Fed holds rates on Chinese slowdown and low US inflation
• The Federal Reserve has elected to hold rates at low levels for now due to the impact of slowing Chinese demand on US industry
• The impact is two fold, US companies are exporting less into China and Chinese companies are now trying to export more to the US and the rest of the world
• China is trying to adjust to a lower rate of growth, ‘a new normal’ but appears to be suffering a potentially ‘severe economic slowdown’ as it makes this adjustment
• We are waiting for news and evidence of new Chinese fiscal stimulus to reinvigorate infrastructure projects such as domestic and overseas road and rail projects
• The drive against corruption combined with provincial debt issues appears to has served to slow many projects and may prevent others from gaining relevant permits
• China’s stock market collapse is likely to exacerbate the slowdown by denying financial support to other domestic investors and entrepreneurs
• China is loosening monetary policy to compensate including relaxing regulations on inward investment but it takes time for these measures to take effect and slower growth rates may make inward investment look less attractive.
• The next Fed meeting is set for October 27-28 Oct
Economic News
US – The Fed kept rates on hold on the back of concerns over developments in China and emerging markets as well as weakening export sector.
• In addition, expectations for Fed funds rate as of year end have been revised downwards:
o YE15: 0.375% v 0.625%
o YE16: 1.375% v 1.625% (one member submitted an estimate for a <0% rate)
o YE17: 2.625% v 2.875%
o As suggested by FOMC members’ estimates, one rate increase before YE remains on the cards.
o Unlike the October meeting the December vote (15-16 Dec) will be followed by a press conference by the Chair.
o Three major indices hit session highs on the announcement before giving up gains and closing in the red for the day.
o Bond yields fell on the news while gold prices were up >US$10/oz.
o In a property market, building permits recorded a better than expected rebound through Aug following a sharp decline in Jul (+3.5%mom v -15.5%mom in Jul and +2.5%mom forecast).
o Housing starts continued to slide in Aug albeit at a slower rate (-3.0%mom v -4.1%mom in Jul and -3.8%mom forecast).
o In a labour market, weekly jobless claims fell to the lowest in eight weeks (264k v 275k in the previous week and no change forecast).
China – The number of cities where property prices increased mom last month climbed to 35 out of 70, up from 31 recorded in Jul.
• However, the growth rate was more than compensated by falling prices elsewhere with the total decline of 2.3%yoy in Aug compared to -3.7% in Jul.
• The declines have now narrowed for the fourth month in a row and the rate of decline is the smallest since Sep/14.
Germany – Inflow of refugees into Germany may add 0.6% to GDP by end 2020 and cut inflationary pressures by 0.2pp to 1.6%, on Oxford Economics estimates.
• Although “it would not solve the economy’s longer-term demographic problems”.
• A revision comes on top of previously forecast net migration of 1.3m between 2015 and 2017, while new estimates put an influx to 800k in 2015 alone.
New Zealand – government blocks Chinese company from buying farm in New Zealand
• We are not surprised to see New Zealand protect the ownership of its farms but wonder what retaliation the Chinese might take in banning NZ products from China
• Craigmore Farming which invests in and operates a multi farm portfolio of farms in New Zealand is another way to invest in NZ farming
Currencies
US$1.1420/eur vs 1.1327/eur yesterday. Yen 119.41/$ vs 120.92/$. SAr 13.248/$ vs 13.332/$. $1.558/gbp vs 1.549/gbp
0.723/aud unch vs 0.717/aud
Commodity News
Precious metals:
Gold US$1,129/oz vs US$1,119/oz yesterday
Platinum US$977/oz vs US$966/oz yesterday
Palladium US$607/oz vs US$609/oz yesterday
Silver US$15.11/oz vs US$14.90/oz yesterday
Base metals:
Copper US$ 5,344/t vs US$5,367/t yesterday - Codelco is restarting its open pit Andina mine (240ktpa capacity) after completing inspections of operations following an earthquake recorded off Chilean coast.
• Antofagasta is also expected to progressively restart its 400ktpa Los Pelambres mine.
