Proximity to US rate rise continues to drag gold and PGMs lower
• US dollar continues to rise as prospect of rate rise attracts funds as commodity currencies weaken
• China’s currency trading range with the US dollar must be sorely strained by weaker Chinese data
• Commodity producers are said to be exacerbating their currency weakness by hedging the FOREX risk of their external debt
• Base metals prices post some recovery following recent falls in contrast to falling gold and PGMs which continue to fall
Zambia – Concerns over potential for pullback of hydropower supply as water levels fall at Kariba and Cahora Bassa.
• The two dams, which supply a significant amount of the available electrical power in Southern Africa are fed by the Kafue and Luangwa Rivers.
• Kafue water levels are said to be low and the Luangwa only gets summer flow so we wonder if this might also impact the giant Cahorra Bassa dam hydropower station.
• A significant reduction in rainfall over recent years in the Zambezi catchment area has reduced water inflows potentially exacerbating any shortage
• Mining companies are the first to suffer as major power users within Zambia and elsewhere in the region
• Low copper prices and power issues are likely to cause more miners to cut production to avoid a sharp rise in unit costs
See First Quantum Minerals comment below
Economic News
US – Consumer spending growth slowed in Jun with May number revised downwards.
• PCE: +0.2%mom v +0.7%mom in May (revised from +0.9%mom)
• Reports of slowing consumer spending may lead the Fed to delay monetary tightening cycle currently expected to start some time this year.
China – Equity market gain on announced new measures to limit short selling.
• Citic Securities, the nation’s largest brokerage by assets, voluntarily suspended its securities lending business.
• Two other brokerages are reported to have joined Citic with similar restrictions.
• Two main exchanges issued new rules yesterday forbidding short sellers from opening and closing short positions within a single day.
Australia – The Aussie dollar surged 1.7% at some point this morning as the RBA left benchmark rates unchanged at 2% but changed its rhetoric regarding the currency.
• The Board removed certain bits in the Aug press release on a desirable national currency depreciation.
• The statement contained “the Australian dollar is adjusting to the significant declines in key commodity prices”.
• However, the following has been removed “further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices”.
• The report was optimistic on the labour market as the Board said the economic growth “has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year”.
Greece – Equities continue to slide on the Athens stock exchange after registering a 16.2% decline in the first day of trading after a five-week closure on Monday.
• The index is down 4.5% despite authorities restriction on short selling and a ban on redemptions from mutual funds.
US$1.0964/eur vs 1.0982/eur last week. Yen 124.03/$ vs 124.08/$. SAr 12.651/$ vs 12.684/$. $1.559/gbp vs 1.564/gbp
US$0.738/aud unch vs0.729/aud. Weak data out of China indicates slowing consumption weakening commodity currencies. We expect the South African rand to weaken significantly from here.
Commodity News
Precious metals:
Gold US$1,090/oz vs US$1,095/oz yesterday
Platinum US$956/oz vs US$982/oz – Brutal fall in PGMs on expectations of lower auto demand in China
Palladium US$593/oz vs US$614/oz –
Silver US$14.53/oz vs US$14.73/oz –
Base metals:
Copper US$ 5,239/t vs US$5,173/t –
Aluminium US$ 1,612/t vs US$1,605/t –
Nickel US$ 10,895/t unch vs US$10,695/t
Zinc US$ 1,924/t vs US$1,889/t –
Lead US$ 1,715/t vs US$1,675/t –
Tin US$ 16,050/t vs US$16,185/t –
Energy:
Oil US$50.10/bbl vs US$51.70/bbl
Natural Gas US$2.782/mmbtu vs US$2.754/mmbtu
Uranium US$35.25/lb unch vs US$35.25/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$53.60/t unch vs US$53.90t –
Thermal Coal $55.9 vs $55.8 cif ARA Europe –
Tungsten - APT European prices price $220.0/mtu unch vs $225/mtu
Lithium - First Chinese mandatory standard for Lithium-ion cells and batteries used in portable electronic equipments was officially implemented on 1st August
• Lithium-ioncells and batteries contained in mobile power, mobile phones, laptop computers, digital cameras and other portable electronic equipment now have to pass a series of tests to ensure their safety.
• Poorly made lithium-ion cells and batteries can cause fire and related issues with the transportation of lithium ion cells now subject to new restrictions by air regulators.
• Observers expect some manufacturers / factories may fail the new tests to the benefit of better quality brands.
• Chinese regulators reckon this may serve to make Chinese manufacturers to produce better quality cells than Japan and South Korean.
Company News
First Quantum Minerals (LON:FQM) 512 pence, Mkt Cap £3.5bn – Production slows as Zambia cuts power to miners
• First Quantum are taking steps to manage disruption to their mines caused by power cuts in Zambia by Zesco.
