SP Angel – Morning View – Wednesday 19 12 18
Metals slide on US dollar strength and Q4 GDP concerns
Safe haven demand as Trump targets Fed rates
MiFID II exempt information – see disclaimer below
Golden Star Resources – Drilling results extend Wassa underground mineralisation
Petropavlovsk (POG) – Update on IRC debt refinancing
Solgold* (LON:SOLG) – Newcrest increases holding in SolGold to 15.23% from 13.83%
Talga Resources * (ASX:TLG) – vanadium prospect identified in Talga permits
Q4 Global GDP seen slowing on Trade volumes and Markit PMI data according to Capital Economics
- We go with Capital Economics who are as professional as it gets when it comes to forecasting.
- But it is an interesting time to use Global Trade Volumes for GDP forecasting if Trump hikes Tariffs causing the reorganisation of a proportion of global cross border trade.
- The key here is that intra-national trade far outweighs cross-border trade while cross-border trade issues are grabbing most of the headlines.
- Team Trump is telling the Fed not to raise rates and has warned the Fed against making ‘yet another mistake’.
- Trump’s rhetoric is as blunt as ever but with equity markets preparing for a significant slowdown in advance of a potential showdown with China it may make sense for the Fed to support Trump through the maintenance of lower interest rates.
- Raising US interest rates would serve to accelerate US fund inflows creating further problems for emerging markets as the flow of funds back into US Treasuries strengthens the US dollar and upsets currency flows.
- Confidence has been eroded in Western and emerging equity markets as US rates have risen and fund flows back into the US have unbalanced markets. Tariff disputes have added to problem as investors have sought the safety of the US dollar as US rates rose.
- Further weakening of the German Ifo economic institute business climate index which has fallen for four months now added to negative revisions in Japanese growth forecasts.
- Brent oil fell 2% yesterday but recovered 1.5% today indicating that global growth may not be under so much threat.
- WTI Oil prices collapsed 7% yesterday, but this was due to specific regional supply issues. WTI futures are higher indicating confidence going forwards.
Conclusion: Much is down to the US Fed and Trump’s negotiations with China. US CPI is running at 2.3% annualised but tightening employment may serve to raise wages and inflation causing the Fed to move rates higher.
A stronger US dollar shows the ongoing flow of funds into the currency indicating further general caution by investors.
Rare earth producers neglected in EV expansion
- Despite rapidly accelerating EV adoption, rare earth explorers and developers are broadly overlooked with sweeping losses. Rainbow Rare Earths led the pack with -71% fall in 12-month share prices, followed by Hastings Technology Metals (-47%), Peak Resources (-45%) and Arafura Resources (-41%). By contrast, advanced-stage rare earth explorer Mkango Resources records +38% y/y gains on the back of announcing Talaxis funding and positive drill results.
- With EV uptake forecast to rise, the demand case is clear. 5kg rare earth metals are consumed in powerful permanent magnets in motors and batteries per vehicle.
- “The major shift that we’re expecting to see in the industry is this push towards magnet materials becoming the dominant rare earth package, the neodymium and praseodymium, and to a lesser degree dysprosium, which is overtaking from catalysts – which [have] pushed the industry forward before”, according to Roskill analyst.
- The requirement for rare earths in EVs is expected to continue to grow at double-digit rates for the next decade. “We’re talking about 30, 40, up to 50% demand growth per annum for any of the rare earths used in magnets”, according to Adamas Intelligence director Ryan Castilloux.
- However supply is limited, dominated by Chinese output, with only two non-Chinese mines operating. The Chinese Ministry of Industry and Information Technology rare earth oxides quota was revised upwards by 40%, with the nation supplying more than 80% global output.
- “If you strip out Lynas, which has successfully expanded its rare earth processing capacity, the world excluding China now relies more on Chinese rare earth elements than ever. The focus should not really be on how we can accelerate the establishment of new mines, or just to build plants that can process and separate the REO concentrates, but to look at what those mines need to thrive”, Castilloux said.
- Castilloux had also seen a tightening of Chinese environmental policy and a clampdown on rife illegal mining activity taking Chinese REO production out. The reported inventory levels in China has consequently declined steadily over the past three years, giving indication that overproduction across the Asian nation of magnet rare earths had essentially vanished. “This signals overproduction is now under control and it is laying the groundwork for higher prices this year [and] into 2019”.
