Economic News
The IMF released new global economic growth forecasts suggesting world growth rate will come down 0.3pp this year to average 3.1% (down from 3.3% forecast in its Jul/15 report).
• Growth forecasts are uneven between regions with developed economies expected to pick up slightly, while emerging economies are to post a slow down for the fifth year in a row.
• “Recovery is most advanced in the US and the UK where monetary policy likely to tighten soon,” the IMF said.
• Downside risks for emerging economies have increased on the back of lower commodity prices hurting respective trade balances, reduced capital flows as well as increasing pressure on national currencies.
• The weak commodity price outlook is estimated to cost nearly 1pp annually from the average economic growth in commodity exporters over 2015-17. Oil exporters are expected to favour the worst with lower prices’ effect on potential growth of -2.25pp over the same period.
US – Trade balance deficit widened through Aug amid strengthening dollar and weakening demand in foreign markets.
Date Announcement Period Actual Expected (Bloomberg) Prev month
Monday ISM Services PMI Sep 56.9 57.5 59
Tuesday Trade Balances Aug -US$48.3 -US$48.0bn -US$41.8bn
Wednesday Consumer credit Aug US$19.5bn US$19.1bn
Thursday Weekly jobless claims Oct 274k 277k
China – Markets remain closed for the Golden Week and will reopen on Thursday.
Japan – The Bank of Japan kept the pace of monetary easing unchanged and saying little on a potential change in the course later this year.
• The Bank will continue buying Y89tn worth of bonds and other assets per annum.
• “Japan’s economy has continue to recover moderately, although exports and production are affected by the slowdown in emerging economies,” the statement read.
• Meanwhile, weak inflation data released lately suggest the economy is unlikely to reach 2% target next year at current pace of monetary stimulus.
• Etsuro Honda, a special adviser to prime minster and one of the proponents of Abenomics, said that there is “more and more evidence” that the BoJ may need to do more.
• The Bank will release a new outlook of the economy and inflation on Oct 30.
Germany – Industrial production disappointed in Aug with the weakest reading since Aug/14 released this morning.
• Industrial production: -1.2%mom/+2.3%yoy v +1.2%mom/+0.8%yoy in Jul and +0.2%mom/+3.3%yoy forecast.
UK – Industrial production climbed 1.0%mom in Aug led by stronger car production numbers.
• Estimates were for a 0.3%mom increase.
Zambia – Ministers are set to hold meetings with miners wo check on the status of job cuts and keep those to “bare minimum”.
Russia - President Putin is 63 today
Currencies
US$1.1241/eur vs 1.1206/eur yesterday. Yen 120.03/$ vs 120.24/$. SAr 13.472/$ vs 13.6441/$. Sterling $1.530/gbp vs 1.516/gbp
0.720/aud vs 0.712/aud –
Commodity News
Precious metals:
Gold US$1,149/oz vs US$1,138/oz yesterday – China is estimated to have added nearly 0.5moz (15) to its gold reserves through Sep.
• The value of gold assets as announced by the PBoC stood at US$61.2bn at the end of last month which is equivalent to 54.9moz v 54.5moz held at the end of Aug.
• China has been adding to its reserves through summer with 19t bought in Jul and 16t in Aug.
Platinum US$941/oz vs US$919/oz yesterday
Palladium US$705/oz vs US$698/oz yesterday
Silver US$15.88/oz vs US$15.66/oz yesterday
Base metals:
Copper US$ 5,215/t vs US$5,150/t yesterday –
Aluminium US$ 1,570/t vs US$1,557/t yesterday -
Nickel US$ 10,085/t vs US$9,910/t yesterday
Zinc US$ 1,672/t vs US$1,655/t yesterday
Lead US$ 1,648/t vs US$1,619/t yesterday
Tin US$ 15,850/t vs US$15,505/t yesterday
Energy:
Oil US$52.6/bbl vs US$49.30/bbl yesterday
Natural Gas US$2.467/mmbtu vs US$2.457/mmbtu yesterday
Uranium US$37.00/lb vs US$37.00/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$53.7/t unch vs US$53.6/t – price is trading but maybe less movement due to Chinese holiday
Thermal coal (1st year forward cif ARA) US$49.90/t vs US$49.40/t
Other:
Tungsten - APT European prices $180/200 per mtu from $180/190 last week – prices remain unchanged
Ferrochrome – Benchmark charge chrome price for delivery in Europe fell 4c to US$1.04/lb last week marking the lowest reading since Q1/10.