• Low water levels at the Kafue Hydropower dam are responsible for the power cutback as lower rainfall in recent years has failed to replenish rivers and dams in the region.
• The company was forced to shut the commissioning of the processing plant at Sentinel causing layoff of 1,480 workers from the site last week. We are not aware of any other closures in Zambia but more are likely to follow.
• We believe First Quantum many have redirected the power available to them to the Kansanshi copper mine in order to preserve production at this unit
• The situation is a further example of how vulnerable copper production is to local issues and how global copper production forecasts for 2015 are likely to be lower than initially forecasts.
• Management have been aware of the potential for further power disruption and are involved with the development of at least one new power station to supply future power to its mines in Zambia.
• We reckon Zesco has been overproducing power from the Kafue Dam in the hope that new rains might replenish supplies. This approach is now likely to exacerbate power problems within Zambia.
• We are not surprised to see FQM’s response. Management have never been shy to take tough decisions to make their intentions clear. The Zambian government and Zesco should be under no illusion that the mismanagement and cutting of power supplies is affecting large numbers of jobs in the region.
• We would recommend an overhaul of the processes for managing Zesco at the very least.
Fresnillo (LON:FRES) 641 pence, Mkt Cap £4.724bn – Interim results
• The company reports a 44% decline in profit for the 6 months to 30th June to $76.4 with an 18% reduction in silver prices and a 7% decline in gold prices more than outweighing the impact of increased production levels and lower costs per tonne at all mines except Fresnillo and Herradura.
• Cash flow from operations before tax, including approximately $18m of working capital savings, increased to $297m from $265m and the company retains a strong balance sheet with net debt of $540.8m representing 19% of capital employed.
• Capital expenditure guidance for the full year has been reduced to $570m from the earlier estimate of $700m underlining a continuing rigorous approach to cash flow management. The $130m reduction represents capital projects which have been deferred until 2016 rather than cancelled.
• Fresnillo is taking the long view on expansion and reiterates that the company is “on track to meet our 2018 production targets of 65 million ounces of silver and 750 thousand ounces of gold.”
• The company has declared an interim dividend of 2.1 US cents.
Ironveld (LON:IRON) 5.25 pence, Mkt Cap £17.1m – conversion of consultant fees into equity
• Life must be a bit tough at Ironveld. The company which raised £750,000 from the market last December today reports the conversion of £17,896 worth of fees owed into new ordinary shares at a price of 5.67p/s.
• We know times are tough for iron ore projects / miners and this would normally ring a few alarm bells but the payment of fees with stock is a growing trend and a process which demonstrates the value of being a listed company. The company also converted directors fees into equity back in June.
• The good part is that Ironveld are making progress with the planning and potential development of their planned 15MW High Purity Iron (HPI) smelter.
• The smelter is for the production of HPI (99.5% iron content) which sells for a premium over the normal 63% iron ore prices with Vanadium and Titanium slag by-products.
• The project DFS is looking at the production of 42,000t of HPI, 415 tons of vanadium and 8,269 tons of titanium.
• Management are looking at combining offtake agreements with debt and BEE funding with debt funders running some form of due dilligence.
• The team are evaluating draft construction contracts for the smelter and need to obtain quotes for contract mining.
• Iron ore mining rights are in the process of being transferred to Ironveld from HACRA (Sylvania Platinum) and Pan Palladium through the South African DNR following approval of the company’s EIA.
• The company received approval from the South African DTI for SAR13.3m for a a cost sharing grant for 30% of the infrastructure related to the company’s planned 15MW smelter back in February. The funds will be used for engineering and design work for the project and for additional working capital.
• The smelter is planning to start commercial production of High Purity Iron (HPI) with Vanadium and Titanium slag by-products.
Sirius Minerals (LON:SXX) - 17.25 pence, Mkt Cap £375m – Results of soybean and corn crop studies
• Sirius Minerals reports that soybean trials at the University of Sao Paul and Texas A&M and on corn at the North Dakota State University have demonstrated the effectiveness of the polyhalite product as a fertiliser on both crops.
• The tests showed that soybean yields and bean protein yields were 16% higher with polyhalite than with its competitor MOP and SOP products and corn fertilised with polyhalite yielded a 3% improvement compared to MOP and ammonium sulphate.
• Sirius also reports that “Polyhalite yields return $25/ha more than traditional yields in corn” and that “By using polyhalite, 50% less K2O was needed in Texas and 66% less in Brazil to maintain yields.” The company estimates that the soybean yield in Brazil equates to savings of $31/hectare.
Conclusion: Sirius Minerals has been working with a number of agricultural research bodies around the world to assess the merits of its polyhalite product and is building a body of evidence demonstrating improved yield performance in a number of crops in various parts of the world. These latest results add to that body of evidence and will assist in marketing polyhalite. We look forward to news on progress with parallel challenges of mine development and financing to develop the North York Potash Project.