Crisis developing in some commodity countries
• Zambian and some other nations are struggling to cope with the impact of lower metals prices and rising import costs
• Commodity currencies have collapsed with many likely to weaken further as a stronger US dollar combines with lower exports to weaken local currencies
• Zambia has raised interest rates to 15.5% in an attempt to contain rising inflation putting enormous strain on local borrowers and on the population
• Russian interest rates peak at 17% (now 11%) as the Rouble collapsed and other commodity exporting nations are sure to continue to suffer the combined impact of weaker currencies and rising inflation. Russia is suffering more from low oil prices than from any other commodity.
• Brazil is suffering a similar crisis with interest rates at 14.25% and in recession despite hosting the Olympics and world cup
• The effect is to create an economic death spiral killing off local borrowers and reducing government tax receipts
• We wonder if this could create a re-run of the Asian or Latin American debt crises
Economic News
US – Auto sales accelerated in Oct beating market estimates and marking a decade high annualised pace.
• The Big Three automakers recorded double-digit yoy sales growth.
• On a less positive note, factory orders contracted for a second consecutive month in Sep on the back of stronger dollar weighing on sales in overseas markets and spending cuts by energy companies.
• Manufacturers have also been trying to reduce inventories amid lukewarm global demand.
Date Actual Expected (Bloomberg) Prev month
Monday ISM Manufacturing PMI Oct 50.1 50.0 50.2
Tuesday Factory Orders Sep -1.0%mom -0.9%mom -2.1%mom
Vehicle Sales (annualised) Oct 18.1m 17.7m 18.1m
Wednesday ADP Payrolls Oct 180k 200k
Trade Balance Sep -US$41.0bn -US$48.3bn
ISM Services PMI Oct 56.5 56.9
Thursday Jobless Claims weekly 260k 260k
Friday Nonfarm Payrolls Oct 180k 142k
Unemployment Oct 5.10% 5.10%
Hourly Earnings Oct 0.2%mom/2.3%yoy 0.0%mom/2.2%yoy
China – Services industry growth accelerated in Oct (52.0 v 50.5 in Sep), according to Caixin PMI data.
• Despite an improvement in new orders which picked up from Sep recent low, business sentiment in the services sector ease to the lowest in ten years of data collection.
• Services companies are reported to have cut their selling price for the second month in a row, although, unlike in manufacturing, input costs continued to increase during the period.
• Better services PMI nearly compensated for a weak manufacturing PMI reading with composite index at 49.9, just a notch from the neutral 50.0. The index hit a multi-year low of 48.0 in Sep.
Eurozone – While services sector growth has been revised downwards in Oct on the back of weaker numbers in Germany, the industry continues to expand at a robust rate.
• Markit Final Services PMI: 54.1 v 54.2 estimated previously and up from 53.7, a seven-month low, in Sep (Germany: 54.5 v 55.2; France: 52.7 v 52.3).
• An increase in the services PMI from the Sep reading is attributed to stronger new business orders and increased employment.
ECB – The Bank released a study today on effects of QE on credit markets saying there is evidence the monetary accommodation works.
• “The results presented suggest that these measures have significantly lowered yields in a broad set of financial market segments.”
• Programmes “have contributed to a reduction in banks’ funding costs, which has incentivised them to pass on the cost relief to final borrowers by granting more credit at better conditions”.
• It remains to be seen whether the latest push by the ECB will allow the bank to accelerate inflation in the Eurozone to target 2% and avoid the economy slipping into deflation.
Australia – Another month of robust retail sales with the gauge up in 15 months of the past 16 months.
• Retail sales: 0.4%mom/0.6%qoq (Q3) in Sep v 0.4%mom/0.7%qoq (Q3) in Aug and 0.4%mom/0.7%qoq forecast.
Zambia - raises interest rates to 15.5%
• Zambia has raised interest rates to 15.5% from 12.5% in an effort to cut rising inflation.
• The fall in copper prices combined with lower than expected production from some miners partly caused by reduced hydropower availability has caused Zambia’s currency to halve. Zambia imports all its oil but the fall in oil prices is not sufficient to offset the pullback in copper and other commodities.