Company News
Glencore (LON:GLEN) – 121.5 pence, Mkt Cap £17.5bn – Funding factsheet gives schedule of debt and confirms no covenants but..
Click the link below to see Glencore’s funding factsheet
https://www.glencore.com/assets/investors/doc/debt-investor/GLEN-2015-Glencore-plc-update-and-details-of-funding-structure-6Oct2015.pdf
• Glencore’s debt and debt maturities have come to the fore in recent weeks as low commodity prices and a collapse in earnings focus investor attention on the company’s ability to redeem, refinance and service its debt.
• The company appears to have sufficient committed liquidity to cover it’s debt over the next 20 months so long as the group continues to generate surplus cash.
• The treasury has $3.1bn of cash and cash equivalents and expects to bring in another $2bn from disposals which along with modest earning should cover the $5,370m worth of current bond redemptions
• Revolving Credit Facility (RCF): Just $6.6bn of the $15.25bn of committed syndicated ‘RCF’ is comprised of short term and long term funding
• $8.45bn of this is a relatively short term facility to 28 May 2016 with a 12-month term-out option to May 2017. Question is what happens after that if the banks refuse to roll over the facilities.
• The other $6.8bn is a 5-year RCF.
• We don’t know how the $6.6bn is drawn within the RCF and if all of this can be set into the longer term RCF?
• Bilateral bank loans: $3.4bn is drawn on bilaterial bank loans made up of many loans each of <$100m within operating subsidiaries where the term is not disclosed and the total available to borrow is much higher than $3.4bn. Repayment is to be made by the operating subsidiaries though we can not see if the subsidiaries are able to repay all these loans or if the loans are guaranteed by the parent company
• Glencore bonds:
Glencore hold some $5.37bn of current bonds maturing over the next 12 months
• The group also holds $31.114bn of non-current bonds maturing between November 2016 and 2042
• The longer the date the generally higher the coupon with rates varying between 1.075% for a relatively small JPY denominated bond and 7.5% for a small US$350m perpetual bond which was redeemed in October
• Only $1,450m of bonds are based on LIBOR + a modest coupon indicating the little sensitivity to interest rates
Appendix – detail of capital market notes
• The detail of the capital markets notes in the Appendix highlights the $5.37m of current bonds due to mature over the next 12 months
• Today’s statement gives confidence in the group’s ability to meet its commitments but also highlights the need to either retire or refinance facilities on a regular basis to continue to grow.
• A loss making Glencore could find financial markets tougher to access, though the group managed to work through the liquidity crisis of 2008 and we see options for further financing.
• It is evident that Glencore have quite a few options but if the banks wanted to close ranks and really make life tough for Glencore then there may be potential for a squeeze, though we would rather not see the potential for such an unpleasant event – remember Ashanti Goldfields which was squeezed into financial servitude through the use of Exotic options on gold supplied by Goldman Sachs!.
• Risks: We believe the major risk relates to the refinancing of current, short dated, bonds which could see further drawing on the RCF. Then there is the refinancing risk on bonds maturing in late 2017. If the RCF facilities are not renewed / extended then Glencore will need to refinance in other ways.
• If there are any ratings related triggers in the corporate debt facilities including the RCF this could limit liquidity. There is no mention any limits on drawings related to ratings downgrades which may or may not be an omission.
