Central bankers holed up at Jackson Hole
• Central bankers have plenty to talk about this week at Jackson Hole in their annual jamboree.
• Central Banks used to be regarded as low key and venerable institutions, now they are steering financial markets in ways not seen before.
Dow falls >1000 points, its biggest fall ever and then recovers
• The Dow Jones, the US industrial companies index recovered after its biggest ever fall yesterday but recovered much of its loss by the end of the day
• The S&P 500fell by 5.3% but recovered to record a loss of 3.9% by the close.
• The FTSE closed 4.7% down on the day.
Metals prices – ‘has the sky fallen in on our heads?’
• The world is ever more interconnected as with problems in China likely to impact companies in the west
• Cheap good from China / Asia have suppressed manufacturing margins and inflation in the West for many years – will this come to an end?
• Chinese investors are racing for the exit as the stock market refuses to find much other than state-ordered support.
• There is talk of a ‘new normal’’ but we do not believe we are yet in the new normal of slower Chinese growth and that this still needs to be established.
• Fundamentally, China is supporting thousands of inefficient and unproductive state companies.
• Government strategy has been to merge these enterprises with their competitors, force some management change and to IPO the resulting companies on the Shanghai market to raise cash for the government and reduce their dependency on the state.
• The strategy would have worked in a higher growth environment but killing corruption and tightening credit conditions has stalled growth for construction and other industry.
• China is likely to bring in some stimulation to rescue its corporate strategy and may even cut rates to support this move. This might have some unintended consequences.
• The Fed is still likely to raise rates in accordance with its plan and is unlikely to be deterred unless US growth stalls.
• Fundamentally, metals prices should be bottoming out with mines cutting uneconomic production and the potential for deficits to develop in base metals next year.
• We are looking for a ‘new normal’ of slower Chinese growth to still consume metals inventories in zinc, nickel and lead next year with copper relatively well balanced
• SRB buying could easily move metals into deficit territory if the SRB swings into action.
Flu Vaccine – successful trials for a new type of flu vaccine could eliminate the need for annual vaccinations
• If this vaccine is successful then global productivity could see a material benefit along with reduced healthcare costs.
Tube strike rescheduled for 8th & 10th September
• Nice of those lowlife union officials to move the strike to dates when they can disrupt even more journey’s for hardworking Londoners
Economic News
US – Dennis Lockhart, a voting FOMC member and the president of the Atlanta Fed, sticks with the view the Fed should start raising rates this year.
• Next FOMC meeting is on Sep 16-17.
• Economic news due today:
o Jun S&P/CS property index (+0.1%mom/+5.1%yoy v -0.2%mom/4.9%yoy), Aug Markit services PMI (55.1 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)
China – Equities continued to fall marking the sharpest four-day decline since 1996 on expectations the government will not be looking to provide market support measures.
• Shanghai Composite Index declined 7.6% on the day taking total losses to 22% in the last four days.
• The currency continued to depreciate with the PBoC setting the midpoint rate at 6.399 per USD, 0.2% weaker than the previous fix of 6.386.
Germany – Ifo business confidence and current situation indices measuring economic sentiment among German executives beat expectations posting an increase in Aug.
• Business confidence: 108.3 v 108.0 in Jul and 107.6 forecast.
• Current situation: 114.8 v 113.9 in Jul and 113.9 forecast.
• Final Q2 GDP growth numbers come in line with expectations (+0.4%qoq/+1.6%yoy, co change from preliminary readings) driven by exports.
China Metals Exchange boss abducted by angry investors in dawn raid
• Hundreds of investors grabbed Shan Jiuliang, head of a minor metals exchange in China and handed him over to police.
• The Fanya Metals Exchange had raised funds to buy minor metals such as Indium and Bismuth to support financial products by offering high interest and highly liquid products.
• When metals prices pulled back the investment schemes effectively collapsed. The exchange was backed by a number of minor metals mining companies based in China.
• The exchange bought several year’s worth of supply for some minor metals and had paid premium prices. Traders are reported to be pushing prices of these metals lower in anticipation of forced selling of the exchange’s stockpiles.
• This might be a great time for China’s State Reserve Bureau ‘SRB’ to step in, to rescue investors and acquire cheap metal
• We suspect the exchange may be holding some of the more common Rare Earth Elements.
