Gold prices rose a smidgen as China’s central bank devalues the Yuan yet again
• The move reflects funds being parked in gold in preference to paper currencies as the PBoC action creates greater uncertainty for investors and industry
• We would expect investors and traders to park money in gold in case the PBoC move causes other currencies in the region to devalue
• The PBoC move may also serve to delay the US Fed’s intention to raise US interest rates in September – and this is mentioned in dispatches by PBoC commentators
• The US Fed reckon their rate rise will be so small as not to have much impact but that the period of ultra-low rates must come to an end
Copper, nickel, lead and tin gain on Chinese Yuan depreciation and potential for greater Chinese domestic demand
• Aluminium prices fell as the move is likely to increase the export of Chinese aluminium as local producers become more competitive.
• Lower aluminium prices may also increase demand for aluminium and may accelerate the move by automakers to manufacture more auto bodies using aluminium
• Stimulating production in China should lead to a stronger Chinese economy and greater local demand for the other base metals.
• Renewed investment in infrastructure should drive nickel and zinc demand while a pickup in consumer demand should help tin in terms of electronics demand
• A potential pick up in house purchases in China should help copper as Chinese houses are thought to be significantly underwired with copper.
Economic News
China Central Bank ‘PBoC’ using Capital Flow Analysis
• The PBoC has set Thursday’s Yuan / dollar currency rate 1% lower taking the total currency devaluation to around 4.5% so far this week
• If the Chinese Yuan trades at the lower end of its 2% trading range around the new midpoint, then the Chinese authorities might lower the reference point yet again.
• The move may spark further currency devaluations in the region as South Korea, Japan and Taiwan exporters increasingly struggle to compete with cheaper Chinese goods.
• US policymakers have warned against potential damage to the global economy in the event of a currency way.
• The Asia Times reckons the PBoC has done the right thing blaming the US Fed’s stated intention to raise US interest rates white the economy weakened
• The paper states “With China’s PPI at -5.4% YOY and CPI at +1.6%, most Chinese businesses and consumers are paying much higher real rates than their Western or Japanese counterparts.”
• Lower commodity input prices allow the PBoC room for devaluation with raw material input prices still significantly lower after devaluation than they were six-months ago
• Some are now calling for China’s US dollar currency peg to be disbanded altogether.
• One Chinese analyst is calling for the USD/CNY rate to devalue by 7% to give a real boost to exporters to help offset a 1% fall in the value of exports seen from January-July this year
Asian Financial Crisis’ 1997-2001 causes
• Debt-to-GDP ratios rose significantly in the four major ASEAN economies
• Thailand, Indonesia, South Korea were running large current account deficits
• Deregulation of financial market encouraged lending creating asset bubbles
• Widespread corruption and lending to businesses of poor quality enlarged bad debt books
• Higher US interest rates designed to cut US inflation sucked money out of Asia and other emerging markets
• Thailand floated the Thai Bhat causing rapid devaluation causing other countries to devalue in the region
• The IMF urged fiscal restraint, which is now broadly seen as having worsened the crisis
No prises for spotting some similarities with today’s financial environment – maybe the Fed should hold off raising interest rates for a bit longer?
In the words of US songwriter Gil Scott-Heron’s B Movie song ‘You can panic now…and avoid the rush!’
China – sale of $180bn of US Treasuries last week
• US Treasury yields were described as robust last week as China sold $180bn worth of US
• China held a peak of $1.65 trillion in 2014 and now hold around $1.47 trillion of US Treasuries according to ZeroHedge.com
• The scale of the sale is dramatic and it would be interesting to see where these bills were sold into
China – Tianjin port blast kills 44 and injures hundreds more
• The blast was reckoned to have the force of 24 tonnes of TNT with a second blast measuring as a 2.9 magnitude earthquake
• Judging by pictures of the wreckage there is going to be one almighty insurance claim on this one
• The explosion wrecked more than 1,000 Renault cars – shame!.
US$1.1115/eur vs 1.1129/eur last week. Yen 124.55/$ vs 124.67/$. SAr 12.770/$ vs 12.829/$. $1.562/gbp vs 1.557/gbp
US$0.734/aud vs0.729/aud. Rand and Australian dollar rise as commodity prices gain on Chinese Yuan devaluation
Commodity News
Precious metals:
Gold US$1,118/oz vs US$1,117/oz yesterday – Below we repeat the words of the World Gold Council latest report
We believe gold demand has picked up in Q3 with new investment demand apparent this week as China devalues its currency
Gold Demand Trends Q2 ’15:
https://www.gold.org/supply-and-demand/gold-demand-trends
• Gold demand dropped 12% to a six-year low of 914.9 tonnes in a challenging quarter. Despite pockets of strength, demand was down in all sectors.