• We are reminded: when you own a small amount to a bank then it’s your problem, when you owe a really large amount to 60 banks then it is their problem.
Trading Buy Recommendation: We rate Glencore as a Trading Buy, these are tough times for Glencore’s mining and oil & gas business and the H2 is suffering appreciably lower commodity prices than H1. We hope for better performance out of the trading business, but lower prices may limit the potential for gains here as well. We feel Glencore stock is likely to remain volatile but with further upward potential as commodity markets recover from low levels.
Major Miners – Rio Tinto, BHP, Anglo American
• Read across: All the major mining companies carry significant debt. Rio Tinto nearly came unstuck in 2009 post the Lehman Bros collapse and was effectively rescued by the Chinese. Every debt laden company carries refinancing risk if earnings or debt availability falls. The market might also fret over the debt schedules of Rio Tinto, BHP and Anglo American if they knew what might need to be refinanced and when.
Berkeley Energy (LON:BKY) 21.75 pence, Mkt Cap £39.2m – Resource update from Zona 7
• Berkeley Energy has announced its revised resource estimate for the Zona 7 at its Salamanca Uranium project in Spain.
• The updated resource of 22.1m tonnes at an average grade of 645ppm U3O8 (0.065%) represents around a 4% increase in total contained uranium oxide within Zona 7 which now contains around 35% of the total uranium resource (89.5m lbs U3O8) of the Salamanca Project which also includes the Retortillo and Alameda projects.
• The results reported today show over 88% of the resource at Zona 7 is classified as indicated. The updated estimate, which uses a cut-off grade of 200ppm, shows an increase of almost 10% in grade to 645ppm from the 589ppm reported in the earlier estimate.
• Zona 7 is substantially higher grade than the other deposits within the Salamanca Uranium Project (Retortillo 367ppm; Retortillo Satellites 492ppm Alameda and satellites 462-472ppm) and is emerging as the most likely deposit for initial mining.
• The company has signalled that it plans to publish the findings of a pre-feasibility study into the overall economics of the project during the current quarter.
Conclusion: The company had previously released drilling results showing the continuity of high grade, shallow uranium mineralisation at Zona 7 so the resource upgrade is not unexpected, however it maintains the positive momentum of an emerging narrative of improvement at the Salamanca Uranium Project. We look forward to the project development and economic analysis in the pre-feasibility study.
Firestone Diamonds (LON:FDI) 23pence, Mkt Cap £71.1m – Capital Markets Day
Firestone Diamonds held a Capital Markets Day yesterday for which they rolled out the big guns complete with the Lesotho Minister for Mines and High Commissioner. It was a slick presentation with detailed updates and plenty of before and after pictures from Glen Black the Chief Project Officer, Paul Bosma the COO, Grant Ferriman the CFO, Stuart Brown, CEO and Lucio Genovese the Chairman.
Key points below:
• Firestone are on track for completion in December 2016 as per the revised schedule with 49% of the overall project completed – the EPCM side is basically done, on the construction side both the residue storage facility and earthworks are over 80% complete. This includes the power line and substation which was energised last week and a new 5.8km access road completed in August.
• They are behind on the civils with only 20% complete. Nothing new here the delay was down to the late handover of earthworks due to the late approval of work permits, bad weather and increased overburden which we know about already.
• Meanwhile on the fabrication front the SMPP is 73% complete, while a delay in the accommodation units means they are 41% complete.
• They’ve been busy re-logging core and remodelling the resource too. The net result is they’ve increased the bottom cut off from 1mm to 1.25mm which increases the $/ct value. They’ve also removed the boart factor (it’s negligible) and further work on density has resulted in a higher confidence local block estimate.
• The weighted average un-escalated diamond price for the new Mine Plan is US$131/ct, the upside diamond price remains US$156/ct. Taking a prudent approach, they have not escalated these values and won’t given the current diamond market, until production starts in Jan 2017.
