Glencore (LON:GLEN) – 75.9 pence, Mkt Cap £14.2bn – What’s spooking the Glencore share price
• The market appears to have slashed the value of Glencore stock based on a scenario of metals prices remaining at low levels for several years as presented by Investec.
• The market has applied the rationale to Glencore with a vengeance.
• Given that the market rarely reacts so savagely to analyst reports we feel there is more going on than is immediately apparent.
• Glencore reckons it can service its debt and the company finances its commodity trading quite legitimately as it has done for many years.
• Low interest rates are a benefit though lower liquidity in debt markets always has the potential to trip up larger borrowers.
• Saudi Arabia and maybe some other Middle Eastern sovereign funds are moving out of equities and into cash and other instruments to fund deficits and local issues.
• Some investors might worry about Glencore’s $17bn worth of ‘readily marketable inventories’ but most of this is said to be hedged and have been a nice little earner for Glencore.
• This should not worry investors based on what we know about commodity trading strategies – the Red Kite fund have similar financing positions running with copper.
• While Glencore is easy prey to investors wishing to play the short side of the commodity story based on a China hard landing, more detailed analysis may pay off.
• Particularly for investors who participated in the share placement last week – they should be asking to go through assumptions of the Investec analysts and the banks involved in the placing such as Citi Group.
• Investec had a good short call on Glencore before their results on valid concerns about potential earnings downgrades, exposure to copper and a potentially overleveraged balance sheet.
• This recommendation by Investec was then moved from a sell to a hold after Glencore bolstered its balance sheet.
• A week later a sector piece from Investec says there may be zero value to equity holders in Glencore if commodity prices stay low for several years.
• Investors should scrutinise what is behind this statement – “several” can mean more than 2 years but not many – so how long is their definition of several.
• What are the supply/demand assumptions behind their commodity price forecasts – supply is often much more bottom up in analysis with demand a top down view on global growth.
• Analyst models often forecast prices 2-3 years out and then revert to a long term mean price which can be much lower depending on the point in the cycle.
• What other assumptions are driving their base case assumptions on working capital, the trading book or inventory being held.
• It is unlikely that banks will pull their credit lines with Glencore easily – if they do we could have a “Lehman’s moment” which will have much broader repercussions outside the sector.
• Sudden falls like this are worrying but the sky has yet to fall in on our heads.
Saudi Arabia – redemptions drive equities lower as SAMA effectively forces funds to sell liquid investments (FT)
• Saudi Arabia and presumably some other Middle Eastern sovereign wealth funds have withdrawn $50-70bn or more funds from asset managers in london.
• SAMA, the Saudi Arabian Monetary Agency needs cash to pay the nation’s deficit with oil prices and to fund its activities in Yemen and possibly to compensate families for other recent events.
• We wonder which asset class Saudi Arabia might sell next – London property?
Economic News
US – The US dollar continued to strengthen as the latest economic reports show consumer sentiment improved through Aug and inflation measure edged up slightly.
• Consumer spending climbed 0.4%mom in Aug v a 0.4%mom increase in Jul (revised from +0.3%mom) and a 0.3%mom gain forecast.
• Charles Evans, the president of the Chicago Fed and a voting member of the FOMC, thinks the central bank should wait for inflation growth to accelerate before starting to tighten the monetary policy.
• “I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation,” Evans said during the speech.
• He warned the Fed over the “substantial costs” should it make a mistake and raise rates too soon.
• Economic news released yesterday and due today:
Date Announcement Period Actual Expected (Bloomberg) Prev month
Monday PCE Delfator/Core Aug 0.3%yoy/1.3%yoy 0.0%yoy/1.3%yoy 0.3%yoy/1.2%yoy
Pending Home Sales Aug -1.4%mom/+6.7%yoy 0.4%mom/8.1%yoy 0.5%mom/7.2%yoy
Tuesday SP/Case Shiller Jul 0.1%mom/5.2%yoy -0.1%mom/5.0%yoy
Japan – Small business confidence index improved slightly through Sep, but remained below the threshold that indicates optimists outnumber the pessimists.
• The monthly Shoko Chukin Bank survey: 49.0 in Sep v 48.8 in Aug and 48.3 forecast.
India – The RBI cut rates for the fourth time this year in a move to support the economy with inflation remaining at low levels helped by soft commodity prices.