• Prices for imported goods have risen dramatically while consumer prices nearly doubled in October to 14.3% from 7.7% mom.
• The nation recently held a national day of prayer to ease tensions over the developing economic crisis
• The increase in Zambia's benchmark lending rate was the first by the southern African nation since November 2014.
Currencies
US$1.0924/eur vs 1.0985/eur yesterday. Yen 121.32/$ vs 120.76/$. SAr 13.794/$ vs 13.823/$. Sterling $1.543/gbp vs 1.541/gbp
0.719/aud vs 0.718/aud –
Commodity News
Precious metals:
Gold US$1,119/oz vs US$1,133/oz yesterday – Physical demand in China recovered in Q3/15 following weak H1/15, according to the China Gold Association.
• Consumption was up 7.8%yoy to 813.9t in the first nine months.
Platinum US$965/oz vs US$974/oz yesterday -
Palladium US$649/oz vs US$646/oz yesterday – ETF holdings fell by 31,600oz on Monday
Silver US$15.30/oz vs US$15.35/oz yesterday
Base metals:
Copper US$ 5,181/t vs US$5,131/t yesterday –
Aluminium US$ 1,513/t vs US$1,505/t yesterday –
Nickel US$ 9,980/t vs US$10,095/t yesterday –
Zinc US$ 1,701/t vs US$1,693/t yesterday –
Lead US$ 1,702t vs US$1,701/t yesterday
Tin US$ 14,850/t vs US$15,000/t yesterday –
Energy:
Oil US$50.30/bbl unch vs US$48.90/bbl yesterday –
Natural Gas US$2.278/mmbtu vs US$2.277/mmbtu yesterday
Uranium US$36.00/lb unch vs US$35.75/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$46.8/t vs US$47.3/t –
Thermal coal (1st year forward cif ARA) US$49.05/t vs US$48.50/t –
Steel – Chinese anti-corrosive steel exports to the US may be taxed as much as 236% given the level of subsidies they receive , according to preliminary results by the US Department of Commerce.
• Five Chinese exporters are estimated to have received subsidies equal to that amount on the US numbers.
• The case is the first decision in three sets of trade enquiries filed by US steel producers this year given a glut of production from foreign producers led by China that took prices down to nine-year lows and saw US mills shut 31% of capacity.
Other:
Tungsten - APT European prices $165-195/mtu vs $165-185/mtu last week – spreads widen suggesting some resistance to lower prices. Prices for better quality concentrates should be higher.
Ferrochrome – Benchmark charge chrome price for delivery in Europe at US$1.04/lb its lowest level since Q1/10.
Company News
Glencore (LON:GLEN) 130 pence, Mkt Cap £18.7bn – Update highlights debt reduction and shows higher production of oil, zinc, ferrochrome
• Glencore produced an impressive Q3 production update with higher production of zinc (+13%), ferrochrome (+14%) and oil (+57%).
• Glencore has yet to see the impact of planned reduced production as management work to cut back at the group’s higher cost operations.
• For now the company continue to see the benefits of previously planned expansion and in oil the impact of its acquisition and development in Chad.
• Copper production rose by 1% yoy in Q3 to 391.3t.
• The pullback in metal production will mainly be seen this quarter and next year as copper production now suspended at Katanga in the DRC and from lower production at the Alumbrera mine which is at the end of its natural mine life.
• Zinc rose by 14% yoy in Q3 to 347.3t due to expansion plans with production being cut back with higher cost production being cut back at a number of Australian operations
• Nickel fell by 24% in Q3 yoy to 25,900t
• Ferrochrome rose by 10% in Q3 yoy to 287,000t
• Coal fell 15% in Q3 yoy to 40.2mt - mainly on previously announced production cuts
• Oil production rose by 40% in Q3 yoy on an entitlement basis to 1,957k bbls.
• Debt: management are now targeting net debt of $25m and total debt levels of $40m by the year-end with nearly $6bn raised in recent months.
