BHP chief comments that investors should get used to low commodity prices and ample commodity supplies will persist
• The comments appear to relate more to the slowdown in growth in China and the impact on demand growth for commodities in general
• There is nothing new in this outlook and it is normal for the major mining companies to offer a more bearish view than is perhaps reality
• If BHP, Rios, Anglo and others took more heed of Glazenberg’s wise words on the supply / demand balance then the sector would be a better place all round.
• BHP are a big part of the problem and they do not appear to be helping the sector
• Fortunately, supply interruptions in copper are likely to plunge the market into deficit this year with significant production either delayed or unattainable for the year
• Gold too is supported by renewed strong demand in China and India and from some central banks and prices have held well despite recent ETF selling
• Investors sold gold ETFs in anticipation of rising US interest rates and a stronger US dollar but the Fed keeps kicking the can down the road due to persistent structural issues holding back US growth
• The Fed / market has blamed the weather, we prefer to blame continuing low cost competition from China and other Asia
Economic News
US – “Overall economic activity expanded during the reporting period from early Apr to late May,” the latest Fed Beige Bok read.
• In particular, consumer spending demonstrated strong performance climbing in all 12 districts except one.
• A separate report showed, growth rate in services sector slowed to the lowest in a year on ISM PMI numbers (55.7 v 57.8 in Apr and 57.0 forecast).
• ADP employment change: 201k in May v 165k in Apr and 200k forecast.
• Economic news due today:
o Weekly jobless claims (278k v 282k in the previous week)
ECB – Benchmark Eurozone sovereign yields surge as Draghi said investors should “get used” to volatility in debt markets.
• German 10y Bunds climbed to 0.897%, the highest level since Oct/14.
• Market reaction is explained by expectations the ECB would be willing to try and smooth the market volatility.
• Regarding the exit strategy following completion of the QE programme, Draghi said the situation is currently “far from that” and there were no discussions about that so far.
• The ECB plans to continue buying debt at the current rate until Sep/16.
• Latest ECB forecasts show inflation to average at 0.3% in 2015, 1.5% in 2016 and 1.8% in 2017. GDP change to come in at 1.5% this year, +1.9% in 2016 and +2.0% in 2017.
• The ECB left benchmark interest rate at a record low of 0.05% during the meeting yesterday.
Australia – Retail sales growth slowed down to a halt in Apr while same month trade balance posted larger than forecast deficit.
• Retail sales: +0.0%mom v +0.2%mom (revised from +0.3%mom) and +0.3%mom forecast.
Brazil – The central bank hiked interest rates 50bp to 13.75%, the highest level in six years, in an effort to battle inflation that is at an 11-year high.
• The move was in line with market estimates and marked the sixth consecutive increase.
Greece – Alexis Tsiparis met with Jean-Claude Juncker, the head of the EC, and Jeroen Dijsselbloem, president of the Eurogroup of finance ministers, to discuss conditions for released the €7.2bn bailout tranche.
• Greece PM commenting on the progress dueing the meeting noted there have been productive discussin over the primary surplus condition.
• Dijsselbloem described the meeting as “good”.
• Lenders and the creditor are trying to strike the deal, at least in principle, ahead of the €300m payment due to IMF tomorrow. Although the fund has allowed Greece to delay the payment by several weeks.
US$1.1335/eur vs 1.1384eur yesterday. Yen 123.99/$ vs 124.34/$. SAr 12.389/$ vs 12.255/$. $1.541/gbp vs 1.528/gbp
A$0.775/aud unch vs 0.778/aud
Commodity News
Precious metals:
Gold US$1,183/oz unch vs US$1,189/oz last week - Investors are cutting gold holdings in precious metal’s ETFs on speculation the Fed is planning to raise rates this year.
Platinum US$1,106/oz vs US$1,112/oz last week – JM results (comments below) should give some indication as to how the market is moving for platinum and palladium
Palladium US$756/oz vs US$762/oz last week
Silver US$16.48/oz unch vs US$16.68/oz last week
Base metals:
Copper US$ 5,957/t vs US$6,017/t last week - Production disruptions of around 7% through the first four months of the year were higher than previously forecast on Aurubis’ estimates.