• Supply declined by 5% year-on-year.
• Consumer demand falls in India and China. These markets accounted for almost half the fall in global demand.
• Eurozone issues bolster local investment. Investors in Europe focussed on issues close to home as the Greek crisis dominated the headlines.
• Facing forward: H2 outlook. Prospects for the remainder of the year are more encouraging, with consumers responding to the recent price drop.
• On a half-yearly basis, the year-on-year decline in global gold demand was a more modest 6%
Platinum US$992/oz vs US$991/oz
Palladium US$619/oz vs US$606/oz
Silver US$15.39/oz vs US$15.35/oz
Base metals:
Copper US$ 5,212/t vs US$5,137/t yesterday -
Aluminium US$ 1,577/t vs US$1,583/t last week
Nickel US$ 10,615/t unch vs US$10,515/t last week
Zinc US$ 1,820/t vs US$1,800/t last week
Lead US$ 1,736/t vs US$1,720/t last week
Tin US$ 15,195/t vs US$15,100/t last week
Energy:
Oil US$50.12/bbl vs US$49.30/bbl
Natural Gas US$2.909/mmbtu vs US$2.863/mmbtu
Uranium US$36.40/lb unch vs US$36.00/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$54.40/t unch vs US$54.00t –
Thermal Coal $54.4 vs $55.4 cif ARA Europe –
Tungsten - APT European prices price $215.0/mtu unch vs $220/mtu – tungsten prices remain unchanged this week
Company News
Anglo Pacific Group (LON:APF) 88 pence, Mkt Cap £149.5m – Narrabri coal royalty performing well and “continues to exceed” expectations
• Anglo Pacific, which holds a 1% royalty on the Narrabri coal mine in New South Wales, reports that following the results from the mine operator, Whitehaven Coal, it expects coal production from the Narrabri North mine to be 6.6 to 6.8 million tonnes.
• This guidance is consistent with earlier comments which indicated that production at the mine was expected to build up to 7mtpa rate by 2017.
• Anglo Pacific’s Chief Executive, Julian Treger, commented that “The expected coal production for next year is above the 6.5Mt of ROM coal production that Anglo Pacific had assumed at the time of the royalty acquisition. This royalty continues to exceed our expectations.”
Caledonia Mining (LON:CMCL) 42 pence, Mkt Cap £21.9m – H2 results show Blanket mine continuing to generate cash despite weaker gold prices and increased costs
• Caledonia Mining reports a 60% decline in H1 attributable earnings to $1.9m (H1 2014 $4.3m). Diluted earnings for the half year fell to 3.3 cents per share from 8.0 cents in H1 2014.
• The decline in financial performance results from a combination of factors:
o Gold production of 20,361 oz for the half year was 5% lower than in 2014 as a result of lower grades, however the company reports that this level of production is “slightly ahead of target” and “The achieved grade and tonnage production in the Quarter and in the Half Year were as planned.”
o “On-mine cost control remains good” however costs were adversely effected by “lower grade and increased electricity consumption” resulting in a 12% increase in on mine cash costs to $699/oz and a similar increase in all-in-sustaining costs to $984/oz.
o Sales volumes in the half-year declined by 10% to 21,174 oz and the average realised gold price declined by 6% during the half to $1,187/oz resulting in a 26.5% decline in gross profit to $8.6m.
• The company points to the lower gold price which “In recent months the price of gold has fallen from over US$1,200 per ounce to below US$1,100 per ounce. The lower gold price will, if sustained, reduce Blanket’s cash generation.”
• Caledonia Mining is currently implementing a major re-development of the Blanket mine to access mineralisation below the 750m level and build up production levels to around 65,000oz pa by 2017 and reduce costs. The major cost element in the programme is a $23m shaft deepening project to access lower levels of the mineralisation. With cash balances at 30th June amounting to $23.7m and with operating cash flow for H1 of $5.9m Caledonia Mining has the financial resources to continue this programme.
• The company has established a regular policy of paying a quarterly dividend amounting to 1.5C cents per share. “It is currently envisaged that the existing dividend policy will be maintained however, the Board remains attentive to further changes in market conditions.”
Conclusion: Caledonia Mining is engaged in a major mine redevelopment programme at the Blanket mine which is designed to secure the long term future of the mine. Current commodity price weakness places additional pressure on the company at a difficult time however, we expect production and cost benefits from the investment programme begin to to provide a measure of relief over the coming months and into 2016 while existing cash resources should be adequate to see the company complete the main parts of the programme.
