against the threat of deflation.

CPI fell to +0.5%yoy compared with +0.7%yoy in Apr and +0.6%yoy forecast.

Weaker than estimated numbers are attributed to lower food prices on the back of a mild winter. Core CPI (ex. food and energy) was +0.7%yoy  versus +1.0%yoy in Apr and +0.8%yoy expected.

ECB will vote on the rate change tomorrow with estimates for a cut in refinancing rate and deposit rates.

Asset purchases as part of the quantitative easing programme are not expected this month.

A separate report showed the jobless rate fell to 11.7% but still stood close to its record high of 12.2% seen in Sep/13. Readings vary strongly between regions with unemployment in Austria and Germany at only c. 5% with the one in Greece and Spain running at more than a quarter of the labour force.

France – Foreign Minister Laurent Fabius called the decision by US authorities to fine BNP Paribas for as much as US$10bn as “completely unreasonable”.

French officials argued the fine would damage BNP’s capital base and cut its ability to lend.

The government raised its rhetoric on the matter ahead of the President Obama visit to the country tomorrow.

Market commentators say putting pressure on Barack Obama to intervene and change the decision by the US prosecutors is unlikely to be effective and might make things even worse if anything.

Australia – Q1 GDP expanded at the fastest pace since Q2/13 led by strong exports and construction.

Output advanced at 3.5%yoy compared with +2.7%yoy (+1.1%qoq) in Q4/13 (revised from +2.8%yoy) and +3.2%yoy forecast.

Exports surged 4.8%qoq  adding 1.1pp to GDP growth, while construction investment increased 4.7%qoq, adding 0.2pp to the increase.

Ghana – Miners reject new ground rent fee - Ghana ground rents were last reviewed in 1986 with the rate set at cedis ₵5,000/sqkm, redenominated this is now 50Gp/sqkm

Smaller miners are said to be struggling to pay the rent with the cost of postage and for the check booklet now more than the rent as well as travelling costs to the Office of the Administrator of Stool Lands.

US$1.3608/eur vs 1.3607/eur yesterday.  Yen 102.61/$ vs 102.36/$.  SAr 10.789/$ vs 10.654/$.  $1.673/gbp vs 1.678/gbp 

Commodity News

Precious metals:

Gold US$1,246/oz unch vs US$1,246/oz yesterday – 

Platinum US$1,423/oz vs US$1,436/oz yesterday – A possible deal might have been agreed between protesting miners and platinum producers in South Africa.

Local newspaper (The Business Report) said the AMCU had accepted a government-mediated wage offer which slightly less than demanded minimum of R12,500pm.

Producers are currently considering details of the deal and have not commented as yet.

Palladium US$833/oz unch vs US$835/oz yesterday – 

Silver US$18.84/oz vs US$18.90/oz yesterday

Base metals:

Copper US$6,773/t vs US$6,888/t yesterday – 

Indonesian Economic s Minister is holding talks with government officials and major miners to prepare a new tax deal and re-start shipments of copper concentrates.

No details on what changes are currently considered have been provided.

Aluminium US$1,820/t vs US$1,847/t yesterday – 

Nickel US$18,925/t vs US$19,300/t yesterday – 

Zinc US$2,077/t vs US$2,080/t yesterday

Lead US$2,114/t vs US$2,127/t yesterday

Tin US$23,130/t vs US$23,265/t yesterday

Energy:

Oil US$109.1/bbl vs US$108.7/bbl yesterday

Natural Gas US$4.628/mmbtu vs US$4.602/mmbtu yesterday

Thermal Coal US$81.0/t vs US$81.2/t (03/06/14) 

Coking coal US$120/t unch vs US$120/t (03/06/14) Quarterly seaborne benchmark - 

Uranium US$28.25/lb unch vs US$28.25/lb (03/06/14) - 

Tungsten - US$376.0/mtu unch  vs US$376.0/mtu (03/06/14) APT European 

Iron Ore US$92.5 vs US$92.1 (03/06/14) 62% Fe spot (cfr Tianjin) 

Company News

B2 Gold (BTO CN) – Merger with Papillon Resources

Papillon Resources (ASX:PIR)

The two companies are to merge on an agreed ratio of 0.661 B2Gold shares for each Papillon share.

The merger represents a purchase prices for Papillon of A$1.72 per share with a value of around A$615m (US$565m).

The premium implied on the last closing price on 23 May of 52.7% and 42.24% as at the 2 June 2014.

B2Gold’s three operating mines produced 366,000 pz om 2013 at a cash cost of C$681/oz and an all in sustaining cost of C$1,064/oz.

B2Gold’s production is expected to increase production from the Otjikoto mine in Namibia in late 2014.

The combined group will develop the Fekola project subject to a definitive feasibility study by B2Gold’s Otjikoto Development Team.

The Mineral Resource at Fekola is 4.21m oz is for 68.29 Mt at 2.35 g/t gold giving 5.15 m oz at a cut off grade of 1 g/t gold.

90% of the resource is the Measured and Indicated category with 3.16m oz of gold in the measured category.

The MRE was based on 127,000m of drilling over a strike of 5.1 km to a maximum depth of 480m with mineralisation open at depth and along strike.