Aluminium US$ 1,743/t vs US$1,746/t last week
Nickel US$ 12,885/t vs US$12,950/t last week
Zinc US$ 2,148/t vs US$2,156/t last week
Lead US$ 1,943/t vs US$1,923/t last week
Tin US$ 15,530/t vs US$15,415/t last week
Energy:
Oil US$63.5/bbl vs US$64.9/bbl last week
Natural Gas US$2.642/mmbtu vs US$2.689/mmbtu last week -
Uranium US$35.65/lb sharply unch vs US$35.55/lb last week
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$62.0/t unch vs US$62.2/t – Surprise increase in iron ore price
Thermal coal (1st year forward cif ARA) US$57.8/t unch vs US$58.1/t last week
Seaborne hard coking coal index (quarterly) US$109.5/t unch vs US$109.5/t
Other:
Tungsten $230-235/mtu Europe – China is messing about with tungsten prices as new mines open following a WTO ruling last year
• China has lifted its output quota for tungsten concentrates at a time when tungsten prices have fallen to $235-255/mtu fob China and $225-235/mtu in Rotterdam
• New producing is coming on stream from Wolf Mining and Ormonde is getting ready to build Barruecopardo in Spain which may be behind China’s influence in depressing prices
• North American Tungsten are busy laying off staff at Cantung with the mine working at Short time despite the last reserve report maybe to give the mine’s three year life further extension to delay closure costs
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.
Molybdenum - Supply climbed 7.5%yoy to 583.7mlbs with demand up 4.0%yoy at 559mlbs (IMOA). Market remained in surplus of 24.7mlbs vs a 5.5mlbs surplus in 2013.
• China recorded a 2.9%yoy increase to 200.6mlbs in supply and a 3.0% growth (202mlbs) jn demand. Prices finished the year lower at US$20,300/t. now around US$17,100/t, close to 11 years low.
• Thompson Creek placing the Endako molybdenum mine on care maintenance
Company News
Johnson Matthey (LON:JMAT) 3392 pence, Mkt Cap £6.95bn – Results to end 31st March 2015 in line
• Sales excluding precious metals was up 5% at £3,125m.
• Emission control technologies (ECT) performed well up 8% at £1,782m benefitting from the introduction of new legislation in Europe and market growth in Asia and North America.
• Process technologies also up 5% at £591m with good growth in the oil and gas business and mixed performance in the chemicals business.
• Fine chemicals were relatively flat at +1% at £327m.
• Precious metal products fells by 12% to £379m as a result of lower commission revenues from revision of Anglo Platinum contracts.
• Group operating profit was up 2% at £477.1m at £477.1m.
• Operating profits of the ECT division was up 16% at £236.9m and process technologies up 4% at £106m.
• Operating profits were up 6% at £88.8m of chemicals helped by process efficiency improvements.
• Precious metals profits down 22%.
• In the ECT division, Light Duty Vehicle (LDV0 catalysts did particularly well up 9% to £622m driven by Euro 6b legislation for new models of diesel cars.
• From 1st September 2014, tighter NOx emissions standards are being introduced to bring them in line with gasoline cars.
• The tighter NOx emissions requirements requires additional catalyst technology and increases sales value per vehicle by 20%.
• This is expected to increase significantly from 1st Sept 2015 when legislation will apply to all diesel vehicles produced in the EU.
• Diesels vehicle share of sales remain unchanged at 52% in 2012/2015.
• The company expects this share to decline as petrol cars become more fuel efficient but absolute numbers of diesel cars are expected to grow in the medium term.
• Diesel engines continue to offer fuel efficiency and CO2 emissions advantages over petrol engines.
• CO2 limits are to fall from 130g/km to 95 g/km in 2020 which could also favour diesel cars.
• Certain petrol engines could also opportunity for additional catalyst sales with the introduction of Euro 6c emission standards starting from Sept 2017.
• This regulation imposes a limit on the number of particulates that can be emitted.
• The company have developed a three way filter technology TWFTM to meet this legislation.
• The Asian LDV catalyst business was up 5% ahead of vehicle production of 3% in the region.
• In North America volumes in catalyst grew in line with the 3% growth in vehicle production.
• In North America Heavy Duty Diesel (HDD) catalysts were up 18% ahead of the 16% growth in truck production driven by the recovery in the US economy.
• Strong sales of catalyst systems for large trucks was seen with higher catalyst value per vehicle.
• In Europe, the HDD catalyst business benefitted from the new Euro VI legislation.
• Sales grew by 6% despite a weak truck market.
• Within the new business sector, battery technologies sales were up 23% to £84m and down 14% to £6m.
• The division is still running at operating loss at £22.1m widening from £18.3m last year.
Conclusion: Operating profits were only 2% ahead for the group with precious metals being the main drag to profits. The ECT division is performing strongly and Johnson Matthey continues to be well placed to benefit from tightening legislation for both diesel and petrol vehicles. Euro 6b legislation was particularly helpful for catalyst requirements for diesel cars with Euro 6c requirements expected to increase catalyst requirements for petrol cars. The company also appear to have a product for limits to particulates which should help as concerns increase on health issues as a result of particulate emissions.
