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Morning View . Copper falls as wage negotiation fears subside

Morning View . Copper falls as wage negotiation fears subside

SP Angel are the No. 1 broker for AIM mining stocks in London 

Avesoro Resources  (LON:ASO) – 2017 financial results

Botswana Diamonds (LON:BOD) – Financial results for 6 months to December 2017

Caledonia Mining (LON:CMC) – Record gold production in 2017

First Quantum Minerals (TSE:FM) HALTED – Zambia send FQM $7.9bn tax bill. Strike persists at Cobre Panama

Metminco (LON:MNC) – ASX Trading halt pending announcement on revised terms to capital raising

 

Chinese winter to hit steel mills

  • Chinese steel mills are expected to face increasingly stricter environmental controls as the nation ramps up their clean sky initiatives, driving ongoing demand for high-grade iron ore. Tangshan City, the top steel-making metropolis, extended production cuts beyond the winter heating season by ordering a two-tier system of restrictions through Nov 14. Mills closest to the city centre have received orders to halt 15% capacity, while the remainder will need to idle 10-15%.
  • The move will continue to boost demand for more-efficient high-Fe content ore, with the market anticipating an increase in high-grade ore supply out Brazil in response to elevated premium prices.
  • BHP Billion Ltd.’s president told “it is clear that tougher and tougher environmental standards will come and continue to rise. We get information from the ground in China that those grade differentials and that focus on quality is there to stay”. In response, BHP is moving toward developing its South Flank iron ore deposit at its Western Australian operations, which will help increase the company’s overall iron ore grade to 62% from 61%. BHP can’t compete against its higher-grade ore rivals Vale SA and Rio Tinto Group, but the company will fight to focus on competitive costs.

 

Tin tops Rio’s demand list for battery metals

  • A research list, prepared by the Massachusetts Institute of Technology, singles out old-fashioned tin as the metal tipped to be the most exposed to new technology from electric vehicles to robotics. Mining giant Rio Tinto Group also include vanadium, niobium, lithium, silver, zinc and salt as potential investment targets, according to head of Rio’s Ventures unit.
  • The unit, set up to review incorporating materials outside of the miner’s existing portfolio, is assessing deals with the study providing “a guide to some areas where we at venture will be looking for opportunities and willing to invest”.
  • We are very much active. We are looking for those investments right now, and if we find one in a few months or so, then you’ll see us invest”.

 

Zambia to conduct tax audit of companies for past 6 years

  • Zambia’s tax agency plans to conduct audits on mining companies in the country running back six years after uncovering 76.5 billion kwacha ($7.9 billion) of underpayment by a “prominent” miner
  • The Zambia Revenue Authority may extend the period of the audit should it find a pattern of “consistent, systematic, premeditated” tax evasion, it said in a statement

 

Zambia targets 1m copper output this year

  • Zambia expects to produce more than one million tonnes of copper this year after revising its 2017 copper production upwards on the back of stable power supply, rising copper prices were also expected to boost revenue collection in Africa’s No.2 producer of the metal, which ranks exports of the metal as its biggest export
  • Ministry of Mines Permanent Secretary Paul Chanda said the copper production figure was revised upwards to 800,000 tonnes from 786,731 tonnes announced by the central bank last month
  • Chanda said projects such as a new shaft by Mopani Copper Mines (MCM) owned by Glencore and an expansion project by China Non-Ferrous Africa Mining (NFCA) would start production this year and further boost copper output in 2018 and beyond

 

Dow Jones Industrials

 

+0.47%

at

24,727

Nikkei 225

 

-0.47%

at

21,381

HK Hang Seng

 

-0.17%

at

31,495

Shanghai Composite

 

-0.29%

at

3,281

FTSE 350 Mining

 

+0.59%

at

17,585

AIM Basic Resources

 

-0.27%

at

2,521

 

Economics

US – The FOMC is widely expected to raise rate by a quarter of a percentage point from current 1.25-1.50% with the announcement due at 1800GMT.

