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Today's Market View Including Afarak Group, Continental Coal, International Ferro Metals and Gold Fields Limited

Published: 13:04 08 Nov 2013 GMT

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Economic View

US - Q3 GDP climbed 2.8%qoq (annualised), up from 2.5%qoq in Q2 and 2.0% forecast.

Strong growth is reported to have primarily driven by a surge in inventories. GDP less change in private inventories climbed 2.0% during the quarter compared with an increase of 2.1% in Q2.

Personal consumption slowed down to a 1.5% growth, down from a 1.8% advance in the previous quarter.

The Commerce Department highlighted the estimate of Q3 GDP are incomplete and are subject to further revisions. The second estimate based on a complete set of stats will be released on Dec 5 2013.

Weekly jobless claims totalled 336k in the week ended 02 Nov, compared with 345k (revised from 340k) recorded in the previous period and 335k forecast.

Delayed Oct NFP are out today with estimates suggesting the economy added 120k jobs last month, up from 148k in Sep.

Unemployment rate is expected to tick up 0.1pp to 7.3%.

Previously, Chicago Fed President and FOMC member Charles Evans commenting on the future of the bond purchases tapering said he wanted to see “consistent” non-farm payroll growth 200k-plus and a lower unemployment rate.

NFPs have surpassed the 200k-plus level only once (Jan) this year (see graph below). However, a fastening growth in the employment rate toward the average recorded in H1 is likely to propel the Fed to adjust the stimulus programme.

(For chart please click on link above)

China - Exports rebounded by more than forecast in Oct with the trade surplus expanding to the highest level this year suggesting global demand improved during the period.

Overseas shipments increased 5.6%yoy, compared with a 0.3%yoy decline in Sep and a 1.7%yoy increase forecast.

Imports climbed 7.6%yoy, versus a 7.4%yoy gain in Sep and forecast.

Shipments to the US (+8.1%yoy) and the EU (+12.7%yoy) increased at the fastest rate since Feb. 

ECB - The Board surprisingly cut benchmark rates by 0.25pp to a record low of 0.25% highlighting the ECB’s concerns over the risk of deflation in the region amid record debt levels in a number of Eurozone members and high unemployment rates.

The euro fell against the dollar following the announcement trading around 1.342 by the end of yesterday, down from 1.352 before the statement.

The ECB President Mario Draghi said the council is prepared to ease further should inflation fail to pick up.

Among other options the ECB may start charging banks on their reserves parked at the ECB. Currently the interest rate is zero.

The council will keep on providing unlimited amounts of cheap loans to Eurozone banks until the second half of 2015. 

Germany - Trade surplus rises to a record high today’s figures showed.

Previously, the IMF and US Treasury criticised rising Germany’s export surplus which increases imbalances in the euro-area and puts pressure on its partners trying to cut deficits.

UK - The BOE held rates at 0.5% and made no changes to the quantitative easing programme, in line with expectations.

The interest rate is forecast to remain at 0.5% with BoE forecasts suggesting it is not until 2016 that the unemployment target of 7% will be met, the year when rates will start to go up.

France - Sovereign credit rating has been cut one notch to AA on the back of high unemployment and recent tax reforms which are likely to hurt growth in the medium term, according to S&P.

“We see France’s fiscal flexibility as constrained by successive governments’ moves to increase already-high tax levels, and what we see as the government’s inability to significantly reduce total government spending,” the statement read.

In support of the announcement, industrial production released this morning showed output contracted 0.5%mom (-0.9%yoy) in Sep compared with a revised 0.7%mom growth in Aug and a 0.1% gain forecast.

Mongolia - 106 exploration licenses revoked by the Mineral Resource Authority on the grounds the permits issued did not comply with Mongolia’s mineral laws.

Licenses have been granted by a former Chairman who have been jailed in Jan and sentenced to four years in prison for corruption.

Permits have been suspended and awaited an official final resolution since then.