A PFS was completed at the project in June 2013 projected production of 306,000 oz annual production with a mine life of 9 years at an average operating cost of US$580/oz.

All in sustaining cost was estimated at US$725/oz with a capital cost estimated of US$292m including contingencies.

Papillon had appointed Lycopodium to complete a DFS at the project scheduled for completion in the second half of 2014.

A mining permit had been granted by the Malian government for the project.

Cash and cash equivalent assets stand at C$190m with unused debt capacity of C$150m.

Conclusion: This looks like a good move for both parties. The Fekola resource is large and will add significantly to B2Gold’s production profile once developed. The project is advanced with a DFS already commissioned which will now be taken over by B2Gold’s in house development team. Permits for the project are already in place. The current capex projections for the project should be within the scope of B2Gold based on its current balance sheet position.

Papillon Resources appears to have performed consistently and so far has gone through a text book process of proving up a resource and taking it close to definitive feasibility. The metallurgy and mineralogy is said to be good and open to conventional treatment so the B2Gold team should not come across too many negative surprises.

In terms of valuation, B2Gold has paid with paper around US$109/oz for the whole resource and US$178/oz for measured ounces.

Bellzone Mining (LON:BZM) – Placing for £1.1m with China Sonangol 

The company has placed 51.32m shares at 2.5pence with China Sonangol International a 22% discount to the closing mid-price.

The company is said to remain in discussions with other parties to fund the Kalia project.

Conclusion: Against a falling iron ore price, the potential for finding funding for the Kalia project given the capex and logistical challenges, looks daunting.

DiamondCorp (LON:DCP) – Final Results show good progress at Lace

The results reviewed progress made in the development of the brownfield Lace diamond mine.

So far the build is going to plan and is under budget.

The company sees an improved outlook for the rough diamond market with diamond prices strengthening in 2015 with the global economy.

Conclusion: The company look on course with their development programme at Lace and we look forward to further news on the scope to include the high grade kimberlite zone at the 345m level into the resource at Lace. The shares remain a buy.

Kodal Minerals* (LON:KOD) – Results highlight progress at phosphate project in Norway

Kodal Minerals continue to press ahead with plans for the future development of the Kodal phosphate project in Norway.

The project is located just 85Km out of Oslo and just 25 km from a major port.

The team have now applied to change the land use to mining licenses from extraction licenses.

The company has gained a further seven new licenses covering some 20sqkm around the current mine plan to complement the existing resources of:

The company raised £2.55m last year in new money with a cash balance of £1.5m at end March 2014 highlighting the low cost structure of running the company.

Cash resources were well used considering the progress made and cost of listing on AIM at the year end.

The company is now focussed on preparing environmental studies to support its permitting and planning applications for the Kodal phosphate project.

The company has advanced metallurgical studies for the extraction of phosphate and for the sale of associated iron ore.

The phosphate product is described as ‘luxury’ by traders due to its exceptionally low level of impurities, in particular uranium.  This is very high-grade phosphate of over 40% P2O5 and will be good for blending with other phosphates.

The phosphate was formed in an igneous process whereas sedimentary phosphate contains high levels of uranium.  At some stage we foresee uranium limits being imposed on the use of phosphate for fertilizer as some phosphate fertilizers contain surprisingly high levels of uranium.  Uranium in soils is particularly concentrated by certain plants such as tobacco.

Phosphate is mixed with potash to create certain types of fertilizer.  Rising potash production should, in our view, create further demand for phosphate and cause prices to rise further.

The project also produced iron ore in titanomagnetite form.  While it is possible to remove the titanium it is more practical to sell this to smelters in China which are set up to take this material.  As phosphate prices rise we expect the significance of this co-product to fall away.

Phosphate prices:  we expect phosphate prices to pick up from relatively low levels and to perform well over the longer term as new wealth generation changes diets and consumption levels in China, India and other developing nations.

The team recently sent additional samples from drill core off for testing to make concentrate and tailings samples for analysis with concentrate grades broadly in line with expectations.

Kodal plans to produce 220,000tpa of 41.8% phosphate P2O5 worth around $26.4-41.8mpa - assuming $120-$190/t

The project should also sell around 660,000tpa of 62.5% iron concentrate worth $39.6mpa at $60/t at local port

Capex is currently estimated at around $122m. 

DCF $327m on pre-capex on management’s $190/t price assumption for higher grade phosphate.  Prices for low quality phosphate rock from Morocco are currently down from $120/t to $108/t giving some idea of how the market has moved in recent months.

JORC indicated resource of 14.6Mt at 2.26% P (5.18% P2O5) and 24.12% Fe

JORC inferred resource of 34.3Mt at 2% P (4.59% P2O5) and 20.38% Fe.

Conclusion:  The team are well funded to progress development work on their phosphate project in Norway.  We expect to see further newsflow on the project and the development of the permitting process over the coming months. 

*SP Angel acts as Financial Advisor and Broker to the company.

*The author of this report does not hold shares in Kodal Minerals

Three Partners of SP Angel and SP Angel LLP hold stock in Kodal Minerals due to their long running financial support for the company. 

SP Angel and its Partners are locked in and can not sell shares for the first year of trading

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