  • The central bank is also expected to upgrade its economic growth forecasts amid a more positive assessment of the growth outlook expressed by Fed policymakers recently.
  • Previously, New York Fed suggested that four rate hikes would still be considered “gradual” on the back of a “quite stimulative” fiscal policy.
  • Median FOMC forecast is currently for three hikes this year.

 

Germany – Zew investor confidence index dropped to the lowest level since 2016 in March on the back of concerns over a potential global trade war.

  • “Concerns over a US-led global trade conflict have made the experts more cautious in their prognoses… the strong euro also hampering the economic outlook for Germany, a nation  reliant on exports,” Zew President said.
  • ZEW investor expectations index: 5.1 v 17.8 in February and 13.0 forecast.

 

UK – Employment and labour earnings growth accelerated in January driving the pound stronger against the US$.

  • Earnings growth (including bonuses) beat market estimates climbing 2.8% with previous numbers revised upwards 0.2pp to 2.7%.
  • Unemployment rate fell back to 4.3%, the lowest level in decades.
  • Weekly earnings (ex bonus, 3m %yoy): 2.6 v 2.5 in 3m to December and 2.6 forecast.
  • Employment change (3m): 168k v 88k in 3m to December and 84k forecast.

 

Peru – Opposition for President Pedro Pablo Kuczynski to remain in the office grows ahead of the impeachment vote due this Thursday.

  • Opposition party presented video footage that shows members of parliament being offered favours from the government in exchange for their support during the coming vote.
  • In particular, one of the lawmakers has been offered access to public investments promised to be directed towards one of his regions in exchange for support.

 

India – considering banning 91 business people from travelling overseas

  • India is considering the prohibition of travel for 91 business people who are involved with some 400 companies which are deemed to be willful defaulteds.
  • We suspect many might take flight in anticipation of the ban.

 

Currencies

US$1.2279/eur vs 1.2346/eur yesterday  Yen 106.33/$ vs 106.47/$  SAr 11.953/$ vs 12.001/$  $1.403/gbp vs $1.406/gbp  0.770/aud vs 0.770/aud  CNY 6.331/$ vs 6.331/$

 

Commodity News

 

Precious metals:         

Gold US$1,316/oz vs US$1,315/oz yesterday

   Gold ETFs 72.9moz vs US$72.9moz yesterday

Platinum US$946/oz vs US$953/oz yesterday

Palladium US$988/oz vs US$995/oz yesterday

Silver US$16.29/oz vs US$16.31/oz yesterday

           

Base metals:   

Copper US$ 6,732/t vs US$6,832/t yesterday

  • Copper slumps to its lowest level in more than three months as rising inventories signal healthy supply. LME copper stocks grew by a further 3,200 tonnes yesterday to bring the total to 322,475 tonnes, surging 61% this month. Chief commodities economist at Capital Economics notes that while some investors have been worried that potential strikes across copper mines could create shortages, disruptions are not a major threat given robust supplies. “We’ve been forecasting from the beginning that copper prices would fall this year because we just didn’t think the market was that tight”, adding a year-end target of $6,500. Labour contract negotiations have successfully sealed across a number of major operations, while talks at Antofagasta see progress.
  • Metals have also been weighed down by trade wars, higher US interest rates and a stronger dollar. While US Donald Trump imposed hefty import tariffs on steel and aluminium, sources in Washington reveal he is also poised to unveil new tariffs targeting China by the end of the week.
  • Concerns surrounding supply security weaken as workers at Antofagasta Plc’s Los Pelambres copper mine in Chile have opted to extend a period of government mediation, in an effort to reach an agreement on a new labour contract. Output across the world’s top copper producing nation are threatened by vast wage negotiations this year, with workers in the mine’s largest union last week rejecting an offer for a new labour contract, triggering a period of government mediation and paving the way for an eventual strike.
  • By mutual agreement, we have agreed to a period of five days during which we will vote on the company’s final offer”, said union leader. “In the last few hours we have reached agreement on certain issues, though anything can still happen”.