US$1.3414/eur vs 1.3518/eur yesterday. Yen 98.17/$ vs 98.69/$. SAr 10.274/$ vs 10.273/$. $1.608/gbp vs 1.609/gbp

Commodity News

Precious metals:

Gold US$1,309/oz vs US$1,317/oz yesterday - Gold fell yesterday on the back of a stronger US dollar and is up slightly this morning ahead of the US employment numbers.

SPDR gold holdings remained unchanged at 868.4t (27,921koz) valued at US$36.5bn yesterday. Holdings lost nearly a third of the total from the start of the year.

Platinum US$1,458/oz vs US$1,466/oz yesterday

The NUM rejected the Northam’s wage offer and extended the strike which is now in its sixth day.

NUM is demanding wage increases of between 22% and 43% with an increase in housing allowances of 69%.

Northam which has improved its offer twice already offered increases of 7-8% in the first years.

Palladium US$760/oz vs US$760/oz yesterday

Silver US$21.67/oz vs US$21.78/oz yesterday

Base metals:

Copper US$ 7,139/t vs US$7,127/t yesterday - Copper is little change this morning ahead of the US NFP released later today.

Aluminium US$ 1,817/t vs US$1,815/t yesterday

Nickel US$ 13,985/t vs US$14,059/t yesterday

Zinc US$ 1,902/t vs US$1,912/t yesterday

Lead US$ 2,134/t vs US$2,143/t yesterday

Tin US$ 22,700/t vs US$22,750/t yesterday

Energy:

Oil US$103.5/bbl vs US$105.0/bbl yesterday

Natural Gas US$3.527/mmbtu vs US$3.507/mmbtu yesterday

Ethylene prices to crack! - British Polythene Industries

British Polythene Industries have commented on the high price of polymer supplies in relation to their sales of silage stretch-film which are marginally ahead of last year.

The average polymer price is at an all-time high this year with a small reduction seen in October, as European ethylene contract prices started to fall. 

We do not claim to be expert in these markets but we do understand that Shale Gas (Natural Gas) produces ethylene and methanol in a steam cracker.

Huge production of shale gas in the US and new shale gas production in Europe and elsewhere looks like it should collapse polymer prices going forward.

British Polythene Industries are also waiting for a more realistic price correction as they see that raw material prices continue to defy global supply and demand issues, and lower cost feedstock is becoming more readily available to polymer producers where ‘fracking’ is permitted. 

We don’t pretend to know much about British Polythene Industries but we do feel a better price environment is just around the corner.

U.S. quoted chemical company Westlake Chemical Corp. (WLK), in an interview in October this year, noted that lower ethane prices were putting a smile on their face – U.S. ethane prices fallen over the last two years on the back of shale-gas.

A proportion of ethane traditionally is injected back into the gas grid for power and heating this can act lower natural gas and polymer prices.  Strong production of ethane in the U.S. means that that price lever of rising demand is no longer as effective.  .

Uranium US$34.90/lb (07/11/13) unchanged on the previous close

Others:

Iron Ore - US$136.9 (07/11/13) vs US$137.1 (06/11/13) 62% Fe spot (cfr Tianjin) - Chinese demand falls 9% in October on September’s year high

Company News

Afarak Group ( formerly Ruukki Group) (LON:AFRK) – Q3 sales rose for ferrochrome, chrome ore and other ferroalloys look more positive 

Afarak Group, formerly Ruukki Group, based in Helsinki, have reported strong interim numbers to end September

Sales rose by 10.7% to €30.8m in Q3 vs €27.8m yoy.

Production tonnage sold from processed products rose by 2.8% to 11,359t vs 11,051t yoy

EBITDA margins recorded 9.4% to give €2.9 in Q3 vs € -2.2m yoy

The company reduced its Q3 loss to € -1.9m vs € -6.1m yoy

Cash flow from operations was € -1.8 vs € -2.9m

Cash at end September stood at €13.1 vs €39.7m yoy and €17.7m at end June this year

The company continue to negotiate its intended share issue with Sail Resources with negotiations expected to conclude by the year end.