• The decision to cut rates by 50bps to 6.75% exceeded market expectation for a 25bp move.
Spain – The nation enjoys the longest run in retail sales growth since the financial crisis.
• Retail sales climbed 3.2%yoy in Aug, marking the 12th consecutive monthly increase.
• The measure came in line with market estimates and down on +4.2%yoy in Jul.
• On a separate note, inflation picked up through Sep from the previous month which should provide some support to consumers’ inflation expectations.
• CPI EU harmonised: +0.4%mom/-1.2%yoy v -0.4%mom/-0.5%yoy v +1.0%mom/-0.7%yoy forecast.
Currencies
US$1.1251/eur vs 1.1189/eur yesterday. Yen 119.70/$ vs 120.22/$. SAr 14.050/$ vs 13.863/$. $1.519/gbp vs 1.521/gbp
0.697/aud vs 0.702/aud
Commodity News
Precious metals:
Gold US$1,127/oz vs US$1,138/oz yesterday
Platinum US$903/oz vs US$928/oz yesterday
Palladium US$647/oz vs US$656/oz yesterday
Silver US$14.56/oz vs US$15.84/oz yesterday
Base metals:
Copper US$ 4,954/t vs US$5,018/t yesterday
• Energy and Mines Minister in Peru expects development of the Tia Maria project to restart before the nation’s general elections planned for Apr/16 which should drive an increase in employment in the region.
• The US$1.4bn copper project has been put on hold in May/15 on the back of local violent protests.
• Tia Maria is expected to supply 120,000pta of copper cathodes once up and running which is equivalent to 6% of the nation’s copper production.
Aluminium US$ 1,556/t vs US$1,569/t yesterday
Nickel US$ 9,800/t vs US$9,970/t yesterday
Zinc US$ 1,626/t vs US$1,637/t yesterday
Lead US$ 1,655/t vs US$1,665/t yesterday
Tin US$ 15,475/t vs US$15,150/t yesterday
Energy:
Oil US$47.7/bbl vs US$48.2/bbl yesterday
Natural Gas US$2.669/mmbtu vs US$2.602/mmbtu yesterday
Uranium US$36.75/lb vs US$37.00/lb yesterday
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$56.6/t vs US$56.6/t
Thermal coal (1st year forward cif ARA) US$48.80/t vs US$49.20/t
Other:
Tungsten - APT European prices rose for the first time since beginning of July to $180/200 per mtu from $180/190 last week
• This is entirely unhelpful for Wolf Minerals which shipped first concentrate recently from the Hemerdon Mine in the UK
Company News
Alecto Minerals (LON:ALO) 0.12 pence, Mkt Cap £1.7m – Scoping Study on Kossanto East Gold Project
• Alecto have published a scoping study where they have looked at jointly developing gold deposits in Mali with Desert Gold.
• The companies have looked at the development potential of a 400,000 tpa low cost gold heap lech operation combining Alecto’s Kossanto East Godl Project nd Dessert Gold’s Farabantourou Gold Project.
• The Scoping study is based on known gold deposits within both permits.
• The study looks at an annual production rate of around 27,000 oz based on selective mining of high grade ore with a cut-off grade of 1 g/t.
• The study looked at supply of ROM of grade to a heap leach pad with a head grade pf 2.1 g/t gold.
• An 80% recovery rate has been built in.
• The combined resource at Farabantourou and Kossanto East have a total estimated resource of 365,000 of of gold at a cut-off grade of 0.5 g/t.
Amur Minerals* (LON:AMC) 13.5p, Mkt Cap £61.3m – H1/15 earnings update: US$8.3m in the bank on successful exercise of ESA with Lanstead
• H1/15 was marked by the award of a mining license for the100% owned Kun-Manie nickel copper sulphide project located in the Far East of Russia.
• The “Detailed Exploration and Production License” was registered in Jun/15 following the one-off payment of 23.6m RUB (c. US$0.4m) to Rosnedra.
• The license covers 20 years through to Jul/35 with an option to extend the permit if additional mineralisation is discovered.
• In Apr/15, a portion of the Inferred resource at Kubuk was upgraded to Indicated category with the current mineral inventory standing at 3.5mt at 0.68% Ni and 0.18% Cu (Indicated Resource) and 17.1mt at 0.56% Ni and 0.16% Cu (Inferred Resource).