Aluminium US$ 2,069/t vs US$2,080/t yesterday

Nickel US$ 13,405/t vs US$13,540/t yesterday

Zinc US$ 3,200/t vs US$3,245/t yesterday

Lead US$ 2,357/t vs US$2,347/t yesterday

Tin US$ 20,745/t vs US$20,800/t yesterday

           

Energy:           

Oil US$67.5/bbl vs US$66.5/bbl yesterday

Natural Gas US$2.678/mmbtu vs US$2.659/mmbtu yesterday

Uranium US$22.15/lb vs US$21.75/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$65.9/t vs US$65.9/t

Chinese steel rebar 25mm US$647.9/t vs US$647.9/t

Thermal coal (1st year forward cif ARA) US$75.6/t vs US$73.0/t

Premium hard coking coal Aus fob US$216.9/t vs US$216.9/t

 

Other:  

Tungsten APT European US$325-334/mtu vs US$322-330/mtu

Cobalt LME 3m US$90,250.0/t vs US$89,250.0/t

  • Exploration for battery metal cobalt quadrupled in Q4 2017, as drilling rose to account for 50% total activity of battery materials worldwide. Mining Intelligence data indicates fifty projects reported drill results in the last three months, rising from 12 during the previous quarter.

Glencore chief warns carmakers of cobalt supply crunch

  • Chief executive, Ivan Glasenberg, warned that the automotive industry is waking up too late to the fact that China will hold most of the world’s supply of cobalt and create supply chain problems
  • Glasenberg said he was nevertheless prepared to sell cobalt mines in the Democratic Republic of Congo to China if the price was good, he added that the company was not changing its production plans in the DRC
  • More than 60 percent of global cobalt production comes from the DRC, Glencore, the world’s biggest producer, agreed last week to sell a third of its output to China’s GEM

Lithium supply boost from Rio Tinto’s Jadar mine

  • Early studies on Rio Tinto Group’s Jadarite lithium and borates project in Serbia indicate attractive prospects for low-cost operations. The mine will have the potential to produce ~50,000tpa lithium carbonate with options for future expansion, sustaining mining for decades.
  • The asset could provide ~10% global demand once production begins in 2023, adding to existing market concerns for oversupply which is expected to drag lithium carbonate prices below $10,000/t long-term.

Lithium sector is poised for rush of deals in electric revolution

  • The tripling of lithium prices over three years has drawn significant investor interest as major players jostle for dominance to supply multi-billion dollar supply deals fundamental to the electric vehicle battery revolution. China is expected to top the list of mergers and acquisitions as companies seek control of the market to match government targets of 7 million vehicles by 2025.
  • Analysts on energy metals at House Mountain Partners LLC note “you’ll see elevated activity this year driven mainly by the Chinese. The consolidation necessary in the space will start to happen now”. The prospect of consolidation provides an indicator the lithium sector is maturing after its most recent price boom.
  • China’s biggest supplier, Ganfeng Lithium Co., aims to deploy proceeds from a planned $1 billion Hong Kong listing to extend an acquisition spree. Chinese suitors, including Tianqi Lithium Corp. are presenting offers for Nutrien Ltd.’s $4 billion stake in Chile’s major Quimica & Minera de Chile SA. The Asian majors have rapidly expanded operations to challenge the trio of producers that have long dominated the market – Albemarle, SQM and FMC.
  • Operators of new projects that are successfully entering production are also remaining wary of predators. While Galaxy Resources Ltd. is seeking to add partners as it advances the Sal de Vida project in Argentina with informal talks with automakers and battery suppliers, Tawana Resource NL says it sees an increasing risk it will become a target.

