Metals and miners hit over China concerns
• Equity indices in China, Japan, Hong Kong and Australia recorded a nearly 2% decline post the announcement with mining stocks having been particularly hit hard.
• Concerns over Chinese economic growth and potential demand for base metals drive commodity prices lower.
• The Bloomberg Industrial Metals index that tracks returns from aluminium, copper, nickel and zinc futures dropped 2.8% yesterday, marking the worst decline in six weeks.
Miners suffer significant price falls yesterday as traders look for reasons for the Fed’s decision to hold interest rates
• The Fed’s decision to hold rates appears to have spooked the market as new evidence is emerging of a further downturn in construction activity around the world.
• Construction machinery manufacturers are reporting worsening sales figures indicating significantly less activity in infrastructure projects with a collapse in demand in Russia, China, Brazil and France and little new support from the US and UK.
US sanctions against China have potential to escalate into trade war
• The US has had enough of Chinese agents hacking into its systems and stealing personal details and trade secrets
• US sanctions against the hackers is likely to include some major Chinese companies and could spark a trade war between the US and China.
• China has pre-empted the move by arresting a US citizen on charges of spying just weeks ahead of President Xi’s visit to Washington.
Economic News
China – Manufacturing PMI fell unexpectedly to hit the lowest reading in more than six years
• The Caixin China index dropped to 47.0 this month, down from 47.3 in Aug and underperforming 47.5 forecast.
• Nearly every component of the flash PMI including new orders and employment recorded a decline from previous month.
• PMI, Output, new orders, new export orders, employment, output prices, input prices, stocks and quantity of purchases all fell
• The only indicators to increase were Backlogs of work and Supplier’s delivery times
• China’s President Xi is in the US this week and is due to meet Obama on Friday
• Xi’s speech last night indicated that China will not manipulate its currency to boost exports – its already done that!
• That china does not engage in hacking – it’s already done that according to the US!
• That China will never close its open door to the outside world – China has been happy in the past to raise barriers to imports where its industry is disadvantaged and old habits die hard
Germany – Manufacturing and services PMIs come short of expectations in Sep coming down to 2-month lows; although, respondents noted an increase in new domestic and export orders with the employment rate up on Aug numbers.
• Manufacturing PMI: 52.5 v 53.3 in Aug and 52.6 forecast.
• Services PMI: 54.3 v 54.9 in Aug and 54.5 forecast.
France –France posted a surprising recovery in the manufacturing sector through Sep with the segment PMI back in expansionary territory.
• On a less positive note, “there was less positive news on the employment front, with jobs being shed at the sharpest rate since Nov/14”, according to the report.
• Services’ sector business confidence index, while continuing to show firms expect the activity to increase over the coming 12 months, declined to the lowest in 11 months.
• Manufacturing PMI: 50.4 v 48.3 in Aug and 48.6 forecast.
• Services PMI: 51.2 v 50.6 in Aug and 51.0 forecast.
• Numbers indicated the economy expanded “a mere 0.1%” in Q3/15.
Eurozone – “The September PMI surveys indicate a further steady expansion of the Eurozone economy, but there remains a worrying failure of growth to accelerate to a pace sufficient to generate either higher inflation or strong job creation,” Markit reports.
• “The survey data indicate that the Eurozone economy expanded 0.4% in the third quarter, in line with the second quarter. This is, however, below what’s generally regarded as its long-term potential growth rate and puts the economy on course to grow by just 1.6% this year.”
• Manufacturing PMI: 52.0 v 52.3 in Aug and 52.0 forecast.
• Services PMI: 54.0 v 54.4 in Aug and 54.2 forecast.
Currencies
US$1.1109/eur vs 1.1194/eur yesterday. Yen 120.25/$ vs 119.92/$. SAr 13.658/$ vs 13.561/$. $1.534/gbp vs 1.548/gbp
0.705/aud unch vs 0.712/aud
Commodity News
Precious metals:
Gold US$1,127/oz vs US$1,135/oz yesterday
Platinum US$942/oz vs US$964/oz yesterday
Palladium US$622/oz vs US$607/oz yesterday
Silver US$14.79/oz vs US$15.15/oz yesterday
Base metals:
Copper US$ 5,110/t vs US$5,148/t yesterday – Prices fell 3.6%, the most since Jul, during the yesterday’s trading session on LME.