- Looking to capitalise on improving market fundamentals and continue strong performance into 2019, Mkango Resources expanded their exploration program with the most comprehensive drill programme to date. The company completed 10,900m diamond drilling, returning significantly higher rare earth grades particularly within the ‘black carbonatite’ zone.
- The drill programme (schematic geological map available at www.mkango.ca) comprised infill drilling to confirm and upgrade the existing Indicated and Inferred Mineral Resource Estimates, step out drilling to test extensions to the mineralisation, and geotechnical drilling.
- Offtake and project finance partnership with Talaxis, a Noble Group subsidiary, gives the project some defence against variable Chinese conditions, while separation of rare earth concentrates and development of downstream processing will improve margins for the technology metals.
- Mkango CEO William Dawes highlights “for customers, they want to see security of supply, they want to see there are new sources of rare earths”.
Christmas / new year trading statements and morning notes
- We expect markets to be volatile through the period with the potential for investors to pick up some bargain prices in certain key stocks.
- We will not be producing a morning note between Christmas and New Year but we will be watching out for mining company trading statement to see what slips out.
Dow Jones Industrials
HK Hang Seng
FTSE 350 Mining
AIM Basic Resources
US$1.1403/eur vs 1.1375/eur yesterday Yen 112.40/$ vs 112.51/$ SAr 14.278/$ vs 14.254/$ $1.268/gbp vs $1.265/gbp 0.720/aud vs 0.720/aud CNY 6.896/$ vs 6.896/$
Gold US$1,250/oz vs US$1,248/oz yesterday
- Gold hit five-month high and holdings across exchange-traded funds surge as investors await the bank’s decision after President Donald Trump trashed convention to urge Chairman Jerome Powell to hold fire. Global assets expanded more than 10t to the highest since July, with investors seeking havens as equities founder, and expectations of hikes in 2019 recede.
- Gold snapped a six-month losing run in October, held its ground in November, and then gained this month as investors position themselves for 2019 by adding to worldwide holdings in ETFs. While Trump upped the ante by issuing a blunt appeal for the Fed to avoid making “yet another mistake” by moving on rates, policy makers are still widely expected to raise borrowing costs for the ninth time since they started tightening in 2015. Gold’s been drawing demand amid expectations that U.S. hikes are now largely done, enhancing its appeal.
Gold ETFs 69.9moz vs US$69.6moz yesterday
Platinum US$792/oz vs US$794/oz yesterday
Palladium US$1,257/oz vs US$1,261/oz yesterday
Silver US$14.70/oz vs US$14.70/oz yesterday
Copper US$ 6,010/t vs US$6,064/t yesterday
- Industrial metals continue to falter under renewed pressure following a defiant speech from China’s president Xi Jinping diminishing hopes of an early settlement in the top commodity buyer. President Jinping used the occasion of the 40-year anniversary of the start of China’s “Reform and Opening Up” to congratulate the stewardship of the communist party and reaffirm state control of industry. While promising Chinese economic "miracles that will impress the world," the president's speech was light on detail about further free-market reforms.
- Little indication of fresh economic stimulus for the country’s slowing economy and a commitment to its “Made in China 2025” policy – a major sticking point in negotiations between the world’s two largest economies – sent base metal prices tumbling.
- The London Metal Exchange index is set to suffer its first down year since 2015.
Aluminium US$ 1,925/t vs US$1,939/t yesterday
Nickel US$ 10,830/t vs US$10,955/t yesterday
Zinc US$ 2,532/t vs US$2,545/t yesterday
Lead US$ 1,960/t vs US$1,932/t yesterday
Tin US$ 19,230/t vs US$19,170/t yesterday
Oil US$56.5/bbl vs US$58.5/bbl yesterday
Natural Gas US$3.870/mmbtu vs US$3.600/mmbtu yesterday
Uranium US$28.60/lb vs US$28.60/lb yesterday
Iron ore 62% Fe spot (cfr Tianjin) US$68.5/t vs US$68.4/t
Chinese steel rebar 25mm US$590.3/t vs US$592.3/t
- Rebar futures in China edged lower as investors weigh rising inventory in the property sector. Real estate inventory in 100 Chinese cities has risen for the first time in nearly three years according to a study from Shanghai E-House Real Estate Research Institute.
- China’s property sector, a significant driver of steel demand, faces mixed signals. While property inventory has risen according to local research, and sales have dropped the steepest in 13 months, there are signs stimulus is starting to seep through to property investments.
