Gold $1,115/oz falls as investor offload 5 tonnes of bullion into China’s less liquid market
• The sale / sales are thought to have been made into China’s smaller gold market half an hour after the market opened to take advantage of the lower liquidity and fragile market environment
• A large investment fund is thought to be responsible for the majority of the gold sale
• Reports last week indicate that the China government has raised its gold holdings by 57% to 53.32m oz from the last figure released in 2009
China – market rescue costs $209bn – Chinese investors sell gold to cover losses
• China’s remarkable stock market rescue may have cost the nation around $209bn
• China Securities Finance Corp has access to 3 trillion yuan of funds (around $480bn) from the central bank and other lenders.
• The equity market is around 6.6 trillion in its entirety so the government is effectively prepared to buy back half the market to protect the value the market’s investments.
• Reasons:
o To avert unrest caused by the destruction of value for so many new investors into the market who had over invested their savings and borrowed funds. China has >90m individual investors with more than 12m new investors coming in to the market in April. These investors were encouraged to buy into the IPOs of formerly state run companies
o To enable the government to continue to restructure and IPO more state run companies using the market as an incentive for management
o To support the myriad of financial instruments sold to private investors which are linked to the equity market and some of which offer extraordinarily high yields
o Chinese regulators allowed the expansion of online lending to private investors by less well regulated financial groups causing a massive increase in loans for margin and for equity investment.
o Chinese investors appear to have over borrowed and over invested using loan products causing the potential for the widespread destruction of value in any stock market collapse
o Suspending half the stocks in the market, banning short selling and preventing >5% stockholders from selling was not enough on its own to halt the collapse. A further $209bn is reported to have been invested within a few days in buying up the market giving some indication of how fast investors moved to unwind their investors.
o Investor panic is easily driven by a need to repay loans used for investment when share prices fall. Many investors should be grateful that the government has rescued the market though the nation will inevitably question the cost of the bailout when the dust settles. The trick for China will be how to limit investor leverage while selling new state-sponsored IPOs into the market.
o The speed and scale of China’s market response is incredible by any standards and affirms the government’s commitment to its strategy of using the market as an important part of its strategy to restructure, reform and re-float state and para-statal companies into the market. It is interesting to see a communist government using such a capitalist style mechanism to improve its economy!
Economic News
US – Consumer inflation excluding energy and food costs climbed 1.8%yoy in Jun, up from 1.7%yoy in May and in line with market estimates.
• A separate report showed housing starts are back on a growing trend with Jun numbers up 9.8%mom compared with a 10.2%mom decline in May.
• Additionally, building permits climbed 7.4%mom taking the gauge to the highest level since 2007.
• Economic news due this week:
o Wednesday: Jun existing home sales (+0.9%mom v +5.1%mom in May)
o Thursday: Weekly jobless claims (280k v 281k in the previous week)
o Friday: Jul Markit manufacturing PMI (53.6, unchanged from Jun reading), Jun new home sales (-0.1%mom v +2.2%mom in May)
Germany – Euro zone members are prepared to consider extending maturities and reducing interest rates on Greek bonds, Angela Merkel said.
• However, Athens should prove their commitment to reforms first and pass the first assessment on implementation of austerity pledges.
• Writedowns of outstanding debt are ruled out for now with Merkel arguing “classic haircut, writing down 30 to 40% of the debt” would violate European law.
UK – House prices growth accelerated in Jul to 5.1%yoy, up 0.6pp from 4.5% recorded in Jun, according to Rightmove.
Greece – Banks open today, while capital controls remain in place.
• Limits on withdrawals are to be kept and payments and wire transfers abroad are still not possible.
• The stock market will be closed until further notice.
• Agreed VAT increases on food and public transport have already taken place with rates up to 23% from 13%.
US$1.0847/eur vs 1.0887/eur yesterday. Yen 124.27/$ vs 124.10/$. SAr 12.433/$ vs 12.317/$. $1.558/gbp vs 1.565/gbp
US$0.737/aud vs0.740/aud
Commodity News
Precious metals:
Gold US$1,115/oz vs US$1,144/oz yesterday –
• Strengthening of the US dollar on the Fed comments that first interest rate hike towards the end of the year remains on the cards seen gold prices down significantly through Monday morning.
• In early hours of trading in Asia, gold briefly touched US$1,088/oz, the lowest in five years.
• The move followed unusually high market volumes with 900,000 lots traded on a gold futures contract on the Shanghai Gold Exchange. This compares to an average of less than 30,000 lots for Jul so far.
