Gold - US$1,135/oz – may rise on new QE and further delay in interest rate rises
• The environment may soon be set for a new rise in gold prices
• Commodity prices have pulled back in response to falling demand for raw materials as infrastructure and construction projects stall and emerging market currencies collapse
• Potential fiscal stimulus in China, talk of a potential fourth round of QE in the US and the FED’s delay to raising interest rates mark a downturn in sentiment
• A major part of the problem is an uncertain outlook created by the outlook for higher interest rates and the impact that will have on consumers and therefore ongoing demand
Equipment manufacturers report falling sales in construction machinery as JCB cuts 400 jobs due to collapse in emerging market demand
• JCB report a collapse in demand for diggers and related JCB machinery by 70% in Russia, 36% in Brazil, 47% in China and 26% in France
• The company report a 'Huge wave of uncertainty' with even strong growth in the UK and North America softening as confidence in the outlook falls.
• Part of the problem lies with central banks and the uncertainty created by potential interest rate rises.
• Builders and their financiers want greater certainty before committing to the construction of projects which will not come on stream for two ore more years.
• Russia, Brazil and China have country specific issues but the softening in confidence elsewhere may be as much of a problem as the collapse in these markets.
• Russia is under sanction for its role in the Ukraine and the Rouble has collapsed, it has also stopped buying French cheese and other European produce in retaliation.
• CAT which had $55bn of sales last year also report an 11% fall in machinery sales for the three months to end August yoy, in line with the fall seen for the rolling three months to end July.
• CAT sales fell 5% in its home market of North America but were flat in Europe, Africa and the Middle East which is quite impressive. Sales in Asia fell 29% while Latin American sales fell by 33%.
• Energy & Transportation sales continued to underperform with a deterioration in sales through August with sales down by 21% for the three months to end August yoy. Industrial sales were steady at -16% lower yoy but Power Generation fell by -14%, Transportation was -38% lower and Oil & Gas was -20% down.
• Some of CAT’s fall is due to aggressive sales by Komatsu driven by a weaker Yen and not helped by a stronger US dollar. CAT’s strong position in the Mining sector is not helped by the collapse in commodity prices and the suspension of some existing and planned mining operations.
• Komatsu also report sluggish sales following a very respectable 1.1% increase in net sales in Yen terms for the full year to end March this year. Komatsu also report slowing sales due to the slump in China. The Komatsu ceo reports that customers do not want to order equipment till after they see projects are underway. Hitachi Construction Machinery Co also report that demand for excavators is running at almost 50% below levels seen a year ago.
• Komatsu report that demand for mini excavators used mainly for housebuilding and small civil engineering works in urban areas is relatively good but weak demand for larger excavators as full-scale construction works stall.
• FOREX: The worst sales falls are in countries which has also seen significant currency depreciation making imported machinery very much more expensive. While this may favour local producers we feel the currency devaluation also serves to stall local projects. In the case of China construction demand stalled well before the devaluation of the currency. France, sadly, could not collapse its currency with a stronger German economy maintaining a strong Euro.
• QE: While we wait for more news on Chinese fiscal stimulus we note comments from Passport Capital who are looking for a fourth round of US QE and comments yesterday on the BBC relating to the potential for a further interest rate cut. Capital Economics also ask “Are troubles in emerging markets a third leg of the global crisis?
Conclusion: JCB’s statement is at odds with the Komatsu report on mini excavators indicating that sales may be suffering more from a stalling of infrastructure and other civil engineering works. There is no surprise in the fall in mining equipment sales for CAT and Hitachi but the statements on infrastructure projects are key. China has made some comments on fiscal stimulus but the market seems unconvinced and the major equipment manufacturers are still reporting falling sales in this area. We await further news on new stimulus programs.
Economic News
US – David Lockhart, a voting FOMC member who voted to leave rates at current levels during the latest Sep meeting, said he would agree to the first rate hike in one of the coming FOMC meetings once the current market volatility settles down.