 

Company News

Avesoro Resources  (LON:ASO) 9.33 pence, Mkt Cap £183.5m – 2017 financial results

  • Avesoro Resources reports a reduced attributable loss of US$27.5m compared to US$112.9m in 2016.
  • Revenue from gold sales increased by over 50% to US$97.8m (2016 – US$63.6m) while production costs declined by approximately 15% to US$73.5m (2016 – US$87.0m).
  • After depreciation and other costs, gross losses were reduced by more than 80% to US$8.0m (2016 – US$48.2m).
  • Impairment charges against the value of the New Liberty mine of US$ 42.5m in 2016 were not repeated though there were impairments of items held under finance leases of approximately US$2.9m. Reduced administration expenses and a maintained level of exploration expenditure led to a reduced  loss from operations of US$15.5m (2016 – US$105.5m).
  • Operating cash flow reversed the US$40.1m recorded in 2016 to a positive US$11.0m however, after allowing for US$34.9m of investment (2016 – US$39.2m) net outflow of free cash before financing declined from US$79.2m in 2016 to US$24.0m in 2017.
  • Net debt increased to US$116.3m (2016 – US$80.0m) increasing gearing (net debt:net debt + equity) slightly to 47% from 43% in 2016.

Conclusion: Remedial action at the New Liberty mine is reducing losses and slowing down cash outflows. We hope that management’s efforts will further reduce the financial strain and bring the company to greater financial stability in the coming year.

 

Botswana Diamonds (LON:BOD) 1.25 pence, Mkt Cap £6.4m – Financial results for 6 months to December 2017

  • Botswana Diamonds reports a loss of £177,000 for the six months to 31st December 2017 (2016 – profit of £61,000 which benefitted from £197,000 exchange translation).
  • The company reports that drilling is continuing at its Ontevreden kimberlite project and that elsewhere it has discovered nine kimberlites in the Northwest and Free State provinces of South Africa. Work is underway to “extract samples of micro diamonds for analysis and to delineate the size of the kimberlite pipe.”
  • At the Thorny River project in South Africa, a scoping study is now underway to help determine the potential of the kimberlite pipe and dyke system adjacent to the former Marsfontein and Klipspringer diamond mines. The study is expected to be available by mid 2018.
  • Exploration is also continuing in Botswana where the company is operating in joint-venture with the major Russian diamond compant, Alrosa through Sunland Minerals. At present work is directed to geophysical surveying to help identify future drilling targets.
  • Elsewhere in Botswana, “Progress is being made in our Maibwe joint venture … A prospectus is being drawn up by the liquidator of BCL to identify options”. The prospectus is expected to completed by mid-2018.

 

Caledonia Mining (LON:CMCL) 512.5p, Mkt Cap £54.3m – Record gold production in 2017

  • Caledonia Mining reports that following an increase of almost 21% in gold production during the quarter ending 31st December 2017 its 49% owned Blanket gold mine in Zimbabwe delivered record gold production of 56,133 oz in 2017 increasing output by 11.5% over 2016, which was itself a record 50,351oz.
  • Costs on all-in-sustaining basis declined by over 7% to US$847/oz.
  • As a result of the strong operating performance, attributable profit increased by 11% to $9.4m and the company generated free cash flow before finance of $2.9m after allowing for $24.5m of operating cash flow and $21.6m of investment spending.
  • Gold production benefitted from a combination of higher grades and increased mill throughput where the benefits of the improved underground ore handling system installed as part of the major investment programme to develop the deeper levels of the mine are delivering operational efficiencies and cost savings.
  • As previously announced, the upgraded resource estimate for the Blanket mine has prompted a decision to extend the Central Shaft currently being developed by a further 250m to allow access to an additional two production levels and potentially extend the mine’s life by 4 years to 2031.
  • Commenting on the progress of the re-development plan and the resulting robust cash generation, Chief Executive, Steve Curtis, said that “For the next two years, the bulk of the cash generation will be deployed to the Investment Plan at Blanket which we are confident will further increase cash flows as we increase production to 80,000 ounces of gold by 2021.  Once the Investment Plan is completed towards the end of 2020, we expect to have substantial free cash flows to deploy elsewhere”.
  • Addressing the wider changes in Zimbabwe Mr. Curtis went on to discuss the new Government’s proposals in relation to “indigenisation policy  and specifically the removal of the indigenisation requirement for gold mining companies.  These pronouncements have now passed into law and accordingly, the boards of Caledonia and Blanket have agreed to implement a rights issue at Blanket to raise approximately $4 million which will be underwritten by Caledonia's Zimbabwean subsidiary.  Blanket will use the proceeds of the rights issue to advance work on certain of its satellite properties. Assuming that Blanket's indigenous shareholders do not subscribe for shares in accordance with their rights, it is expected that, subject to the terms of the rights issue, Caledonia's shareholding in Blanket will increase from 49 per cent to slightly over 50 per cent.”

