Gold (US$1,163/oz) is doing exactly what it does in a time of crisis – its relative performance is good compared with Shanghai and Greek stocks
• Gold is acting as a good, liquid, store of value as Chinese investors sell commodities to raise cash
• We expect gold prices to pull back some more as the China crisis unfolds before rising again
China
Markets recover on Expectation of strong stimulus in China to rescue local markets
Chinese state intervention appears to be working as restrictions on stock sales and PBoC liquidity supports China Securities Finance Corp equity buying
Recovery in metals prices suggests state intervention is working – but will there be another leg down
• Commodities continue to as investors look for liquidity as China’s authorities suspend trading in >50% of stocks
• China’s key brokerages agreed to put $19bn into a stabilisation fund and promised not to sell shares till the market recovers 4,500 points
• Iron and steel benchmark futures in China has biggest ever trading day reinforcing its position as a useful liquid market
• Copper recovers as trade volumes double in China
In a worst case scenario – China may suffer a ‘Lehman Bros.’ style collapse with a number of Chinese banks and brokerages needing to be rescued
• Chinese investors have a propensity for leverage and many private investors have been sold ‘Umbrella Trusts’ which guarantee returns but which are also lent to hedge funds which use them to make leveraged stock bets.
• Now it’s the turn for the short sellers to take the pain as stocks are bought up by the state and others remain in suspension
But this is this going to hurt
• Luxury goods and high-end Auto manufacturers will likely suffer as profits on stock portfolios turn to losses and speculators sell what they can to raise cash
• Diamond and other precious stones and minerals prices may be hit hard at the high end if some of China’s new millionaires are stopped out
Can the underlying cause of China’s market collapse be fixed
• The Chinese state has been restructuring parastatal companies and selling them into the stock market as a mechanism to pay down debt
• The system has worked well but overhyped stock prices, leverage and the Chinese proclivity to gambling has inflated the market to unsustainable levels
• The mechanism of turning state companies into stock market darlings is a good one and the government may well return to this process when the dust settles
• Local demand is likely to suffer in the short term at all levels but should return if this stimulus is successful
Unconfirmed reports of Chinese ‘Equity citizen’ committing suicide.
• Chinese police rescue woman who had invested family money in CRRC, a former parastatal train manufacturer. The rescue indicates the state in monitoring social media comments.
• The story of CRRC is a good case as the IPO of CRRC was from the combination of two competing train manufacturing companies enabling the restructuring and reformation of the companies ready to build trains for the planned Silk Road rail routes as well as the multitude of suburban rail systems being built around towns across China.
• We suspect China will continue to support the market as floating para-statal companies is a pillar of its strategy for reform and to avert public unrest
HK’s Hang Seng index recovery is a barometer for the success of China’s market rescue with strong gains posted overnight
Metals price falls accentuated by financial sales and stop loss selling
• The collapse in Chinese equities and the pull back in construction / heavy industrial activity remains a threat for commodity prices to continue to slide
• Commodities have been used for carry trade financing and as collateral for other financing within China.
• While some lending on commodity assets was unwound last year following the discovery of fraud at one of China’s largest ports, much metal is still held as collateral for other finacing
• Some or much of this collateral may still be sold to cover margin calls and losses in other areas
• Traders have also become increasingly cautious as inventories built at ports as manufacturers slow commodity purchases on slower domestic demand
Latest China official PMI numbers showed the manufacturing sector expanded for the fourth consecutive month in Jun.
• Estimates were for a slight acceleration in growth from May (50.4 v 50.2 in the previous month).
• Services favoured better posting 53.8 reading, up from 53.2 in May.
• HSBC measure of the manufacturing PMI was less positive: 49.4 v 49.6 in May.In a separate report, the World Bank released its latest economic growth forecasts showing Chinese growth to slow down to 7.1% this year and 6.9% by 2017 compared with +7.4% in 2014.
Macau – Casino revenues are reported to have fallen 36.2%yoy in Jun to US$1.67bn.
• The sector has not favoured well in the last 18 months as mainland China pushed to reduce corruption.
• In 2014, casino revenues recorded the first full year annual decline since records began in 2002.
China – The PBoC is stepping up efforts to support sinking stocks.
• The China Securities Finance Corporation will be given access to additional liquidity from the PBoC to “hold the line against the outbreak of systemic or regional financial risk”.
• The CSF will also provide US$42bn to brokerages to help them accelerate purchases of shares.