Currencies
US$1.1549/eur vs 1.1483/eur last week. Yen 119.66/$ vs 120.50/$. SAr 13.117/$ vs 13.208/$. $1.580/gbp vs 1.571/gbp
US$0.719/aud vs 0.725/aud - Yen and Euro continues to rise as Chinese shares continue their collapse, many by their daily 10% limit
• US dollar weakness continues on expectations for postponement of Fed rate rise
• South African rand smashed through key resistance levels yesterday in significant weakening of the currency despite USD weakness
Commodity News
Precious metals:
Gold US$1,148/oz vs US$1,156/oz
Platinum US$986/oz vs US$999/oz
Palladium US$555/oz vs US$590/oz
Silver US$14.79/oz vs US$15.06/oz
Base metals:
Copper US$ 4,955/t vs US$4,932/t - Chinese copper ore and concentrates imports fell slightly in Jul but remain 10.8% up in the first seven months of the year.
• Weaker shipments in Jul (-2.3%mom/+7.2%yoy) were led by lower deliveries from Chile (-12%mom/+52.3%yoy) and Australia (-51%mom/-46.7%yoy).
Aluminium US$ 1,538/t vs US$1,525/t
Nickel US$ 9,490/t unch vs US$9,715/t
Zinc US$ 1,719/t vs US$1,731/t
Lead US$ 1,658/t vs US$1,649/t
Tin US$ 14,195/t vs US$14,700/t
Energy:
Oil US$43.40/bbl vs US$43.80/bbl
Natural Gas US$2.670/mmbtu vs US$2.637/mmbtu
Uranium US$36.50/lb unch vs US$36.40/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$54.7/t unch vs US$54.8t –
Thermal Coal $51.5 vs $51.6 cif ARA Europe –
Other:
Tungsten - APT European prices $203/mtu (range $196-210/mtu) vs $205.0/mtu last week
Company News
Antofagasta (LON:ANTO) 555p, Mkt Cap £5.47bn – Half Year Results
• Antofagasta reports a 31% drop in first half revenues to $1,786m as a result of a 15.5% reduction in copper sales volumes (resulting from shipping delays due to adverse weather combined with reduced commodity prices for copper and by-product metals. Copper prices were down 17% at $2.51/lb.
• Copper production was also adversely affected by lower production at Los Pelambres, where the impact of lower grades were exacerbated by the actions of protesters which resulted in the loss of some 8000 tonnes of copper production during Q1.
• The company is maintaining its previously announced reduced production guidance of 665,000 tonnes of copper production for 2015.
• Cash costs of US$1.88/lb are in line with 2014 and overall operating costs of $1,224m were $284m (19%) lower than in 2014 with $198m ascribed to cost reduction and the balance of $86m resulting from volume reduction.
• EBITDA declined by US$ 48.6% to US$561.6m as a result of the lower revenues, partially offset by the cost reductions.
• Operating cash flow of US$808m declined by 31% but aided by the $947m sale of the Water Division, Aguas de Antofagasta, the balance sheet remains strong with attributable net cash of $1,031m after capital expenditure of $596m (down 22% from $767m in H1 2014).
• Antofagasta has declared an interim dividend of 3.1 cents/share (2014 11.7 cents/share) representing a 35% payout of the 8.8 cents of earnings (2014 31.2 cents/share) from continuing operations.
• The new 70% owned Antucoya copper oxide mine, located approximately 45 km east of the Michill operation, is currently being commissioned with initial production expected towards the end of Q3. The $1.9bn project remains within budget with total capital expenditure up to 30th June 2015 reported as $1.8bn.
• The expansion of the Centinella concentrator to 105,000 tpd capacity is continuing and although the project has been delayed due to the unexpectedly heavy rains in the Atacama Desert during March, the project is now expected to be completed early in 2016. Capital expenditure on the expansion project amounted to $413m as of 30th June – approximately 80% of the total $520m budget.
• Antofagasta is also evaluating and reviewing a further expansion at Centinella via the construction of a second 90,000tpd concentrator starting in 2019 to deliver an additional 140,000 tpa of copper production with 150,000 oz pa of gold and 3000 tpa of molybdenum at a pre-feasibility capital cost estimate of $2.7bn.
• The company is also evaluating a possible “brownfield” expansion of the Los Pelambres mine which would increase the daily ore throughput from the current 175,000 tonne rate to 205,000 tonnes at a cost of $1.6bn to increase annual copper production by 90-95,000 tonnes.
Conclusion: Antofagasta has been impacted by the weaker commodity prices but has a strong balance sheet to withstand this phase of the commodity cycle. A pipeline of expansion projects positions the company to “maintain our competitive position in this challenging environment and when the copper cycle begins to recover, we will enjoy healthy margin growth.”