Aluminium US$ 1,590/t vs US$1,596/t yesterday –
• The aluminium market should return into balance in the next five years, Rio Tinto reports.
• “Demand for our products is clearly healthy. The issue we face is excessive supply,” the Company said during the International Aluminium conference in Vancouver.
• Demand is forecast to hit 78mt by 2025, up 24mt from current levels. This implies a relatively conservative 3.7%pa CAGR.
• In the meantime, Rio estimates market fundamentals will continue to force further capacity closures.
Nickel US$ 9,800/t vs US$9,765/t yesterday –
• Indonesian government officials say recent reports that the nation is looking into a relaxation of the ore exports ban are false.
• “We are firm. Minerals are important but the value lost form exports ban is not that high,” the nation’s coordinatin ministry for economic affairs said.
• Earlier in the months, a series of reports suggested Indonesia might lift the ban amid increasing economic pressures, MetalBulletin said.
Zinc US$ 1,667/t vs US$1,633/t yesterday –
Lead US$ 1,699/t vs US$1,688/t yesterday
Tin US$ 14,850/t vs US$14,870/t yesterday
Energy:
Oil US$49.50/bbl vs US$48.20/bbl yesterday -
Natural Gas US$2.586/mmbtu vs US$2.581/mmbtu yesterday
Uranium US$37.25/lb unch vs US$37.25/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$56.5/t vs US$56.6/t
Thermal coal (1st year forward cif ARA) US$50.10/t vs US$50.00/t yesterday
Other:
Tungsten - APT European prices fall further to $180/190 per mtu from $185/195 last Friday
Company News
Firestone Diamonds (LON:FDI) 23.75 pence, Mkt Cap £73.4m – First Drawdown on Absa Loan
• The company has satisfied the conditions to draw down on their project finance facility from Absa.
• The facility is for US$82.4m and the first draw down is for US$7.6m.
• The total cost of the facility is estimated at 10%.
• Initial production from Liqhobong is expected in Q4 2016 with 43% of the project completed.
• The company has also drawn down US$20m of the US$30m of the Eurobond facility from Pacific Road and RCF.
• At the end of Aug 2015, the company had spent Zar 959m of the total project budget of Zar 2 bn.
• The project remains within the original US$185.4m budget.
Conclusion: It is good that conditions are in place for first draw down of the loan. Initial production is on target and with the current weakness in the diamond market accompanied by heightened concerns over China, timing into the end of next year would be good news for the company. Diamond producers such as Petra Diamonds have been sold off based on risk aversion and are moving into levels where valuations are starting to look compelling for those patient enough to ride out the cycle. Diamond demand comes mainly from the US where the market continues to remain strong.
Gemfields (LON:GEM) 60 pence, Mkt Cap £326.4m – JORC Reserve & Resource Update for Kagem Emerald Mine
• JORC Proven and Probable Reserves of 1.1 bct of emerald and beryl at a diluted ore grade of 291 carats/t.
• JORC Proven Ore Reserve of 920,000 tonne or 276 m carats at a grade of 300 c/t and Probable Ore Reserve of 2.9 mt of 840 m carats at 288 c/t.
• Reserves support a 25 year LoM open pit with processing capacity from the current 90,000 tpa to 180,000 tpa by July 2018 by inclusion of the Fibolele pit.
• The Kagem operation at the Chama Pit is planning to ramp up ore production from 120 ktpa to 150 ktpa over a 3 year period with an increasing scale of operation at Fibolele to 30 ktpa.
• Kagem is currently in the process of doubling the potential capacity of the wash plant by duplicating the picking belts.
• The upgrade is expected to start in October 2015.
• This results in average annual production of emeralds and beryl of 44.7 mct over the LoM.
• Capex of US$84m to be spent on the first four years with US$516m over LoM of which US$310m related to capitalised was stripping costs.
• Average total operating costs estimated at US$264.99/t.
• An NPV on a 10% base case is estimated at US$520m based on annual sales of US$173m on 44,655 kcarats or around US$3.87/carat.