FinnAust Mining* (LON:FAM) 1.6p, mkt Cap £4.8m – Director steps down
• FinnAust report that Alastair Clayton, executive director has resigned from the company.
• The Board is grateful for Alastair’s contributions and wishes him well..
* SP Angel acts as nomad and broker to the company
Kefi Minerals* (LON:KEFI) 0.9p, Mkt Cap £12.4m – Potential to double gold resource at Tulu Kapi project in Ethiopia
• Kefi Minerals are looking to increase the gold resource at the Tulu Kapi gold project in Ethiopia.
• Exploration on the adjacent gold licenses shows a number of gold prospects with similar geology to Tulu Kapi with potential to feed the planned new mine.
• The Kefi team have used polygonal estimation for a pre-resource estimate of the potential of a number of untested zones which shows a potential doubling of the gold resource.
• The press release claims mineralisation at the Komto 1 and 2 prospects has potential to host a bulk tonnage open cut resource returning a 10.5m intercept grading 1.5g/t gold.
• Eight trenches show a potential 3km strike with best results including:
o K1003: 7m at 7.27 g/t Au
o K2012: 13m at 1.07 g/t Au
o K2013: 6m at 1.24 g/t Au and 5m at 1.07 g/t Au
o The Soyoma prospect, 15km north-west of Tulu Kapi, showed 14.2m at 8.2 g/t gold in trenching.
o Channel samples returned best results of 3m at 4.2g/t Au, 2m at 2.75g/t Au and 1m at 2.65g/t Au.
Tulu Kapi mine DFS update expected later this month.
• Key stats for new mine
• Production approx.. 960,000oz of gold over 13 years
• Costs: all-in-costs of c. US$783/oz
• CAPEX expected to come in at c. US$120m based on contract-mining and new process plant
• 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
• Contractors indicate potential for funding / forward financing
• Bank lenders are reviewing the Draft DFS
• US$50m spent to date
• Funding: potential for US$100m debt plus US$20m in contractor financing / equity.
Conclusion: Work being done by the Kefi team should continue to add value to the Tulu Kapi project in Ethiopia. The geologists estimate, using the polygonal method, the potential to double the ore resource. More importantly discovery of more near surface high-grade gold ore could add significantly to early cash flow and meaningfully improve the value and payback of the project.
*SP Angel act as Nomad to Kefi Minerals. An SP Angel analyst has visited the Tulu Kapi mine site with Kefi Minerals.
Metals Exploration* (LON:MTL) 6.8 pence, Mkt Cap £92.8m – Final Results highlight progress with Runruno Mine now close to commissioning
• Significant progress has been made on building the Runruno mine.
• The process plant is now 82% complete with commissioning expected in June 2015 and to be done in stages.
• Ore commissioning is expected shortly after in early Q3 2015.
• The remaining work left is related to electrical and piping installations around the plant with a night shift crew being put in place to advance this process.
• Stage 1 of the tailings facility is ready for operations in line with commissioning in June 2015.
• The construction of the tailings facility has been from materials sourced from the pre-strip.
• The mine has had access to grid power since February which has helped in progressing the build.
• In preparation for full commissioning a mini operations plant has been built and commissioned on site.
• This has been mainly for training purposes and has included two processing circuits – one for milling and floatation and the other for the build-up of cultures for the BIOX circuit.
• The initial stock of bacteria to be used in commissioning and then ramp up of the BIOX plant is being produced by the mini-lab.
• As at the end of Dec 2014 the company had cash of £12.251m and is fully funded through construction and commissioning.
• Of the US$75m senior debt facility, US$72.8m has been drawn with a balance of US$2.157m still available.
• The US$8m cost overrun facility remains undrawn.
• The senior debt facility covers a 54 month period at six month US$ libor plus 4.75% during construction coming down to a spread of 4.25% at project completion.
• The variable US Libor rate has been swapped for the full term at 1.575% fixing the interest payment to 5.825% on project completion.
• Interest payments are bi-annual starting on 30 June 2015 with principal payments starting from 31 Dec 2015.
• The loan requirements for hedging will result in 35% of the annual forecast gold production for the following three years on a rolling quarterly basis.
• Gold swaps outstanding are for 15,000 oz of gold in 2015 at US$1,290/oz, 30,000 oz at US$1,287/oz in 2016 with an average over the period of 90,000 oz at US$1,287/oz.
