China – base metals steady despite sales to cover margins in China
Precious metals pull back as crisis unfolds. Fear of contagion may push gold higher
• China cut interest rates yesterday by 0.25bp to 4.6% to help the broader economy work through effects of stock market correction
• Policy makers have given support to equities and are now focussing their attention on support for the underlying economy.
• We see China’s stock market moves and the economy as ‘not’ so well correlated but there is strong potential for a collapsed stock market to slow domestic consumption and GDP growth
• China has spent around $200bn supporting equities and another estimated $200bn on currency support with little impact other than bailing out investors.
• Oil and precious metals fell again with oil hammered down by oversupply and gold sold to cover margin calls
• Growth in China is likely to slow further and this will impact the global economy particularly if China exports more low cost goods as domestic demand falls
• We suspect the Chinese authorities have decided to let the market find its own level. They have given investors sufficient time to bail out and any remaining sellers were either too slow or are possibly larger stockholders who shouldn’t be selling into the market under its current restrictions. As they say, Beijing is a long way away!
• Repricing of assets looks natural in China as the market finds a better fundamentally supported level.
Oil – ‘the best cure for low oil prices is low oil prices’,
Yes, it’s our favourite expression for this market
• Some observers seem surprised that Saudi Arabia is continuing to oversupply the market with oil.
• The strategy seems clear, to drive down oil prices with oversupply till higher cost producers collapse at which point OPEC will be better able to manipulate prices higher
• The major iron ore producers have a similar strategy but without the ability to use a cartel to manipulate prices higher again.
• There are other political benefits to low oil prices, Russia which supported conflict in Syria and Ukraine, is heading for economic collapse and low oil prices are helping Western nations to recover economic growth with lower energy costs and low inflation.
• High oil prices accelerated the drive towards alternative power sources, electric cars etc.. now low oil prices are needed to draw consumers back to oil products
Panama – the Panama Canal is reported to have sprung a leak and it’s going to take more than a small Dutch boy to fix this one
Economic News
US – Consumer confidence at the highest level since Jan according to the Aug Conference Board report.
• The index climbed to 101.5 this month, from 91.0 in Jul and 93.4 forecast, led by strengthening labour market.
• With the survey completed before Aug 13, results do not include recent developments in wold financial markets.
• On a separate note, new home sales posted a 5.4%mom increase in Jul, recovering from a 7.7%mom decline in Jun.
• Property prices’ growth slowed down in Jun with the S&P/CS index up 4.97%yoy v +4.99%yoy in May and +5.10%yoy forecast.
• Markit services/composite PMIs: 55.2/55.0 in Jul v 55.7/55.7 in Jun.
• Economic news due today:
o Jul durable goods/ex transport (-0.4%mom/+0.3%mom v +3.4%mom/+0.6%mom in Jun), Jul capital goods orders ex air/defence (+0.3%mom v +0.7%mom in Jun)
China – A lending rate and reserve requirement ratio (RRR) cuts fail to return confidence in Chinese equity markets.
• The PBoC yesterday announced it will cut the one-year lending rate 25bp to 4.6% and decrease the RRR by 50bp to 18% for most big banks.
• More than 1tn CNY (US$156bn) worth of outstanding margin loans have been closed on the Shanghai and Shenzhen exchanges from the Jun peak of 2.27tn CNY.
• Consumer sentiment hit the highest level since May/14 in Aug; although, the study was carried before the CNY devaluation on Aug 11 and a subsequent sell-off in equity markets.
• The Westpac MNI China Consumer Sentiment Indicator: 116.5, up 2.0 points from Jul.
Japan – Small and medium sized businesses’ confidence came in at 48.8 in Aug highlighting challenging outlook for the sector.
• The last time the measure have been seen above 50 was back in Mar/14, a month before th government hiked the sales tax to 8% from previous 5%.
Switzerland – Market expectations for the economy to have slipped into recession in Q2/15 on the back of stronger currency weighing on exports and weak manufacturing growth.
• Estimates are for a 0.1%qoq contraction following a 0.2%qoq decline in Q1/15.
• The data are due on Friday.