- Chinese President Xi Jinping announces his government will continue its multi-year effort against pollution, poverty and financial sector risk. Speaking at a ceremony to mark the 40th anniversary of China’s reform, he added that “no one is in the position to dictate to the Chinese people what should and should not be done,” amid tensions between U.S. and China.
- Investors also look to gauge prospects for additional stimulus from mainland authorities even as tighter anti-pollution curbs in production centers constrain steel supply from mills
Thermal coal (1st year forward cif ARA) US$89.1/t vs US$89.0/t
Coking coal futures Dalian Exchange US$208.8/t vs US$208.4/t - Coking coal and coke futures fell yesterday in China on the slowdown in blast furnace iron ore for the winter.
Coking coal prices may well have seen their peak with tighter environmental restrictions increasing the move towards steel production from Electric Arc Furnaces.
Cobalt LME 3m US$57,000/t vs US$58,000/t
China NdPr Rare Earth Oxide US$45,968/t vs US$45,971/t
- Luxfer Holdings acquires Neo Performance Materials in a strategy to become a leading global manufacturer of highly-engineered advanced materials for high end applications. The $612m deal targets the global leader in the innovation and manufacturing of rare earth and rare metal-based functional materials used in many of today’s advanced technologies.
- Neo has reported sales of US$454m, with their operating model generating high free cash flow conversion. The operation has significant additional capacity within their nine manufacturing facilities to support growth. The company is “an industry leader in rare-earth powders used to manufacture magnets for performance micro motors and other critical applications, while the Chemicals and Oxides segment complements Luxfer’s own zircon-based chemicals business”.
- The deal also expands Luxfer’s access to high-growth Asian markets, diversifying its customer base and creating a more direct path to procure raw materials.
China Lithium carbonate 99% US$10,078/t vs US$10,151/t
China Ferro Vanadium 80% FOB US$95.5/kg vs US$98./kg
China Antimony Trioxide 99.5% EU US$7./kg vs US$6.9/kg
Tungsten APT European US$275-290/mtu vs US$275-295/mtu
EU to impose new emissions standards for new vehicles in 2030
- CO2 emissions from new cars will need to be 37.5% lower by 2030
- While the European Parliament was pushing for a 40% reduction, Germany, wanted no more than a 30% reduction in emissions while the European Council was asking for a 35% reduction.
- The new rules should accelerate the move to electric vehicles in Europe with VW previously stating that it will stop all combustion engine development plans.
- VW is now looking to sell some 3m EVs by 2025 out of 12m total sales for the group which includes Audi and Porsche but under the new rules EVs will need to make up some 40% of global sales indicating that VW will need to ramp up its plans or risk being left.
Disordered crystals are promising for future battery technology
- Small, disordered particles of magnesium chromium oxide may hold the key to new magnesium battery energy storage technology, which could possess increased capacity compared to conventional lithium-ion batteries, find UCL and University of Illinois at Chicago researchers.
- The study, published today in Nanoscale, reports a new, scalable method for making a material that can reversibly store magnesium ions at high-voltage, the defining feature of a cathode.
- While it is at an early stage, the researchers say it is a significant development in moving towards magnesium-based batteries.
China’s share of global output to fall by 2040
- China’s share of global output is forecast to fall over the next two decades according to Capital Economics
- The country will account for 17% of global gross domestic product by 2040, below its current 19% share, having peaked at 20% in the mid-2020s.
- The fall will largely be driven by an expected 12% decline in its working-age population by 2040
- In combination with other structural headwinds this means that China’s sustainable growth rate will fall to just 2 per cent by the late 2020s
Gem Diamonds (LON:GEMD) 113p, Mkt Cap £156.9m –Letseng mine recovers two more large diamonds
- Gem Diamonds reports that its Letseng mine in Lesotho recovered two more large diamonds within a twenty-four hour period.
- A 101 carat Type IIa diamond brings the total number of diamonds in excess of 100 carats in size recovered from the mine during 2018 to fourteen.
- The mine has focussed on improving its ability to recover large diamonds and Letseng yielded seven stones larger than 100 carats during 2017 compared to five during 2016. A table in the company’s 2017 Annual Report shows that the previous record year for recovering diamonds larger than 100 carats was 2015 when 11 stones were recovered.
- The second large diamond reported today was also a white Type IIa stone weighing 71 carats.
