Glencore – has Glencore cut enough to turn copper, zinc and lead markets to deficit and will other miners follow its lead?
• Glencore’s cuts of copper, zinc and lead appear to have turned sentiment in favour of price recovery in recent weeks but will these cuts be sufficient to offset the impact of lower demand out of China and elsewhere.
• Zinc: Our initial analysis shows the zinc market should plunge into a deficit of 365,000t next year indicating potential for a significant upturn in prices.
• Lead may still show a surplus of 35,000t next year despite Glencore’s cut.
• Copper: Glencore’s cuts combined with other pullbacks should take the market into deficit next year depending on how fast demand for copper recovers in China
• China infrastructure: of greater concern is the delay to massive infrastructure and construction projects in China where some $45bn of projects appear to be delayed
• The Chinese government have taken back some Rmb 1 trillion from local authorities on unspent budget allocations with some 193 projects said to be delayed out of 815 projects in total.
• Of 333 railway projects under construction, 99 are seen as <50% complete and another 20 <10% complete marking a slowdown in consumption of metals and leading to a significant build up of stock levels.
• China’s National Development and Reform Commission approved around $130bn of railway, port and highway projects this year.
• Regulators are concerned at the total level of debt lent by banks to commodity traders, though much of the finance is out of China in the case of other traders.
• Vitol Group, a major oil trader, signed a record $8bn of loans on last week with 57 banks. While Trafigura also refinanced some $2.2bn of loans at the start of the month with 28 banks. Glencore renewed its revolving credit facility in May raising $15bn in two parts.
• Debt: Glencore is looking to cut $10bn off its debt and could cut its borrowings further if financial regulators consider the market to be at risk from the level of loans into the sector.
Ford plans to invest $1.8bn in China over the next five years to expand research and development
Economic News
US – Lael Brainard, a voting member of the FOMC, expressed her dovish view over the future pace of monetary policy highlighting risks of premature tightening.
• “The downside risks make a strong case for continuing to carefully nurture the US recovery and argue against prematurely taking away the support that has been so critical to its vitality,” Brainard said during her speech in Washington.
• “Even as lift-off is coming into clearer view ahead, by some estimates, the substantial financial tightening that has already taken place has been comparable in its effect to the equivalent of a couple of rate increases”.
• Slow pace of labour earnings growth remains a concern despite a solid recovery in the number of people employed.
China – The latest trade data shows the sharpest decline in imports since May this year highlighting concerns over the strength of domestic demand.
• Imports (in RMB terms): -17.7%yoy v -14.3%yoy in Aug and -16.5%yoy forecast.
• Exports: -1.1%yoy v -6.1%yoy in Aug and -7.4%yoy forecast.
• Australian dollar fell 0.4% on the news before claiming some of its losses back.
• Poor economic data led FTSE Mining Index lower this morning.
Australia – Business confidence rebounded in Sep as measured by the NAB Index (+5 v +1 in Aug).
• The optimism is reported to have been partly attributed to the recent change of prime minister who is considered by many market commentators as being positive for business.
• In particular, employment sub-category recorded a good rebound increasing to 4 from -1 in Aug.
• On a down side, exporters posted a deterioration in the outlook with sub-index down to 1 from 11 seen in Aug.
Currencies
US$1.1386/eur vs 1.1379/eur yesterday. Yen 119.69/$ vs 120.15/$. SAr 13.439/$ vs 13.317/$. Sterling $1.525/gbp vs 1.535/gbp
0.730/aud vs 0.736/aud –
Commodity News
Precious metals:
Gold US$1,156/oz vs US$1,164/oz yesterday –
Platinum US$980/oz vs US$990/oz yesterday
Palladium US$688/oz vs US$713/oz yesterday
Silver US$15.73/oz vs US$15.99/oz yesterday
Base metals:
Copper US$ 5,284/t vs US$5,342/t yesterday –
• Unwrought coper and copper-fabricated product imports jumped 31%mom in Sep on the back of a positive Shanghai/London arbitrage window.
Aluminium US$ 1,595/t vs US$1,629/t yesterday -
• China continues to flood overseas markets with aluminium and aluminium products latest trade data show.
• Sep shipments totalled 350kt, up 2.9%mom and down 12.5%yoy.
• In the first nine months of the year, China exported a total of 3.6mt equivalent to a 17.7%yoy increase.
Nickel US$ 10,525/t vs US$10,685/t yesterday
Zinc US$ 1,828/t vs US$1,876/t yesterday
Lead US$ 1,795/t vs US$1,806/t yesterday
Tin US$ 15,905/t vs US$16,100/t yesterday
Energy:
Oil US$50.40/bbl vs US$53.10/bbl yesterday
Natural Gas US$2.528/mmbtu vs US$2.537/mmbtu yesterday
Uranium US$38.00/lb unch vs US$37.30/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$54.4/t vs US$54.2/t –
Steel – Global steel demand is forecast to record a c.2%yoy decline this year on the back of a slowdown in China, according to the WorldSteel estimates.