• With a new resource model and revenue estimate they did a whittle pit optimisation, had a look at what the neighbours where doing to come and then came out with a new mine plan. The resulting optimal design includes a split shell which defers waste, lowers the strip ratio and reduces ramp failure risk. Key is the reduction in capex cost for the initial mining fleet.
• An update of the 2013 numbers post financing shows the NPV up to US$389, shorter payback now 49mths and an increased IRR of 42%. While operating costs on a ZAR/t basis are a touch higher on a US4/t basis they’ve come down thanks to the weaker Rand.
• A closer look at the numbers shows without the US$15m standby facility things would be tight, with it headroom stands at $18.6m.
• Internally they are pushing hard to complete construction earlier however publicly they are remaining prudent and sticking to the revised timetable with completion due at the end of next year.
• In terms of the diamond market overview, the short term outlook remains weaker with the lower quality market well supplied (demand is still there for the mid-high quality stones) however, the larger producers are reacting to the softening prices. The view was that next year we will see some consolidation with a recovery towards the end of the year.
As they say timing is everything and while no one likes to see a delay it could be a blessing in disguise with the mine ramping up at a time when the diamond market is forecast to improve.
Gemfields (LON:GEM) 55 pence, Mkt Cap £299.2m – Final Results and operating update
• Gemfields has reported a 7% increase in revenues and a 9% increase in EBITDA for the year to 30th June. Profit after tax declined by 24% to $12.3m in part, reflecting a 15% increase in in selling expenses and G&A to $55.3m. Even so, the results exceed both company guidance and our expectations and reinforce our positive view of the company.
• At Kagem in Zambia, production of emeralds and beryl rose by almost 50% during the year to 30.1m carats. Average grades, however, declined from 253ct/tonne to 242 ct/tonne and the company reduced operating costs to $1.48/ct from $1.58/ct in 2014.
• Ruby and corundum production from the Montepuez mine in Mozambique rose by almost 30% during the year to 8.4m carats, despite a fall in the average grade to 26 ct/t (2014 – 41 ct/t) .
• The lower grades led to increased costs at Montepuez with unit costs rising to $2.57/ct from $1.12/ct. The company notes, however, that the increased unit costs are “being directly attributed to a greater proportion of lower grade but significantly higher quality alluvial deposit ore being processed during the year.”
• As previously announced, the company has recently expanded its geographical scope through the signing of binding agreements to acquire two more emerald projects, both located in Colombia. These comprise the acquisition of a 70% interest in the Coscuez Emerald Mine and acquisition of 75% and 70% interest in two Colombian exploration companies which hold exploration rights and mining licence applications.
Medusa Mining (ASX:MML) A$0.42, A$87.3m – Building production towards target levels
• Medusa Mining suffered a run of around 14 missed targets / profit warnings in a row.
• They can not blame lower gold prices but they can blame a former management for a lack of investment and lack of forward mine planning.
• Medusa’s move to raise gold production from 65,000ozpa towards a target of 200,000ozpa was never going to be easy but the team are at last closing in on a new target of 150-170,000ozpa.
• In all the chaos, the company committed the greatest of offences and delisted from the London Stock Exchange.
• Raising production required the instillation of a new larger mill and associated plant along with a massive expansion of the mine including new shafts and development of around 100 working underground stopes
• One of the main problems they had once the mill was up and running was getting enough ore in to fill it.
• The solution was a new shaft which is currently being built at a cost of $10m or an extra $80/oz to the AISC.
• Once this is up and running it means the total hoisting capacity will increase from 2.4kktpd to 2.7ktpd.
• In the meantime mill utilisation (design capacity 2,500 tpd) has improved and is now at 75% while the recovery for Q2 remains at 94% (this has been fairly steady).
• Another big issue was dilution however by changing the way they pay their contractors from a per tonne mined basis to a m3 blasted basis this has improved stope grades by 50%.