• Normalisation of monetary policy “later this year” remains well on the cards, according to Mr Lockhart.
• His comments come on the back of a speech by John Williams, also a voting FOMC member who voted for no change recently, who said an increase before year-end remains “appropriate”.
• Existing home sales dropped 4.8%mom last month compared with a 1.8%mom increase in Jul and -1.6%mom forecast.
• Declines in the West and the South of the country were particularly big on the back of sharp price increases.
• Nationwide median home price increased to US$228,700 in Aug, up 4.7%yoy. This compares to increases of 6.0%yoy in the South and 7.1%yoy in the West.
ECB – ECB Chief Economist Peter Praet reiterated the institution’s readiness to change the pace of its bond purchases should the economic situation deteriorate, accordin to an interview in a Swiss newspaper.
Australia – House prices inflation accelerated through Q2/15 (+4.7%qoq/+9.8%yoy) beating market estimates and marking the sharpest increase since 2009.
• Expectations were for a 2.3%qoq rise, up from +1.6%qoq recorded in Q1/15.
• Australian dollar climbed 0.2% on the announcement.
• The RBA watches closely developments in the property market including risks of inflating property prices to unsustainable levels in the context of further monetary easing.
Burkina Faso – Former interim government loyal forces issued an ultimatum to current interim government to disarm and surrender by this morning or face attack.
• Soldiers opposed to the rebellion left military bases and entered the capital on Monday pushing insurgents into negotiations.
Currencies
US$1.1194/eur vs 1.1299/eur yesterday. Yen 119.92/$ vs 120.27/$. SAr 13.561/$ vs 13.372/$. $1.548/gbp vs 1.553/gbp
0.712/aud unch vs 0.716/aud
Commodity News
Precious metals:
Gold US$1,135/oz vs US$1,139/oz yesterday
Platinum US$964/oz vs US$981/oz yesterday
Palladium US$607/oz vs US$603/oz yesterday
Silver US$15.15/oz vs US$15.19/oz yesterday
Base metals:
Copper US$ 5,148/t vs US$5,295/t yesterday -
Aluminium US$ 1,596/t vs US$1,630/t yesterday
Nickel US$ 9,765/t vs US$9,850/t yesterday
Zinc US$ 1,633/t vs US$1,670/t yesterday –
Lead US$ 1,688/t vs US$1,692/t yesterday
Tin US$ 14,870/t vs US$15,150/t yesterday
Energy:
Oil US$48.20/bbl vs US$48.10/bbl yesterday -
Natural Gas US$2.581/mmbtu vs US$2.580/mmbtu yesterday
Uranium US$37.25/lb unch vs US$37.25/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$56.6/t vs US$56.4/t
Thermal coal (1st year forward cif ARA) US$50.00/t vs US$50.30/t yesterday
Other:
Tungsten - APT European prices fall further to $180/190 per mtu from $185/195 last Friday
Company News
Acacia Mining (LON:ACA) 248 pence, Mkt Cap £1.02bn – JV on Nyanzaga Project
• The company have agreed to an earn in agreement with OreCorp on the Nyanzaga Project in Tanzania.
• OreCorp will be the manager of the project and be able to earn up to 25% through the completion of various work programmes over three years.
• The aggregate project investment is expected to be US$15m including an up-front payment to Acacia of US$1m.
• If the DFS delineates a project with NPV greater than US$200m, Acacia has the option to retain its 75% and regain control of the project for development purposes.
Anglo Asian Mining* (LON:AAZ) 4.9p, Mkt Cap £5.5m – Interim figures show improved free cash flow on lower costs and maintained guidance
Hold (Valuation under review)
Production
• H1/15 production hit record levels with gold dore output at 35,924oz (vs H1/14: 27,044oz).
• The Agitation Leach ‘AL’ plant processed 278kt of ore at an average grade of 3.50g/t for 23,436oz gold (vs H1/14: 312kt at 2.70g/t for 19,446oz).