• “The steel industry has, for the time being, reached the end of a major growth cycle,” the agency said.
• Low growth cycle “will last for the time it takes for other developing regions of sufficient size and strength to produce another major growth cycle”.
• WorldSteel consumption is expected to hit 1.51bnt this year, down from 1.54bnt in 2014.
• Demand to post a small increase through 2016 to 1.52bnt.
Thermal coal (1st year forward cif ARA) US$48.70/t vs US$49.50/t
Other:
Tungsten - APT European prices $180/200 per mtu unchanged at this impossibly low level
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
Beowulf Mining (LON:BEM) 2.55 pence, Mkt Cap £10.9m – Kallak North iron ore project
• Beowulf Mining have updated the market on their iron ore project in Northern Sweden.
• The news is that The Mining Inspectorate of Sweden has written to the Government of Sweden and recommended that the Exploitation Concession for Kallak North be granted, letter dated 9 October 2015.
o This is nice news and one that should add some option value to Beowulf in anticipation of an era when iron ore prices might once again rise to enable such projects to go ahead again.
o In the meantime we wait to see if Beowulf might venture to do something more interesting and potentially more value adding with its time and its shareholder funds unless Beowulf management know something more about a potential near-term recovery in iron ore pricing and demand than the rest of us.
DiamondCorp (LON:DCP) 9.125 pence, Mkt Cap £34.3m – Update on Commissioning and Valuation
• The conveyor belt system from the first production level to surface has been completed and is being commissioned.
• Commissioning is expected to be completed with all future kimberlite and development waste mined at Lace transported to surface via conveyor rather than trucks.
• This will result in a reduction in opex/t.
• Dump trucks will be used for transporting kimberlite from UK4 production level onto the conveyor belt at a rate of 30,000 tonnes per month.
• As mining progresses at UK4, the conveyor belt is to be extended to the first block cave level.
• The conveyor belt capacity has been sized at twice the current front end capacity.
• The company has been looking at ways to reduce water consumption to be able to reach the planned mining rate of 1.2mtpa (200 tph).
• A de-grit circuit has been put into place with the bottom screen size increased from 1m to 1.25mm – this results in a 50% reduction in water consumption.
• The increase in the bottom cut off size results in a loss of small stones but these are the lower value stones.
• The change in the cut off size results in a coarse diamond size frequency resulting in a potentially higher valuation and lower grade.
• The company is not planning sales of its existing package of 4,250 carats as diamond parcels of less than 10,000 carats is attracting weaker prices.
• The company is currently undertaking an independent valuation of what diamonds are expected to achieve in commercial volumes.
• An increase in the bottom cut off increases the scope for better recoveries of bigger stones and hence has a knock on effect on valuation and grades.
• The valuation is expected to increase from the current range of US$140-US$160 per carat to US$160–US$200 per carat.
• This will also result in recovered grades dropping proportionately.
Conclusion: Completion and commissioning of the conveyor belt is significant step forward. The increase in the bottom cut-off and the implementation of a de-grit circuit improves water efficiency at the mine significantly – it is likely that the de-grit circuit on its own will enable production to reach planned rates of 1.2 mtpa from existing water supplies.
The increase in the bottom cut off increases bottom valuation from the recovery of higher value stones with a proportional reduction in grades resulting in a neutral impact on mine economics. Ground conditions have resulted in a slower recovery of a more optimal package size – against a weaker diamond pricing environment, the company is wise to delay sales till a larger size package is accumulated. While things are running more slowly than expected, it is good to see the focus on efficiency and value and we remain buyers.
Firestone Diamonds (LON:FDI) 21 pence, Mkt Cap £64.9m – Update on the sale of the Botswana operations
• Tango Mining the potential purchaser of the company’s Botswana operations has not been able to meet the deadline to pay the deposit.
• The deposit of US$0.3m was due on the 30 September 2015.
• As a result of the terms of the conditional sale agreement have been amended.
• The disposal which is expected to be completed on the revised date of 8th April 2016 will be subject to a number of revised conditions.
• These include Tango Mining raising the balance of the consideration to US$7.65m, Tango meeting the increase in the care and maintenance programme which is running at US$40,000 per month, both parties obtaining ministerial approval for the transfer of the controlling interest in Monak and Tango Mining receiving approval from the TSX Ventures Exchange.
• Should the conditions not be waived or met by the revised date, the deal is not likely to concluded.