• Silver streaming: the forward sale of silver to Silver Wheaton for $900m in cash allows Glencore to retain 20% of the spot silver price for each ounce delivered .
Conclusion: Analysts have to dig a little harder into today’s production report to see the impact of the cut in production through Q3. The picture is fogged by production from a number of expansions masking the impact of the suspension of higher-cost production of copper in the DRC and zinc and coal in Australia so while Glencore is cutting back in some areas of copper and zinc production it is still expanding in others.
Berkeley Energy (LON:BKY) 27.75 pence, Mkt Cap £50.1m – Zona 7 Pre-feasibility study improves project returns
• Berkeley Energy has announced the findings of its pre-feasibility study for its Salamanca Uranium Project in Spain. The study incorporates mining the shallow, high grade the Zona 7 deposit where the company recently announced a substantial resource upgrade.
• Mining of Zona 7 starting in year 2 has had a radical impact on the economics of the overall project which is now reported to generate an after tax NPV (discounted at 8%) of US$871.3m and an IRR of 93.3% based on a long term uranium price of US$65/lb.
• The company comments that its use in the economic analysis of a $65/lb price of uranium oxide “represents a consensus view of market analysts long-term price to incentivise new uranium production.” Sensitivity analysis presented by the company shows that a 10% lower long term uranium oxide price ($58.50/lb) would reduce the after tax NPV by approximately 13% to $754m. Current uranium oxide price is $35.75/lb.
• The project, which covers “17.5 years with initial mining at Retortillo, being replaced by Zona 7 in year 2 and Alameda coming into production in year 3 with Retortillo resuming operation in year 9, once the high grade ore from Zona 7 is mined out” is expected to incur pre - production capex of $81.4m (down from a previously announced $95.1m) and produce a life of mine average of 3m lbs of U3O8 pa at a C1 cash cost of $15.60/lb (previously $24.60/lb).
• The mine expects to produce an average of 5.2m tonnes of combined ore at a low average life-of-mine waste:ore ratio of 1:1.84 (Retortillo 1:2.7; Zona 7 1:0.98 and Alameda 1:1.8)
• The benefits of the early exploitation of the high-grade Zona 7 deposit are reflected in average production of “4.3 pounds per year during steady state operations” in the early years of the project after initial ramp up and this is apparently a key factor in the enhanced economic returns. Construction is now expected to start in 2016 with the company looking for initial production in 2017.
• Permitting is well advanced at the EU, National, Regional and Provincial level, with both “the Mining Licence and Environmental Licence already obtained, the final approvals comprise the locally issued Urbanism Licence and the Construction Authorisation by the Ministry of Industry, Energy and Tourism.” The company expects the remaining licences to be “finalised well ahead of the targeted commencement of site works in mid-2016.”
• A full Definitive Feasibility Study is expected to be completed in May 2016 and the company is progressing approaches from potential financiers.
Conclusion: The Company has signalled for some time that it was rescheduling the Salamanca Uranium Project to give greater prominence to the early development of the shallow, high-grade Zona 7 deposit and today’s announcement underlines the pragmatism of that decision. The Salamanca Uranium Project has been re-energised with the strengthening of the management team earlier this year. Salamanca Province in Spain is a mining-friendly jurisdiction with the provincial Mines Department clearly well-versed in the process required to permit a new mine. The province already has an operating tungsten mine at Los Santos, a permitted tungsten mine under development at Barruecopardo and now a well advanced permitting process clearly underway for Berkeley Energy.
Gemfields (LON:GEM) 44.3 pence, Mkt Cap £240.7m – Trading Update in Line
• Emeralds - Kagem reported 7.5m carats for the quarter up from 6.3m carats for the same time last with an improved grade of 237 carats per tonne.
• Unit operating costs saw an improvement to US$1.48 per carat and improvement of 9% from last year.
• The fourth high wall pushback at the Chama pit was completed in the September quarter with a total of 4 mt of waste moved during the quarter.
• Cash rock handling costs fell to US$2.12 per tonne showing an improvement of 27% with the higher scale of production driving efficiencies.
• The September auction of higher quality emeralds generated revenues of US$34.7m.