• The Gosha mine also contributed 14kt at 6.12g/t for 2,182oz gold to ‘AL’ production in H1/15.
• Heap leach ‘HL’ operations which treats both crushed as well ROM material processed 599kt at 1.11g/t for 12,488oz (vs H1/14: 273kt at 1.16g/t for 7,598oz).
• SART plant, producing precipitated copper sulphide concentrate (c.60% Cu) with minor amounts of silver and gold, achieved output of 418t Cu, 4,981oz Ag and 14oz Au (vs H1/14: 369t Cu, 15,641oz Ag, 72oz Au).
• Gadir: Underground operations at Gadir, part of the Gedabek mine, reached the orebody with 2kt of ore at 9.45g/t mined during the period.
• Floatation plant: Construction of the 90tph flotation plant is nearly complete with first commercial production expected by end September.
• The plant is forecast to contribute 5,000oz of gold and 1,600t of copper through Q4/
Output guidance
• Production guidance reiterated at 70,000-75,000oz for FY15 (vs FY14: 60,285oz).
• The third quarter performed above management expectations with 14,841oz produced through mid-Sep taking Total for the year to 50,779oz.
Financial results
• Gold sales Totalled 33,295oz (post 12.75% PSA) at an average price US$1,204/oz (vs H1/14: 23,545oz at US$1,297/oz).
• Revenues were US$41.8m with dore sales of US$40.1m and copper concentrate proceeds of US$1.7m (H1/14: US$32.7m (Total), US$30.5m (dore), US$ US$2.2m (concentrate))
• Operating cash costs (C1 equivalent) averaged US$736/oz (vs H1/14: 1,014/oz) on the back of stronger production, USDAZN depreciation (the currency fell 26% from 0.78/US$ to 1.05/US$ in Feb/15) and operational efficiencies.
• We estimate that level of C1 costs is equivalent to US$802/oz in Total Cash Costs (inc Royatlies) (vs H1/14: US$1,178/oz).
• EBITDA climbed to US$10.7m (vs H1/14: US$2.0m) reflecting lower operating costs.
• PAT Totalled -US$3.4m (H1/14: -US$6.9m) with EPS at -3.0USc (vs H1/14: -6.2USc).
• FCF** came in at US$3.8m (vs H1/14: -US$0.2m) after accounting for capex spend of US$9.1m which included US$2.1 on flotation plant (of US$4.7m Total), US$3.1m on tailings dam and waste treatment system as well as US$3.3m in deferred waste stripping costs (vs H1/14: US$5.4m on deferred stripping).
• The Group made two debt amortization payments to ATB for US$4.9m taking the outstanding amount down to US$32m. The ATB loan debt service cover ratio for H1/15 was 2.15x, nearly twice the 1.25x demanded by the lender.
• Net debt fell US$48.7m with US$1.8m cash balance as of Jun/15 versus US$52.4m as of Dec/14.
• The Company has unutilised credit facilities of US$1.4m as of H1/15 under the loan agreement with CEO of the Group for US$4m.
Conclusion: It is encouraging to see the Gedabek processing plant now performing better allowing the management to reiterate its FY15 production forecasts.
The 70-75koz gold production target includes 5koz from the 90tph flotation plant and, thus, is dependent on the performance of the unit that is about to go through final commissioning stage.
The new flotation plant will start off by processing tailings from the agitation leaching plant and is expected to improve overall metal recoveries to 90% gold, 80% copper and 70% silver from current 75% gold at the AL circuit (H2/14: 71%).
On operating costs, while C1 have gone down 27%yoy, taking into account national currency depreciation and a 33% increase in gold produced, reported numbers also indicate some inflation pressure in the region.
Anglo Asian was Free Cash Flow positive in the first half though operating costs remain too high to cover debt amortization payments to ATB (US$5m in H2/15).