Conclusion: Caledonia Mining’s redevelopment plan has delivered another year of record gold production. Additional mineral resources have enabled a 4 year extension to the current mine life through deepening of the Central Shaft. Political changes in Zimbabwe seem likely to enable Caledonia to increase its interest in the Blanket mine.

 

First Quantum Minerals (TSE:FM) TRADING HALD, Mkt cap $12.4bn – Zambia send FQM $7.9bn tax bill. Strike persists at Cobre Panama

  • First Quantum Minerals shareholders are in for a rough ride.
  • Zambia has handed the company which has its principal assets in the country a massive US$7.9bn bill for what it sees as unpaid and overdue duties going back six years.
  • Import duties in Zambia run at between 15-15% in Zambia indicating that either FQM imported $30-61bn or the government claim may have been misrepresented or miscalculated in some way
  • Zambia is not known for irrationality and has been seen as one of the better countries in Africa for miners to do business in.
  • The Zambian tax authorities were alerted to the potential for reduced tax payments by transfer pricing following a video of Vedanta CEO, Anil Agarwal, in 2014 boasting that its Zambian operations make a minimum of $500m profit every year. The problem was that Vedanta continued to claim it was making losses at its KCM subsidiary.
  • The nation subsequently adjusted its royalty structure in an effort to regain lost revenues from the use of transfer pricing.
  • Zambia also cut power to mines owned by First Quantum and Glencore over tariffs.
  • The move comes at a bad time for First quantum which is dealing with a strike by workers who downed tools last Friday at it’s Cobre Panama copper mine which is still under construction and is around 70% complete according to recent reports. The project’s total cost is estimated to be $5.48bn in total.
  • First Quantum has a net debt position of around US$4.7bn representing a gearing 31% gearing.

Conclusion: First Quantum Minerals is one of the world’s best copper mine builders and operators with management currently focussed on the completion of the Cobre Panama project. The company has done more to create new jobs and investment in Zambia than any other miner since it stated by restarting the old Bwana Mkubwa mine in 1988.

We are surprised to see Zambia making this claim and feel certain that a more settlement will be reached as First Quantum has long been seen as a reasonable employer and investor in the country from our knowledge of the region.

 

Metminco (MNC LN) 0.975p, Mkt Cap £1.2m – ASX Trading halt pending announcement on revised terms to capital raising

  • Metminco shares have been suspended on the ASX pending an anticipated announcement on revised terms for the company’s rights issue.
  • Metminco also announced the immediate resignation of CEO, Ram Venkat on Monday
  • Last week Redfield Asset Management reported that it had reduced its stake in Metminco to 1.92% from 8.62% in a series of transactions following the rights issue announcement between 12 March and 14 March indicating elevated demand for the stock at the time.
  • Lanstead also sold 9m shares in an off-market transaction on 2 February selling its stake down to 8.09% from 15.19% previously.
  • Metminco is looking to raise A$5.3m in a non-renounceable rights issue, though the terms of this issue are now due to change.

 

 

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