Equities collapse as confidence in Chinese growth falls
• The Shanghai equity market crashed 8.5% today despite new rules to allow its main state pension scheme to invest up to 30% of its net assets in Equities for the first time
• Chinese factory activity is falling as seen in the Caixin / Markit manufacturing PMI which fell to 47.1 from 47.8 on Friday.
• The big problem for China’s authorities is that 80% of China’s investors are individuals managing their own portfolios many with leverage.
• Millions of Chinese investors are watching the collapse of all or part of their life savings despite repeated government action to support the market including a ban on short selling and limits on larger investors selling stock.
• HK’s Hang Seng is down 5.2% on the day and other markets are also pulling back
• The UK FTSE 100 has fallen 2.4% so far today with the large cap miners taking most of the pain.
• The IMF claimed there is ‘No crisis’ at the weekend and Capital Economics reckon the slowdown in China is not a bad as markets suggest.
• So, when should we start buying back into the big miners?
• We expect the Chinese government to bring in some form of economic stimulus to rescue the market
Gold prices rise as crisis deepens
Nazi gold train reported to be discovered in tunnels in Poland
• Two men are reported to have discovered a Nazi train carrying gold in tunnels in mountains near the town of Wroclaw in Ploand.
• The train is said to have left the town of Wroclaw in 1945 travelling south west before disappearing into the hills around Walbrzych.
• The train is thought to be in tunnels dug by the Nazis in the region which had a network of rail tracks.
London – underground strikes planned for Wednesday and Friday
• Unions claiming to represent tube drivers have ordered strikes for Wednesday and Friday.
• The action starts at 6:30 on Tuesday night and will effectively cripple the network for four days
• The strike is over demands which could lead to a 6.5% increase in already expensive rail fairs.
• Tube driver salaries start at £49,673pa rising to £50,000-60,000pa plus 43 days annual leave.
• They work just 36 hours a week and get even more time off if some desperate commuter trying to get home on an overcrowded tube throws themselves under their train.
• The union is demanding a cut in working hours to 32 hours a week, a four day week for the same full time salary, night bonus payments to be paid forever and night time payments to be paid on lines which are not even opening at night.
• What’s more is most trains drive themselves these days leaving the driver with the onerous task of opening and closing the doors.
Economic News
US – Economic news due this week:
• Tuesday: Jun S&P/CS property index (+0.2%mom/+5.1%yoy v -0.2%mom/4.9%yoy), Aug Markit services PMI (55.6 v 55.7 in Jul), Jul new home sales (+5.8%mom v -6.8%mom in Jun), Aug consumer confidence (93.4 v 90.9 in Jul)
• Wednesday: Jul durable goods/ex transport (-0.4%mom/+0.4%mom v +3.4%mom/+0.6%mom in Jun), Jul capital goods orders ex air/defence (+0.4%mom v +0.7%mom in Jun)
• Thursday: Q2 Preliminary (2nd reading) GDP (+3.2%qoq v +2.3%qoq (1st reading)), Weekly jobless claims (275k v 277k in the previous week)
• Friday: Jul personal spending (+0.3%mom v +0.0%mom in Jun), Jul core PCE (+0.1%mom/+1.3%yoy v +0.1%mom/1.3%yoy in Jun)
China – Equity indices post heavy losses amid a widespread sell off in developed and emerging markets.
• The benchmark Shanghai Composite is down 8.5% today with all 2015 gains now erased.
• The Shenzhen Composite index fell 7.6%.
• Expectations for monetary stimulus from the PBoC over the weekend did not materialise which made many to question the determination of Beijing to support the market.
• Monday sell-off follows a nearly 12% drop recorded through last week.
Japan – Shinzo Abe said that it was acceptable for the Bank of Japan to miss its 2% inflation target.
• Previously, the Bank said growth in prices will accelerate to 2% in two years’ time from Apr/13.
• Lower commodity prices and oil prices, in particular, made the BoJ revise its forecasts for 2% inflation rate to come in around Sep/16.
• The currency is up 2.4% so far today.
Greece – A third of Syriza lawmakers declined to accept a new bailout deal leaving the party to form a new anti-austerity leftwing party ahead of snap general elections to be held next month.
US$1.1483/eur vs 1.1243/eur last week. Yen 120.50/$ vs 122.96/$. SAr 13.208/$ vs 12.9037/$. $1.571/gbp vs 1.571/gbp
US$0.725/aud vs0.732/aud – US dollar weakness continues on expectations for postponement of Fed rate rise
• South African rand smashes through key resistance in significant weakening of the currency despite USD weakness
Commodity News
Precious metals:
Gold US$1,156/oz vs US$1,152/oz on Friday -
Platinum US$999/oz vs US$1026/oz
Palladium US$590/oz vs US$608/oz
Silver US$15.06/oz vs US$15.38/oz
Base metals:
Copper US$ 4,932/t vs US$5,041/t
Aluminium US$ 1,525/t vs US$1,553/t
Nickel US$ 9,715/t unch vs US$10,170/t
Zinc US$ 1,731/t vs US$1,775/t
Lead US$ 1,649/t vs US$1,688/t
Tin US$ 14,700/t vs US$15,350
Energy:
Oil US$43.80/bbl vs US$46.13/bbl
Natural Gas US$2.637/mmbtu vs US$2.722/mmbtu
Uranium US$36.40/lb unch vs US$36.40/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$54.8/t unch vs US$55.52t –
Steel – A number of stainless and special steel mills have been asked to reduce/halt production between Aug 20 - Sep 5 in order to guarantee air quality during the military parade.
