INTRODUCTION
In the news: The Chinese Devaluation, The Uranium Sector, Copper Production & Gemfields (LON:GEM)
A second devaluation of the Chinese yuan looks on the surface to be measured and contained. This certainly seems to be the case when you put it into the context of the drops in the euro (-18%) and the yen (-22%) against the US dollar over the last year. We know that the Chinese economy is going through something of a tough patch and the strength of the dollar — to which the yuan is pegged — has hammered China’s export competitiveness; growth has slowed and the stock market has crashed. Despite some of the more rabid right-wing senators in Washington DC saying these cuts are proof that the Chinese market is rigged against US interests, the reality is that the US (and others) has long called for Beijing to let its currency move more freely.
China wants the yuan to become a reserve currency. However, this is something that the IMF cannot allow as long as it is held under such tight control. The more freedom the market gives the currency, the more it will devalue, and it was its continued fall during yesterday’s trading that gave Beijing the opportunity to cut again this morning. I’d ignore any noises from Beijing that this is it and it won’t cut again. It will. Get used to it.
The sad thing for us is that it hits the commodity price decks. Still, if a more competitive currency helps restore growth then that would obviously be a good thing. As we commented just last week, the commodity markets (and natural resources stocks in general) are in a period of ‘Capitulation, Despondency and Depression’. Bring it on, though, because the next steps are ‘Hope, Relief and Optimism’.
One area that is seeing things happen right now is uranium. It’s difficult to keep up with all that’s going on. We are seeing a lot of M&A activity, as shown by the proposed mergers of Anatolia Energy with URI and Fission Uranium with Denison Mines. The restart of the Sendai nuclear reactor yesterday is just a sentiment milestone rather than any change in the demand dynamic, but it is an important first step is bringing Japanese demand back on-line. The Japanese Government is getting up the nerve to increase the speed of the restarts, which can only be good news.
The latest exciting development is at Paladin Energy, the largest of the independents. While Paladin has been a depressing story for quite some time, the stock was suspended on Tuesday on the announcement that John Borshoff will step down as CEO and be replaced by Alexander Molyneux in a temporary capacity. Molyneux has been establishing himself as an important player in the uranium space; his fund Azarga owns the Dewey Burdock Project in Wyoming, close to Peninsula Energy’s†† Lance Project (among others). Molyneux is thought to have been instrumental in getting Paladin’s largest shareholder — the Chinese fund Hopu — into the stock. Paladin shares reacted positively to the news and we think that shareholders can expect to see some action soon.
Copper output is being disrupted by ‘deadly storms’ in Northern Chile. Despite their setting in the Atacama Desert, one of the hottest places on Earth, the cities of Arica, Parinacota and Los Rios have all been struck by torrential rains, causing mudslides that killed three people. Codelco halted work at the Chuquicamata mine earlier this week and temporarily suspended work at its Rodomiro Tomic operation. Chile is having a pretty miserable 2015 on the weather front. The north of the country was also badly hit by storms in March and the problem is that the ground had been scorched by seven years of drought; thus, when these rains come flash floods cause absolute chaos.
To finish with, we had a quarterly market update from the excellent Gemfields plc this morning. Gemfields, for whom Mila Kunis acts as brand ambassador, is one of the stand-out performers in the mining space on the London market. You can see why. Everything is pointing in the right direction in terms of production, grades are good and any cost increases have been offset by the increased scale of exploration, processing and mining activities at both Kagem and Montepuez. The next catalyst will be a high-quality rough emerald auction, which is scheduled to take place from 31 August to 4 September. We, and Mila, will study these figures closely.