China – the real economy will be shaken by this week’s market collapse
• The impact on sentiment will be hard to turn around and we can expect a fall in domestic demand and in particular luxury goods.
• China wants to use the market to restructure and rescue parastatal companies.
• It’s a smart idea to combine underperforming companies particularly where they are competitors to build new value and help the transition.
• Listing these companies creates management incentive and refinances the businesses
• The problem is in the disconnect between the company’s ambitions and the ongoing need for state stimulus to create demand for these companies
• China will need to continue to stimulate domestic demand to avert further crisis.
• This stimulus should be good for base metals and other industrial commodities and should spark a recovery in prices
• We should question how sustainable this recovery should be and how volatile markets might be within this environment
• Fundamentally, the world is still absorbing China as a new entrant into an expanded global economy - the transition was never going to be easy.
Economic News
IMF – New economic forecasts suggest little effect from a possible “Grexit” on world economic growth rates in 2016.
• The economy is expected to expand at 3.8% next year, in line with previous forecasts.
• 2015 global GDP growth forecasts have been revised downwards to 3.3% from 3.5% led by weaker US data.
• “The underlying driver for a gradual acceleration in economic activity in advance economies…remain intact,” the IMF report read,
• “Developments in Greece have, so far, not resulted in a significant contagion. Timely policy action should help to manage such risks if they were to materialise.”
US – The FOMC Jun meeting minutes showed that members agreed the economy is gaining momentum, although current conditions continue to fall short of required levels to start tightening.
• “Most participants judged that the condition for policy firming had not yet been achieved; a number of them cautioned against a premature decision,” minutes said.
• A small number of participants “viewed the economic conditions for increasing the target range for the federal funds rate as having been met or were confidence that they would be met shortly”.
• The Fed is planning to release a separate document called an “implementation note”, which would describe “measures to be employed to implement the FOMC’s decision abouth the stance of policy [i.e.interest rates]”.
• On a separate note, US weekly jobless claims climbed 15k to 297k compared to a 275k reading forecast.
• Applications run below 300k mark for the 18th consecutive week which is consistent with improving conditions in the labour market.
Greece – Athens submitted new reforms proposal as part of a three-year bailout deal currently considered by creditors.
• The submission of the plan marks a 48-hour revision period before the plan will be presented to Eurozone finance ministers on Saturday.
• Should ministers decide the plan does not go far enough, European leaders will be discussing the Greek exit from the euro on Sunday.
• The new proposal is said to be similar to a compromise offer made by creditors before Greece rejected terms of the bailout in a national referendum last Sunday.
• The revised offer includes concessions on the pension reforms and tax increases side.
US$1.1116/eur vs 1.1044/eur last Thursday. Yen 122.17/$ vs 121.42/$. SAr 12.395/$ vs 12.502/$. $1.545/gbp vs 1.540/gbp
US$0.746/aud vs0.746/aud
Commodity News
Precious metals:
Gold US$1,163/oz vs US$1,153/oz yesterday –
Platinum US$1,034/oz vs US$1,038/oz –
Palladium US$650/oz vs US$661/oz –
Silver US$15.44/oz vs US$15.38/oz –
Base metals:
Copper US$ 5,571/t vs US$5,546/t –
Aluminium US$ 1,688/t vs US$1,677/t
Nickel US$ 11,300/t unch vs US$11,205/t –
Zinc US$ 2,002/t vs US$1,987/t –
Lead US$ 1,794/t vs US$1,788/t –
Tin US$ 13,960/t vs US$14,270/t –
Energy:
Oil US$59.1/bbl vs US$57.7/bbl
Natural Gas US$2.742/mmbtu vs US$2.685/mmbtu
Uranium US$36.25/lb unch vs US$36.30/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$49.90/t vs US$47.00t –
Thermal Coal $58.7 unch vs $58.5 cif ARA Europe –
Tungsten - APT European prices price $225.0/mtu unch vs Monday vs $217.5/mtu on Friday
Company News
Avalon Resources (ASX:AVI) A$0.03, Mkt Cap A$7.2m - Update on Exploration activities near the Viscaria Copper Project
• The main focus for the company remains to increase the resource at the Viscaria Copper project.
• Drilling has been undertaken on a bedrock copper anomaly – the Nihka Prospect which is near Viscaria.
• The prospect which was found from auger drilling is co-incident with a magnetic anomaly which is 1100m x 500m.
• A diamond drill hole tested the prospect with drilling to a depth of 326.5m.
• Assay results have been returned from the hole and show a sequence of altered and brecciated rock consistent with an iron oxide copper system.
• Significant intervals of iron values were intersection with 90m to 202 m averaging 11.5% Fe.
• Copper grades ranged from 0.1% to 0.16% copper.
• Follow up drilling is likely to be undertaken based on further modelling of the magnetic information.
• Another target West Nukutus which is 10km from Nihka is also to be tested with diamond drilling expected to be started in mid to late July.
• This 1km long bedrock copper gold anomaly has been defined for auger drilling which saw copper assays of 0.5% copper and gold of 0.1 g/t.
Hummingbird Resources (LON:HUM) 32 pence, Mkt Cap £34.2m – Mineral Development Agreement with Govt of Liberia
• A 25 year MDA has been signed with the Govt of Liberia for the Dugbe Gold Project.
• Fiscal terms have been agreed within the MDA for royalties of 3% and income tax rate of 25% with credits for historic exploration.
• Fuel duty is to be reduced by 50% and 75% for the first five years if the gold price is below US$1,500/oz.
• The government get a free carry of 10% in the Dugbe Gold Project.
Conclusion: The MDA sets out reasonable terms against a lower gold price scenario. The PEA indicated that, despite a relatively low resource grade of 1.4 g/t gold, a 3.5mtpa tank leach operation costing $212m would generate an NPV of 186m and an IRR of 29% at a gold price of $1300/oz. With gold prices below US$1,200/oz the project needs more help with the hydropower project close to Dugbe also likely to help with project economics.
Sirius Minerals (LON:SXX) - 20.3 pence, Mkt Cap £440.7m – Update following recent approvals
• With recent approval for the project by park authorities a number of steps need to be undertaken before final decision.
• Some key steps need to be achieved before final decision notices are issued to the company.
• For the mine and the MTS decisions are needed from both the NYMNPA, Redcar and Cleveland Borough council.
• For the materials handling facility decision notices are needed from Cleveland Borough council.
• For the temporary construction accommodation and a park and ride facility decisions are needed from the Scarborough Borough Council.
• These decisions are expected by the end of September 2015.
• A new DFS incorporating any inputs from these approvals is expected during Q4 2015.
• Financing which is expected to be mainly debt and discussions are expected to be concluded in Q1 2016.
Conclusion: A number of steps still need to be taken with financing such a large scale of capex the next big challenge.