Copper – Glencore reckon Chinese funds have orchestrated the collapse in copper prices
• We reckon its not just a few hedge funds but also China Inc. which has effectively manipulated commodity prices lower through the generation of significant paper volumes of short-term supply into the market
• Rio Tinto, BHP and Vale appear determined to beat China at its own game by overproducing iron ore till Chinese producers go bust on mass
• Sadly a group of Chinese funds are playing a similar game in the paper market for copper
• As they say in oil markets, the best cure for low oil prices is low oil prices! Same might apply to copper in time
Economic News
China – China public funds rise to RMB6.88 trillion of Total assets at end July (Asset Management Association of China)
• Inc 3.22 trillion of money market funds
• RMB 1.3 trillion of domestic stock funds
• RMB 1.73 trillion of hybrid funds.
• Mainland China has 98 fund management companies with 46 joint ventures and 52 domestic companies
China – cargo through ports rises 2.9% to 6.65bn tonnes through January-July
• Inland ports added 4.7% while coastal ports added just 2.1% yoy to 4.61 billion tonnes.
• Container ports saw 5.8% yoy to 120m 20ft container equiValents moved – The explosion at Tianjin will impact year end figures
PNG – bans fruit and vegetable imports
• The Agriculture and Livestock minister is also considering a bank on products which don’t have English language labelling.
• The move is aimed at encouraging the growing and sale of local production in markets that have been dominated by imported vegetables.
• PNG does not import much in the way of mineral commodities but the bans may indicate a new era of protectionism within Asia if China’s devaluation continues to win market share against local producers in the region.
Chile – peso falls 1.4% to new 12-year low of 699/USD making a Total fall of 13% this year
• Copper prices are leading the currency lower with copper also falling to a new 6-year low of $5,000/t.
• The fall in copper prices threatens to push Chile into recession with Q2 showing probable contraction
• Our view is that Chile is going to have to get used to working in a lower copper price environment and the boom time for related business are over for now
US$1.1055/eur vs 1.1088/eur last week. Yen 124.10/$ vs 124.22/$. SAr 12.868/$ vs 12.912/$. $1.568/gbp vs 1.559/gbp
US$0.735/aud vs0.734/aud. – When will the Rand break SAR13/USD – its just a matter of time!
Commodity News
Precious metals:
Gold US$1,122/oz vs US$1,120/oz yesterday –
Platinum US$996/oz vs US$997/oz
Palladium US$594/oz vs US$605/oz
Silver US$14.99/oz vs US$15.24/oz
Base metals:
Copper US$ 5,043/t vs US$5,023/t
Aluminium US$ 1,565/t vs US$1,558/t
Nickel US$ 10,455/t unch vs US$10,420/t
Zinc US$ 1,786/t vs US$1,778/t
Lead US$ 1,708/t vs US$1,700/t
Tin US$ 15,330/t vs US$15,555
Energy:
Oil US$48.96/bbl vs US$48.47/bbl
Natural Gas US$2.709/mmbtu vs US$2.734/mmbtu
Uranium US$36.40/lb unch vs US$36.40/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$54.41/t unch vs US$55.13t –
Thermal Coal $53.1 vs $53.4 cif ARA Europe –
Tungsten - APT European prices price $205.0/mtu unch vs $215/mtu – risk that tungsten prices might slip further again this afternoon following Yuan devaluation
Company News
Glencore (LON:GLEN) 177 pence, Mkt Cap £23.3bn – Disappointing results hit by unexpected fall in copper
• EBITDA of US$4.611 bn down 29% from the same time last year below consensus
Industrial (eg Mining)
• Industrial EBITDA fell by 29% to US$3.4 bn with trading and marketing EBITDA down 27% to US$1.2bn.
• Industrial EBITDA was impacted mainly by prices with copper having the major impact.
• Copper prices have been impacted by “aggressive and synchronised large-scale short selling by significant highly-levered Chinese fund manager activity”.
• Copper EBITDA fell by 40% to US$1,282m.
• Actual supply and demand fundamentals are better than pricing would suggest in copper.
• Zinc fundamentals are also said to be strong with a supply deficit expected to emerge as the Century and Lisheen mines definitely close.
• Zinc EBITDA was relatively stable up 2% to US$667m.
• Nickel prices did not perform as expected with supply coming out of the market being met by a lack of demand growth.
• Nickel EBITDA was down 38% to US$319m.
• Global stainless steel production, the main driver for nickel, fell globally with weak markets across the developed world converging with weak Chinese demand.
Trading:
• Trading was tough in the first half with physical premiums collapsing particularly affecting aluminium and nickel.