• An offshore project contingency fund of US$13.4m is also available once the senior loan facility has been used.
• As at the end of March, capital incurred stood at US$162.02m of the total capex of US$182.8m.
• Capital outstanding at that time was US$20.75m, US$9.98m committed (48%) and US$10.8m to be placed (52%).
• All major packages for equipment, services and civil construction have been placed with US$95.5m of procurement contracts executed.
• US$6.8m has been paid in import VAT, customs duties and stamp tax which the company is technically not required to make under its legal status in the Philippines.
• Metals Exploration have a contractual agreement under its FTAA status to benefit from exemptions on VAT and import duties.
• The company continues to contest these payments through the courts.
Conclusion: The Runruno mine is now close to commissioning and is fully funded for completion and ramp up. The company has set out in the strategic report contained within their full results the process that has been undertaken to get to this stage which has held a number of challenges which have been well managed under the leadership of Ian Holzberger. Putting into place the structures to attract project financing and using a self-build approach has been carefully managed and to budget. The delays which have held up the project have been previously flagged.
Once in full production Runruno will be targeting an average of 101,800 oz in the first five years and 92,700 oz over a 10 year mine life. C1 cash costs are in the first quartile which provides scope for cash generation as production builds up.
*SP Angel act as broker to Metals Exploration
Sierra Rutile (LON:SRX) - 29.5 pence, Mkt Cap £154.1m – Bringing in a partner for its agricultural businesses
• The company has announced an agreement with an emerging markets focussed agricultural company, Carmanor, for Carmnanor to earn into a maximum 75% interest in Sierra Rutile’s agricultural business, African Lion.
• African Lion’s pineapple plantations are specifically excluded from the deal as they are already sufficiently established to be self funding.
• Carmanor is to expand African Lion’s palm oil, rubber and cacao plantations and fund the construction of an oil palm minin-mill.
• The transaction is subject to Carmanor achieving certain milestones in African Lion’s business plan and should free up Sierra Rutile to focus on its primary mineral sands business. In the event that Carmanor fails “in its obligations under the business plan, Carmanor’s ownership of African Lion would reduce as low as zero, based on the business plan milestones it did or did not meet.”
Conclusion: The plan to bring in a specialist to manage the agricultural businesses with performance targets seems a sensible move to focus on the main mineral sands business.
Sirius Minerals (LON:SXX) 20.8 pence, Mkt Cap £459.9m – Marketing update
• Sirius held an analyst meeting yesterday providing an update on the marketing strategy for POLY4, a multi-nutrient fertilizer.
• Polyhalite or ‘POLY4’ is marketed as a fertilizer containing four of six macro nutrients (potassium, sulphur, magnesium and calcium) together with a number of micro nutrients.
• Multi-nutrient nature of the product compensates for the lower potassium content compared to alternatives (14% K2O in POLY4 v 60% in MOP and 50% in SOP) and allows for completion in various markets.
• In addition, the lack of chloride in POLY4 makes it a valuable product for chloride-sensitive crops such as tobacco, fruits and some vegetables.
• Sirius is allocating a significant proportion of its annual budget for agronomic research which is seen as vital in establishing the benefits of the POLY4 use in farmers’ economics.
• The multi-year nature of studies is necessary in testing application effects through several calendar seasons.
• Sirius collected a comprehensive data series showing POLY4 beneficial results when compared to MOP application (on K2O equivalent) in terms of yields and quality of selected crops, in its third year global agronomy programme.
• Tests are run using a third party product which has been tested and proven to be chemically identical to planned POLY4.
• In terms of market penetration, Sirius is following a two-way plan: competition/substitution within existing market segments (incl MOP, SOP, SOPM and others) and expansion of chloride free market at the expense of chloride containing alternatives like MOP.
• The latest FERTECON study on the future market for polyhalite forecast 50mt polyhalite potentially available for POLY4 in 2018.
• The 50mt forecast is comprised of: 35-40mtpa in substitution of MOP, 11.6mt – SOP, 4.6mt – SOPM. Assuming standard K2O contents for above fertilizers, that equates to 16% of the total global market (7.2mt K2O of the total 45.9mt K2O).
• The second route assumes current chloride free fertilizers’ market is limited by tight existing supply, which may be expanded should a larger and cheaper source of production such as POLY4 comes online.
• In terms of offtake agreements, the latest summary confirmed previously released customer commitments including 1mt covered by offtakes subject to certain conditions (i.e. trial test results and product registration in China), 1.1mt under take or pay agreements and the balance of potential 6.5mtpa signed on a less enforceable contract terms.