Aluminium US$ 1,625/t vs US$1,614/t yesterday
Nickel US$ 9,895/t vs US$9,945/t yesterday
Zinc US$ 1,725/t vs US$1,725/t yesterday
Lead US$ 1,711/t vs US$1,715/t yesterday
Tin US$ 14,950/t vs US$15,640/t yesterday
Energy:
Oil US$48.80/bbl vs US$49.26/bbl yesterday -
Natural Gas US$2.643/mmbtu vs US$2.661/mmbtu yesterday
Uranium US$37.25/lb unch vs US$37.25/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$56.4/t vs US$56.2/t
Thermal coal (1st year forward cif ARA) US$50.65/t vs US$51.15/t yesterday
Other:
Tungsten - APT European prices fall further to $180/190 per mtu from $185/195 last Friday
Tungsten – Tesla signs up deal with Pure Energy Minerals to supply lithium hydroxide
• Pure Energy Minerals is developing a lithium brine mine and processing facility in Nevada just three hours drive from Tesla’s Gigafactory
• The first phase of the Gigafactory construction is planned for completion next year in joint venture with Panasonic
• The deal is similar to that signed with Bacanora Minerals in August to take lithium carbonate from Bacanora’s lithium clay mine in Mexico
• Pure Energy Minerals is proposing to produce lithium from brines in the same basin as Albermarble Corporation’s silver peak mine.
Company News
Metals Exploration (LON:MTL) 3.627 pence, Mkt Cap £49.8m – Update on Funding and Commissioning
• In August this year the company announced a potential working capital funding gap as a result of a longer than expected timeframe to secure operational permits.
• The company is to raise US$5m through an issue of 108,033,333 shares at a price of 3 pence.
• The company also intends to launch an open offer for a further 100m shares at a price of 3 price for qualifying shareholders.
• A further US$5m in loan notes could potentially be issued before 31 October 2015 as a contingency instrument.
• Construction of the plant is now complete and the tailings dam and related infrastructure is expected to be completed by the end of September 2015.
• Funds have been raised as a working capital buffer while operational and occupancy permits are being sought.
• This process has taken longer than envisaged.
Conclusion: As flagged in their August announcement, operational permits are taking longer than expected and the company have raised funds through a placement to act as a working capital buffer. Further funds are expected to be raised through a loan note with an open offer also now in place.
Petra Diamonds (LON:PDL) 108 pence, Mkt Cap £560m – Preliminary Results and Maiden Dividend
• FY 2015 saw top line numbers in line with downgraded expectations at US$425m down 10% from US$471.8m.
• Adjusted EBITDA at US$139.3m down 26% from FY 2014 – this is below our projections of US$164m.
• Operating costs were in line with last year at US$272.7m against US$277.4m against our forecast of US$245.1m.
• Adjusted operating cash flow of down 22% to US$141.3m against our forecast of US$162m.
• A maiden dividend of 3 US$ cents has been declared giving them a yield of 1.8%.
• Cash at the end of the period stood at US$166.6m with net debt of US$171.7m.
• Diamond price outlook remains weak resulting in potential lowering of guidance for pricing going forward.
Conclusion: The 2015 number should not be a surprise to the market. The maiden dividend is helpful and should give holders of the shares some support. The key is outlook for diamond pricing which the company say continues to be weak. This risks downgrades to 2016 pricing which currently remain flat on downgraded expectations for 2015. Our projected EBITDA is currently around US$187m putting it on a forward EV/EBITDA of 5.5x making the shares looks cheap prior to any potential downgrades on the pricing outlook.
The shares have been de-rated significantly as a result of disappointments in meeting guidance in 2015 against falling prices in diamonds. We do not see the shares going ex-growth here with scope for cash flows to support the value.
Wolf Minerals (LON:WLFE) 16 pence, Mkt Cap £129.5m – Official mine opening
• Wolf Minerals has completed an official opening ceremony for its Hemerdon tungsten project in Devon. The event was attended by more than 200 guests including local and international dignitaries, Government officials, regulators and shareholders.
• The company has invested more than £140m in the project, which they note is the first major metal mine development in the UK for 45 years (we believe that this was the Wheal Jane tin mine in Cornwall), and completed mine and plant construction on schedule within 18 months.
• The benchmark price for the intermediate ammonium paratungstate (APT) product currently stands at US$185/metric tonne unit and has fallen by almost 40% this year and approximately halved since construction began.
• The western world’s largest tungsten producer, North American Tungsten, which operates the Cantung mine in the North West Territories of Canada is currently trading under the protection of the Companies’ Creditor Arrangement Act and soliciting offers to sell its assets. North American Tungsten attributes its problems to the combination of the low commodity price, operational issues, insufficient capitalisation and high debt service payments.
• The current deadline for offers for NATC’s assets is 30th September suggesting that Hemerdon, which with planned annual production around 345,000 mtu of tungsten trioxide in concentrate is a larger producer than Cantung’s 275,000 mtu production in 2014, could be coming into production at a pivotal time for the international tungsten industry.
Conclusion: The Wolf Minerals team have successfully delivered a major new tungsten mine at a time when, despite the current weakness in commodity prices, there may soon be a real opportunity to assume leadership of the western world’s tungsten industry.