Commodities
Diamonds and precious stones
Interesting couple of snippets for me this week.
Rapaport reports that demand at the Indian IIJS show was strong, just not for diamonds. More on that in the Precious metals segment.
However, anecdotally, it looks as if the major concern of the last few years is starting to abate. Feedback from the show confirmed that industry liquidity levels are improving as manufacturers have cut back on rough diamond purchases, as evinced by all the producers, reduced operating costs and benefitted from working capital unwinds.
Now this does not mean that buyers will flood back into the market immediately, but rather the likely outcome will be pockets of demand, especially in goods closely related to the traditional demand trends seen during Diwali, Golden Week, thanksgiving and this chap...
Bit early to say his name it feels.
Precious metals
It's all kicking off again for the yellow metal. Plenty of newsflow in the sector to consider, ETF demand rising, Physical premiums lifting in India as the strong monsoon harvest has already resulted in significantly higher buyers demand ahead of the Indian festival and wedding periods.
Oh and this morning we have two important pieces of news firstly: The prospect of strikes at the SA producers increasing after the announcement today that the companies have failed to agree a wage deal with both AMCU and NUM after being locked in talks for the last two days.
Secondly: China confirmed a 1.1% increase in gold reserves to 53.93 Moz at the end of July, from 53.32 million ounces a month earlier. It seems that after six years of keeping its mouth firmly shut, there is no stopping her now.
One cannot ignore the fact that in what is an obvious effort to devalue a currency has the PBoC forced the Fed to do this to interest rates...
Maybe wait until the end of the year?
We are now expecting Au to average out at about $1,162/oz. for the year, this compares to $1,190.oz. to date and spot of $1,115 (ish) with next year averaging $1,250/oz. What I hear you scream, a bullish view on gold after 4 years, has he lost his mind? maybe, just maybe...
Platinum still hovering around $1,000/oz. We believe only a fraction of global production makes money at these levels...
This week's performances: Gold: +2%, Silver: +4%, Platinum: +3%, Palladium: +3%, Rhodium: +5%.
Base metals:
Bloomberg are running a great story on the problems impacting the bendy metal and the risk of inventory dumping by the major metal traders.
The story touches on some of the ails of Glencore. Which, as you are all aware, is increasingly looking to reduce their trading inventories to reduce their debt pile...
https://www.bloomberg.com/news/articles/2015-08-13/why-aluminum-is-a-big-headache-for-top-commodity-traders
Caledonia Mining, LON:CMCL, Buy (PT: 55p from 50p)
We published a flash note following the Caledonia update this week "Caledonia Mining’s interim production update continues a theme of solid production and consistent progress in the implementation of the Revised Investment Plan. We believe that despite the recent weakness in the gold price, Caledonia can continue to fund its development programme in a sub-$1,000/oz. price environment. We believe that given the low cost nature of the deposit, a clearly defined production growth profile, a significant cash position and a dividend yield in excess of 7%, Caledonia continues to offer good value for investors. We thereby reiterate our Buy recommendation and increase our price target to 55p based on our revised gold price forecasts."
Gem Diamonds - LON:GEM - PT: 55p from 50p
Interims next week.
I am not expecting too much from the company considering the pretty detailed trading update issued recently and the fact that D&A is largely left to the year-end and no tenders have been held since the large stone sale in July.
Areas to focus on will obviously be costs. I imagine we will see some benefits from currency depreciation, although largely offset by the increased costs attributable to the revised mine plan.
Overall, I remain optimistic about the outlook for Gem and believe the value gap will close in due course.
Gemfields, LON:GEM Buy (PT: 75p)
Gemfields provided a production and sales update during the week, which for me, the only new news was the outperformance at Kagem. 30mcts vs my forecasts of 25mcts, albeit at a slightly lower grade.
Net net, the sales numbers were all in the market and the recent MRM CPR gave shareholders much more insight into the massive opportunity at Montepuez.
Overall I remain very comfortable, the only concern I have right now is that it has performed so much better than the rest of the sector...
Kieron Hodgson is a Commodities and Mining Analyst at Panmure Gordon.
Follow him on twitter here - https://twitter.com/kieronjhodgson