Metminco (LON:MNC) 0.235 pence, Mkt Cap £6.2m – Leave to appeal Mollacas decision in Chile
• Metminco reports that the Chilean Supreme Court has granted its wholly owned subsidiary, Minera Hampron Chile Limitada, leave to appeal a ruling by the Court of Appeal of the IV Region which extinguished rights to the company’s Mollacas Copper Leach Project. The date for the hearing by Chile’s Supreme Court has not been disclosed.
• The Mollacas project contains measured and indicated resources of 15.5m tonne at an average grade of 0.5% copper and 0.1g/t gold. The company says that if the appeal is successful, it plans to fast track the project to development.
• The company’s major project is the Los Calatos copper project in southern Peru where a possible 6mtpa underground copper mine producing around 45,000 tpa of copper in concentrates is under evaluation.
Glencore (LON:GLEN) 183 pence, Mkt Cap £24bn – Half Year Production Report
• Production from own sourced copper was down 3% to 730.9 kt.
• African Copper continues to perform up 10% to 232.5 t with Katanga approving capex for upgrading the production process for whole ore leaching expected to commission in 2017.
• The South American copper operations saw production fall by 12% in Collahuasi for copper concentrates at 89.5kt and Antamina down 7% at 56.8 kt.
• In Australia Copper metal production was down 6% to 102 kt with copper in concentrates up 6% to 24.8 kt.
• Zinc was up 12% to 730.3 kt with production from Mount Isa and McArthur River in Australia ramping up 30% to 394 kt.
• Nickel production was relatively flat at 48.9 kt.
• Production from Ferroalloy assets saw ferrochrome production up 16% to 756 kt with Lion 2 now fully ramped up.
• Over the period the S&P GSCI Industrial Metals Index was down 8% to 315 with copper, lead, nickel down by 14%, 11% and 17% respectively.
• Zinc and aluminium were the only metals up over the period at 4% and 2% respectively.
• Coal was down 4% to 68.7 Mt with Australian thermal coal down 7% to 24.2 Mt with South African thermal coal exports were up 8% to 11 Mt and domestic production was down 2% to 10.1 Mt.
• Coking coal production was down 7% to 2.9 Mt.
• Both thermal and coking coal prices remained under pressure over the period down around 18-20%.
• Glencore’s share of production wa
• s 5.3m barrels up 26% from H2 2014 due to ramp up of the Badila and Mangara fields in Chad.
• As a result of the sharp drop in oil prices, the company are revising capex and production profiles in Chad which will result in a US$790m write down at the interim stage.
• Industrial capex was US$3bn for H1 2015 with target capex for the full year now US$6bn against the previous range of US$6.5-US$6.8bn.
Conclusion: Production is not ramping up sufficiently to offset the steep price falls across most of the commodities produced by Glencore with Zinc being a shining star with both production and prices up. While Glencore does not have iron ore, it does have exposure to oil where a write down in being taken on its Chad assets of US$790m. The company has seen a continues stream of earnings downgrades resulting in a relatively weak pricing. It is not clear how well Glencore’s trading business has done against this volatile commodity price environment. A dividend yield of 6% should be supportive.
International Ferro Metals* (LON:IFL) 1.5 pence, Mkt Cap £8.3m – Production Report for June Quarter
• Ferrochrome (FeCr) production was up 4% on a quarter on quarter basis to 51,030 tonnes.
• Sales were relatively flat on the quarter up 0.4% to 51,618 tonnes and stock fell by 12.4% to 7,582 tonnes.
• On the 1st April Eskom put up prices by 12.69% around 4.69% higher than expected.
• The company achieved its target to use 100% contractual arrangements on UG2 but the cost advantage of this was offset by higher cost of own ore due to lower planned production from Lesedi.
• An ongoing cost saving plan is being implemented to offset input cost rises.
• Production cost for the quarter was up 3% at Zar 8.70/lb up 3% from the previous quarter at Zar 8.43/lb.
• Production in July has been impacted by electricity constraints by Eskom and power tipping at the furnace which has since stabilised.
• FeCr prices continue to be under pressure as Chinese internal production continues to be more competitive helped by lower power costs in China.
• The recent increase in Chinese production saw FeCr prices edge down from 78-79US$/lb to 76-77US$/lb.
• Cash was helped by forward sales of 15,000 FeCr in May for Zar 116m resulting in net borrowings over the period falling by Zar 35m to Zar 450m.
• Full year guidance for production remains unchanged at 200,000t.
• The operating loss for the second half expected to be similar to the first half of the year.
Conclusion: Production was up 4% despite power constraints and forward sales are helping cash flows. Management continue to face headwinds from more competitive Chinese internal production.
*SP Angel act as broker to IFL