• In the meantime, the insurance regulator said it had allowed “qualified insurers” to increase their asset allocation to equities.
• Trading in nearly half of all listed companies on two major exchanges are reported to have been suspended to date locking some US$2.6tn worth of equity.
• Shanghai and Shenzhen indices both posted 5.9% and 2.5% declines, respectively.
• On a separate note, passenger vehicle sales fell in Jun for the first time since Jun/13.
• Sales totalled 1.4m units, down 3.2%yoy, led by a general economic slowdown together with a major correction in the stock market.
Well done to the London Underground Tube drivers for calling today’s strike
• Given the number of ‘workers’ walking, running and cycling to work today the strike has done more for getting Londoners active than all other sporting events
Economic News
Japan – Core machinery orders, a proxy for private business investment, posted the third consecutive monthly increase in May (+0.6%mom v 3.8%mom in Apr).
• This comes in sharp contrast to a 4.9%mom decline forecast.
• The increase marks the strongest reading in the last 16 months.
Yesterday Japan’s current account recorded the second-highest monthly surplus in the last five years in May on the back of receipts and payments on overseas investments.
• At the same time, imports exceeded exports during the month reflecting higher costs for inbound shipments on weaker yen.
UK – Growth forecasts have trimmed by 0.1pp to 2.4% for 2015, according to the Office for Budget Responsibility latest estimates.
• The economy expected to expand 2.3% in 2016.
• The US, China and Greece have been mentioned as sources of global economic stress risks.
Australia – The economy added 7,300 jobs in Jun versus forecasts for no change taking the total to 224k over the past 12 months.
• Unemployment came in at 6.0% with the participation rate up slightly at 64.8%.
• The Australian dollar gained 0.6% on the back of the announcement.
• Expectations are for H2/15 to come in weaker than the previous six months as commodity markets remain under pressure.
Greece – The IMF is lobbying for a debt restructuring while Eurozone leaders stress the “haircut” on the debt is currently not part of negotiations.
• Alexis Tsiparis is expected to present a detailed reform proposal to Brussels today.
• European officials will be reviewing the plan on Friday before the Eurogroup meeting this Saturday.
• The ECB extended the ELA programme with the limit kept unchanged at €89bn.
Yesterday the government was given five days to reach a deal with creditors or claim bankruptcy following the emergency summit by European leaders this Sunday.
• Eurozone leaders said the No vote over the weekend has significantly lowered chances of reaching the deal.
• “We have a Grexit scenario prepared in detail: we have a scenario as far as humanitarian aid is concerned,” Mr Juncker, the EC president, said.
• The ECB which has been providing ELA to Greek banks said the programme could not be extended beyond the weekend without the deal which would see local lenders cut off emergency funding.
Chinese Premier Li Keqiang will have been ‘unimpressed’ by the rescheduling of his meetings by EU leaders in Brussels
• The delay to Premier Li’s meeting as European policymakers met yet again with Greek leaders highlights Europe’s crisis with Greece and the vulnerability of markets in this environment
• You can imagine Premier Li on the phone back to China telling of his dismay at Europe’s problems with this minor corner of the Eurozone
US$1.1044/eur vs 1.1031/eur last Thursday. Yen 121.42/$ vs 121.63/$. SAr 12.502/$ vs 12.540/$. $1.540/gbp vs 1.541/gbp
US$0.746/aud vs0.739/aud
Commodity News
Precious metals:
Gold US$1,163/oz vs US$1,153/oz yesterday –
Platinum US$1,038/oz vs US$1,017/oz –
Palladium US$661/oz vs US$635/oz –
Silver US$15.38/oz vs US$14.97/oz –
Base metals:
Copper US$ 5,546/t vs US$5,376/t –
• China is a big beneficiary of the fall in copper and other commodity prices and the fall has come at a particularly good time for China’s policy makers as it will allow greater investment and stimulation without so much risk of inflation
• The bad news is the collapse is real and it might take more than a public policy sticking plaster to restore confidence
• The good news is that policy makers have lots of room for manoeuver and high parastatal debt levels give every reason to restore growth to some inflation
o Global copper demand fell 3% in Q1 ( 150,000t), mainly due to China (110,000t), Japan the EU and Russia
o Copper demand in the EU was down 5% yoy in Q1
o The Americas were up 3%
Aluminium US$ 1,677/t vs US$1,658/t
Nickel US$ 11,205/t unch vs US$10,885/t –
Zinc US$ 1,987/t vs US$1,948/t –
Lead US$ 1,788/t vs US$1,727/t –
Tin US$ 14,270/t vs US$13,950/t –
Energy:
Oil US$57.7/bbl vs US$56.2/bbl
Natural Gas US$2.685/mmbtu vs US$2.736/mmbtu
Uranium US$36.30/lb unch vs US$36.30/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$47.00/t vs US$50.00t – Reports of iron prices as low as $44/t at differing Chinese ports amid record volumes traded in Benchmark iron and steel futures
Thermal Coal $58.5 unch vs $57.8 cif ARA Europe –
Tungsten - APT European prices price $225.0/mtu unch vs Monday vs $217.5/mtu on Friday
Company News
Centamin (LON:CEY) 60.25 pence, Mkt Cap £694.1m – Q2 Preliminary production results
• Centamin reports that Q2 gold production at its Sukari mine of 107,781oz is broadly in line with Q1 output of 108,233 oz and that the company remains on course to achieve its forecast 430,000-440,000 oz of annual gold production.
