China - Gold and Foreign Exchange reserves
• Chinese gold reserves rose 610,000oz in July to 53.93moz vs 53.32moz in June and 33.89moz in May
• The nations reserves fell to US$36.513 trillion worth of foreign exchange in July vs 36.938 trillion in June
• China’s devaluation of the Yuan may persuade the US Fed to hold back on interest rate rises.
• It is possible China’s devaluation was a pre-emptive move to stem the flow of funding back into the US dollar
Comex – ratio of paper gold to physical gold rises to record 124 times
• The higher ratio is mainly driven by rising sales of physical gold to consumers with the US mint selling 170,000oz of gold bullion in July, its 5th highest record.
• Some 25,386oz of physical gold on Comex were reregistered as effectively undeliverable on Thursday.
• There is potential for a massive squeeze if a significant number of traders who are long of gold paper decide convert papery into physical.
Economic News
ECB minutes indicate the Eurozone might well have reached a turning point on inflation
• The minutes suggest it is premature to draw a firm conclusion
• Low commodity and other input prices give the ECB room for further QE / stimulus action
Eurozone growth – slows as French economy stalls in Q2
• France – Zero growth in France in Q2 - France failed to record any economic growth in Q2 despite growth of 0.7% in Q1.
• Germany – Q2 growth 0.4% vs 0.3% in Q1
• Italy – 0.2% growth vs 0.3% in Q1
Greece - Greek MPs back bailout deal
• We suspect this will not be the last we hear of the Greek bailout
• Will Greece adhere to the terms of the bailout?
• How is it that Ukraine is allowed to writedown a portion of its debt but Greece is not?
• Maybe European policymakers can get back to running the Eurozone rather than negotiating with Greece
China – Tianjin death toll rises to >50 with >700 injured and many missing
• The fire started in a storage area holding gases and toxic chemicals
• The authorities fear widespread contamination
• Tianjin is the world’s 10th busiest container port
• The disaster will have some impact on global trade despite the ability for shippers to reroute goods to other ports along China’s Eastern coast line
• Rio Tinto had five iron ore carriers in the harbour which will be rerouted.
• BHP also ships through Tianjin
• Tianjin port manages some 110mt of metal ores, 89mt of coal and 19mt of crude oil (equivalent to 375,000bblspd)
US$1.1137/eur vs 1.1115/eur last week. Yen 124.31/$ vs 124.55/$. SAr 12.827/$ vs 12.770/$. $1.561/gbp vs 1.562/gbp
US$0.739/aud vs0.734/aud.
Commodity News
Precious metals:
Gold US$1,117/oz vs US$1,118/oz yesterday –
Platinum US$995/oz vs US$992/oz
Palladium US$622/oz vs US$619/oz
Silver US$15.46/oz vs US$15.39/oz
Base metals:
Copper US$ 5,179/t vs US$5,212/t yesterday -
Aluminium US$ 1,574/t vs US$1,577/t last week
Nickel US$ 10,520/t unch vs US$10,615/t last week
Zinc US$ 1,834/t vs US$1,820/t last week
Lead US$ 1,742/t vs US$1,736/t last week
Tin US$ 14,995/t vs US$15,195/t last week
Energy:
Oil US$50.30/bbl vs US$50.12/bbl
Natural Gas US$2.913/mmbtu vs US$2.909/mmbtu
Uranium US$36.40/lb unch vs US$36.40/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$55.30/t unch vs US$54.40t –
Thermal Coal $53.9 vs $54.4 cif ARA Europe –
Tungsten - APT European prices price $215.0/mtu unch vs $220/mtu – tungsten prices remain unchanged this week
Company News
Serabi Gold* (LON:SRB) 3.75p, Mkt Cap £24.6m – Serabi returns to profit
• Serabi Gold generated an operating profit of US$543,000 during the six months to June 2015 reversing the US$2.7m loss for the equivalent period in 2014. After finance expenses of US$972,000, partially offset by investment income and foreign exchange gains, the company posted a profit for the half year of US$76,897 (2014 loss of US$2.9m).
• The company generated US$1.5m of operating cash flow and held cash of US$4.5m resulting in net debt of US$10.1m at 30th June
• The company produced a total of 15,626 ounces of gold in the first half of 2015, of which 14,843 oz came from the main Palito mine at a cash cost of US$767/oz (US$967/oz on and all-in sustaining cost basis). The remaining production comes from the development at Sao Chico where the company is expecting production to build up in the coming months.
• Serabi CEO, Mike Hodgson, reports that the Palito mine is “operating very well” but points out that with Sao Chico still in ramp-up phase Palito is bearing all the overheads and as a result the scope for short term cost reduction is limited though as production increases at Sao Chico fixed overheads will be spread across a larger production base.
• By the end of June, the company reports that 4,300m of the planned 5000 metres drilling programme at Sao Chico was complete and that the first production stope was underway with 2800 tonnes of ore in place.
• Serabi states that it remains “on target to meet our 2015 production guidance of approximately 35,000 ounces at an all-in sustaining cost of US$900 to US$950 per ounce.”
