Economic News
China – electrical power consumption falls 1.3% to 503TWh in Jul as industry slows
• Chinaese electrical power consumption fell to 1.3% yoy to 503 TeraWatt hours in Jul this year, down 1.3% compared to the same period last year, according to statistics released by the National Energy Administration.
• In the first seven months of this year, the country consumed 3,166.8 TWhs of electricity, edged up 0.8% than in the corresponding period of last year.
• During the period from Jan to Jul, primary industry consumed 57 TWhs of electricity, reflecting an increase of 2.4% year on year. The power consumption of secondary industry was 2,290 TWhs, 0.9% less than a year earlier.
• The power consumption of tertiary industry was 404 TWhs for the seven-month period, rising 7.5% from a year earlier.
• Electricity consumed by residents in urban and rural areas went up 4.7% year on year to 415.8 TWhs during the reporting period.
• The country added 52.37 million kilowatts (kW) of new capacity in the first seven months of this year, of which 5.97 million kW was from hydroelectric and 28.86 million kW from thermal power..
China – Property Developer China Vanke goes against the trend
• China Vanke announced first half results where revenues rose by a quarter based on volumes with prices down by around 3%.
• Property prices in China are said to have stopped their fall since April with supply falling more than demand.
• Figures from China’s National Bureau of Statistics shows Gross Floor Areas (GFA) is down 16% year on year with residential sales up 7%.
• This reflects more demand from cities that are thriving like Shenzhen where supply is more scare than third tier cities where inventories remain high.
• Companies such as Vanke seem to be in a better position to capitalise on the current conditions in the market.
Zug, Switzerland – home to more registered companies than people
• Wales, home to more registered sheep
• Scotland, home to more registered whiskey drinkers
• Australia, not home to the Ashes anymore
US$1.1088/eur vs 1.1089/eur last week. Yen 124.22/$ vs 124.45/$. SAr 12.912/$ vs 12.876/$. $1.559/gbp vs 1.565/gbp
US$0.734/aud vs0.736/aud.
Commodity News
Precious metals:
Gold US$1,120/oz vs US$1,117/oz yesterday –
Platinum US$997/oz vs US$996/oz
Palladium US$605/oz vs US$619/oz
Silver US$15.24/oz vs US$15.28/oz
Base metals:
Copper US$ 5,023/t vs US$5,130/t
Aluminium US$ 1,558/t vs US$1,566/t
Nickel US$ 10,420/t unch vs US$10,655/t
Zinc US$ 1,778/t vs US$1,822/t
Lead US$ 1,700/t vs US$1,742/t
Tin US$ 15,555/t vs US$15,400
Energy:
Oil US$48.47/bbl vs US$48.60/bbl
Natural Gas US$2.734/mmbtu vs US$2.781/mmbtu
Uranium US$36.40/lb unch vs US$36.40/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$55.13/t unch vs US$55.06t –
Thermal Coal $53.4 vs $53.8 cif ARA Europe –
Tungsten - APT European prices price $205.0/mtu unch vs $215/mtu – tungsten prices slipped again on Friday probably something to do with Chinese devaluation
Company News
Glencore (LON:GLEN) 171p, mkt cap £22.4bn – Trading Rabbits out of hats
Recommendation: Not a buyers market just yet
• Glencore are due to report Interim results tomorrow but may outperform its peers through smart trading and logistics.
• The statement will highlight the plight of lower commodity prices and will give some insight into how well Glencore is able to manage its disparate portfolio of mining assets alongside its dominant commodities trading business.
• Iron ore & coal: Glencore is barely affected by fall in iron ore prices which hit Rio Tinto so hard but it is affected by lower thermal coal pricing and cuts in production volumes where it cut around 15% so far and may cut come more to maintain margins.
• Trading: We are looking for the trading business to perform ‘relatively’ well. We use the term ‘relatively’ advisedly as it is not easy to outperform in a bear market but if any company can it is Glencore.
• The mining business is a different matter and we expect some pain though not as much as seen at some other larger miners.
