Economic News
Kazakhstan – Tenge falls 23% as nation removes exchange controls
US$1.1123/eur vs 1.1055/eur last week. Yen 124.06/$ vs 124.10/$. SAr 12.9664/$ vs 12.868/$. $1.565/gbp vs 1.568/gbp
US$0.729/aud vs0.735/aud – US dollar strengthens and ZAR:USD rate weakens towards 13
Commodity News
Precious metals:
Gold US$1,137/oz vs US$1,122/oz yesterday
Platinum US$1017/oz vs US$996/oz
Palladium US$620/oz vs US$594/oz
Silver US$15.38/oz vs US$14.99/oz
Base metals:
Copper US$ 5,055/t vs US$5,043/t
Aluminium US$ 1,568/t vs US$1,565/t
Nickel US$ 10,405/t unch vs US$10,455/t
Zinc US$ 1,810/t vs US$1,786/t
Lead US$ 1,710/t vs US$1,708/t
Tin US$ 15,350/t vs US$15,330
Energy:
Oil US$46.81/bbl vs US$48.96/bbl
Natural Gas US$2.709/mmbtu vs US$2.709/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$54.41t –
Thermal Coal $52.6 vs $53.1 cif ARA Europe –
Tungsten - APT European prices price $205.0/mtu unch vs $215/mtu – no change
Company News
Glencore (LON:GLEN) 161 pence, Mkt Cap £21bn – Risk remains on leverage but offers good potential if metals prices recover
• Yesterday’s results and the recent fall in commodity prices highlights issues around Glencore’s business model. We don’t think the company are running the wrong business model and there is good upside risk to a recovery in copper prices but we do feel a need to better understand Glencore’s balance sheet to gain more confidence in the stock
• Debt; Non-current borrowings $39bn and current borrowings $11.4bn gives total borrowings of $50.4bn. Cash and cash equivalents and marketable securities came to $3.097bn. ‘Readily marketable inventories’ of $17.7bn to give a net debt number of $29.6bn.
• Readily marketable inventories; We do not know what the composition of these ‘readily marketable inventories’ are but given recent volatility and slightly lower demand in China we are concerned at the potential impact of unwinding some or all of this position.
• We speculate some of the $17bn might be tied up in the financing and arbitrage of aluminium and we further speculate that if this is so at what price is this metal really readily saleable? The LME is a big market but the sale of a significant tonnage of physical aluminium could cause some movement in the price. We choose our words carefully here as we are purely speculating. It would be in the interests of Alcoa and Rio Tinto which bought Alcan a few years ago to help in the unwinding of such a position but we suspect cash is tight all round.
• Recent borrowings; Glencore borrowings are cheap in mining terms, in April the company issued $2.25bn of interest bearing notes issuing 3-year, 5-year and 10 year paper with coupons of 2.125% on the 3-year, 2.875% on the 5-year, and 4% on the 10 year paper. These are good financing rates for a company with Industrial assets in The Congo, Zambia and South Africa, Australia, Latin America. Borrowing rates may well rise on the back of rising US interest rates though we suspect the US will only raise rates slowly while there is little threat of inflation.
• Copper; Glencore’s African copper Industrial (mining and smelting) division had a horrible first half reporting a loss of $182m in EBIT terms dragging the copper mining EBIT down to $286m vs $1,384m yoy. The business may perform better in H2 through the ramp up of copper production at Katanga in the DRC. We also expect the copper marketing business which, by the sounds of things, was hit hard by the Chinese bear raid on the copper market to perform better.
• Oil: Glencore has a market neutral stance on oil and did well in its oil marketing (trading) business. But a big benefit of lower oil prices will be lower operating costs across the Industrial, mining and smelting businesses where oil/fuel prices can make up around a 1/3rd of costs.
• Outlook: China has become the major swing factor metals demand and its recent slowdown in construction and industrial activity has reduced demand for metals. Demand growth for most commodities continues in China at a slightly slower pace and the unwinding of metal inventories used as collateral
• Glencore appears to have been looking for the development of deficits in the supply / demand balance for copper and some other metals this year and for this to raise prices. Copper production should fall in particular on lower grades in some of the world’s bigger copper mines. We agree with Glencore, though the stalling of much construction and industrial demand in China has set back the time frame for the development of these deficits.