• The event is organised to commemorate the 70th anniversary of the victory of WWII as well as the second Sino-Japanese War.
• The troop parade will be held in Beijing on Sep 3.
Thermal Coal $51.6 vs $52.4 cif ARA Europe –
Tungsten - APT European prices price $203/mtu (range $196-210/mtu) vs $205.0/mtu last week
Ferrochrome – Prices hit the lowest level recorded since the launch of the MB charge chrome index in 2012 on Friday last week.
• The price fell 1c to 76c/lb on the back of the devaluation of the yuan.
• High carbon prices in Europe are reported to stand at 89-95c/lb, the lowest in two years.
Company News
Anglo American (LON:AAL) 694 pence, Mkt Cap £9.7bn – Sale of the Mantoverde and Mantos Blancos copper mines
• Anglo American reports that it has reached agreement for the sale of its in interest in Anglo American Norte SA to a consortium of investors led by Audley Capital Advisors and including Orion Mine Finance.
• Anglo American will receive an initial $300m in cash and future payments of up to an additional $200m, dependant on factors such as the performance of the LME copper price and the possible future extension of the sulphide resource at the Mantoverde mine. In addition to Mantoverde, assets include the Mantos Blancos copper mine.
• Describing the sale as a good outcome for Anglo American, Chief Executive Mark Cutifani said that “we are focusing our diversified portfolio on our largest and most value accretive assets, which include the Los Bronces and Collahuasi copper mines in Chile and the Quellaveco copper project in Peru.”
Avocet Mining (LON:AVM) 3.0 pence, Mkt Cap £6.3m – Reduced first half losses and lowering of production guidance for 2015.
• Avocet Mining report a reduced loss for the six months to June 2015 of $37.66m (2014 loss of $46m). The company produced 11% fewer ounces of gold (39,859oz vs 44,798oz) as a result of complex metallurgy and the impact of the strike at Inata, but was able to reduce cash production costs by 18% to $1021/oz (from $1246).
• The complex metallurgy of the Inata orebody which consumes additional reagents and is variable in its treatment characteristics has led the company to reduce its gold production guidance for 2015 to 75-80,000oz from earlier estimates of 86,000oz.
• Cost saving initiatives, including adjustments to mining plans and “resizing the expatriate and local workforce” have helped to contain and reduce costs “however, the fall in the gold price from a high of over US$1300 per ounce in February to below US$1100 in July has partially offset these successes.”
• Capex was resuced to $2.7m from $6.9m in 2014
Conclusion: The inata mine continues to face challenges and is also facing the impact of lower gold prices – the reduced production guidance target reflects these challenges.
BHP Billiton (LON:BLT) 10.01 pence, Mkt Cap £55bn – Expect collapse in results tomorrow as outlook worsens
• BHP is due to report final results tomorrow with a significant fall in earnings to around £4bn for the year with potential to fall further to £3bn for FY 2016.
• The full year results will reflect better times in the FY H1 when prices and premiums were better softening the blow of the second half to end June which will show the impact of falling prices in almost all divisions.
• BHP is being hit hard by the collapse in oil, coal, copper and iron ore prices and looks set to suffer further towards the year end as lower prices should continue to force margins lower.
• Worse still failing production levels in oil and across a range of metals means that unit costs are likely to have risen.
• Copper, iron ore and thermal coal performed better for the first nine months of the year but everything else suffered.
• Iron ore failed to meet ambitious production targets and its 5% production increase will be more than offset by the collapse in iron ore prices earlier this year.
• Cost cutting; Andrew Mackenzie, BHP’s ceo will have to cut more fat off BHP’s once lardy cost base to restore shareholder value.
• Mackenzie, being a Scotsman, may also prefer to cut its dividend to conserve cash .
• Writedowns: BHP recently took a US$2.8bn writedown in its oil business mainly on the Hawkville field, the balance on Petrohawk.
• The company will also take a £1.3bn writedown on the demerger of South 32 earlier this year.
• Capex: capital expenditure will be under threat and maybe BHP’s plans to invest US$1.5bn in Onshore US through FY 2016 could be under threat
• Oil prices are now at such low levels that BHP will be under strain in its offshore oil and gas business
Minera IRL (LON:MIRL) 3.4 pence, Mkt Cap £7.8m – Removal of the interim CEO
• Minera IRL reports that “the Board has unanimously voted to remove Diego Benavides from the position of Interim CEO” the announcement goes on to say “The company is also investigating allegations of impropriety received through its recently implemented and independently managed Whistleblower hotline. The investigation will be overseen by the Company’s independent members of the Board, Doug Jones and Robin Fryer.”
