Precious metals prices find some support following sharp selloff on early Monday morning (2.30am GMT)
• Volatile market can cause investors to buy or sell commodities with the US dollar seen as a better haven for cash than gold by some
• Yesterday’s opportunistic selloff came on a day when many traders are on holiday with many funds away from the market
We note:
• Commodity price deflation is amazingly beneficial for China at present enabling policymakers to rescue the market without the threat of inflation in the wider economy.
• Deflation - US dollar strength is causing commodity prices to weaken in the US, China, Zimbabwe the UK and other linked currencies.
• Inflation – equally commodity prices may be inflated in some weaker currencies; Eurozone and in the commodity currencies of Australia, Chile, South Africa etc….
• But what goes down can also go up again with this deflation helped by lower oil prices (Iran deal) as well as lower thermal coal and metals prices.
• So when oil prices go up again and metals prices bottom out, then policymakers might struggle to find room for bailout packages.
• Interest rates; maybe it is wishful thinking but warnings on raising interest rates may not prevent over borrowing by individuals and companies in the West.
• Greek potential for default is deferred but has not gone away and China will surely suffer further correction
• Gold will once again have its day but may have to wait for investors to have good reason to sell the US dollar
Economic News
Greece – repays ECB €4.2bn but not IMF
• This is effectively robbing as Christine Lagarde to pay Angela Merkel – handbags at dawn!
Japan – Head of Toshiba resigns over accounting scandal. Toshiba is said to have inflated profits by $1.2bn over several years
US$1.0855/eur vs 1.0847/eur yesterday. Yen 124.31/$ vs 124.27/$. SAr 12.398/$ vs 12.433/$. $1.558/gbp vs 1.558/gbp
US$0.737/aud vs0.737/aud
Commodity News
Precious metals:
Gold US$1,108/oz vs US$1,115/oz yesterday –
Platinum US$987/oz vs US$986/oz –
Palladium US$618/oz vs US$612/oz –
Silver US$14.85/oz vs US$14.84/oz –
Base metals:
Copper US$ 5,523/t vs US$5,498/t –
Aluminium US$ 1,682/t vs US$1,694/t -
Nickel US$ 11,875/t unch vs US$11,510/t –
Zinc US$ 2,054/t vs US$2,051/t –
Lead US$ 1,822/t vs US$1,823/t –
Tin US$ 15,580/t vs US$15,495/t –
Energy:
Oil US$56.5/bbl vs US$57.1/bbl
Natural Gas US$2.834/mmbtu vs US$2.826/mmbtu
Uranium US$36.40/lb unch vs US$36.40/lb – India looking to build a strategic uranium reserve to counteract potential shortage of nuclear fuel
• Uranium bugs may be about to have their day as state planners forecast potential for a shortage of nuclear fuel.
• The Indian government appears to be planning a reserve pool of between 5,000-15,000t of uranium sufficient for 5-10 years of operation within India
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$51.30/t unch vs US$50.70t –
Thermal Coal $57.5 vs $57.4 cif ARA Europe –
Tungsten - APT European prices price $225.0/mtu unch vs $217.5/mtu two weeks ago - China to build new tungsten reserve
• China Molybdenum plans to build a new CNY3bn tungsten reserve
• The reserve may offer a price of CNY65,000/t (10,480/t) to create a level to underpin prices, even though this is significantly lower than current prices in Europe.
• The reserve price equates to $105/mtu vs the current European price of $225/mtu.
• We suspect only very desperate producers will sell very poor quality material into the fund.
Company News
Ariana Resources (LON:AAU) 1.1p, Mkt Cap £7.3m – soil and rock-chip geochemical program results
• Ariana have announced results from follow-up soil and rock-chip geochemical programs done on the Karakavak and Kepez West prospects at the Kiziltepe Sector of the Red Rabbit Gold Project in western Turkey.
