Every Cloud Has a Gold Lining
With Gold currently priced at a five year low of $1,085/oz. the All-In-Sustaining-Costs [AISC] is
becoming increasingly relevant, not just for margins, but for survival. The NYSE listed gold
miners supply this number in a comparable format, and it currently averages around $920/oz.,
and ranges from around $760/oz. for New Gold [TSE:NGD] up to $1055/oz. for Gold Fields
[NYSE:GFI].
Of course miners’ Capex has been an early casualty, and though some of the equipment
manufacturers like Atlas Copco [STO:ATCO-A] are reporting a bottoming out of order declines,
some like Joy Global [NYSE:JOY], are still having a torrid time.
Another casualty has been exploration budgets. Across the larger producers the cuts have broadly
been in the order of around a third over the last 4 years, with Kinross [ NYSE:KGC] , Agnico
Eagle [NYSE:AEM] and Newcrest [ASX:NCM] all cutting their exploration spend by more
than 50%.
With the Gold price at these levels it is inevitable that production will decline and miners must
find higher-grade projects. Given the lack of home grown exploration they will be forced to look
at the junior explorers with the best AISC potential. Falling production and a scramble for assets
has to be good news for some of the beleaguered AIM listed explorers who have great projects
and limited capital; and terminal for those that have neither.
Reviewed by William Lynne.
Economic Review
The UK economy continues to be buffeted by world events notably the developments in Greece, the Chinese
stock markets and a strengthening dollar. However, domestic demand remains relatively strong as a result
of low inflation, driven largely by low oil prices and the topic of interest rate rises seems to be back on the
agenda
The Greek tragedy continues, with the Greeks living on to fight another day. Greek banks recently reopened
after being shut for three weeks as a result of the deadlock over the country's debt, the government
has commenced repayment of its loans to the ECB and IMF after Athens arrived at a cash-for-reforms deal
aimed at preventing a default and a 'Grexit'. One of the many catches is that Greek citizens are limited to
withdraw up €420 a week, with restrictions on sending money abroad and other stringent controls.
Nonetheless, it can be seen as progress. The agreement that is reached may well stave off the headwinds
faced by British companies, especially those on AIM, who export to the European Union, in the coming
months.
The Chinese stock market plunged by nearly a third at one stage earlier this month, wiping away almost
$4 trillion from share values. The world's largest consumer of commodities has seen a recent slowdown in
their economy, which in essence has been a catalyst for the decline in many commodity prices, especially
gold price falling steadily since 2012.
Though the Chinese government claim that gold reserves were up 57 percent, the rise was below analysts'
expectations. China’s weakening outlook coupled with rumours of a US interest rate rise later this year has
caused the price of the yellow metal to fall to its lowest level in more than five years. The Chinese economy
shows no sign of staging a return to rapid growth, which will only add to the slump in gold and many other
raw materials.
Gold
Gold prices consolidated near the $1,100 level in June 2015, but have recently dipped below that important
level as investors continued to focus on prospects of high interest rates in the US. Gold plunged to the
lowest level seen since February 2010, and at one point sellers dumped an estimated record 33 tonnes in
just two minutes. The majority of this sell off was as a result of stop-loss orders triggered by a bout of
technical selling after prices broke below key support levels.
Copper
The fall in gold prices also seeped its way through into other commodities, though there was a resurgence
in price in the early months of 2015, copper has now faced a downward trend since May 2015. A little rise
was witnessed in July 2015 as investors returned to the market to seek bargains. Global copper production
capacity at mine level through 2018 is expected to grow at an average annual rate of 6% to reach 27.4
million tonnes (mt) a year, according to a new report by the International Copper Study Group. This could
suppress the price for some time to come. Conversely if the price remains low the anticipated new mines
may not come on stream as expected, potentially leading to some price stabilisation.
Iron Ore
The price of iron ore fell below $50 a tonne for the first time since April 2015. Rising production and a fall
in oil costs has led to an oversupply of iron ore, which paired with weak demand has led to a price drop,
especially in China, where a slowing economy has slowed demand for steel. Thus, according to Goldman
Sachs, prices can be seen dropping over the next four quarters, from $49 a metric ton through September
to $44 by the April-to-June period of 2016.
Diamonds
One of the best-known and most sought-after gemstones have lost their glitter on the back of slack demand
and lower rough diamond prices. Rough diamond prices are down 3.4 percent for the first half of 2015,
with the Ziminsky Global Rough Diamond Price Index stating the precious rocks have fallen by 9.54 percent
in the past year, squeezing the profits of producers. Rapaport Group noted that manufacturers will further
decrease their rough diamond acquisitions in the near term to reduce existing inventory and increase
liquidity levels, thus continuing to squeeze producers in to lowering the price of rough diamonds.