• The reasons for the removal of the interim CEO are not specified, however, the inclusion of the references to unspecified impropriety in the same announcement will inevitably drive speculation that the two are linked.
• Since the untimely demise of the founder, Courteney Chamberlain earlier this year, Mineral IRL has faced challenges in restructuring its management against a background of friction with local community groups in the vicinity of its proposed new 100,000 oz pa gold mine development at Olachea.
• Earlier this month, Mineral IRL reported that “The Community has raised concerns about the status of the Company's plans to reorganize its management structure to better serve the stakeholders, and the specific role of certain individuals within the Company. This situation was also reported by the Community to the Puno press on 14 August 2015.” This led the company to postpone the start of a proposed 5000 metre drilling programme and to delay the negotiation of an EPCM contract to advance the mine development.
• It is unclear at the moment whether the departure of Mr Benavides resulted from this community pressure, was the result of the separate internal investigations mentioned above, or some other, unrelated cause.
Conclusion: Whatever the outcome of the continuing investigations, management is being diverted from its efforts to finance and develop the new Ollachea mine and is facing pressure from external groups. We hope for a speedy resolution of the current situation and a focussed effort to restore community relations and get mine development and financing back on track.
SolGold* (LON:SOLG) 1.9 pence, Mkt Cap £14.4m – New target within Cascabel license offers prospect of further discovery
• SolGold today report the identification of a new potential copper porphyry target at ‘Aguinaga’ on the Cascabel license in Ecuador.
• Aguinaga is 3km away from the Alpala Central copper porphyry deposit into which SolGold have drilled 12 deep drill holes.
• A second drill rig has now arrived to speed up drilling and to test outlying targets within the Cascabel license area.
• The team have run geophysical and soil sampling surveys over the Aguinaga area. Assays off the 100m x 100m soil grid show elevated copper, molybdenum and zinc.
• The gold and copper / zinc ratio is also said to ‘support an inferred porphyry centre characterised by higher temperatures of mineralisation’. ‘The low manganese in soil that flans the central copper zone to the north and south is related to intense late-stage hydrothermal alteration. This is reported to be typical of metal zonation around porphyry copper-gold deposits.
*SP Angel acts as Nomad and Broker to SolGold. An SP Angel analyst has visited the Cascabel project.
Stellar Diamonds (LON:STEL) 0.45 pence, Mkt Cap £3.7m – PEA Study on the Tongo Project, Sierra Leone
• The company reports the outcome of an independent Preliminary Economic Assessment of the surface and underground mining potential of its Tongo Project in Sierra Leone.
• The study, which was conducted by Paradigm Project Management, indicates that development of the Tongo 1 kimberlite dyke by both surface and underground mining to a depth of between 300 to 400 metres could produce a total of 956,000 carats of diamonds over an 18 year mine life.
• Estimated diamond values of $270/ct and operating costs of $108/t are estimated to generate a pre-tax IRR of 31% and a pre-tax NPV of $53.2m at a discount rate of 10%.
• The initial 4 years of production from open-pit mining requires estimated capex of $24.8m to produce approximately 117,800 carats over the first 3 years of open pit mining with a further 838,000 carats of production from predominantly underground mining in years 4 to 18.
• The company indicates that it sees potential to extend mine life through deeper mining on the Tongo 1 dyke and/or the possible mining of a further 3 kimberlite dykes known on the licence, though we suspect that additional exploration may be required to demonstrate the full resource potential of these additional areas..
• Stellar Diamonds was granted a two –year extension to its exploration licence in July and this should allow time for completion of the Environmental and Social Impact Study which is already well advancesd and for submission of a mining licence application.
Conclusion: The capex required to get Tongo 1 into production is relatively modest and if the diamond values of $270/ct assumed in the study can be achieved or exceeded, the project should generate robust returns from the open pit phase and help to fund the underground phase of operations.
Tri-Star Resources* (LON:TSTR) 0.115 pence, Mkt Cap £9.7m - Update on the Roaster Funding
• The funding structure for the roaster has now been fully agreed with definite agreements in place with Bank Nizwa for US$40m of senior debt.
• In addition, mezzanine funding of US$15m has been put into place as expected.
• The equity contribution by the three partners will be pro-rated for the US$15m of equity as expected.
• The payment for the first two tranches of the sale of the Intellectual Property into SPMP totalling US$4m is to be received by Tri-Star on financial close.
• This will be offset against the US$6m equity contribution required by Tri-Star.
• A final tranche of US$2m will be available from the IP sale when the pilot plant for the roaster is commissioned.
Conclusion: With financial close secured, work can start on the roaster. We anticipate construction of the roaster of 18-20 months from financial close giving scope for production of 20,000 tpa of antimony metal and trioxide. Tri-Star is now well positioned to exploit the favourable economics of the antimony market as a speciality metal and be the first roaster outside China, built to EU standards. We continue to see upside in the shares and remain buyers.
*SP Angel acts as Nomad and Broker to Tri-Star Resources