Currencies
US$1.1506/eur vs 1.1549/eur last week. Yen 119.41/$ vs 119.66/$. SAr 13.157/$ vs 13.117/$. $1.569/gbp vs 1.580/gbp
US$0.712/aud vs 0.719/aud - Any delay to the US Fed rate rise may stem the flow of funds into the use and allow the US dollar to weaken
Commodity News
The EU is reported to be investigating ‘anticompetitive behaviour in precious metals spot trading’
• Maybe the EU would like to investigate Gordon Brown’s sale of gold into the spot market in a series of very public auctions
• Perhaps also the EU could look into the manipulation of copper prices lower in the recent bear raid, blamed on a series of leveraged Chinese funds.
• The gold market has moved on, so maybe the EU could investigate something more current and more relevant to global markets.
Precious metals:
Gold US$1,138/oz vs US$1,148/oz
Platinum US$982/oz vs US$986/oz
Palladium US$538/oz vs US$555/oz
Silver US$14.54/oz vs US$14.79/oz
Base metals:
Copper US$ 4,992/t vs US$4,955/t -
Aluminium US$ 1,543/t vs US$1,538/t
Nickel US$ 9,495/t unch vs US$9,490/t
Zinc US$ 1,712/t vs US$1,719/t –
• Chinese zinc demand will continue growing but at a slowing rate given large per capita consumption base and the transformation in the nation’s steel industry, according to China Nonferrous Metals Industy Association (CNIA).
• Local demand per capita is already more than double global per capita consumption suggesting it would be hard to sustain growth rates recorded in previous years.
• “Annual consumption of zinc was 14.2% in 2000-2010 and then fell to 6.4% in 2010-2014,” the CNIA said.
• The CNIA says China is past its steel production peak with estimates for steel demand to range between 680-700mt through 2016-2020. This compares with 738mt consumed in 2014.
• Weaker steel production/demand will weigh on demand for galvanized steel products, accounting for c. 60% of China’s total zinc consumption.
• Zinc demand to grow 3.1%yoy to 6.55mt this year with production to post 12.5%yoy increase to 6.3mt.
Lead US$ 1,654/t vs US$1,658/t
• Chinese production is expected to remain stable through 2015 as a drop in primary supply (-3.7%yoy, 3.06mt) is likely to be compensated by an increase in recycled lead output (+7.5%yoy to 1.65mt) on CNIA numbers.
• Lead demand is expected to climb 2%yoy to 5.05mt.
Tin US$ 14,050/t vs US$14,195/t
Energy:
Oil US$43.10/bbl vs US$43.40/bbl
Natural Gas US$2.686/mmbtu vs US$2.670/mmbtu
Uranium US$36.65/lb unch vs US$36.50/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$54.9/t unch vs US$54.7t –
Thermal Coal $51.8 vs $51.5 cif ARA Europe –
Other:
Tungsten - APT European prices $203/mtu (range $196-210/mtu) vs $205.0/mtu last week
Company News
Junior miners – weathering financial storms
• There has been much talk about the impact of lower commodity prices on the earnings of large cap miners over the past week but what of the junior miners?
• Juniors are as much affected by market sentiment as by lower metals prices and one could argue that the majors have been catching up with the juniors on the downside.
• Smaller mining companies are seeing substantial benefits from lower currency levels in commodity producing regions with gold mining likely to see some resurgence in Australia and South Africa.
• FOREX: the South African rand, Australian dollar, Chile Peso etc have all fallen dramatically with the fall in major commodity prices
• OIL: lower oil and related energy prices are also a great benefit for remote mining companies with fuel often accounting for a third of all operating costs. Oil prices are now just 42% of where they were yoy.
• Cost reductions: The South African rand has fallen 24% yoy and the Aussie dollar is also 23% lower yoy. Other inputs like reagents and services should have also fallen in price indicating to us that miners could, and we emphasise could in theory slash around a third off their cost base with relatively little effort. Many juniors have already pared their cost base and are well incentivised to keep costs down.
• Explorers: many junior explorers should be more affected by the longer term outlook, where BHP and Glencore recently reaffirmed positive forecasts for demand growth. Sentiment affects the availability of finance but the London market has been robust in its support of junior miners despite an understandable lack of interest from the major institutions. New, expert, funds have sprung up with mandates for longer-term mine financing and these are now supporting projects which offer value and near term cash flow potential.
• Gold stocks make up a large part of the Junior sector and picked up with the rise in gold price. Demand for physical gold is strong as seen in recent figures but the paper market has failed to recoup recent losses despite financial chaos in Shanghai Equities and its potential contagion into other financial and business areas.
