US and UK edge closer to interest rate rises
• Statements by Yellen indicate a first US rate rise later this year, with the Bank of England likely to follow
• The US dollar predictably continues to rise in anticipation of the rate rise
• Base Metals managed to shake off the negative impact of a stronger US dollar to rise this morning
• Gold prices pulled back with the US dollar and perhaps on news that the IMF may not support the Greek bailout due to its mandate on sustainable investment
• We forecast gold prices to recover once the crisis has moved to a point where gold is not being sold to cover other funding issues
Greece protestors show strong opposition to bailout deal
• Greek protestors voiced concerns overnight at the prospect of a further bailout agreement.
• One protestor described living in Greece under the austerity as living in a prison.
• The IMF have objected as they see the bailout terms as running contrary to their mandate which only allows the IMF to support sustainable debt relief.
• The IMF see the current agreement between Europe and Greece as unsustainable and is keen to see an element of debt relief to qualify for their support.
• The FT report protests in China against a Rare Earth Metals exchange which had sold investment products promising 10% returns which used rare earth metal stocks as collateral
• A recent collapse in the price Rare Earth Metals has caused the Fanya Metal Exchange to refuse to pay out on related investment products prompting angry protests
• The exchange has around 200,000 clients with invested funds of around $6.4bn
• The exchange has blamed foreign forces for betting against the Rare Earth Metals market
• They blame foreign forces which are alleged to have contacted domestic institutions to maliciously go short of China’s rare metals markets
Economic News
US – Industrial production recovered from three monthly consecutive contractions climbing 0.3%mom in Jun.
• Estimates were for a 0.2% gain.
• Manufacturing, accounting for 2/3s of the index, was flat during the month while major losses were recorded in autos and auto parts manufacturing (-3.7%mom).
• Oil and gas sector recorded another monthly decline in well drilling but the pace of contraction seems to be slowing down. Overall oil and gas activity levels are down 535.6% from a year ago.
• Among major winners, utilities sector posted a 1.5% increase following a 1.2% growth in May.
• Other reports showed New York manufacturing index up more than forecast (3.86 v -1.98 in May and 3.00 expected), while US capacity utilization climbed 0.2pp to 78.4%.
• Utilization rates are up 2.6pp over the past yea but remain 1.7p below its average since 1972.
• Economic news due today:
o Weekly Jobless claims (285k v 297k in the previous week), Jul Philly manufacturing index (12.0 v 15.2 in Jun)
ECB – The Board is holding the monetary policy meeting today with estimates for benchmark rates to be left unchanged.
• This is in sharp contrast to the US Fed stance on rates with the first hike forecast to come later this year.
• The EURUSD exchange rate is down c.1% this morning ahead of the ECB press conference.
Greece – Parliament approves conditions of the bailout in a late night vote yesterday paving the way to a fresh €86bn financial help package.
• The vote was accompanied by a series of protests outside parliament with certain estimates suggesting a more than 10,000 turnout.
• 229 of 300 Greece’s MPs voted in favour with a number of Syriza party members turning down bailout proposals and calling Tsiparis’ deal as betrayal of their core principals.
• Tsiparis is likely to reshuffle the government amid opposition among his own party leaders.
• The EU authorities are reported to have prepared a €7bn package to be disbursed to Athens for it meet debt repayments due next week.
• The short term fix will have a three months maturity and should allow enough time to finalise discussions over the full €86bn programme.
Zambia – Miners argue a 5pp increase to 35% in corporate tax rate will discourage added value processing operations in the country.
• Chamber of Mines representing interests of Glencore, Vedanta, First Quantum and other producers in the region asked for the rate to remain at 30%.
• The government approved a plan last month by which the icome tax rate on mineral processing would increase to 35% from 30%.
• In addition, mining royalties will be cut to 6% and 9% for underground and open pit mining, from 8% and 20% ruled previously.
US$1.1091/eur vs 1.1023/eur yesterday. Yen 123.90/$ vs 123.58/$. SAr 12.408/$ vs 12.369/$. $1.562/gbp vs 1.564/gbp
US$0.738/aud vs0.746/aud
Commodity News
Precious metals:
Gold US$1,146/oz vs US$1,155/oz yesterday –
Platinum US$1,010/oz vs US$1,028/oz –
Palladium US$641/oz vs US$657/oz –
Silver US$15.05/oz vs US$15.32/oz –
Base metals:
Copper US$ 5,595/t vs US$5,647/t –
Aluminium US$ 1,722/t vs US$1,716/t -
Nickel US$ 11,650/t unch vs US$11,780/t –
Zinc US$ 2,086/t vs US$2,103/t –
Lead US$ 1,869/t vs US$1,873/t –
Tin US$ 14,825/t vs US$14,725/t –
Energy:
Oil US$57.2/bbl vs US$58.2/bbl
Natural Gas US$2.917/mmbtu vs US$2.848/mmbtu
Uranium US$36.25/lb unch vs US$36.25/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$50.70/t unch vs US$50.70t –
Thermal Coal $57.5 vs $58.1 cif ARA Europe –
Tungsten - APT European prices price $225.0/mtu unch vs $217.5/mtu last Friday
Company News
Anglo Pacific (LON:APF) 87 pence, Mkt Cap 145m – Kestrel Royalty Update
• Production rates at Kestrel have improved following a panel change out during Q4 2014.
• For Q2 105 production was 1.118 Mt and for the first half 2.252 Mt.
• Kestrel production within the Anglo Pac royalty area for H1 2015 was up 22% in line with the company’s previous guidance.
• For the second half Rio has guided to tonnages which are in line to slightly above the company’s previous guidance.
Anglo American (LON:AAL) 868 pence, Mkt Cap £11.9bn – Second Quarter production report mixed
• Iron ore production was down 9% at Kumba for the quarter while Minas Rios ramped up to 1.8 mt on a wet basis.