• Metals and marketing EBITDA nearly halved from US$902m to US$460m.
• Oil marketing conditions were said to be favourable in the first half with coal offering less opportunities.
• Energy products marketing EBITDA doubled from US$252m to US$509m.
• Agricultural commodities were impacted by a slow start in grains trading with EBITDA from marketing activities falling by 52% to US$261m. A fall in wheat prices will not help through H2.
• Glencore expect the H2 to be better and management believe this will underpin full year guidance of US$2.5-US$2.6bn for their marketing and trading businesses.
• Net income was down 56% to US$882m.
• Capex down 21% to US$3.389 bn helping to reduce net debt by US$982m to US$29.6bn.
• As previously reported the company will be taking a write down of US$792m on the Chad assets as a result of the lower oil price.
• A US$256m loss was taken on their in-specie distribution of Lonmin shares and a US$235m net incremental cost related to a leak at Line 1 at Koniambo.
Conclusion: These numbers highlight the exposure of Glencore’s numbers to copper. The trading side saw metals volatility and collapse in premiums impact the trading and marketing EBITDA for metals which halved over the period while oil marketing and trading EBITDA performed well – doubling over the period as Glencore took advantage of market opportunities.
The second half is expected to be better for marketing EBITDA with the company guiding to US$2.5 – US$2.6bn in the second half.
Industrial EBITDA fell by 29% and looks likely to suffer further in the second half with copper prices continuing to be under pressure. The company’s commentary on copper is particularly interesting as copper prices continue to be “attacked” by highly leveraged Chinese hedge funds. Price movements in copper will lead to big swings in industrial EBITDA in the second half.
EBITDA of US$10bn is forecast for the full year and performance of copper will dictate on whether this is achieved.
We are disappointed with these results and are concerned that if China does not move to stimulate domestic construction, infrastructure and other industrial activity that Glencore could also disappoint through the second half.
Gem Diamonds (LON:GEMD) 128 pence, Mkt Cap £177m – Half year Results
• Revenues down 26% at US$118m from US$148.9m the same time last year.
• Manufacturing and partnership arrangements contributed US$3.3m to group revenue and US$2.6m to underlying EBITDA.
• Underlying EBITDA was down 38% at US$46.1m.
• Carats sold Totalled 46,961 carats at Letseng for the first half down 15% on the same period last year.
• The average US$ per carat was down 21%.
• The company announced an optimised mine plan at Letseng which would enable for an increased contribution for higher value material from the satellite pipe.
• Satellite ore tonnage is to increase to 1.65 mtpa in 2015 to 2019 and 2 mtpa from 2020 onwards.
• The satellite to main pipe tonnage ratio for the period was 33:67 for the period against 36:64 the same time last year.
• At Ghaghoo 132,125 tonnes of ore were treated with 35,283 carats recovered.
• Mining of the trial section at Level 0 is now complete with mining moving to Level 1 in May and June with average grade at 29.1 cpht from 27.8 cpht.
• Production continues to ramp up but at a slow pace due to difficult localised ground conditions within the ore body.
• At full ramp up they expect to achieve the nameplate capacity on the plant of 60,000 tonnes per month.
• Total sales for Ghaghoo was for a Total of 10,096 carats achieving a Total value of US$2.1m or an average of US$210/carat.
• In July after the half year end the company had a sale of 29,891 carats from Ghaghoo achieving sales of US$4.9m.
• Direct cash costs before waste was up by 3.2% at Letseng but down in US$ currency terms by 4%.
• At the end of the period, a strong cash position of US$83.8m with US$10.2m of cash generated after accouting for waste stripping.
• The US$25m facility used for Ghaghoo Phase 1 is being extended to a 6 year facility with repayments due to start in 2016.
• The diamond market in the first half was difficult as previously reported but is expected to stabilise for higher quality stones in the second half.
Conclusion: These results are in line with expectations. Focus will be on how operational improvements come through at Letseng and success in ramping up production at Ghaghoo.
The first half market conditions have been well flagged by Gem Diamonds and other diamond producers. The second half is expected to stabilise but with concerns about China and emerging markets accelerating, price appreciation cannot be relied on and we prefer the volume growth and diversification offered by Petra Diamonds.
Hochschild Mining (LON:HOC) 80.5 pence, Mkt Cap £296m – Six month results
• Hochschild Mining reports that its first half revenues declined by over 30% to $190.3m from $282m in 2014. Losses from continuing operations widened to $37.75m from $1.5m.
• Revenues from gold in dore and in concentrates represent around 33% of the Total.