• In Jun/15, an in-house economic update of the 2007 SRK PFS was released studying the potential for underground development of Maly Kurumkon/Flangovy and Kubuk deposits as well as prospects for further internal processing of flotation concentrate for production of matte and refined base metals.
• The Preliminary Economic Assessment will go through independent audit in H2/15.
• In Aug/15, the Company signed a Financial Advisory Agreement with the state Far East and Baikal Region Development Fund established by order of President Putin for development of the Far East region.
• The agreement allows the Company to collaborate with the Fund in attracting financing from Russia, China and India.
• Currently, 6,000m drilling programme is progressing to plan with an aim to prove up the continuity of the geology along the Kurumkon Trend as well as infill drill the Flangovy area.
• Admin costs kept at modest US$1.1m (H1/14: US$1.2m) in H1/15.
• The Company remained debt free through the period with cash balances at US$8.3m as of Jun/15.
• Cash inflow from the Lanstead Equity Swap Agreement (ESA) amounted to US$9.1m including US$2.8m in additional payments due to share price appreciation through H1/15 (23.5p on Jun/15 v 10.5 on Jan/15).
• The Company reported PAT US$3.3m driven by gains on revaluation of the Lanstead ESA.
• As of Sep/15 there is one more settlement payment with Lanstead outstanding.
Conclusion: The Company has done well in securing the mining license which in turn allows the team to move the project into development stage. The ESA worked out better than expected on the back of the share price performance with cash balances as of Jun/15 standing at more than US$8m. This should comfortably see the team through the 2015 field season, pay for metallurgical test work for Flangovy and Kubuk ores carried by SGS Minerals as well as complete the independent audit of the latest PEA. Medium term plans include development of a DFS and identification of suitable funding options for Kun Manie project development.
*SP Angel act as Nomad and Broker to Amur Minerals
Asiamet Resources (LON:ARS) 1.4 pence, Mkt Cap £7.3m – Drilling demonstrates continuity of shallow high grade zones at Beruang Kanan.
• The company has reported that assay results from an additional 14 holes of its current 80 hole/6500m infill drilling programme at Beruang Kanan demonstrate “strong copper mineralisation has been delineated in the southern part of the BK044 zone and further high grade mineralisation was also intersected in the BK058 zone.”
• Among the results reported today, are an intersection of 22m averaging 2.76% copper from a depth of 22m in borehole BKM32250-03; 46.4m at an average grade of 1.69% cpopper from 1.6m depth in hole BKM32200-03; and 21m averaging 1.77% copper from a depth of 9m in BKM31800-01.
• The company reports that its drilling programme for 2015 at BKM is now complete though one rig remains deployed on scout drilling in the Beruang Kanan South and Beruang Kanan West prospects though this work is expected to be complete by the end of October.
• The company is working towards a Preliminary Economic Assessment which will draw together the resources estimation and metallurgical work which should crystallise the plans for a future development.
Conclusion: The continuing success of the infill drilling programme in locating shallow high grade mineralisation bodes well for a positive outcome to the resource estimation work and the subsequent PEA on Beruang Kanan.
Noricum Gold* (LON:NMG) 0.14p, Mkt Cap £3.8m – Bolnisi Project Update
• Noricum Gold has provided an update on its recently acquired Bolnisi project in Georgia where it is working toward upgrading a Russian standard C1/C2 resource totalling 38.6m tonnes at an average grade of 1.3% copper, 1 g/t gold and around 13g/t silver in the Tsitel Sopeli and Kvemo Bolnisi deposits into a JORC compliant form.
• Overall, the Russian resources estimates ascribe 450,000 tonnes of contained copper, 900,000 oz of gold and 20m oz of silver together with lead, zinc and barite.
• Noricum Gold is currently compiling an extensive database of historical information including over 200,000 metres of drilling as well as trenching and assay data.
• In addition, Noricum Gold has undertaken a short programme of diamond drilling to help verify the eastward extension of mineralisation defined by the Soviet era drilling at Tsitel Sopeli. Results from the recent drilling include 8m at an average grade of 0.49g/t gold and 6.23% copper from surface in hole TSPDH003; 8.1m at a grade of 5.67g/t gold and 1.73% copper from surface in hole TSPDH007 and 15m at 2.07 g/t gold, 2.39% copper and 2.97% zinc also from surface.