BHP Billiton (LON:BLT) 10.01 pence, Mkt Cap £55bn – Cost savings support drive to maintain 50% EBITDA margin
• BHP are making the best out of a worsening environment.
• The sale of South 32 ejected some higher cost assets back on 18th May and the divestment of some US oil and fracking assets is also helping to maintain margins.
• Some serious cost cutting slashed $2.7bn off BHP’s enlarged cost base realising some $4bn in annualised cost savings when combined with unit productivity benefits.
• Underlying attributable profit came in at $6.4bn matching the consensus forecast for £4bn of earnings. Attributable profit fell to $1.91bn including $1.6bn losses from discontinued operations and $2.9bn of exceptional items.
• Earnings are forecast to fall to £3bn for the next financial year but could fall further given the company’s sensitivity to lower oil, iron ore and copper prices. We would expect the market to downgrade expectations for FY H1 2016 and for the full year unless there is a marked recovery in commodity prices.
• Sensitivities: given that commodities prices are significantly lower than those seen over the past 12 months to end June, BHP will see some further negative impact.
• Oil prices if maintained at current levels are $9/bbl lower than the $68/bbl seen by BHP for the past year. This could knock some $1.3bn off earnings though the sale of a number of higher cost assets should help offset this impact.
• Iron ore prices are around $6/t lower than the average for last year though the company reckon they will cut iron ore costs to $15/t from $19/t. The result is for a potential approximate $296m hit to the division.
• Copper prices are significantly lower than seen in BHP’s last financial year resulting in a potential negative adjustment of $1.6bn. Management are focussed on cutting costs with a 15% potential cost reduction at Escondida.
• Dividend: BHP have increased the dividend in accordance with their progressive dividend policy. There is no suggestion this is under threat just yet but dividends will come at the expense of lower capital investment in the group
Conclusion: There will be some gains to be made from weaker currencies, particularly a weaker Australian dollar and Chilean peso and we do expect to see further significant benefit from corporate cost initiatives. Management have done well to maintain EBITDA margins at >50% but will struggle in today’s lower commodity price environment. BHP remains a leading miner with an exceptional low cost base.
Fortescue – suffers 88% fall in profits
• Fortescue and other higher cost iron ore miners are suffering in this lower price environment for iron ore.
• The miner which is known for its higher cost production was always going to be a casualty of the race to grab market share by the big three iron ore majors.
• Fortescue is cutting costs and capex but may also have to restructure debt and raise new cash to survive a prolonged period at current price levels though Fortescue’s ceo, comments the company is very comfortable in its ability to meet its debt commitments.
• But if iron ore prices fall to average $40/t then Fortescue could face a $5bn shortfall in 2019.
• Fortescue reckons it can cut its direct mining and processing costs to a third of levels seen in 2012, a move which might be very necessary for corporate survival.
• The fall in the Australian dollar will help Fortescue in the meantime as will much needed deflation in mining sector costs across Australia.
Ortac Resources* (LON:OTC) 0.055p, Mkt Cap £1.9m – Ortac exercising Zamsort Call Option
• Ortac reports that it has now exercised its call option with the private Zambian mining and exploration company, Zamsort for a further US$600,000 of Secured Convertible Loan Notes (the No. 2 Loan Notes).
• As with the previous Loan Notes, these pay an annual interest rate of 8% and “upon conversion of the loan notes, Ortac’s potential shareholding in Zamsort would be 19.35% of the issued share capital of Zamsort.” Ortac is in discussions with Zamsort to potentially increase its interest further.
• Ortac has now invested a total of $1.2m in Zamsort which hold a prospective copper/cobalt mining and exploration licence at Kalaba in north-west Zambia some 40 km from First Quantaum Minerals’ Trident project.
• Zamsort has renewed the small scale mining licence over a 4 sq km area within the wider exploration area of 999 sq km and is engaging a drilling contractor to complete diamond and reverse circulation drilling over the area proposed to be mined over the next 2 years in order to gain increased confidence in the mineral resource.
• The current resource estimate, which has been prepared internally by Zamsort and does not meet the international reporting standards (though it has been registered with the Zambian Geological Survey and Ministry of Mines) stands at 16.59m tonnes at an average grade of 0.94% copper equivalent.
• Metallurgical testing is underway at the Copperbelt University in Kitwe and terms from a preferred mining contractor are being assessed.