• Risk on the upside: Glencore is highly leveraged to copper and if Glasenberg and his team are right, and we think they normally are, then Glencore should show much better performance as metals prices recover.
• Dividends; Glencore maintained its interim dividend but could come under pressure through the second half
• Market manipulation: We also wonder when US regulators might investigate potential ‘market manipulation’ by a series of Chinese funds in which are alleged to have forced the copper price lower.
• Glencore refer to “aggressive and synchronised large-scale short selling across all the major exchanges including, for the first time, significant highly-levered Chinese fund manager activity. These bear raids, along with liquidation of commodity basket positions, have materially impacted pricing with short-selling volumes generating significant paper volumes of short-term supply into the market.”
• Forex benefits: Weakness in currencies in many of Glencore’s mining locations added some $879m to H1 EBIT and will add further in H2. The Kazak Tenge fell by 23% yesterday after Kazakhstan decided there was little point in maintaining exchange controls. Glencore has a substantial zinc business, Kazzinc in Kazakhstan which will substantially benefit from this move. Glencore currency sensitivities show the business can add back a further $1.11bn for a 10% fall in the AUD, CAD and ZAR vs the USD.
Conclusion: We are looking for an opportunity to buy Glencore stock and reckon that selling the stock now could risk missing the next upturn in copper prices
Aureus Mining (LON:AUE) 20.875 pence, Mkt Cap £76.6m – ceremonial opening of the New Liberty Gold mine
• The New Liberty mine has been formally opened in a ceremony attended by the President of Liberia and the Minister for Land, Mines and Energy as well as community leaders and other dignitaries.
• Paying tribute to the Liberian Government, Aureus Mining’s Chief Executive, David Reading, commented that “The New Liberty mine could not have been built without the strong support of the Liberian government, the support of the local communities, and the perseverance of all those involved during what has been a challenging period for the country”.
• New Liberty is expected to produce 120,000 oz of gold per year and Mr Reading is quoted that Aureus “is now working towards reaching steady state production during Q4 2015.
Conclusion: Aureus Mining and its EPCM contractor, DRA Mineral Projects have delivered the New Liberty mine on schedule against a background of global financial austerity and a major epidemic in west Africa. Persevering through these challenges to deliver a major development in Liberia has probably developed closer ties and a high level of credibility with the Liberian government which may stand Aureus Mining in good stead as it moves ahead with other projects at Ndablama and Weaju in Liberia and elsewhere in the region.
Exxaro Resources Zar 6311, Zar 22.6 bn – Interims to 30 June 2015
• The company reported revenues of Zar 8,324 m up 12% from the same time last year and down 7% from the second half of 2014.
• This is against a year when average AP14 coal prices fell by over 20% to an average of US$55-59/t.
• This resulted in an operating profit of Zar1,811m against Zar 792m last year.
• The company plan to divest and delay certain projects and assets under current market conditions this includes disposal of their Brisbane office.
• No further capex was spent on the Mayoko iron ore project against R456m spent in H1 2014 – the company is ensuring it retains the permit.
• The EBITDA loss at Mayoko was reduced by 86% from the second half of 2014 to R40m from R286m.
FinnAust Mining* (LON:FAM) 1.4p, mkt Cap £4.1m – Rod McIllree taking FinnAust to the next level
• Rod McIllree, the new, interim CEO, at FinnAust is looking to take FinnAust to a new growth strategy.
• He is working on how to extract maximum possible value from the company’s existing assets while working towards some broader opportunities in Scandanavia.
• Any move will be well scrutinised by Chairman, Dan Lougher, Western Area’s man on the board.
• Hammaslahti; Drilling on FinnAust’s properties in Finnland found a new high-grade copper, zinc, lead and silver lode underneath the old Hammaslahti mine open pit.
• The potential of the project is being evaluated to see where to go next.
• Enonkoski; the team have discovered a short, shallow interval of remobalised nickel / copper sulphide to the south east.
• Outokumpu; the discovery of around 50m of iron sulphides in drilling may suggest a sulphidic tail to an orebody or some kind of feeder structure though this is some way off any form of discovery
• Mitterberg; (80% owned); The team are looking at ways to monetise value from Mitterberg.