• we forecast the second half to get tougher for Glencore as base metals revenues, where Glencore is strong will have been reduced further by the recent fall in metal prices.
• Operating profit: Bloomberg market forecasts $1.8bn for the interim and a massive $3.8bn for the full year. We reckon the market’s full year consensus Operating Profit of $3bn on $86bn of forecast sales is overoptimistic and we feel the market will revise its numbers lower following the release of the interim figures.
• Divisions:
o Metals & Minerals: FY ’14 EBIT $1,515m – H1 ’15 est – base metals prices held up quite well through much of H1 but have since fallen back further.
Copper has by far the greatest impact on the business followed by zinc. We calculate a $910m hit to the business on the H1 copper price and a similar further hit to the business from lower copper prices through H2 though currency benefits will offset some of this impact
• Energy:FY ’14 EBIT $524m – going to take a beating at the interim through lower oil prices, though oil trading might see some exception profit
o Glencore have neutral exposure to oil prices indicating that lower oil prices may not have such a marked impact on the business
• Agriculture: FY ’14 EBIT $856m – interims likely to see some improvement on volume growth but may suffer through H2 with recent lower wheat prices
• FOREX: The fall in the Australian dollar, South African rand will have a significant positive impact on Glencore’s mining costs, but will be more seen in H1 than H1.
• Rating: Investment Grade BBB, is important to Glencore as the company needs to maintain an investment grade rating to keep its borrowing rates low.
• Gross Debt: $50bn
• Net Debt: $30.5bn at the year end
• Write downs – wrote down $7.7bn off its Xstrata assets in 2013. Glencore is due to write down US$790m on Caracal Energy bought for $1.6bn before the oil price collapsed.
• Asset sales: Glencore sold $290m of assets last week.
• Capex: Axed $800m off its capital cost base representing around 10% of last year’s capex bill. Industrial capex is forecast to be $6.5-6.8bn down from $7.9bn planned
• Cost savings: Miners are great at cost savings, there won’t be as much ‘fat’ in Glencore’s operations as elsewhere but Glencore will still find some excess to trim.
• Peers: Glencore is set apart from Rio Tinto, BHP or Anglo American: It is bigger in base metals and its trading business is a significantly larger part of the group than the imple marketing arms of the other majors. Glencore is building its agricultural trading and commodities business which we believe should see good quality longer term growth.
• Outlook: Glencore had expressed confidence in the development of deficits in many commodity markets. Slower GDP growth in China has shaken confidence with smaller deficits and some surpluses now likely to develop in metals inventories.
• Is Glencore is too big to fail? Glencore is by far the biggest commodity trader in the world and its big because it is good at what it does. If Glencore went down it could be to industry as Lehman Bros was to finance.
• Shareholder Activism: Harris Associates, a US activist hedge fund have built a £250m stake in Glencore representing around 1% of the group. David Herro, Harris’ CIO, said he is looking for long term value from Glencore.
• Opportunities: We do not know what Glencore will buy next but we can be sure the group is ready to ‘opportunistically’ acquire more mining, trading and maybe energy assets at discount prices.
• Dividends: Glencore has returned some $9.3bn to shareholders representing more cash to shareholder in dividend and share buybacks than it raised in its float in May 2011 (listing price 530p).
• Metals prices: There has been much noise over the fall in iron ore prices earlier this year but base metals had held up relatively well till China hit the breaks and economists started to factor in markedly lower GDP numbers for this year. Nickel, zinc and copper all collapsed further making life harder for Glencore mines.
• Lonmin: Glencore has completed the in specie divestment of its 23.9% stake in Lonmin
Conclusion: We agree with Harris Associates in their view for longer term value creation.
Glencore didn’t get to where it is today by being a rambling, sleepy old, mining company. Glencore is a fast moving, ‘opportunist’, trading and mining business.
Yes, it will be set back by lower metals prices in the short term, but Glencore will use the opportunity to buy more assets more cheaply and is more than likely to emerge as a bigger, stronger company going forward.