• On a separate note, Chinese official gold reserves are reported to have jumped 60% since 2009, the last time the PBoC revealed its holdings.
• As of Jun-end gold reserves stood at 1,658t (553.3moz) compare to 1,054t as of Apr/09.
• This makes China the sixth world’s largest holder of gold reserves (the US and Germany, being the second and third largest, held 8,134t and 3,383t, respectively, as of Jul/15). In % of total reserves Chinese remains at the bottom of the list when compared with other sovereigns with 1.6% versus just under 10% the world average at the end of 2014.
Platinum US$986/oz vs US$1,004/oz –
Palladium US$612/oz vs US$627/oz –
Silver US$14.84/oz vs US$15.00/oz –
Base metals:
Copper US$ 5,498/t vs US$5,497/t – Refined copper production in China climbed 9.4%yoy to 3.78mt in the first half of the year, according to the NBS.
• Jun production hit the highest in the first six months as smelters ramped up production following maintenance works in May.
Aluminium US$ 1,694/t vs US$1,706/t -
Nickel US$ 11,510/t unch vs US$11,430/t – Poseidon Nickel, an Australia based nickel producer, is putting three of its sites on care and maintenance to cut costs following a fall in metal prices.
• Three operations include Mt Windarra, Lake Johnston and Black Swan.
• Additionally, CEO and senior management agreed to take a 20% cut in salary.
• Cost reduction programme is implemented with a view that operations may be brought back online in up to four months once market conditions improve.
Zinc US$ 2,051/t vs US$2,063/t –
Lead US$ 1,823/t vs US$1,827/t –
Tin US$ 15,495/t vs US$15,300/t –
Energy:
Oil US$57.1/bbl unch vs US$57.1/bbl
Natural Gas US$2.826/mmbtu vs US$2.876/mmbtu
Uranium US$36.40/lb unch vs US$36.25/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$50.70/t unch vs US$50.50t –
Thermal Coal $57.4 vs $57.6 cif ARA Europe –
Tungsten - APT European prices price $225.0/mtu unch vs $217.5/mtu two weeks ago
Company News
Aureus Mining (LON:AUE) 23.5 pence, Mkt Cap £86.2m – New Liberty mine on track to ship the first dore for refining by end of July
• Aureus Mining reports that the plant at its New Liberty Gold Mine in Liberia has now achieved nameplate capacity. During performance testing as part of the commissioning process, the plant operated at 152 tph at a plant availability of 96%.
• The “mine is on track to reach full scale commercial production by Q4 2015 and to sustain an annual production rate of 120,000 ounces throughout 2016.”
• Other aspects of the start-up at New Liberty are also going according to plan with mine production coming principally from the Larjor pit and adequate supplies of explosives and ancillary materials available on site.
• The company reports that its first shipment of dore gold for refining is expected to take place before the end of July.
Conclusion: Aureus Mining is delivering the New Liberty Mine on schedule and against a background of the global economic climate at the time of the decision to proceed with mine development and the impact of the Ebola epidemic reflects well on the determination and professionalism of the company and its EPCM contractor, DRA Mineral Projects.
Berkeley Resources (LON:BKY) 17.25pence, Mkt Cap £31.1m – Clears the first permitting hurdle for the Salamanca Uranium Project process plant
• The company has announced that the Nuclear Safety Council has issued a favourable report which allows “the commencement of preliminary infrastructure works to access the plant, notwithstanding any other permits that may be required.”
• The issue of the report, which is binding on the Ministry of Industry, Energy and Tourism, represents the first step in a three stage process needed to obtain an operating permit for the proposed plant.
• The next stage will be the application for the Authorisation for Construction which Berkeley Resources reports is now well advanced and intends to submit shortly.
• Berkeley Resources has identified a uranium resource of 30.1m lbs of uranium (23.2m tonnes at an average grade of 589 ppm U3O8) at its Zona 7 licence in west of the city of Salamanca in the Salamanca Province of western Spain. An infill drilling programme at Zona 7 is underway and a further update to the resource estimate is expected in September and the company expects to submit an application for the development of Zona 7 during Q4 2015.
• The recent announcement of the appointment of the former Leyshon Resources MD, Paul Atherley, as Managing Director noted that “the integration of the high grade Zona 7 deposit into the project’s development plans” would be a priority in order to increase the scale of the project.
• Salamanca is a mining friendly province which has an operating tungsten mine at Los Santos and recently approved the development of a second tungsten mine at Barruecopardo. Berkeley Resources itself was granted an Exploitation permit in April 2014 for its Retortillo Project, which together with the Alameda, Zona 7 and Gambuta deposits forms the Salamanca Project.