Conclusion: Tango Mining have struggled to raise the deposit for their purchase of BK11 and the associated licences. Against the current backdrop for prices and no other bidders at the current price, we see limited scope for this transaction to be completed.
Kefi Minerals* (LON:KEFI) 0.475 pence, Mkt Cap £8.3m – Preferred plant contractor appointed
• Kefi Minerals have announced the appointment of Sedgman a preferred contractor for construction and for the plant start-up.
• The scope of work will include the Front end engineering design, fixed construction costs, the estimated cost of $63m of 1.6-1.7mtpa of feed and performance guarantees for the start up and first year of production.
• The contract compares well with the 2015 DFS which anticipated a fixed-price lump sum contract of $61m for a smaller 1.2mtpa plant not inc a fixed price and performance guarantees which might normally add significantly to the bill.
• Sedgeman’s proposal forecasts gold production of around 105,000ozpa for the first five years and sets KEFI’s peak funding requirement at $120m plus provisions for cost-overruns and finance charges.
• Finance: KEFI reckons it will fund the Tulu Kapi gold mine development at the project level using debt, gold streaming finance and $20m of project-level equity from the Ethopian government.
Conclusion: It is great to see mining companies getting better value for money out of contractors and for the mining industry to better focus on costs and delivery of value in new projects. Sedgman are a top quality name in the mining world and will work hard to protect their reputation as a leading contractor. EMED Mining, formerly run by Harry Adams, has managed to nearly halve the capital cost of its development. While Tulu Kapi is a green fields project, we we look forward to KEFI exercising similar cost control in Ethopia.
*SP Angel act as Nomad to Kefi Minerals.
Intelligent Energy (LON:IEH) 97pence, Mkt Cap £180m – Working Group to develop 90kW stack
• In the week when Hunyadi launched a fuel cell car in the UK Intelligent Energy ‘IE’ announces a working group to develop a 90kW fuel cell stack.
• Problem with the Hunyadi car is where to fill up with hydrogen?
• We don’t know of any filling stations for hydrogen vehicles and it’s a bit laborious to have cylinders of hydrogen delivered to your home. Not to mention the fitting of a suitable storage facility for the gas bottles. Maybe you can bleed off some hydrogen if you work at a petrochemical plant or you could fit a coal gasifier/purifier in your own facility.
• Fuel cell developers have long mooted the instillation of small scale hydrogen production units at filling stations or as domestic units using conversion from natural gas or electrolysis. Neither appear available as yet.
• IE have been working on a variety of fuel cell stacks for some years with management previously hinting at deals with Apple and aerospace manufacturers. The company currently sells a small-scale unit for topping up mobile phones though the price is prohibitive. Macrumors, a website about Apple products, carries a story about the ability of an IE fuel cell fitting into a an iPhone 6. We suspect this is not with Apple’s approval and we also suspect the temperature sensitivity of Apple’s component’s will rule out the use of a fuel cell for some time.
• Back to today’s press release, IE are leading a working group to develop its 90kW stack for mass manufacture. We hope it runs cooler than the stacks we last saw at the company’s Loughborough facilities.
• IE has been around a long time is supported by the British Government and has a €5m grant to play with plus the involvement of four industrial partners alongside BMW and Daimler who are there to set out stack requirements.
• The company’s knows its stuff but has yet to settle on a main product. Experts reckon if IE management could make their minds up and focus on one strategic product then the company might be able to transition from a development company to a commercial manufacturer.
Conclusion: It will be interesting to see if Hunyadi are able to sell many fuel cell vehicles in the UK / Europe. Hunyadi may gain first mover advantage in this area but we suspect it will simply highlight the lack of refuelling options in the UK.
*The author of this note has previously visited IE’s facilities in Loughborough and has also visited other fuel cell manufacturing sites in the UK and Europe.
Weatherly International (LON:WTI) 0.6 pence, Mkt Cap £5.7m – Quarterly Operations and Production Update
• Tschudi produced 3,544 tonnes of copper cathode for the quarter averaging 84% of nameplate capacity at 1,185 tonnes per month.
• The company expects to achieve nameplate capacity of 1,400 tonnes per month in the December quarter.
• Ore stacked grades have increased from 0.53% to 0.73%.
• Production of 2015 calendar year is now expected to be 10,400 t of copper cathode – 4% above previous guidance.
• Operating costs are not reported but are expected to be reported in the December quarter.
• Resource and reserve estimates at Tschudi are currently being updated.
• The company are looking at expanding plant capacity from 17,000 tonnes to 20,000 tonnes at a relatively low capex investment of US$1.2m.
Conclusion: In terms of production levels Tschudi is making improvements, however, without any data on costs it is hard to judge whether this is profitable.