Commodities going nowhere
• China demand needs to show some recovery to recreate confidence
• Short term trade is moving prices – with direction mainly led by the US dollar
• Copper, showing some positive momentum on supply disruptions and the risk of a rising deficit
• Demand still looks opaque to most investors and China is doing its best to confuse the picture
China - ongoing destocking activities and reduced purchasing activity all suggest the sector may remain in contractionary territory as we head into mid-year
• The government is warning the Chinese people of lower growth ahead through its use of an ‘informed government source’
• We believe China will move to more targeted stimulus to avert key sectors collapsing under within a lower growth environment
• Some parastatal companies may be re-engineered or closed to cut pollution and to raise efficiency
• As always with China, we look at what the traders are doing and not at what the government says
Economic News
US – Manufacturing beat forecasts in May despite the strength in the dollar.
• ISM manufacturing PMI climbed to 52.8 last month compared with 51.5 in Apr and 52.0 forecast.
• Economic news due today:
o Apr factory orders (-0.1% v +2.1% in Mar), New York manufacturing PMI (58.0 v 58.1 in Apr)
Japan – Real wages recorded first increase in two years this Apr, albeit a very modest one (+0.1%yoy).
• Managing to kick start an increase in labour earnings is a key goal of PM Abe to end two decades of deflation.
Eurozone – Germany and Spain, bth recorded a contraction in unemployment last month.
• The number of unemployed declined for an 8th consecutive month in May (-6k v -9k (revised from -8k) in Apr and -10k forecast).
• Jobless rate held unchanged at 6.4%.
• In Spain, unemployment contracted for a 4th consecutive month last month (-118k v -119k in Apr and -116k forecast).
India – The RBA cut interest rates for a third time this year cutting the repo rate by 0.25pp to 7.25%, in line with estimates.
• “With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today,” the RBI said.
• Reverse repo rate has been cut to 6.25%, while the cash reserve ratio held at 4%.
• Inflation has been slowing lately driven by lower oil prices with wholesale price index down in the last six months.
Australia – The RBA held rates at a record low, in line with expectations, as monetary authorities await the effect of previous two cuts this year to filter through the economy.
• Market focused on the RBA governor statement which offered little clues to further easing in the future.
• The currency climbed 0.9% following the announcement and briefly traded above 0.77.
Greece – European leaders agree to accelerate talks between Athens and international creditors during an emergency meeting in Berlin.
• Angela Merkel, Francois Hollande, Jean Claude Juncker and Christine Lagarde all agreed to escalate negotiations over Greece.
Brexit – British and Greece could exit the Eurozone this year, though a Greek exit is more likely and a British exit is far less likely if the PM negotiates concessions in Europe
US$1.0974/eur vs 1.0962eur yesterday. Yen 124.54/$ vs 123.82/$. SAr 12.272/$ vs 12.295/$. $1.524/gbp vs 1.528/gbp
A$0.768/aud unch vs 0.765/aud
Commodity News
Precious metals:
Gold US$1,187/oz unch vs US$1,188/oz last week
Platinum US$1,106/oz vs US$1,116/oz last week
Palladium US$773/oz vs US$781/oz last week
Silver US$16.70/oz unch vs US$16.71/oz last week
Base metals:
Copper US$ 6,028/t vs US$6,100/t last week -
• New nationwide industrial standards for the use of low-voltage aluminium alloy cables are estimated to cost 100-250kt in copper demand per annum, on Goldman Sachs numbers.
• The National Energy Administration has recently approved minimum quality standards for low voltage cables used primarily to connect buildings with substations.
Aluminium US$ 1,751/t vs US$1,764/t last week
Nickel US$ 12,955/t vs US$12,740/t last week
Zinc US$ 2,148/t vs US$2,218/t last week
Lead US$ 1,940/t vs US$1,977/t last week
Tin US$ 15,455/t vs US$15,490/t last week
Energy:
Oil US$65.6/bbl vs US$63.3/bbl last week
Natural Gas US$2.654/mmbtu vs US$2.715/mmbtu last week -
Uranium US$35.40/lb sharply unch vs US$35.00/lb last week
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$59.5/t unch vs US$60.2/t – last week
Thermal coal (1st year forward cif ARA) US$57.5/t unch vs US$57.4/t last week
Seaborne hard coking coal index (quarterly) US$109.5/t unch vs US$109.5/t
Other:
Tungsten APT European US$257.5/mtu unch vs US$257.5/mtu
FeCr lumpy Charge 52% Cr US$1.08/lb vs US$1.08/lb last week – Chinese stainless steel mills will be releasing their monthly offer prices this week.