Conclusion: The successful commencement of the permitting process for the process plant coupled with the enhanced high grade resources at Zona 7 and the additions to the management team added to the exploitation permit for Retortillo and the application for mining Zona 7 all point to an acceleration of activity at Berkeley Resources.
Polyus Gold (LON:PGIL) 171 pence, Mkt Cap £5.2bn – Second quarter operating results
• Refined gold output for Q2 is up 22% over Q1 2015 at 432 koz.
• This gives H1 2015 production of 783 koz a 5% increase year on year.
• Olimpiada put in a strong performance up 24% to 201 koz with Verninskoye up 14% to 42 koz.
• Total ore mined across the group was 5.7 mt with average strip ratios down to 2.3 from 2.8.
Rambler Metals (LON:RMM) 10 pence, Mkt Cap £14.4m – PFS completed on Ming Copper Mine
• The company has published a PFS based on a 21 year mine life for the mine.
• This is based on targeting an underground mine from both high grade massive sulphides and the Lower Footwall Zone.
• The initial feasibility study only looked at mining the high grade massives on a low tonnage basis.
• As part of the PFS a new resource and reserve has been estimated for the project.
• A mineral reserve of 8.667 mt has been estimated at 1.82% copper, 0.52 g/t gold and 2.94 g/t silver.
• A measured and indicated resource of 28.3 Mt has been estimated at 1.51% copper, 0.2 g/t gold and 1.96 g/t silver.
• The ROM production is targeted to increase from 650 mtpd to 850 tpd in the first year, 1180 tpd in year 2 and to 1,250 tpd from year 3 to year 21.
• Once in steady state, the majority of the ore is expected to come from long hole bulk mining of the footwall zone which will reduce unit costs.
• Average annual cash cost are expected to be $1.97/lb.
• The 5 year $66m capital for mining of the footwall zone is to be funded by the current mining operation.
• However, the initial expansion of the operation will require working capital which will result in a shortfall in the first year of $8.43m.
• The company is in discussions with debt funders for funding targeting up to US$25m of funding.
• Using a copper price of US$2.79/lb (US$5,047/t), gold of US$1,100/oz and silver of US$15.54/oz, the company achieves an after tax IRR of 45%.
Conclusion: A new mine plan based on reserves and resources gives investors more visibility on the potential for the Ming mine. Cash flows should support debt funding with the company assuming conservative prices for copper and gold against a muted background for metals. We look forward to hearing progress on debt funding.
Tri-Star Resources* (LON:TSTR) 0.115 pence, Mkt Cap £9.7m (inc. new stock) – Placing and Issue of Loan Notes to raise £3.5m
• The company has raised £1.5m in a placing of 1,500,000,000 shares at a price of 0.10p.
• In addition, the company has conditionally agreed with Odey the issue of a further £2m of secured convertible loan notes.
• The placing and subscription of the loan note will be subject to an EGM to be held on the 5 August 2015.
• On Friday, the company also announced the revised terms of the funding of the antimony roaster with its partners at SPMP which is developing the roaster in Oman.
• The total funding remains the same but the equity contribution of the JV partners has been reduced from US$20m to US$15m.
• This is a result of an increase in the mezzanine loan which has increased to US$15m from US$10m.
• As a result Tri-Star’s equity contribution will be reduced from US$8m to US$6m.
• Tri-Star is to also to benefit from the IP of the roaster which as previously announced is to be sold to SPMP for a total sum of US$6m to be paid in three tranches.
• The company has delivered to SPMP two required third party commercial and technical reports which on acceptance satisfies one of the conditions of the IP sale.
• On acceptance of the reports by SPMP, the first two tranches totalling US$4m (Tri-Star’s share being US$2.4m) will be partially applied to Tri-Star’ 40% equity investment in the roaster.
• The third tranche of US$2m which will be payable to Tri-Star (share of US$1.2m) will be received on commissioning of the antimony roasting pilot plant.
• All payments will be subject to financial close when a definitive facility agreement is in place on debt funding.
• The company has already in place a facility offer letter from Bank Nizwa for US$40m of senior debt.
Conclusion: This fund raise puts Tri-Star in a position to fund its share of the equity required within SPMP. This a key step in progressing the construction of the roaster which should on completion crystallise significant value for Tri-Star. We maintain our buy recommendation.
*SP Angel acts as Nomad and Broker to Tri-Star Resources