The new Flotation Plant “should enable (AAZ) to achieve much higher production of copper and precious metals at a lower cost of production”. This combined with the blending of higher grade ore from Gadir (140kt at 9g/t in resource on a non-JORC report by SRK) should help the Group lower costs and return to profit.
*SP Angel acts as Nomad & Broker to Anglo Asian Mining. SP Angel analysts have visited the Gedabek and Gosha mine sites
**Net CFO (after Tax and Debt Interest) less Capex/Exploration
Goldplat (LON:GDP) 3.5 pence, Mkt Cap £5.9m – Trading Update
• The company continue to make ongoing improvements to the circuits in place at the recovery operations in South Africa.
• A replacement mill was commissioned for the low-grade circuit in September with the same capacity as the old mill which came to the end of its life.
• This is expected to reduce maintenance time on this circuit.
• A new pumping station has been commissioned at the tailings retreatment CIEL plant to increase the volume of materials through this facility.
• The new liquid cyanide storage facility was also commissioned for first delivery of liquid cyanide.
• At Kilimapesa the company are taking steps to improve mining.
• The de-watering and equipping of the Teng-Teng decline shaft has been completed.
• Another adit has been put in place replacing the previous Adit D which was shut due to safety reasons.
Conclusion: Ongoing improvements are being put into place to better efficiency of the recovery operations – we look forward to hearing further on how this impacts profitability at the operations.
*SP Angel act as nomad and broker to Goldplat
Hummingbird Resources (LON:HUM) 26 pence, Mkt Cap £27.8m – Interim results and project update
• Hummingbird Resources has reported a loss for the 6 months to 30th June of $1.9m or 2.1 cents per share.
• The company raised $6.3m in June and having extended its bridge facility with Taurus by $5m (to $15m) to assist in continuing development and initial plant earthworks at the Yanfolila gold project in Mali ahead of the full $75m drawdown facility, as of 18th August, the company held $12m in cash.
• Optimisation studies on the Yanfolila mine development, “highlighted robust economics for an increased 1Mtpa low-cost high grade gold project, producing 100,000 oz gold in year one and 79,000 oz per annum over a six and a half year mine life. At a US$1,250 gold price this outline an NPV8% of US$72.4 million, IRR of 35.1% and low all in sustaining costs of US$733 per ounce of gold.”
• The company considers that, as a result of its grade control drilling and other technical work, including geotechnical studies, which we suspect may refine the pit layout, “it is evident that we can further improve these figures.”
• Construction activity at Yanfolila is expected to pick up through the rest of this year and the company is targeting initial gold production in 2016.
• The recent announcement of a proposed hydroelectric power project on the Dugbe River should, if it proceeds, provide potential advantages to the development of Hummingbird’s Dugbe Gold Project in Liberia. In the present gold price environment we imagine that Hummingbird will focus primarily on the higher grade Yanfolila project, however, a potential pipeline of development projects provides a long term growth path for the company.
Minera IRL (LON:MIRL) SUSPENDED 3.5 pence, Mkt Cap £8.1m – Suspension of AIM trading and dismissal of former interim CEO
• Mineral IRL has requested that its shares be suspended from trading on AIM while it initiates proceedings in Peru to dismiss the former interim CEO of the company, Mr Diego Benavides.
• The company is also, acting on legal advice in Peru, initiating criminal proceedings against Mr Benavides.
• The Company is requesting that the trading suspension remains in place “until such time as the Board is satisfied that appropriate control has been re-established.”
Rockwell Diamonds (LON:RDI) C$0.19, C$10m – Quarterly production and sales
• Average carat price was down 24% on the company’s diamonds at US$1,791/carat.
• Volumes processed were down by 43% on the same period last year with grades flat giving production of 5,613 carats down 41%.
• Sales were down 28% in terms of value to US$9.558m with the number of carats sold falling 40% to 5,359 carats.