• Estimates are for mills to announce a CNY 50 per tonne cut, equivalent to a reduction made in early May, MetalBulletin reports.
Molybdenum
• The International Molybdenum Association (IMOA) released its 2014 supply/demand numbers:
• Global: Supply climbed 7.5%yoy to 583.7mlbs with demand up 4.0%yoy at 559mlbs.
• Market remained in a supply surplus of 24.7mlbs versus 5.5mlbs in 2013.
• China: The biggest producer and consumer of the metal recorded a 2.9%yoy increase (200.6mlbs) in supply and a 3.0% growth (202mlbs) jn demand.
• Prices finished the year lower at US$20,300/t with the latest LME quote currently standing at US$17,100/t, close to 11 years low.
• Thompson Creek said it is placing its JV Endako molybdenum mine in British Columbia n care maintenance since Jul 1 on the back of the “continued weakness in the molybdenum market”.
Company News
Acacia Mining (LON:ACA) 305 pence, Mkt Cap £1.25 bn – Update on Gokona Underground Mine
• The company reports first stoping ore from Gokona in the North Mara.
• The first stoping ore has been sent to processing with the first stope demonstrating expected geotechnical characteristics with the grades and tonnages in line with the company’s expectations.
o Acacia only announced receipt of the final approvals for underground mining at Gokona in May and has moved ahead quickly to start production on a mining area expected to produce a total of 450,000 oz of gold over a 5 year mine life at a competitive all-in cost of under $750/oz.
Avalon Minerals (ASX:AVI) A$0.031, A$7.1m – Drill Hole intersects high grade copper
• Results from VDD 185 has returned an intersection of 10m at 1.2% copper from 425m including 5.6m at 1.6% copper.
• The hole is outside the existing mineral resource area at the D zone and was completed at 479.7m.
• The intersection was close to the interpreted sulphide lens and 300m from VDD 183 where there was an intersection of 3.5m at 2.2% copper.
• The results show that the mineralisation is improving in thickness and grade with depth.
• VDD 186 has been drilled between VDD 183 and 185 with chalcopyrite visible across multiple intersections in the hole.
• Assay results from the hole are expected in mid-June.
• All three holes, VDD 183, 185 and 186 are outside the current resource estimate.
• The announcement shows useful schematics of the drilled sections.
• The project has a total resource of 63.86 Mt at 1.05% copper at a 0.4% cut off grade.
• The D Zone has a resource of 13.6 Mt at 1.0% copper.
Conclusion: Good assay results from drilling at the D zone supplement positive results reported from the A zone where a drill programme is planned. Drill results offer scope for resource increases around both these zones.
Cobre Montana (ASX:CXB) 7.3c, mkt cap A$9.5m – new ‘pilot plant’ process for extraction of Lithium from ‘micas’ could add new source of supply
• Cobre Montana is looking to extract lithium using a new process from the Cinovec project in the Czech Republic
• The project hosts lithium in micas which grade 2-4.5% lithium and hosts some 20% of all known lithium reserves
• The pilot plant is very small and runs at 1-3kg per hour and needs to be scaled up to use more industrial scale components
• The process uses fine grinding and dissolution in sulphuric acid at around 90 degrees centigrade to recover the lithium and other minerals in the mica.
• Cobre claims costs can be reduced to $1,800/t of lithium carbonate though this may be with the benefit of by-product credits
• In reality it is going to be very hard to beat the $2,000-2,500/t costs achieved in Latin America by the extraction of lithium brines from Salars
Kefi Minerals* (LON:KEFI) 0.8p, Mkt Cap £11.4m – Tulu Kapi financing and project update
• Kefi Minerals report the company remains on track to update the Tulu Kapi DFS this month.