• Cash: The group had £795,368 at end June and £640,032 at the time of the writing of today’s announcement the group recorded a loss of £927,371 for the year to end Dec 2014. Mining companies are generally short of cash in the current environment but companies like Western Areas understand the importance of funding exploration through the mining cycle and should continue to support exploration at FinnAust going forward.
* SP Angel acts as nomad and broker to the company
Orosur (LON:OMI) 6.6 pence, Mkt Cap £6.4m – FY 2015 results to 31 May 2015
• Revenues for the period were down 18% on a combination of lower gold production – down 11% and prices down 5%.
• Gold production for the full year stood at 53,485 oz.
• Operating cash cosh rose by 15% to US$912/oz with an AISC of US$1,185/oz.
• The company reported a loss before tax of US$6.8m.
• After an impairment taken on the Pantanillo project, the company reported a net loss before tax of US$49.4m.
• For next year the company are guiding to lower production of 30-35,000 at an AISC of US$1,100-1,200/oz.
• To improve on AISC the company has optimised its mine plans resulting in lower production.
• The company invested US$8.5m in capex over the period and US$5.2m in exploration for the year.
• Cash balance stood at US$4.787m with total debt of US$1.481m with cash net of debt of US$3.306m.
• Exploration continued during the year to replace reserves and resources.
• At the end of the year M&I resources stood at 725,000 oz at 1.18 g/t at a cut off grade of 0.5 g/t gold.
• Proven and probable reserves stood at 159,000 oz at an average grade of 1.8 g/t gold.
• Some of the oz found to replace reserves had to be discounted as a result of lower gold prices assumptions.
• The company continue to explore a number of brownfield deposits near the mine.
Conclusion: With lower gold prices, the company are having to mine ore that will meet an AISC cost target of US$1,100-US$1,200. This makes them bearly profitable in the current gold price environment – however, a cut back in G&A and debt over the year should be helpful with net cash of US$3.3m at the end of May.
Polyus Gold (LON:PGIL) 194 pence, Mkt Cap £5.882bn – H1 Results
• The company announced a 130% increase in first half profits to $583m (2014 $253m) as a result of a 91% rise in operating profits to $531m and a 44% rise in operating cash flow to $515m.
• The increased earnings reflect a substantial improvement in cash costs which, helped by the depreciating Rouble currency, fell by 34% to $436/oz (H1 2014 - $662/oz) and all-in sustaining costs (down 32% to $617/oz from $905/oz) as well as a 5% increase in gold production to 783,000oz.
• Average gold prices realised fell by 4% to $1257/oz driving a 1% overall increase in revenues to $1,019m.
• All of the group’s mines were able to deliver cost reductions, however the 61% decline in cash costs at Titimukha (64% on AISC basis) to $499/oz reflected improvements to mining and the switch to selective processing which improved both grades and recoveries. Further improvements in processing and recovery were also achieved at the Kuranakh and Verninskoye mines. Stripping costs, however, rose by 185% y-o-y as a result of the continuing cut back at the Olympiada mine.
• Capital expenditure was 67% lower than H1 2014 at $96m reflecting lower spending levels at the Natalka project as construction moves towards completion, tighter capital controls over both development and maintenance spending and the declining Rouble.
• At 30th June, Polyus held $1,377m cash (up 17% on 30th June 2014) and carried net debt of $375m (2014 - $370m)
• The Group has reiterated its production guidance for 2015 of 1.63-1.71m oz of gold.
Vast Resources (LON:VAST) 1.35 pence, mkt Cap £19.9m – First gold production from Pickstone Peerless expected by the end of August 2015
• Vast Resources, which is currently developing its Pickstone Peerless open-pit gold mine in Zimbabwe, reports that it has commissioned the ball mill and the carbon-in leach plant and that “first gold production is targeted for the end of August 2015”.
• Pickstone Peerless is expected to produce 10,000 oz of gold annually.
• The company is also restarting the Manaila and Baita Plai polymetallic mines in Romania and Chief Executive, Roy Pitchford commented that “Vast retains the objective of having three fully operational mines by the end of 2015, two in Romania and one mine in Zimbabwe.”