- Photographs of the two recently recovered stones are available on the company’s website at http://www.gemdiamonds.com/ and show two attractive, clear white diamonds
Conclusion: The recovery of a 101 carat diamond at Letseng brings the total number of stones in excess of 100 carats recovered during 2018 to a record fourteen and demonstrates that the mine’s focus on recovering large diamonds is proving effective.
Golden Star Resources C$3.96, Mkt Cap C$430.9m – Drilling results extend Wassa underground mineralisation
- Golden Star reports the results of 5 new drill holes, totalling around 4800m of infill and step-out drilling on the underground mineralisation at Wassa in Ghana.
- The infill drilling in holes BS18DD001, BS18DD002 and BS18DD393M has confirmed the continuity and width of gold mineralisation within the B Shoot structure while step-out drilling in holes BS18DD392D1 and BS18DD391D2 has demonstrated the continuation of mineralisation at least a further 200m down plunge to the south of the current inferred resources and has identified a new footwall zone of mineralisation.
Among the results highlighted in the announcement released in Canada on 17th December are:
- A true width intersection of 10.4m between 774.5m and 787.5m depth averaging 11.9g/t gold in infill hole BS18DD393M which included 6.4m (true width) averaging 16.2g/t from 776.5m.
- Hole BS18DD393M also included a lower grade, shallower, intersection of 38.9m true width from a depth of 374.1m which averaged 2.9g/t gold
- Infill hole BS18DD001 included multiple intersections tanging up to 14.3m true width at grades of up to 12.6g/t gold while another infill hole, BS18DD002 intersected 12.0m, true width, at an average grade of 6.7g/t gold from a depth of 587m and included 5.3m averaging 11.3g/t gold from 592.4m.
- Step-out drilling in hole BS18DD392D1 intersected three separate mineralised zones; 4.9m (true width) averaging 4.0g/t gold from 794m depth; 4.9m averaging 6.6g/t gold from 784m; and 16.2m averaging 6.7g/t from 944m; and
- Step out hole BS18DD391D2 also made multiple intersections within the B Shoot including 15.6m, true width, averaging 4g/t gold from a depth of 256.17m
- Commenting on the results, CEO, Sam Coetzer summed up saying “The step out drilling results continue to confirm the extension of the Wassa Underground deposit to the south and the deposit remains open down plunge, which suggests further exploration potential. The infill drilling results also confirm the previously recorded grades and widths of the deposit and we expect to upgrade a portion of Wassa’s Inferred Mineral Resources into the Indicated category.”
Conclusion: The recent drilling is likely to enable an upgrade of the existing resources in the “B Shoot” while also demonstrating further expansion potential down plunge towards the south. The continuing robustness of the down-plunge B Shoot mineralisation is an endorsement of the company’s decision to switch from mining complex, low-grade open pit ore to concentrating on developing the higher grade, metallurgically straightforward underground mineralisation.
Petropavlovsk (POG) 6.02p, Mkt Cap £199.1m –Update on IRC debt refinancing
- Petropavlovsk has provided a progress report on the re-financing of the debt of its 31.1% owned IRC where its acts as guarantor for the loan facility with the Industrial and Commercial Bank of China (ICBC).
- The company reports that the first stage of its plan to reduce its guarantee has been completed with IRC “entering into a new US$240 million facility (the "New Facility") with Gazprombank (Joint-Stock Company) ("Gazprombank"). The amount of Petropavlovsk's current guarantee will initially reduce from US$204 million to US$160 million being a US$120 million corporate guarantee ("the Corporate Guarantee") and a US$40 million two year fixed guarantee”.
- The Gazprombank facility is reported to offer more favourable terms than those of the ICBC loan as well as providing “an extended period to repay its debt finance and will mature in 2026”.
- The loan “Consists of two tranches, with the first tranche [amounting to US$160m] being amortised over the life of the loan and the second tranche of US$80 million being payable in full at the end of the term of the New Facility”. The first tranche attracts interest at 5.7% above LIBOR. Interest on the second tranche is payable at 7.7% above LIBOR.
- Commenting on the moves to reduce Petropavlovsk’s guarantee exposure to IRC’s debt, CEO, Dr. Pavel Maslovsky, said “Petropavlovsk has taken a decisive step in de-risking the Company's liability with regard to IRC's debt obligations. The attractive terms of the New Facility with Gazprombank provide IRC with the ability to maintain its ramp up to full production, generating sufficient cash to meet its repayment schedule whilst Petropavlovsk's guarantee obligations will be reduced”.