• Rubies – Montepuez reported production of 0.5m carats of ruby and corundrum – this is lower volume but higher quality rubies.
• Average grade of 7 carats per tonne versus 41 carats per tonne reflected recovery of higher quality stones from lower grade alluvial ore deposit – the Mugloto pit.
• Unit operating costs were US$12.2 per carat as a result of the lower volume of carats recovered.
• Cash rock handling costs of US$4.5/t, 35% lower than the same time last year.
• The next auction of predominantly higher quality rubies is expected to take place in Dec 2015.
• Faberge is said to have increased gross profits by 61% compared to the same time last year with gross margins improving to 51%.
• At the end of September the company had cash and cash equivalents of US$41.1m and total debt outstanding of US$60m including US$30m at Kagem.
• Net debt at the end of the quarter stood at US$18.9m.
Conclusion: Production at Kagem is in line for the quarter with costs improving with scale.
At Montepuez focus on the alluvial pit at Mugloto saw lower volumes but recovery of higher value rubies – this gives lower overall volume of production for the quarter and grades but given the valuation on higher price of rubies should give better revenue potential. Gemfields is investing in both operations to grow production although sales is likely to be grown at a slower pace to production over the next two years.
Savannah Resources (LON:SAV) 1.925 pence, £5.2m – Drilling underway on targets in Oman
• The company reports that exploration reverse-circulation (RC) and diamond drilling is underway on targets within its Block 4 licence area in Oman where Savannah is earning a 65% interest from the local company Al Thuraya by undertaking exploration.
• The programme comprises an 10 hole programme and to date a total of 6 hole (603m) have been completed on the Aarja prospect where geophysical (VTEM) anomalies, trenching and historic drilling work has shown copper/gold and base metal mineralisation. Historic drilling results from Aarja MaIN zone reported by Savannah today shows an 18.58m wide intersection at an average grade of 4.7% copper from a depth of 143m and trenching results from the southern end of the Aarja pit which show 14.5m at an average grade of 8.03g/t gold and 0.9% copper.
• Additional targets within the current programme include the Gaddamah gossan area where trenching results included a 7.7m long intersection grading 11.35g/t gold, 1.45% zinc and 0.4% copper.
• Following equipment breakdowns and slow drilling progress, the programme is expected to continue for another two weeks.
• The company indicates that if this drilling programme is successful, “we plan to complete a maiden JORC compliant mineral resource estimate before the end of the 2015 calendar year.”
Conclusion: We have commented previously that, in common with other junior explorers with limited cash resources, Savannah had to take challenging decisions on which targets to follow up – we look forward to the results from the drilling at Aarja and Gaddamah.
Vedanta Resources (LON:VED) 496 pence, Mkt Cap £1.3bn – Interims
• Lower revenues of US$5.7bn and EBITDA of US$1.3bn down 12% and 39% driven by lower commodity prices.
• Revenues were helped by an increase in volumes with Zinc India up 29%, Aluminium up 9% and Copper India up 16%.
• Iron ore mining restarted in Goa in H1 FY 2016 with an approved interim capacity of 5.5 mtpa.
• EBITDA margin adjusted for custom smelting of 30% against 43% last year.
• Operating profit before extraordinary items down 44% to US$577m.
• Prices contributed to most of the fall in operating profit resulting in a cut in profit of US$1.03bn – this was offset by volume gains of US$204.8m and cost saving initiatives of US$152.8m.
• Currency depreciation also helped to offset a fall in profits with the rupee depreciation contributing US$99.7m, ZAR & NAD by US$21.9m and Kwacha by US$18m.
• Capex guidance has been reduced further from being cut to US$1bn from US$2bn to now US$0.7bn.
• Net debt fell by US$0.9m.
Conclusion: Improved volumes helped to offset some of the impact of price falls across the board. Capex is being cut again. There is no talk of cut back in supply with the company planning to take up any shortfall in zinc being proposed by Glencore. The company has also restarted iron ore operations in Goa with an interim capacity of 5.5 mtpa which they plan to export – adding to hugely oversupplied market.