• The final mine site and mineral transport system permit from the North York Moors National Park Authority (NYMNPA) is due Jun 30.
Conclusion: Marketing risk for the proposed POLY4 is considered one of the major risks to the economics of the project. While similar polyhalite products are currently produced by Cleveland Potash, Boulby mine volumes are significantly lower (100-150ktpa) with marketing focusing on the “niche” nature of the product. Sirius which is planning to produce 6.5mtpa in Phase I and ramp up to 13mtpa post Phase II is committed to rebrand the product and expand the market to absorb its planned volumes of POLY4.
The price discovery process is in its early stages; however, we think the Company has done well in securing prices close to assumed in Dec/12 PFS study (c.US$150/t) with Chinese offtakers for 1mt. We would expect future contracts to be negotiated at lower levels reflecting weaker benchmark potash prices (US$400-500/t MOP in 2011/12 v current c.US$300/t MOP).
All attention is currently on the York Potash permitting with final decision only weeks away. We understand that securing the mining permit may reveal further interest from producers/customers/distributors which may consider becoming involved in the project as the company moves towards finance and development.
Stratex International plc* (LON:STI) 1.5p, Mkt cap £7m – Goldstone Resources increases its stake in Homase
Goldstone Resources (LON:GRN) 2.4p, Mkt Cap £1.5m
• Stratex International reports that Goldstone Resources, in which Stratex has a 33.45% interest, has negotiated an increased stake in the Homase project in Ghana
• Goldstone is raising its interest to 90% from the current 65% stake on payment of $25,000 to the local partner, Cherry Hill Mining.
• In addition, a number of other pre-existing conditions have been waived including the requirement for Greenstone to commit expenditure to a feasibility study in order to attain an 85% interest. The condition that Goldstone should achieve an 85% interest by 18th March 2016 has also been set aside, as has the obligation of Cherry Hill Mining to contribute to development costs in order to retain a 15% interest..
• Stratex and Goldstone recently reported the completion of an initial auger drilling programme at Homase which had identified two potential zones of previously undiscovered mineralisation on the Homase and Akrokerri licence areas .
• Today’s announcement comments “Goldstone is currently conducting an in-fill auger sampling program over the Homase / Akrokerri project, designed to provide the Company’s geologists with sufficient density of data and confidence of provenance of gold mineralisation to be able to plan a drilling campaign, with a view to potentially adding to the Company’s existing 602,000 oz Au JORC code compliant resource for the Homase / Akrokerri project.”
Conclusion: The increased holding of the Homase project on what appears to be favourable terms should enable the Goldstone and Stratex management to proceed with its exploration work and follow up the recently identified targets without the pre-existing constraints on budgets and timetables of the earlier agreement.
*SP Angel act as broker to Stratex International plc
Ortac Resources* (LON:OTC) 0.11p, Mkt Cap £3.1m – Ortac CEO joins Zamsort Board
• Ortac Resources has announced that its CEO, Vassilios Carellas, has joined the Board of Zamsort Limited in Zambia.
• Ortac recently acquired a 10.7% interest in Zamsort, which holds a Small Scale Mining Licence within a larger Exploration licence at Kalaba some 40 km from First Quantum’s large scale Trident project in NW Zambia. Ortac has an option to increase its holding to 19.35% through a further subscription of US$600,000 loan notes.
• Mr Carellas, who commented that “I am delighted to be officially appointed to the board of Zamsort, and look forward to being involved with the operations of the company and the development of this highly prospective project” will also assume an executive management role within Zamsort.
Conclusion: Ortac’s move into Zambia has the potential to change the direction of the company through a rapid start to mining and the ability to develop a larger resource in a geologically attractive setting.
*SP Angel acts as broker to Ortac Resources
Rambler Metals (LON:RMM) 12.3 pence, Mkt Cap £17.7m – Update on drilling of Ming Mine
• The company has completed two sets of drilling programmes – one in the 1807 zone and another in 1806 and 1805 zones.
• 4,544m of drilling has been undertaken in the 1807 zone to extend potential mineralisation both along strike and down plunge.
• The deepest drill hole completed to date is 100m below the deepest reserve level of 630L
• The 1807 zone has produced most of the tonnes mined since commercial production started.
• Drilling shows potential for extension of 40m along strike west of the zones already in mine plans.
• The company has completed 1,467m of diamond drilling on the 1806 and 1805 massive sulphide zones.
• This has resulted in discovery of a new area with potential for high grade gold mineralisation.
Conclusion: It is good to see potential for resource at the Ming Mine to be extended with drilling showing high grade intercepts. We look forward to formalisation of any further resource potential.