• The company expects an improvement in grades from its open pit mining operation to improve during the second half of the year. We note that waste:ore ratios in the Sukari open pit mine increased from 5.2:1 in Q1 to around 6.8:1 in Q2 and substantially above the 4.5:1 in Q2 2014 but consistent with the average life of mine waste:ore ratio of 5.5:1
• Underground mining rates are up from 264kt in Q1 to 282kt in Q2. We note that the company had been forecasting Q2 underground production of 250,000t of ore, confirming the company’s comment that “the underground mine also performed slightly ahead of expectation”.
Conclusion: Based on these preliminary results, Centamin’s Sukari operation appears to be performing at, or slightly better than planned levels. It will be interesting to see the impact on costs when the full quarterly results are released on 12th August.
Firestone Diamonds (LON:FDI) 31.5 pence, Mkt Cap £97.3m – Sale of Botswana assets
• The company has announced the sale of its Botswana assets to TSX listed Tango Mining for $8m.
• Tango will pay an initial $0.35m and place a further $0.3m in escrow by 30th September as a deposit. The sale is conditional upon Tango raising the balance of $7.35m, the approval of the Botswana Competition Authority and ministerial approvals within Botswana as well as the necessary approvals of the TSX.
• Tango has also agreed to pay the continuing costs of care and maintenance at the BK11 operation up to $40,000/month into an escrow account.
• Firestone Diamonds will use the proceeds of the disposal of its Botswana assets to fund working capital for the development of the flagship Liqhobong diamond mine in Lesotho where production is due to start in Q4 2016.
Conclusion: The Botswana assets have been available for sale for some time as Firestone Diamonds concentrates on Liqhobong and it is positive that an agreement has now been concluded allowing management to focus on delivering its flagship project in Lesotho.
Premier African Minerals (LON:PREM) 2.25p, Mkt Cap £14.5m – Raising £450,000 to advance Zimbabwean lithium/tantalum project.
• The company has announced that it is raising £450,000 to advance its Zulu Lithium and Tantalum project in south central Zimbabwe through the issue of 22.5m new shares at 2p/share.
• The company is also issuing 1.35m share purchase warrants which can be exercised at 3p per share within three years.
• The Zulu project is located on a 5 km long section of lithium and tantalum bearing pegmatite and the company’s website comments that “Premier intends, funds permitting, to advance the Zulu Lithium project by conducting a further 1,000m of trenching and 2,000m of core drilling with accompanying metallurgical studies with an objective of establishing a code compliant Mineral Resource.”
SolGold* (LON:SOLG) 2.35 pence, Mkt Cap £17.9m – Drilling underway on Hole 12
• SolGold reports that the company has started drilling hole CSD-15-012 at its Cascabel copper / gold project in northern Ecuador.
• The hole is located 95 metres east of hole CSD-14-005 which reported a 532m long intersection grading 1.08% copper and 1.08 g/t gold from a depth of 778m and 258 metres grading 1.27% copper and 1.27 g/t gold from a depth of 1052 metres.
• The new hole is planned to test the southeast strike extension of high grade copper and gold within the Alpala Central zone at Cascabel.
Conclusion: SolGold has previously announced that it is deploying a 2nd drill rig to the Cascabel project in late July and is planning to deliver a maiden resource estimate in under a year. With the arrival of a second rig, we expect an increasing flow of information from SolGold in the coming months.
*SP Angel acts as Nomad and Broker to SolGold. An SP Angel analyst has visited the Cascabel project.