Tungsten
The ferro tungsten price is currently circulating around the £19 per kilogram mark, down 24 percent for
the same period a year ago (£25 per kg). Though the long term outlook for demand remains positive, due
to growth in usage by automobile manufacturers, the industrial engineering and manufacturing sectors,
one must keep a close eye on the events in China, where the economy is beginning to slow. With China
being one of the largest consumers of tungsten, a sudden fall in demand would cause huge volatility with
the price of tungsten. A number of recent developments such as the EU directive on Conflict Minerals (still
in trialogue negotiations) and closure of mines, look likely to reduce the supply of tungsten. Existing
producers will be limited in their capacity for expansion; major producers in China are struggling to maintain
output due to falling prices, rising costs and lack of investment.
Reviewed by Darshan Patel
Top 5 risers
Churchill Mining (LON:CHL)
In May, Churchill announced a £850k fundraising at 10p including a one for two
warrant issue exercisable at 15p as funding to progress its international arbitration
claim against the Republic of Indonesia. On 4th June, the company provided an
arbitration update. The statement reiterated that ‘The arbitration before the ICSID
Tribunal arises from the unlawful revocation of the mining licenses relating to the
East Kutai Coal Project in East Kalimantan, Indonesia, in which Churchill and Planet
held a 75 per cent interest. In accordance with the previously advised arbitration
procedural timetable, the Company filed its formal response to Indonesia's
Application for Dismissal of the ICSID arbitration case due to document forgery.’
In making the relevant submissions, Churchill and its solicitors note the fact that
Indonesia no longer alleges that Churchill participated in the alleged scheme to
defraud the State. Indonesia's position now is that Churchill's former Indonesian
business partners, the Ridlatama Group, were the sole perpetrators of the allegedly
fraudulent scheme. "We are pleased that Indonesia is no longer alleging that
Churchill participated in any scheme to defraud the State. The results of the
production of documents by Indonesia reinforces our view that there is no substance
to the fraud and forgery allegations made by the Republic of Indonesia and we look
forward to having this issue dealt with so we can move ahead with having our claims
determined." said Churchill's Chairman David Quinlivan. The Hearing on document
authenticity is due to commence 3 August
West African Minerals (LON:EML)
On 2nd June, the Company issued the news that as previously announced on 11
February 2015, the Board of West African Minerals Corporation received a requisition
from Beaufort Nominees Limited requesting that the Company convene a general
meeting of shareholders of the Company to consider various resolutions to change
the composition of the Board of Directors. The Company had made the following
Board changes and Beaufort has agreed to withdraw the Requisition. Anton Mauve
has stepped down as a director of the Company with immediate effect while
continuing his operational role as president. In addition, Andrew Gutmann and Willy
Simon have been appointed as non-executive directors of the Company with
immediate effect. The Board is now composed as follows. Brad Mills; Chairman,
James Mellon; Non-Executive Director, Gerard Holden; Non-Executive Director,
Andrew Gutmann; Non-Executive Director, Willy Simon; Non-Executive Director.
West African Minerals Corporation (formerly Emerging Metals Limited) is an iron ore
mining and exploration group which has built a portfolio of iron ore assets in West
Africa.
Aurasian Minerals (LON:AUM )
On 12 June, the gold exploration company focussed on South East Asia announced
its results for the year ended 31st March 2015. Losses were £417k and cash stood
at £745k. Bruce Kay, Chairman of AUM commented: "The past year has seen the
continued transformation of Aurasian Minerals plc to implement a new strategy for
the search for mineral deposits in SE Asia, using the services and contacts of three
highly experienced former Newmont, Normandy and Anglo American staff. Positive
progress has been made in identifying prospective zones in Lao PDR and Myanmar
following a full analysis of available data including that obtained from Newmont.
Areas have been selected in Myanmar and three Exploration Permits totalling 1,900
sq.kms. have been lodged. In Lao PDR, data analysis and field sampling have
highlighted prospective areas and a joint venture has been signed with Sahamit to
progress the exploration programme. The SE Asia project has confirmed the
prospectivity of the region and the objective in the coming year will be to secure an
advanced project for AUM either by business development activities or achieving
Coal of Africa (LON:CZA)
On 18 May, the emerging coal exploration, development and mining company
operating in South Africa announced the granting by the South African Department
of Mineral Resources (DMR) of a New Order Mining Right in terms of the Mineral and
Petroleum Resources Development Act (Act 28 of 2002) for its flagship Makhado hard
coking and thermal coal project in Limpopo Province. The DMR also granted the
Section 11 approval transferring the right from CoAL to its wholly owned subsidiary
Baobab Mining & Exploration (Pty) Ltd (Baobab), which will be the project
development company. Makahdo is expected to produce 2.3m tonnes per annum
(Mtpa) of hard coking coal and a further 3.2 Mtpa of thermal coal over a 16 year life
of mine.