Conclusion: The establishment of reserves to support a longer mine life is good news and will help in formalising values for Kagem. Expansion of production goes outside the existing Chama Pit into the Fibolele pit where bulk testing is currently being conducted. Having a reserve in place, de-risks the production from Kagem – the key to growing the top line will also establishing demand for sales.
Highland Gold (LON:HGM) 52 pence, Mkt Cap £169.1m – Interim results – cost reduction and increased free cash flow
• Highland Gold reports a 29% decline in first half profits to US$14.5m from $20.3m.
• The results reflect an 8% decline in revenues, despite a modest increase in gold sales of 119,277 oz (2014 - 116,657 oz) matched by a 7% decline in cost of sales to $101.7m.
• Unit costs benefitted from the positive impact of exchange rates and increased production volumes, partially offset by increased prices for consumables, resulting in a 22% decline in cash cost to US$538/oz (2014 US$689/oz) and all in sustaining costs fell by 21% to US$710/oz from US$900/oz.
• A halving of capex to $18.2m from $36.4m resulted from lower spending at the Belaya Gora mine, controls on capital allocation and the positive impact of the Rouble devaluation helped generate a 72% increase in free cash flow to $37.7m (2014 $ 21.9m).
• Highland Gold’s gross debt amounted at 30th June to $271m. $104m (38%) attributed to the Novoshirokinskoe operation,; $97.5m (36% to the Belaya Gora mine and the balance to the MNV mine. Net debt fell to $231m from $239m.
• The company reports that, in September 2015 “the Group signed an agreement with Alfa Bank regarding a limit increase of the non-current loan from US$60.0 million up to US$100.0m and an extension of the final maturity until December 2018.” At 30th June, Alfa Bank represented 15% (US$41.5m) of Highland Gold’s debt,with Gazprombank (62%) and Sberbank (23%).
Polyus Gold (LON:PGIL) 190.5p, mkt cap £5.8bn – unconfirmed reports suggest potential for a buyout by major shareholder Kerimov
• Margins 60% at half year. A potential take-out price is suggested at $2.97/s (192p) in a press report
• This may be wishful thinking by investors
• While margins are high now at 60% local inflation and the common practice of adjusting prices to match the US dollar may erode margins faster than one might expect
• Alternatives are Polymetal, Highland Gold and Petropavlovsk
Vast Resources (LON:VAST) 1.925 pence, mkt Cap £28.4m – First gold pour at Pickstone Peerless mine
• The company reports that it has poured its first gold at the Pickstone Peerless mine in Zimbabwe. The initial production amounted to 8.5 kg of gold (approximately 273 oz) and will be delivered to the Fidelity refinery in Harare.
• The mine is expected to produce around 10,000 oz of gold annuallyfrom treating the near surface oxide ores at a rate of around 10,000 tpm for six years.
• The open-pittable reserve at the mine amounts to 16.6m tonnes of ore at an average grade of 1.9 g/t gold within an overall resource of 62m tonnes at a grade of 1.8 g/t. The company comments that during this initial period, “expansion of the plant to treat the open cast sulphides, at a rate at least double the current monthly volume, will be evaluated.”
Wolf Minerals (LON:WLFE) 16.25 pence, Mkt Cap £131.5m – Commissioning and handover of Drakelands plant complete
• Wolf Minerals has announced that following the successful commissioning of its Drakelands tungsten recovery plant the company has now assumed full operational control from the EPC contractor, GR Engineering Services.
• The company has also shipped its first concentrate to a long-term customer.
• The operation is now ramping up to full production, which is expected to be achieved in early 2016.
• Wolf Minerals makes the point that it is currently permitted to operate on a seven-day per week basis on a trial basis and that if the operating permit can be modified to incorporate this work pattern on a permanent basis, this would increase capacity by 27% at no additional capital cost while providing “the opportunity to produce additional volumes of tungsten concentrates … lower operating costs, pushing the operation further down the tungsten concentrate production cost curve as well as generate additional employment opportunities.”
Conclusion: Tungsten prices are currently around $185/mtu of the intermediate product, APT and have approximately halved over the 18 months construction period for the Drakelands mine. The opportunity to bring production costs down should increase the resilience of the operation and assist it to weather the current commodity price regime.