• Gold is generally sold off at the start of a crisis as the metal is sold to cover margin calls and repay leverage on falling stocks. The metal then tends to pick up as investors look for safe haven investments with gold used as for both short term and longer term investment. We believe we are still on the starting blocks of a potential crisis.
Conclusion: With BHP suffering from lower oil, copper and iron ore prices and Glencore having a tough time in base metals and Agriculture we are of the view that many smaller miners are less affected. Commission a mine right now will be tough going but most mines take on price protection to protect prices and cash flows for debt repayment through their early years. While this low in metals prices is tough on the profits of the large and mid-cap producing miners like First Quantum many small-caps which are looking to develop new mines will be looking ahead to better commodity prices and a better financing environment going forward.
Asiamet Resources (formerly Kalimantan Gold) (LON:ARS) 1.3 pence, Mkt Cap £6.5m – Shallow zone of high grade copper mineralisation at Beruang Kanan
• Asiamet Resources reports that its current drilling programme identified a zone of shallow, high grade copper mineralisation, which may allow the company to develop a low-stripping ratio starter pit within its Beruang Kanan copper project in Central Kalimantan.
• Assays from hole BKM31850-02 show an 11 metres wide section at an average grade of 2.96% copper from a depth of 6 metres, including 2m at an average grade of 9.26% copper. This intersection displays similar mineralisation to that encountered approximately 125m further south in hole BK058 and “Significantly, the continuity of strong near-surface mineralisation previously reported in historical drill holes BK02 (93m @0.75% Cu, …) and BK03 (79m @0.89% Cu ) has been confirmed in drill holes BKM32550-03 … and BKM32550-04two individual intersections and drill hole BKM32550-04 (125.3mEOH) reported three individual intersections of moderate to high grade copper mineralisation.”
• Follow up drilling is underway at a closer drilling density to improve confidence in this newly identified high grade zone.
• This drilling is part of a planned 6,500 metres, 80 holes resource evaluation drilling programme which is now almost 70% complete with 53 holes totalling 4425.5m drilled to date. The programme is now expected to be completed by mid-September, two months ahead of schedule. As a result, the company is expecting to complete an update to its resources estimate by “late September or early October”. Scout drilling of the BKS, BKW and BKZ targets will continue during September using a single rig.
Conclusion: The discovery of a near surface zone of copper mineralisation has positive implications for the economics of a future mine development project at Beruang Kanan if it can provide a high grade starter pit with a low stripping ratio. Management is taking a prudent approach in following up this zone with a closer spaced drilling pattern which should be able to establish the continuity of mineralisation. We look forward to further drilling results and to the forthcoming resource update.
Herencia Resources (LON:HER) 0.135p, Mkt Cap £5.1m – Additional copper mineralisation identified at Picachos
• Herencia Resources has announced that a programme of geological and structural mapping, sampling to the east of the 40M Shaft and Santa Rosa mine and XRF surface sampling on its Picachos Project in Chile has confirmed shallow copper mineralisation over a strike length of more than 1200 metres. Much of the mineralisation is located within or close to the proposed Picachos open pit.
• Additional mapping of old mine workings and the recent surface exploration programmes appears to “confirm the continuity, at shallow levels, of the copper grades seen in diamond drill hole DDH14003 which returned 117m at 1.14% copper from 182m”. Herencia Resources is optimistic that the deeper level mineralisation encountered in drilling “can extend all the way to surface”.
• The results of the sampling and of the structural interpretation also show that “the area of the proposed open pit immediately to the east of the 40M shaft which was previously modelled as waste could be potential high grade mineralisation”.
Conclusion: Herencia Resources exploration continues to locate additional mineralisation at Picachos and is fast tracking mine development with an objective of starting production during H2 this year. As the reinterpretation of an area previously thought to contain waste shows, the limits of the mineralisation have yet to be established, however, and this may make mine planning difficult if the company is to avoid sterilising areas which subsequently prove to be mineralised.
International Ferro Metals* (LON:IFL) – Stock suspended pending news.
• International Ferro Metals Limited (IFL) confirms that the Financial Conduct Authority (FCA) has granted a suspension of the listing of its fully paid ordinary shares (IFL Shares) on the Official List with effect from 7.30am on 26 August 2015. The IFL Shares will be suspended from trading on the main market of the London Stock Exchange with effect from the same date and time.
• A further announcement will be made in due course.
*SP Angel act as broker to IFL