• Noricum Gold is also planning an extensive programme of geophysical work for later this year and developing detailed exploration programmes to evaluate both the Tsitel Sopeli and Kvemo Bolnisi prospects.
• Tsitel Sopeli is located around 10km from the Madneuli mine which is owned by Noricum Gold’s local partner providing the potential for a toll-treating option for Noricum Gold. The Kvemo Bolnisi project area is also located in close proximity to Madneuli.
• The company also notes that the two priority targets are part of a larger target area that has a combined total of Russian standard resources containing 980,000 tonnes of copper, 6.6m oz of gold and 22m oz of silver.
Conclusion: The extensive historical database should help to guide the conversion to a JORC compliant resource which is being overseen by a former Wardell Armstrong consultant with extensive experience of converting Russian standard resources to a form consistent with western reporting standards. We look forward to further news as the investigations proceed.
*SP Angel acts as Nomad and Broker to Noricum. An SP Angel analyst has visited the Schonberg site in Austria.
Obtala Resources (LON:OBT) 6.25 pence, Mkt Cap £16.5m – Interims
• The company reported sales revenue of £2.3m against revenues of £1m in FY 2014.
• Net profits were £3.02m with cash and cash equivalents at the end of the period was £1.4m.
• For agriculture and processing, the first half of 2015 has been the continued developmet of the Morogoor farm and processing facility in Tanzania.
• There are now 20 varieties of fresh produce starting locally in Tanzania.
• During the period the cannery in Lesotho continued to trial and produce a sample range of canned products which vary from chopped tomatoes to pasta and pesto sauces.
• In Timber – the portfolio has grown but operations have been challenging as a result of exceptionally heavy rainfall in northern Mozambique.
• African Home Stores – The company have bought into a group of retail outlets in Lesotho.
• Sales have been impacted over the period by renovation works to the shopping complex building where the outlets operate from.
Shanta Gold* (LON:SHG) 5p, Mkt Cap £23.4m – Mine Plan and Reserves update
• Shanta Gold has released details of its plans to develop an underground mine at its New Luika mine in Tanzania and of the ore reserves this new development will access in tandem with the existing open-pit mining operation.
• The new underground mine accesses 1.57m tonnes of ore at an average grade of 5.5 g/t gold, via a decline from the Bauhinia Creek pit, over a six year period commencing in Q2 2017.
• This produces a total of 310,000 oz of gold at a cash cost of US$499/oz (AISC US$640/oz) and generates a pre-tax IRR of 56% and an NPV of US$72m at an 8% discount rate assuming a gold price of $1200/oz and pre-production capital expenditure of $38.4m.
• Open pit production continues into 2018,contributing 133,000 oz, with tailings retreatment adding a further 19,000 oz of gold output.
• Taken overall the company reports that the mine plan including open pit and underground mining plus the retreatment project generates “Post-tax NPV for the Plan from January 2016 of US$110.4m at an 8% discount rate and a gold price of US$1,200/oz.” The project sensitivity to gold price assumptions indicates that a reduction to $1100/oz reduces the pre-tax NPV to $76.1m while an increase to $1300/oz produces an NPV of $144.8m.
• “Probable reserves for surface and underground of 2.65Mt at 5.9g/t gold for 506,000oz” comprise an underground reserve of 1.099mt at a grade of 7.1 g/t at Bauhinia Creek; 471,000t at a grade of 5.1g/t gold from Luika and 1.085mt of open pit ore at a grade of 5.08g/t gold.
• The company has already identified additional satellite deposits including the announcement recently of a 2.3mt of indicated/inferred resources at an average grade of 1.7 g/t gold at Elizabeth Hill. Other targets in the area may also provide the opportunity to supplement resources in the future, while both the Luika and Bauhinia Creek structures remain open at depth.
• The company continues to maintain its 2015 production and cost guidance of 72-77,000oza of gold production at a cost in the range $850-900/oz on an all-in sustaining cost basis.
Conclusion: Shanta Gold has laid out a relatively detailed year by year plan of its operations until 2022 and it is clear that the mine’s future is moving into underground operations with supplemental feed from satellite open pit operations.