Iluka Resources (ASX:ILU) A$7.29, Mkt Cap A$3,052m – Half year results
• The company reported a 74% rise in interim net profit after tax to US$20.4m.
• Group EBITDA was $127.2m versus $125.8m with mineral sands EBITDA up 6% to $114.4m.
• The company are expecting 2015 full year production of its three key products to rise by 27% to about 680,000 tonnes.
• Production is expected to be second half weighted with first half production was 276,900 tonnes.
• Profits were helped by the weaker A$ and improved costs.
• Revenues were up 2% with cash cost of production down 12.6% tp US$175.5m.
Lucara Diamonds (CVE:LUC) C$1.66, C$630m – Ongoing Recovery of Exceptional Diamonds
• The company have recovered three exceptional stones over the weekend from the Karowe Mine.
• This includes a 184 carats stone, a 94 carat stone and a 86 carats stone.
• A 12 carat pale pink diamond was also recovered.
Conclusion: As announced with their Q2 update, the plant optimisation exercise and the XRT machines are performing well and are recovering larger and more high value stones.
With lower production guidance for the full year, the improved recovery of quality stones should be helpful particularly if this leads to special dividends from tenders of exceptional stones.
Mariana Resources (LON:MARL) 2.65 pence, Mkt Cap £20.2m – Maiden resource of 2.2m oz of gold and 3m oz of “gold equivalent” at Hot Maden
• Mariana Resources reports a maiden resource estimate for its Hot Maden gold / copper deposit in eastern Turkey. The estimate, which was prepared in accordance with CIM standards and in compliance with JORC Code (2012) was generated by the independent consultants, Runge Pincock Minarco.
• The total resource of 8.36m tonnes is reported at an average grade of 8 g/t gold and 2.0% copper and represents 2.159m oz of contained gold and 167,000 tonnes of contained copper within a north trending zone which appears to be approximately 300m long but open laterally and at depth.
• The estimate uses a cut-off grade of 2g/t of gold equivalent based on a gold price of $1173/oz and a copper price of $2.70/lb and is based on the drilling completed as of 25th June 2015 which includes holes up to and including HTD-17.
• Approximately 68% of the resource reported today (4.71mt grading 10.0g/t gold and 2.2% copper – 1.518m oz oz of gold and 102,000t of copper) is classed as “indicated” with the balance (3.65mt grading 5.5g/t gold and 1.8% copper) as “inferred”.
• The company is proceeding with an NI-43-101 Technical Report which may provide greater detail on the maiden resource and an initial insight into the company’s thinking on possible mine development.
• Drilling is continuing at Hot Maden with 2 rigs in operation. Drilling is being funded by Mariana’s Turkish partner, Lidya Madencilik Sanayi ve Ticaret (Lidya) which is committed to spending US$3m including completing 10,000 metres of drilling to earn a 70% interest in the project.
• The company points out that “Further potential exists to extend the known resource to both the north and south , as well as at depth. In addition, the potential for new discoveries being made along the highly prospective Hot Maden fault/alteration zone remains high.” Mariana also comments that “The in-ground discovery cost for these ounces by the time Lidya has completed its earn-in, will be around US$0.83/AuEq ounce.”
• Drilling is continuing and it will be particularly interesting to see the results from hole HTD-19 which is located around 300m south of the area of the resource estimate and close to holes HTD-01, HTD-03 and HTD-07 which reported relatively narrow intersections of gold and copper up to a maximum of 8m at an average grade of 1.6g/t gold in HTD-08.
• We note, however, that unlike the earlier holes, which were drilled towards the west and south-west, hole HTD-19 is being drilled towards the east and apparently to deeper depths. We infer that with a more thorough understanding of the mineralisation controls evolving as exploration progresses drill targeting is becoming more refined.
Conclusion: Through targeted exploration, Mariana and its Turkish partner, Lidya, have moved quickly to outline a multi-million ounce gold resource at a low discovery cost at Hot Maden. We look forward to further drilling results and to the forthcoming technical report.