• For the first half production at Kumba was down 1% to 22.6 Mt.
• Record export sales were achieved at 11.7 mt up 14% due to the sale of stock.
• Export met coal was up 9% to 5.3 mt as Moranbah production was better and first coal was delivered from Grosvenor.
• Australian export thermal coal increased by 38% to 1.3 Mt with South African export thermal coal broadly flat at 4.3 Mt.
• Eskom production was down 17% to 6.8 Mt due to reduced demand and industrial action.
• Copper as expected decreased by 5% to 184.5 kt but was up 7% on the previous quarter.
• Production from Los Bronces fell by 8% due to lower throughput as a result of water constraints.
• Full year production remains partially dependent on the weather.
• Nickel production was down 41% to 6,300 tonnes due to planned furnace rebuilds.
• Equivalent PGMs were up 60% to 572,000 oz for the quarter as operations reached full ramp up following the strike last year.
• Platinum production was up 33% to 561,000 oz, palladium up 32% to 388,000 oz and rhodium up 58% to 77,000 oz.
• Diamonds were down 6% to 7.9 m carats.
• The De Beers rough price index was on average 4% lower for the first half of 2015.
• For De Beers production a higher average realised price was achieved of US$208/carat due to the production mix.
Conclusion: Production for most commodities within Anglo’s portfolio saw lower production growth which is not helpful with commodity prices going down. While this may be in line with management expectations, there is little reason for investors to switch to Anglo’s against a lower price environment. Water constraints at Los Bronces also highlights the challenges of copper production in areas of water scarcity.
Rio Tinto (LON:RIO) 2583 pence, Mkt Cap £46.2 bn – Second Quarter production results in line
• Iron ore production increased in line with production plans up +8% from the same time last year and 12% from the previous quarter.
• Q2 production was 81.4 Mt and for the half year 153.9 Mt.
• The main elements of the 360 mtpa infrastructure capacity are now said to be in place.
• Sales were 146.5 Mt for the first half (Rio’s share 118.3 Mt) up 10% from last year.
• 25% was sold in the first half referenced to the prior quarter’s average lagged by one month and the remained on current quarter or spot.
• In terms of 2015 guidance, shipments will be 340 Mt on a 100% basis, 7 mt short due to the bad weather.
• Copper production is down 19% for the quarter at 134 kt and down 7% on the previous quarter.
• For the first half production is down 14% to 278 kt.
• Production from KUC was down 72% for the quarter at 17.4 Kt with ongoing work to de-weigh and de-water Bingham Canyon.
• Production from Escondida was up 9% for the quarter at 98.4 kt and for the first half up 22% to 204.6 kt.
• Production from Oyu Tolgoi was up 44% for the first half at 49.8 kt with mining moving to higher grades in the open pit.
• Development of the underground mine at Oyu Tolgoi is going into next steps of feasibility, financing and permitting.
• Copper guidance remains the same with Rio’s share at between 500 and 535 kt.
• Aluminium was flat for the quarter and first half at 818 kt and 1,627 kt respectively.
• Bauxite was up 5% in the first half at 21.179 mt – guidance remains unchanged for aluminium and bauxite.
• Hard coking coal was up 15% for the quarter at 2.1 mt and up 13% for the first half at 4.1 Mt.
• Semi-soft and thermal coal was down 5% for the quarter at 5.09m t and flat for the first half at 10.7 Mt.
• Titanium dioxide slag was down 19% at 301 kt and down 19% for H1 at 624 kt – 2 out of 9 furnaces are idled in RTFT in Quebec.
• Diamonds at Argyle were up 37% to 3.37m carats for the first quarter and up 34% for H1 at 6.591 m carats as the underground ramps up.
• Production from Diavick was down 9% for the first half at 2.183 m carats as a result of mining in an area of high dilution.
Conclusion: No real surprises in these numbers – iron ore is marginally down on guidance due to the weather. Copper guidance is in line with performance from Oyu Tolgoi expected to be better as higher grade areas are mined in the open pit. The titanium dioxide market remains weak. With commodity prices remaining weak, higher production is seen not to be driving growth but cash flows making Rio more a yield rather than a growth play.
ZincOx Resources (LON:ZOX) 12.6 pence, Mkt Cap £21.0m – ZincOx to raise £3.2m
• ZincOx is raising £2.1m from institutional investors plus £1.1m by way of an offer to all qualifying shareholders.
• The placing price is 13p.
• “Proceeds of the Placing are anticipated to be used for:
o accelerating the debottlenecking of KRP including replacement of heat exchangers; and to progress work on the next recycling project.”
o Debt: ZincOx reported that it would have some $56.7m of net debt post its debt restructuring on 31st March. The weighted average cost of this debt is 6.2% based on current LIBOR with the restructuring cutting the company’s interest bill by around $0.5mpa.
o Offtake: The unfortunate side of the restructuring was an increase in the Korea Zinc offtake facility to 1,050,000t from 840,000t. While the terms of the offtake are undisclosed we believe the terms are sufficiently onerous to suggest that ZincOx should do very much better out of the development of a second facility once all elements of the design are settled and the commissioning of the Korean plant are complete.
o Expansion: Development of a second facility in a location with greater EAFD supply of better grade zinc should enable potential for a significant increase in margins and very much better returns for investors.
o Korea zinc’s offtake terms might be onerous but the Korea Zinc did take risk on the project and has supported ZincOx through an extended commissioning period.
Conclusion: ZincOx is now close to finally proving the operation of its EAFD recycling process. Validating its process and showing that modifications to the plant are working should enable the company to raise capital debt for the development of a second plant. This maybe in the form for a joint venture combined with bank debt. We look forward to news on the location of the company’s next site.