On 2 June the company announced the successful completion of Stage 3 of the share
placement, announced on 26 August 2014. The completion of Stage 3 concludes the
private placement which raised a total of £38.225m (US$59.102m) in three tranches.
Stage 3 of the Placement resulted in the issue of 144m ordinary shares at 5.5 pence
per share each, raising GBP 7.92m (US$12.39m). In addition TMM (Pty) Ltd have
been granted 40m options, with an exercise price of ZAR 0.3 per share and are
exercisable for 12 months from 1 June 2015. On 2nd July CZA announced it would
not extend further its deadline to sell its Mooiplaats Colliery to Blackspear Capital for
ZAR 250m. Discussions continue with various parties including Blackspear.
Central Rand Gold (LON:CRND)
The holding company for a group of companies engaged in gold mining and
exploration projects within the Central Rand Goldfield, bordering the southern
outskirts of Johannesburg in South Africa, in May announced a £0.6m placing at 10p.
On 1 July FY December 2014 results were released showing an EBITDA loss of
US$8.6m. The year 2014 was an ‘extraordinary’ one for the Company, with a number
of key events occurring, such as:
· significant capital improvement works carried out on the metallurgical plant;
· temporary closure of the underground mine due to the rising water table; and
· significant strategic investor interest in acquiring 100% of Central Rand Gold
(Netherlands Antilles) N.V. However as per the 16 July announcement, completion
of this transaction has been delayed. The discussions continue to progress towards
completion and the Company will advise shareholders once a resolution is achieved.
Biggest 5 Fallers
Red Rock Resources (LON:RRR)
On 7 May the mining and exploration company with interests in gold in Africa and
investments in other mineral assets announced that Red Rock's local partner in
Kenya, Mid Migori Mining Ltd (MMM), had been advised by the Ministry of Mining of
the termination of its Special Licenses numbers 122 and 202 (the SLs). Red Rock has
since instructed lawyers in Kenya to protect its interests. In May Red Rock also
announced the completion of the sale of its Colombian Gold Assets following the
receipt of the first tranche of the consideration for US$450k. On 26 June, the
company announced it had entered into an option agreement (the Option) with
Elephant Oil Limited (Elephant), an oil and gas exploration company focused on West
Africa. Red Rock’s June update reported that Jupiter Mines (1.2% interest held by
Red Rock) had doubled Managanese production in its second operational year to 8
February 2015. On 30 June it was announced that Australian associate, Resource
Star Limited (ASX:RSL), a company with historic interests in uranium exploration in
Africa and Australia, had terminated the agreement under which it had the right to
acquire a further 45% interest in Sugar Dragon Ltd (Sugar Dragon), indirect holder
of an exclusive license to produce and distribute Candy Crush branded confectionery
in Greater China. It now holds 15%. Sugar Dragon is pursuing an ASX listing.
On 7 July Red Rock announced that it had given notice of exercise of the option to
invest in Elephant Oil Limited (Elephant), an oil and gas exploration company focused
on West Africa, which was announced on 26 June 2015.
Red Rock has agreed to subscribe for 1,086,956 new ordinary shares in Elephant, at
a price per share of 25.3 pence, for an aggregate consideration of £275,000. Red
Rock has also been granted the right to invest a further £412,500 in to Elephant
within a six month period from today, also at 25.3 pence per share.
Elephant is a privately held independent oil exploration company holding a 100%
interest in the production-sharing contract on Block B, onshore Benin, on the prolific
West Africa Transform Margin. The block covers 4,500 km2, or approximately twothirds
of the coastal basin, and is one of only two onshore blocks to have been made
available by the government of Benin. Simultaneously a fundraising of £327.5k was
announced at 0.475p per share with warrants attached.
Lonmin (LON:LMI)
In May, H1 Mar 2015 results were released showing underlying EBITDA of $8m
compared to $103m in the prior year period which excluded strike related costs of
$165m. Persistently low PGM prices and lower volumes sold due to the smelter
outages have resulted in much reduced revenue, partially offset by a weaker Rand /
US Dollar exchange rate. In order to protect the long term value of the business
Lonmin has started the process of reorganising its business aiming for a 10% saving
in labour cost through voluntary separation packages and early retirements. This
may result in a headcount reduction of around 3,500 people. On 26 June, Lonmin
updated the market on the release of the report by the Marikana Commission of
Inquiry into the deaths of striking mineworkers and others at Lonmin's Marikana
mine in August 2012. ‘Whilst Lonmin cannot comment on the findings of the report
as they pertain to others, it is clear from the summary provided that everyone
involved in the tragic events of 2012 has lessons to learn. Lonmin is no exception
and we will be studying Judge Farlam's findings in detail before responding to them.’