• The company highlight:
o “Several additional significantly gold-silver mineralised vein systems identified at Karakavak.
o Coincident gold (>20ppb Au) and silver (>150ppb Ag) soil anomalies encountered along the full 1,800m strike length of Kepez West.”
o Ariana reckons the “Results underpin the broader resource potential of the wider Red Rabbit Gold Project, which has a current global JORC resource of 475,000 oz of gold equivalent.”
o This is a very general statement which may or may not prove to be true on further drilling
o Soil and rock-chip sampling is a useful tool for geologists but is often a poor indicator for much else. What is seen in the soil often does not relate to what is then seen in drilling and untamed geologists often chip away at the best looking rocks to gain unrepresentative samples in rock-chip programs. While these sorts of results can look exciting they are sometimes regarded as about as useful as a trap door in a lifeboat.
o More interestingly the company state that the “Kiziltepe mine construction expected to commence shortly ahead of first gold pour in H2 2016 targeting 20,000 oz per annum.” Reiterating the target made earlier this month.
*The author of this report has previously visited the Red Rabbit project
Goldplat*(LON:GDP) 1.625 pence, Mkt Cap £2.7m – Trading Update warns on profits
Recommendation Under Review
• The company announced yesterday that they expect to make an operating loss for the full year to 30 June 2015.
• Expectations had been at the interim stage reported in March that they would return to profitability by the end of the financial year.
• While trading is said to have improved this does not appear to have come through in time to turn around profits for this year.
• Operations and improvements in Ghana are said to be taking longer to come through.
• The company expect to achieve an overall operating profit for the next financial year.
Conclusion: At the interim stage the company reported losses of £929,000 and it looks from this statement that they expect losses to be around that level for the full year. The trading update provides little detail on their operating activities and there remains little clarity for investors. The company appear hopeful that they can make a profit for next year and we await further news flow on initiatives that are said to be in place to come through.
*SP Angel act as nomad and broker to Goldplat
Mwana Africa (LON:MWA) 1.2 pence, Mkt Cap £16.8m – Results for BNC
• The company reported results for its 74.73% owned subsidiary Bindura Nickel for the 31 March 2015.
• BNC reported a profit after tax of US$11.2m against a retained loss last year.
• Revenues were up 21% for the year to US$78.9m with a 3% increase in tonnages to 7,352 tonnes.
• The price of nickel realised over the period was up 17% to US$16,700/t against US$14,298/t.
• The cost of sales rose by 45% reflecting increases in operating costs from labour and electricity and additional development costs.
• The company has invested in mobile equipment over the period which it expects to result in steady state mining going forward.
• The company spent US$9.5m of capex and US$6.4m on prepayment of the shareholders loan.
• A programme to refurbish, upgrade and restart the smelter was reviewed by an independent third party which estimated the capex for this to be US$26.5m.
• Funds towards this project was raised through an issue of US$20m from a redeemable fixed rate secured bond although a sum of US$2.1m is still due.
• The smelter project has started and is expected to take 9-12 months with a target for completion in Q1 2016.
• The company is in ongoing discussions for an offtake from the smelter.
• Cash at the end of the period was US$11.9m and cash as at the 30 June 2015 was US$2.8m with an overdraft facility of US$7m.
Petropavlovsk (LON:POG) 6.4p, mkt cap £203m – Lower TCC through H2/15 to offer support amid weaker gold prices; Net debt guidance intact
• Gold production totalled 127.5koz (Q1/15: 112.8koz; Q2/14: 147.2koz) taking H1/15 output to 240.2koz (H1/14: 306.4koz).
• Weaker production is attributed to lower processed grades across operating mines.
o At Pioneer, mining operations focused on opening high grade zones through H1/15 with production expected to pick up significantly in H2/15 (H1/15: 99.1koz; H2/15e: 240.9koz (estimates based on POG guided production breakdown))
o At Pokrovka, production is expected to remain close to current levels with little change to processed 1.1g/t grades (H1/15: 26.8koz; H2/15e: 33.2koz).
o At Malomir, weaker production was attributed to lower grades and gold recoveries (H1/15: 1.0g/t and 68%; H1/14: 1.4g/t and 73%) with production expected to remain flat of slightly exceed H1/15 (H1/15: 32.6koz ). Management forecast differs from previously guided 90koz at Malomir in FY15 which would have implied 57.4koz to be produced in H2/15. Should the 680koz target hold, the shortage is likely to be compensated for by production from Pioneer.
o At Albyn, lower processed grades (H1/15: 1.2g/t; H1/14: 1.4g/t) held back production. H2/15 is expected “to be slightly higher than in H1”. Comparing H1/15 results to previously released production breakdown for FY15 (Albyn: 190koz) would have implied 108.3koz from Albyn in H2/15, a 33% increase over H1/15.