The share issue is for 5m new shares representing around 2.01% of the company.

Conclusion: Conditions are improving in ferrochrome and ferroalloy production and we hope the company will move to profit next year.

Continental Coal (LON:COOL) – director shares to be sold

Continental Coal are selling 1 million shares on behalf of Don Turvey its CEO.

The shares were issued during a regulatory closed period according to the ASX and are required to be sold.

If the shares are sold at a loss then Mr Turvey takes the loss but if the shares are sold at a profit the profit goes to charity as would any dividends if paid before the shares are sold.

Unfortunately tax is also likely to be required on any profit made.

General shareholder approval will be required of the company to reissue shares to Mr Turvey.  The next opportunity for this is at the company’s AGM on 21 November.

Gold Fields Limited (NYSE:GFI) – likely to cut 400 from its mines in Ghana (Bloomberg)

Gold Fields is struggling to control costs in Ghana with cash production costs put at $1,250/oz.

Newmont Mining also planning on cutting some 300 jobs.

With gold prices at $1309/oz this morning the most mobile of costs to remove is sadly the employees.

One could blame the operational inefficiencies, rising regional power costs or perhaps lower gold ore grades but perhaps one could also blame a culture of local overemployment and the employing friends and relations at a local level – perhaps not the best team for the job.

It is always sad to see the closure of a mine and the loss of so many jobs but until government’s become more flexible in their royalty take and taxation then more of this is sure to come.

Low grade orebodies are always vulnerable to price falls and need all the help they can from governments and companies alike with concerted effort needed to sustain lower grade mines through periods of lower pricing. 

The Chinese government appears to provide an unfeasible level of support, perhaps because it can and perhaps because they fear the often violent reaction of Chinese miners when their mines close.

Government’s are quick to look to raise taxes when mining companies move to profit, though thankfully the legislative process usually slows down their taxation ambitions.

Government’s seem less quick to respond to help to preserve jobs when lower-grade mines face the prospect of closure. 

One problem is that once a mine is closed that it can be costly and difficult to reopen particularly if the closure was not well organised and if the plant is not maintained.  If permits need to reapplied for then reopening often becomes rather more difficult.

One of the best examples of a nation helping a gold mining company was seen in Azerbaijan where a local loan was organised to support Anglo Asian Mining to preserve and expand the operation through the Global Financial Crisis.  This was good for the company, the lending bank, local jobs, tax receipts and for shareholders.  One of the best win-win deals we have ever seen!

Yesterday we also saw news of the South African DTI supporting engineering study work for Hummingbird’s gold project in Liberia.  Another rare example of well  structured support for local industry. 

International Ferro Metals* (LON:IFL) – Directors buy stock in support of turnaround and better prospects

IFL directors reported share purchases en mass yesterday following the company’s quarterly production result.

The following directors bought stock:  Tony Grey, non-exec Chairman, Stephen Turner, non-exec, deputy chairman, Chris Jordaan, CEO, Xiaoping Yang, non-exec director, Stephen Oke, non-exec Director, Jannie Muller, FD and Terry Willseed, non-exec director.

Directors are restricted from buying stock through closed periods or if there is significant news about to be released. 

The unusually large number of directors buying stock and the level of support offered by the management team lends confidence to our view of the prospects for the business.

Successful implementation of the cost reduction program combines with rising costs at Chinese competitors and a likely rise in demand for ferrochrome from stainless steel producers could generate happy days for IFL shareholders once again.

A weaker South African rand is also a big help for local producers, while new environmental controls and power issues in China are likely to cut global supply.

If production levels tighten and demand picks up then ferrochrome prices could rise once again to good levels.

* SP Angel acts as Joint Broker to IFM

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