Papua Mining (LON:PML)
On 30 June FY Dec 2014 results were released by the UK company focused on the
exploration for and if commercially feasible, development of gold and copper deposits
in Papua New Guinea.
‘Our drilling programmes at the Tripela target in the Nakru region of Exploration
Licence 1462 (EL 1462) are the culmination of those extensive, methodical
exploration efforts and we now believe that the next drilling phase may mark the
intersection of a mineralised porphyry body, which we have interpreted based on
analysis of the alteration system which we have discovered in the Tripela area. We
hope to recommence the drilling programme soon and, once started, the following
six months should prove to be an exciting time.
The investment climate for junior exploration companies is severely depressed at
present and our current low share price is a reflection of that. However, we must
deal with the situation as we find it and we are in the process of seeking additional
funds to continue the drilling at Tripela which, as stated above, is at a very exciting
juncture. While there is no certainty as to the successful completion of the financing
discussions, we are cautiously optimistic that we will secure the financing required
and that we will then be in a position to continue to drill for the mineralised porphyry
at Tripela. However, in the event that the fundraising is not completed successfully
then the proposed drilling at Tripela would be deferred until such time as the required
funding is obtained.
You will notice that the audit certificate for the 2014 financial statements includes an
emphasis of matter with respect to the issue of going concern. If we are successful
in securing the financing arrangements currently under discussion, this going
concern uncertainty will be removed and the company will be in a position to continue
to trade for at least the next twelve months.’
Sovereign Mines of Africa (LON:SMA)
The gold mining exploration Company with properties in the Republic of Guinea in
West Africa announced FY December 2014 results. The company commented that,
at current gold prices there has been no change in sentiment and the market remains
risk averse to the microcap gold sector regardless of how compelling the exploration
play. ‘During the last 14 months, our relentless search for sources of finance to
continue our drilling programme at the Mandiana Gold Project has so far proved
unsuccessful The situation was made more challenging by the ebola outbreak in
Guinea which curtailed exploration activity throughout the country and made an
It remains, however, our view that Mandiana still has the potential to become a tierone
gold mine particularly with the addition in November 2013 of the Mandiana South
exploration concession. We have a JORC-compliant inferred resource of 610,000 ozs
of gold in very deep oxides averaging 1.2g/t (cut-off 0.3g/t gold), including 420,000
ozs having an average grade of 2.3g/ton (cut-off 1g/t gold) and the drilling so far
has only covered less than 10% of the potential strike.’
After a £3.7m impairment the company made a loss of £3.9m ending the year with
cash of £250k.
Emerging Market Minerals (LON:EMM)
On 11 June the uranium, thorium, base and precious metals and gemstones
exploration and development company operating in Madagascar, announced that Mr
William Redford had resigned as a Non-Executive Director of the Company with
immediate effect due to the insolvency of the shareholder which has appointed Mr
Redford. In the same announcement the company gave a corporate update. Further
to the Company's interim results announcement of 26 March 2015, the group's early
stage Marodambo Project in Madagascar, focused on exploration for uranium and
thorium, remains on a care and maintenance footing, pending receipt of the requisite
environmental clearances and approvals from the relevant Madagascan government
authorities in respect of the potential Phase 2 exploration work programme for the
project. The Board continues to diligently assess further potential opportunities to
expand the Company's asset portfolio in line with its stated strategy, but has yet to
identify a suitably compelling proposition, at an appropriate valuation.
As set out in the unaudited interim results announcement of 26 March 2015, as at
31 December 2014 the group had cash reserves of approximately £66,000 and net
assets of approximately £732,000. As at 31 May 2015, the group had unaudited cash
reserves of approximately £22,000.
The Company is currently in discussions with certain of its major shareholders and
other potential funding providers to secure additional working capital and a further
announcement will be made in due course. As set out in its interim results
announcement, the Company anticipates raising additional equity and/or debt
finance as necessary going forward to ensure that the group maintains an
appropriate capital structure and is able to fund its ongoing working capital
requirements and potential future development opportunities. The directors have
deferred all of their salary and fee entitlements for the year to date and will continue
to do so until additional working capital has been secured.