o H1/15 gold sales amounted to 229.7koz at US$1,221/oz (H1/14: US$,1386/oz) including US$11/oz benefit from forward sales.
o As of H1/15, hedging position stood at 75.0koz at an average price of US$1,201/oz.
o 2015 production guidance reiterated at 680koz within the previously forecast 680-700koz range.
o Annual target may be revised downwards to reach optimal cash flow and net debt reduction at a potential loss of marginal ounces at Malomir and Albyn.
o 2015 TCC target reduced to US$600/oz, down from US$700/oz previously, on implemented efficiency programmes and revised mining plan.
o In particular, TCC at Pioneer and Albyn mines accounting for c.75% of the Group’s production came down to US$550/oz and US$600/oz though Q2/15 from US$650/oz and US$950/oz in Q1/15, respectively.
o A cut in production costs should support FCF generation amid falling spot gold prices with net debt projections reiterated at US$600m by YE15, down from US$696m as of H1/15.
o Exploration programme at Pioneer targeted at high grade underground pay shoots delivered impressive intersections and confirmed the continuation of the mineralization 100-240m below existing open pits:
§ 3 proven pay shoots in the Bakhmut zone with selected intersections including –
§ 19.8 at 7.9g/t and 9.4m at 82.3g/t at NE Bakhmut
§ 5.2-22.4m at 2.0-19.5g/t at Bakhmut
§ 1.5m at 47.8g/t at Promezhutochnaya
• 3 pay shoots in the Andreevskaaya zone –
o 1.5-4.8m at 34.7-90.6g/t at Main zone
o 2.0-2.5m at 1.9-4.4g/t at smaller second zone adjacent to the Main target
o Drilling results will be included in the next JORC mineral resource update.
Conclusion: Quarterly production gain pace as the year progresses, although at a weaker pace than we forecast (SPA Q2/14 production: 145.7koz). The management has cautiously reiterated the 680koz FY15 production guidance with nearly 2/3s of annual output to come through in H2/15. Considering mine-by-mine production composition, it is possible previously guided output at Malomir and Albyn to fall short of forecasts with production from Pioneer unlikely to close the gap completely in H2/15. Although, the management warned that a potential weaker than expected production would involve a reduction in unit costs with EBITDA and a reduction in net debt to US$600m by YE15 guidance intact.
*SPAngel analysts have visited the Pioneer, Malomir and Albyn gold mines in Russia
Shanta Gold* (LON:SHG) 5.625p, Mkt Cap £26.1m – Improved outlook for production and costs during H2
• Shanta Gold’s Q2 update indicates that following substantial re-optimisation of the Bauhinia Creek and Luika pits to reduce life-of-mine strip ratios during H1 the company expects a substantial turnaround in both production and cost performance during the second half.
• Gold production in Q2 of 14,664 oz brings H1 output to 28,180 oz and with the company maintaining its production guidance for the full year at 72-77,000 oz production of 43-49,000 oz is implied during H2. We note that Shanta Gold reports production during June amounted to 7,480 oz which, if maintained, would make this target achievable.
• Costs, on an all in sustaining basis, amounted to $1,157/oz bringing the average for H1 to $1,298/oz which is clearly challenging at current gold prices.
• The impact of increased production in the second half of the year leads Shanta Gold to maintain its cost guidance for the full year at $850-900/oz on an AISC basis and the company is projecting costs of $650-680/oz during H2 to achieve this.
• The company has forward gold sales for H2 of 26,000 oz at an average price of $1,221/oz. This amounts to around 55-60% of projected H2 output and should help cushion the impact of current gold price weakness.
• Capital expenditure of $6.6m during the quarter ($14.7m H1) included open pit development expenditures.
• The company expects to complete the feasibility study for underground mining at New Luika during Q3
• Cash balances at 30th June amount to $5.9m leaving Shanta Gold with net debt of $54.5m.
Conclusion: Shanta Gold appears to have passed a watershed with production and cost improvements starting to come through. Achieving their target production and cost levels may prove crucial if Shanta Gold is to weather the current challenging time for gold prices and service their loan obligations.