- Dr. Maslovsky went on to say that “With the twin events of concluding the restructuring of the IRC Facility, and with the successful ongoing ramp up of Petropavlovsk's Pressure Oxidation Hub, the Company is poised to generate returns for its stakeholders in 2019 and beyond”.
- Petropavlovsk has also reported that “Mr. Peter Hambro, a Non-Executive Director of IRC, has been appointed as Non-Executive Chairman of IRC with immediate effect. Consequently, Mr. Hambro will no longer act as the Company's nominee director on the IRC Board. Mr. Hambro will continue to be the President of Petropavlovsk and Senior Adviser to the Board on issues where there is no conflict with his Chairmanship of IRC”.
Conclusion: The reduction of its loan guarantees to IRC could improve Petropavlovsk’s financial flexibility as it continues to build up its POX operation which is scheduled to produce its first gold during Q1 2019.
Scotgold Resources* (LON|:SGZ) 35.5p, Mkt Cap £16.2m – Development starts today at the Cononish Gold mine in Scotland
BUY, Target Price 58p
- The company reports that it is starting development of the Cononish mine today. The start of the work follows the confirmation of planning consent by the Loch Lomond and Trossachs National Park Planning Authority which was announced in October and the subsequent satisfying of the conditions attached to the consent.
- The company comments that it “can now move forward into the development phase with a more thorough understanding of the issues of concern to the various parties”.
- Commenting on the move into development, Chief Executive, Richard Gray said that the company was “looking forward to a very exciting 2019, bringing the Cononish Project into production. We can now put our Implementation plans into action and anticipate the first rock breaking activities at the Cononish mine portal starting early in the New Year.”
Conclusion: The move into development at Cononish is a milestone on what has been a long process to obtain consent to bring the mine to development. We look forward to further news as Scotgold advances the project towards production.
SP Angel acts as Nomad and Broker to Scotgold Resources
Solgold* (LON:SOLG) 37p, Mkt Cap £681m – Newcrest increases holding in SolGold to 15.23% from 13.83%
- SolGold report Newcrest have increased their holding in the company to 15.23%.
- Newcrest bought 27,870,000 ordinary shares with voting rights on 14 December 2018.
- Newcrest has put some US$62.8m directly into SolGold mainly for the Cascabel project.
- BHP have also invested US$45m
- Recent drill results report mineralisation from 1,004m down hole followed by a second hole where mineralisation starts at 740m down the hole. Both holes are near vertical.
- Drilling is to move to focus on a potential shallower resource to the NorthWest at Trivinio which offers the potential to improve the economics of the multi-billion dollar capex Alpala project if shown to have significant higher-grade copper/gold mineralisation.
*SP Angel acts as broker and advisor to Solgold. SP Angel have raised funds for SolGold on eight previous occasions.
Talga Resources * (ASX:TLG) A$0.395c, Mkt Cap A$86m – vanadium prospect identified in Talga permits
- Talga Resources report a significant vanadium prospect on the 100% owned Vittangi project in northern Sweden. The discovery follows a recently completed internal review of Talga’s Swedish projects to assess vanadium potential in response to the metal’s continuing price increase, rising over 550% from 2015, amid strong demand for steel and batteries.
- The review identified known vanadium-bearing magnetite horizons, within the northeastern part of Talga’s Vittangi project defined by adjacent historic drilling, airborne magnetic imagery, surface sampling and mapping by the Geological Survey of Sweden. The vanadium bearing horizon can be traded into Talga’s ground as a distinct high-amplitude magnetic signature that strikes for over 4km in the northeast and 2km in the southeast.
- ASX-listed Pursuit Minerals has previously announced that sampling of the historic SGU core drilling in their permit along strike of Talga returned vanadium in magnetite concentrate grades if 178.2m @ 1.33% V2O5 from 9.0m including 31.0m @ 1.40% V2O5 from 18m and 16m @ 2.03% V2O5 from 171.3m.
Conclusion – The addition of vanadium prospect adds to the battery suite of Talga’s portfolio. We look forward to understanding the extension of reported vanadium from neighbouring Pursuit Minerals.
*SP Angel acts as UK broker to Talga Resources. SP Angel analysts have visited the leading battery R&D institution WMG partnering with Talga.