• The installation of tramming loops allowing continuous one way traffic to the Level 8 shaft hoppers, new fans to increase ventilation, dewatering and new internal shafts are all helping to lower costs and improve efficiencies.
• Looking forward Medusa plan to do further resource drilling from Level 8 and have recently bought 2 underground rigs allowing them to retire their underground drilling contractor – further cost savings.
• The results of the resource drilling will allow the board to make a decision as to whether or not to push ahead with the L16 shaft, a 4 year project which will be funded through cash flow.
• Production guidance for 2015-2016 remains 120k – 130koz at an AISC of $900-1,000/oz. Expect the AISC to remain high in the medium term while they complete key infrastructure projects.
• While fixing the problems at Co-O remain key they are not ignoring their other projects. Though there is no word on the copper porphyry exploration expect an updated resource estimate on the Bananghilig Deposit by December and a scoping study will follow. At the Giunhalinan Prospect they will start scout drilling shortly.
• Without wanting to tempt fate it appears that the problems at Co-O are at the very least under control if not almost behind them. They remain unhedged and have no debt so as the cost savings come through we should see them drop to the bottom line allowing the company to rebuild their cash position (currently c. $14m).
Noricum Gold* (LON:NMG) 0.14p, Mkt Cap £3.8m – Walchen continues to report high grade copper and silver in Austria
• Rock samples taken from high grade dumps at the historic Walchen mine in Austria show good grades for polymetallic ore.
• Walchen Sample grades: 2.25% copper, 0.8 g/t gold, 94.9 g/t silver, 2.44% lead, 1.84% zinc
o The team plan to drill to test near surface mineralisation and will continue to channel sample underground.
o The work is low cost from an exploration perspective but should give better indication of the potential resource at Walchen and the potential to develop an some form of indicative mine plan.
o Georgia: The Noricum are picking up pace on the Bolnisi licenses in Georgia starting with sampling of surface outcrops recently uncovered by the development of a new forestry road. We would expect first results from this exploration within weeks.
*SP Angel acts as Nomad and Broker to Noricum. An SP Angel analyst has visited the Schonberg site in Austria.
Potash Corp drops US$8.8bn bid for K+S
• K+S said the offer did not reflect its fundamental value and would threaten potash production in Germany.
• The deal would have given Potash Corp a 25% global share in the global potash industry. The deal was not helped by falling potash prices.
Paragon Diamonds (LON:PRG) 4.5 pence, Mkt Cap £12.5m – Extension of exclusivity on Mothae while financing negotiations proceed
• Paragon Diamonds reports that it has secured an agreement from Lucara Diamonds to extend the timetable to arrange its $15m financing package to acquire the Mothae diamond property from Lucara.
• Paragon is in negotiation with Acrux Resources Proprietary for the $15m package which will enable Paragon to complete the $6.5m due for Mothae.
• Lucara has reserved its rights to terminate its exclusivity agreement with Paragaon Diamonds if there is any deviation from an agreed, but undicclosed, schedule.
• When financing is completed Paragon will make an initial payment of $2m.
Scotgold Resources Ltd (SGZ LN) 0. 0.6p, Mkt Cap £7.5m – Scotgold closes rights issue
• Scotgold has announced that it has closed it rights issue and raised $1.238m via the issue of 91.09m new shares at a price of 1.3cents.
• The rights issue was 80% subscribed and the new shares issued represent around 7% of the enlarged issued capital.
Tertiary Minerals* (LON:TYM) 2.125p, Mkt £4.2m – Raised £650,000 to advance the MB Fluorspar Project
• Tertiary Minerals reports that it has raised £650,000 through placing 28,888,889 new shares at a price of 2.25p/share.
• The new shares represent approximately 13.3% of the enlarged issued capital of the company.
• The new funds will assist the company “to commence the next phase of drilling this winter at our exciting MB fluorspar project in Nevada.”
*SP Angel act as Nomad and broker to Tertiary Minerals