Savannah Resources (LON:SAV) 2.025 pence, mkt Cap £5.1m – Analysis of historical data points to high grade copper mineralisation at Aarja prospect
• Savannah Resources has analysed historical information, including drilling information from work undertaken during the 1980s, which indicates that high grade copper mineralisation extends beneath the old Aarja pit and along strike towards the southeast.
• It is not clear who was responsible for this historic drilling but the data reported today includes relatively wide intersections of 18.58m averaging 4.7% copper from a depth of 143m in hole 10-23 and 24 metres averaging 3% copper from a depth of 143.5m in hole 10-82 at the Aarja Main area, 33.8m averaging 3.35% copper from a depth of 153.1m in hole AEX 39 and 10m averaging 4.17% copper and 2.43% zinc in hole AEX 31 at the Dogs Bone prospect and 9.8m averaging 3.86% copper from a depth of 224m in hole AEX 36 on the Aarja South area.
• The company intends to complete some confirmatory drilling and should this “verify the historical data, we plan to complete a maiden JORC compliant resource estimate before the end of the 2015 calendar year.”
• The company also comments that “The existing open pit and underground development which access copper mineralisation may allow for a rapid, low cost mine development, but further work is required to confirm this.”
Conclusion: Savannah Resources has a number of promising exploration targets within its Block 4 area in Oman, however, drilling budgets are probably tight and the company may have to make difficult choices in allocating priorities. If the work at Aarja can lead to a resource estimate prepared to JORC standards by the end of this year, it would appear to have a strong case to become a priority target.
South32 Limited (LON:S32) 68.8 pence, Mkt Cap £3.66bn – Mineral Resources and Reserves Update
• At Cannington the silver-lead-zinc massive sulphide deposit, South32 sees a 21% increase in the Mineral Resource Estimate.
• The increase is based on changes in fx rates, commodity prices and including of resource areas in the transition zone.
• Reserves estimates at Cannington remain unchanged.
• The company have used a cut-off dollar value equivalent of A$90/t for the underground resource and A$45/t for the open cut resource.
• At GEMCO, South32 report reserves for the first time for Sands.
• Sands are produced as a by-product during the beneficiation of the GEMCO manganese ore from the gangue constituents.
• Sands were collected in 1m runs for geological logging with samples analysed using XRF technology.
• The cut-off grade used was a 40% manganese washed product cut-off.
• 6.6 Mt of Measured Resource is converted to probable reserves.
• At Illawarra the met coal deposit resources have been upgraded based on additional drilling and for reserves by obtaining extraction permits for longwall panels 901-904.
Tri-Star Resources (LON:TSTR) 0.13 pence, Mkt Cap £11m – Interim Results highlight progress with roaster which moves to the construction phase
• Over the period and subsequently the company has successfully permitted and achieved the key milestones to construct the antimony roaster in Oman.
• Over the period the roaster was permitted, a final engineering report was commissioned, heads of terms were agreed with Traxys was signed as trading partner and the IP value was agreed with partners at SPMP.
• Since then funding has been put into place for a package of US$70m.
• £3.5m was raised post period through an issue of shares and a convertible note – part of which has been used as Tri-Star’s equity commitment in the roaster.
• With funding now secured, construction of the roaster is expected to take 18-20 months to complete with a pilot plant in place in a year.
• Emin Eyi who has successfully led Tri-Star through this process is to become CEO of SPMP and Non-Executive Deputy Chairman of Tri-Star.
• Guy Eastaugh, the current CFO is to take on the role of CEO at Tri-Star.
• Over the period the company incurred a loss of £1.634m.
• Post period and after financial close on SPMP, Tri-Star had £1.75m in cash as of the 18th September 2015.
Conclusion: Emin Eyi is moving to run SPMP full time, now that the roaster moves to the construction phase. This makes sense as the focus now is to get the roaster up and running and will be the main source of value for Tri-Star. Emin remains on the board of Tri-Star as a Non-Executive Deputy Chairman.
*SP Angel acts as Nomad and Broker to Tri-Star Resources