*An SP Angel analyst has visited Serabi’s Palito gold mine and other properties
Stellar Diamonds (LON:STEL) 0.35 pence, Mkt Cap £2.8m – Issue of Convertible Loan Notes and Warrants
• Stellar Diamonds has raised US$330,000 (approximately £211,200) as a result of issuing a new unsecured convertible Loan note to the Hedelberg based private equity investment company, Deutsche Balaton. The Loan Notes, which mature at 7th August 2017 carry a 6% interest rate and the first instalment is due on 7th August 2016. The note may be converted into 37,473,600 shares at an effective price of 0.56p per share. The note may be redeemed for cash at any time subject to 10 weeks notice, however, “Deutsche Balaton may, at its sole discretion, require that the Note be converted into ordinary shares rather than be redeemed.”
• In addition, Stellar Diamonds has granted Deutsche Balaton a warrant to subscribe for shares at an aggregate subscription price of US$330,000. The proceeds are to be used for working capital.
• The Warrant gives the right to subscribe for 57.96m new shares at a price of 0.35p per share which would give Deutsche Balaton up to 10.7% of the company’s enlarged capital.
Vast Resources (LON:VAST) 1.5 pence, mkt Cap £22.0m – First blasting and concentrate production at Manaila mine in Romania and preparing to restart Bahia Bihor
• Vast Resources (formerly African Consolidated Resources) reports that it has commenced operations at the 50.1% owned Manaila polymetallic mine in Suceava County, northern Romania.
• The acquisition of the mine from Sinarom Mining is still subject to final legal ratification by the Romanian Trade Registry which has already been officially gazetted is expected to be registered and “become effective on or around 20 August 2015”.
• Vast Resources has deployed a team of 20 “senior mining experts” to augment the existing 107 staff at Manaila.
• Also in Romania, the company is also reopening the Bahia Bihor (formerly in insolvency and now known as Baita Piai) polymetallic mine in Transylvania where it exercised an option to acquire an 80% interest in March 2015. “Vast has further invested Euro 500,000 (approximately USD 555,000) in electrical networks, salaries, preparing the processing facilities, and is currently upgrading the buildings and preparing for the upgrading of the underground mining facilities in anticipation of the recommencement of the mining activities once it receives the licence to recommence mining.”
Conclusion: Although the company recently announced the start of small scale gold production at its Pickstone Peerless mine in Zimbabwe, the start of operations and Manaila and preparations for the restart of Baita Piai underlines the change of emphasis to the Romanian operations.
ZincOx Resources (LON:ZOX) 12.625 pence, Mkt Cap £23.0m – £3.1m raised through Placing and Open Offer
• ZincOx reports that it has raised a total of approximately £3.1m through the previously announced Placing and Open Offer at 13p/share.
• The Placing raised gross proceeds of approximately £2.1m with a further £1m asa result of the Open Offer.
• The company’s Chief Executive, who has increased his interest in ZincOx by a further 992,556 shares as a result of the placing, had previously indicated that the “funds to be raised in the Open Offer will allow us to press ahead with the pre-development work for the next project and so begin to unlock the full potential of the rotary hearth furnace technology.”
Today we publish a note on Petropavlovsk
Please see key points below:
Petropavlovsk PLC (LON:POG) price 5.5p, mkt cap £180m - Focus on margins – deleverage – regain investors’ trust
Key Issues
• Focus on FCF is preferred to production growth with POG’s output at 550-650koz US$630-880 TCC in 2015/19 (SPA) v 590-680koz <US$700 TCC (Co guidance);
• On our estimates, POG operations to generate US$307m EBITDA and US$178m levered FCF in FY15 reducing Net Debt to US$550 or 1.8x NetDebt/EBITDA this year v US$600m guided;
• We expect the company to reach 1.5x ND/EBITDA target in 2017 (1.2x by YE17) with a potential cash shortage developing through H216/18 period driven by an aggressive debt repayment schedule;
• We assume POG to close a potential liquidity gap (US$24m by YE16 peaking at US$129m in YE17) given existing relationship with major state owned lenders in the region (VTB/Sberbank account for 28%/71% of US$669m bank borrowings as of YE14). We also note potential shortages may prove to be smaller due to a stronger rouble depreciation than we assumed.
• POG is currently trading at a not demanding 3.2x EV/EBITDA and 2.6x PE multiples versus 6.2x and 12.5x among selected London listed gold miners. We think the discount suggests investors question the viability of management guidance regarding a significant reduction in costs amid heavy debt repayments scheduled for the 2015/18 period. We believe POG may re-rate once the team starts to deliver on its forecast production and costs which would contribute to a planned de-leveraging towards the 1.5x ND/EBITDA target.
• We reiterate our BUY recommendation and revise our target price to 7.7p (from 11.0p) on lower production and gold price forecasts.
NAV valuation US$384m (£240m), 7.9 pence per share
Assumptions:
• We expect the Group to produce 654koz gold in FY15 at US$633/oz TCC, slightly below management guidance for 680koz at c.US$600/oz, predominantly driven by higher processed grades at Pioneer (H2/15: 252koz; H1/15: 99koz);
• Gold is on track to post a third annual decline (-5%YTD). We cautiously use US$1,100/oz average in H2/15 assuming a gradual recovery in prices moving forwards (’16:-$1,200; ’17-$1,250; ’18-$1,300) on a rebound in physical demand for gold in emerging markets as well as potential downwards revisions to the pace of the Fed monetary tightening;
• We assume a flat 60.0 USDRUB rate from H2/15 onwards in our estimates as opposed to 7.5%pa depreciation through 2015/20 period forecast by the market and the currency currently trading at c.65 driven by falling oil prices.