• In the wider licence area, the company has prepared a programme of geochemical sampling and drilling “to test and confirm the targets previously identified by former operators.”
Conclusion: Ortac has been actively following up on its initial investment in Zamsort and is clearly sufficiently impressed to be increasing its investment.
*SP Angel acts as Nomad and broker to Ortac Resources
Polymetal International (LON:POLY) 467p, Mkt cap £1,997m - Semi-annual results highlight a12%/16%yoy reduction in TCC/AISC
• Revenue fell 11%yoy to US$648m on the back of weaker gold (-7%yoy) and silver (-18%yoy) prices with gold and silver sales little changed.
• TCC fell to US$552/oz (of gold equivalent), down 12%yoy, driven by a significant depreciation in USDRUB rate and operational efficiencies.
• AISC declined 16%yoy to US$786/oz benefiting from lower TCC and a reduction in exploration and maintenance capex at operating mines.
• Adj EBITDA totalled US$297m, down 4%yoy, with EBITDA margin improving to 46% (H1/14: 43%) on lower operating costs.
• Underlying Net Income came in at US$118m, down 5%yoy.
• Underlying EPS was at 28cents, up from 26cents in H1/14.
• An interim dividend declared of 8c/sh representing 30% of Underlying EPS.
• FCF totalled US$77m versus US$29m in H1/14 with H2/15 cash flow generation expected to further improve on stronger sales including de-stockpiling at Mayskoye and weaker USDRUB.
• Annual production guidance reiterated at 1.35moz GE with TCC/AISC brought down by US$50/oz from previous estimates to US$525-575/oz and US$700-750/oz, respectively.
• Net debt closed at US$1,231m, down US$18m from YE14, as of Jun/15.
Premier African Minerals (LON:PREM) 1.7p, Mkt Cap £11.6m – RHA plant modifications complete
• Premier African Minerals has provided an update on the progress of its RHA tungsten operation in Zimbabwe.
• The company has now implemented previously announced modifications to the process plant which are intended to deliver the design capacity of 16 tph of ore at a mean diluted feed grade of 0.8% tungsten trioxide and produce 5,800 mtu of tungsten concentrate per month. [An mtu or metric tonne unit represents 10kg of product].
• The company is now exploring “the upper tonnage limits of the plant in excess of 16 tons per hour”.
• Shipments of concentrate are expected to resume from 28th August following the plant modifications.
• The modifications are anticipated to produce an increased “percentage of higher grade fines concentrate over the coarse concentrate, with a probable overall increase of total tonnage of concentrate produced.” We suspect that this strategy may result in reduced overall recovery rates, although with the high feed grades planned for the RHA plant this may well be a worthwhile trade off.
• The company also comments that it is able to set up its plant to produce grades of tungsten trioxide concentrate ranging from below 50% to “marginally in excess of 70%” and that it is targeting output at the lower grade as it considers that in the present pricing regime “any penalty for any lower grade concentrate is more than offset by the benefits of lower production costs and a greater tonnage of concentrate produced”.
• At the current price of the benchmark APT (ammonium paratungstate) of US$203/mtu, the company believes that it can secure a concentrate price, after discounts, of between $120-130/mtu implying a discount of 35-40%. Although the exact level of discounts are seldom disclosed for reasons of commercial confidentiality, this discount is larger than the 20-25% discount generally assumed for higher (65%) grade concentrates.
Conclusion: Premier African Minerals is in the process of getting its RHA tungsten concentrate plant up and running and following plant modifications is looking at producing larger volumes of lower grade concentrate to address the impact of lower benchmark prices.
Sirius Minerals (LON:SXX) 16.25p, Mkt cap £359m - Four of five decision notices received with the final one expected before the end of Sep/15
• Decision notices formally approving submitted planning applications are being received by Sirius.
• Four of five notices have been received so far including:
• The mine and mineral transport system (MTS) approval from RCBC (Redcar and Cleveland Borough Council);
• The material handling facility (MHF) from RCBC;
• Accommodation and a Park and ride facility from Scarborough Borough Council;
• Operational Park and ride facility from the NYMNPA (North York Mors National Park Authority)
• The mine and MTS decision notice from the NYMNPA should be arriving before the end of Sep/15 following a successful ruling on the application in Jul/15.
• The remaining application permission outstanding is for the harbour facilities at Teesside and is currently with the Planning Inspectorate under review. The final decision is due no later than summer 2016. The permit should not affect the development schedule for the York Potash Project.