• Cash and cash equiValents declined by over 70% to $84.3m leaving the company with net debt of $358.6m leaving the company with 30% net debt:net debt+equity.
• The company has been investing in its new flagship mine at Inmaculada mine, which is now largely complete, and with net cashflow for investment of $119.2m during the half, Hochschild saw net free cash outflow of $100.9m before additional debt financing of $70.2m.
• Now that Inmaculada is in production, the company expects an improvement during the second half commenting “ Production for the second half of 2015 is scheduled to include the first material contribution from Inmaculada and a stronger contribution from San Jose, with all-in sustaining cost expected to meet guidance of between $13 to $14 per silver equiValent ounce”.
Rambler Metals (LON:RMM) 10.5 pence, Mkt Cap £15.1m – Concentrate shipments
• Rambler Metals reports that it has shipped its eleventh consignment of copper concentrate, bringing the Total to approximately 70,000 wet metric tonnes (wmt) , since it declared commercial production in 2012.
• The shipment reported today Totals 5,250 wmt at an average grade of 27% copper, 12 g/t gold and 87 g/t silver. The company comments that “this is a high quality product with little in the way of deleterious materials”.
• As well as the consistency of copper grades in Rambler’s concentrate shipments, we note that these precious metals grades are somewhat higher than those reported for other recent shipments by Rambler. (May 2015 – 27% copper, 9 g/t gold and 68 g/t silver and December 2015 27.2% copper, 8 g/t gold and 58 g/t silver). These improved precious metals grades should provide a modest mitigation of recent copper price weakness.
Sirius Minerals (LON:SXX) - 17.25 pence, Mkt Cap £375.4m – Polyhalite offtake agreement
• Sirius Minerals reports that it has secured an upgrade to an existing “take-or-pay” supply agreement with an undisclosed “existing Fortune 500 US-based agribusiness customer”.
• An initial agreement with this customer was disclosed in January 2014 under which Sirius Minerals’ York Potash Project would supply 500,000 tpa of its polyhalite product for a five year period from the start of production with a possibility to extend the supply agreement for a further 5 years. The counterparty also had an option to receive up to an additional 500,000 tpa of polyhalite.
• Sirius Minerals has now secured a revised agreement under which it has increased the volume of polyhalite it can supply to this customer to 1.5mtpa and extended the term of the agreement from 5 to 7 years, with possible extensions for two additional five year periods. Unsurprisingly, the price of polyhalite under the terms of this new agreement remains confidential but is “based on a formula linked to the market price of the nutrients contained in polyhalite.”
• Summarising the state of its offtake agreements Sirius Minerals comments that “The company has now secured 3.1 million tonnes per annum of offtake agreements, with an additional 4.8m tonnes per annum in other forms of commitments.”
• Sirius Minerals plans to produce an initial 5mtpa of its polyhalite product and today’s announcement indicates that it has gained a good level of support from its potential customers which should prove important as, following the development approvals secured earlier this year, the company moves towards financing the £1.7bn project.
Conclusion: Sirius Minerals has put a lot of effort into crop trials for its polyhalite to demonstrate its effectiveness for customers. Today’s announcement shows that this work is developing market support from customers and this should prove valuable in financing discussions. Project development, post- financing, is likely to take around 4 years and the early securing of offtake agreements reflects the long-term nature of both the market and the project.
SolGold* (LON:SOLG) 2.05 pence, Mkt Cap £15.6m – Update on Drilling at Cascabel
• Hole 12 is at 647.6m – having been variable the hole is now intersecting intense visible copper from 608m.
• Hole 12 is being drilled towards the SW and is parallel to and 75m SE of Hole 5, the discovery hole.
• Hole 12 is said to be showing an increasing intensity of disseminated and vein style copper sulphide and pyrite mineralisation.
• The second drill rig has arrived on site at Alpala and is being established on the T1 target NW of Alpala.
• The drill rig has been adapted to drill faster and deeper enabling drill hole tests of the rich mineralisation found in Hole 5 and 9 to date and to deepen Hole 8.
• Drilling at Hole 8 stopped due to difficult ground conditions.
• The T1 target is under strong surface alteration of the host rocks and is supported by detailed geophysical data interpreted by SolGold geologists.
• The eruption at Cotopaxi Volcano is not disrupting activities at Cascabel.
Conclusion: The stronger intensity of copper at Hole 12 is good news on prospects for that hole. The arrival of a second rig will speed up drilling and we look forward to results from the T1 target as well as the testing of mineralisation in existing holes.
*SP Angel acts as Nomad and Broker to SolGold. An SP Angel analyst has visited the Cascabel project.