• The completed DFS should help the team complete the full financing for the Tulu Kapi gold mine next quarter.
• CAPEX is expected to come in at c. US$120m based on contract-mining and new process plant
• US$50m has been spent on the project to date and some or all of this may contribute towards the equity component of the project financing
• Bank lenders are reviewing the Draft DFS
• Contractors indicate potential for funding / forward financing
• Gold production of of approximately 960,000oz over 13 years
• Costs: all-in-costs of c. US$783/oz
• NPV of US$112m post tax assuming an 8% discount rate, gold price of US$1,250/oz and US$73m at a gold price of US$1,150/oz
• Funding: potential for US$100m debt plus US$20m in contractor financing / equity.
*SP Angel act as Nomad to Kefi Minerals. An SP Angel analyst has visited the Tulu Kapi mine site with Kefi Minerals.
North River Resources (LON:NRRP) 0.40 pence, Mkt Cap £7.8m – Final Results
• The final results highlighted progress to re-start the Namib lead zinc mine.
• The company has in place a cornerstone investor Greenstone Capital with funding up to $12m.
• A DFS has been completed for a mine with an initial mine life of 3.5 years with annual throughput of 250,000 tonnes.
• Production of 19,100 tonnes of metal in concentrate is projected with 280,000 oz of silver by product.
• The company has been in on-going discussions to secure the mining licence for the project.
• Following completion of the DFS in November 2014, work has been undertaken to optimise the project.
• Key also has been to create access for the next phase of drilling at depth at the South and North of the orebody.
• This gives scope for further resource potential and will facilitate the mine development plan.
• Positive drill results have been received post these results providing the basis for an increase in the reserve and resource base.
• Over the period the company reported losses of £3.2m with cash at the end of the year of £1.9m.
• Greenstone has invested US$6m of the US$12m of committed funds.
Conclusion: Once the mining licence is secured, the company should be well positioned to push ahead with this project.
Rio Tinto (LON:RIO) 2840p, mkt cap £52.3bn – Oyu Tolgoi, copper mine in Mongolia should have mine live beyond 2100 – slightly beyond our normal modelling!
West African Minerals* (LON:WAFM) 2.8p, Mkt Cap £10.0m – Board changes
• West African Minerals has appointed two new non-executive directors to its board.
• Anton Mauve has stepped down as a director and continues his operational role as president.
• The company now has Brad Mills as Chairman plus four non-executive directors
*SP Angel act as broker to WAFM
Zenyatta Graphite (CVE:ZEN) – PEA for Albany graphite project
• Zenyatta Graphite reports positive news in its Preliminary Economic Assesment for its Albany hydrothermal graphite project
• The Albany project is located in Northern Ontario, Canada.
• Production of some 3,000t per day should produce some 30,000tpa of high purity graphite of >99.9% graphite representing around 7% of forecast demand in 2017.
• Price: the price of this highly purified graphite is reported to be at $7,500/t.
• We note pricing for graphite is opaque and is down to individual negotiation, quality and flake size. Zenyatta will need to optimise any future plant to gain the best mix of flake size and grade to again good prices.
• Costs: are ‘estimated’ to be $2,046/t could allow a margin of $5,454/t to give gross revenues over the whole mine life of $4.8bn
• Capex: $411m is a big number for a graphite project and includes $69m of EPCAM costs, $80m (24%) contingency and $263m of total direct capital costs for mining, processing and infrastructure.
• NPV: $438m at a 10% discount rate which is a higher discount rate than the 5% which we normally see applied in Canada.
• IRR: 24% is ok and seems on the low side considering the significant estimated margin.
Conclusion: This is a very interesting project to examine from a graphite perspective.
Much will depend on the ability to consistently attain >99.9% graphite of suitable flake size and on the realisation of the very high price estimated for this product.
Lenders will have to gain confidence in this process and this will likely require significant further testing and maybe small scale production.
The high capex of $411m could be significantly reduced by cutting the hefty contingency and EPCM costs though this could significantly raise the risk on completion and commissioning.