Commodities
Diamonds and precious stones
Moving into Diwali, manufacturing centres in India have shuttered, but now investor focus is firmly on the retail side of the industry. Some interesting conversations have been had in recent weeks. Such as "if diamond prices have fallen so much then surely retail prices will too?"
Not necessarily, but it does form a basis of how one could start to see how an industry could begin its rehabilitation. By providing the opportunity to increase turnover (largely by discounting), sales densities are likely to rise. Now this is not going to be the cure-all, but surely a step in the right direction, no? Just keep an eye on those retail margins.
I also noted polished diamond prices outperformed rough in October.
Precious metals
Jobs data today... Enough said
This week: Gold: (3%), Silver: (3.3%), Platinum: (3.4%), Palladium: (9.9%), Rhodium: (flat)
Base metals:
Conversely, copper futures are coming back from one-month lows. The potential for a more positive outlook for the world's second largest metals consumer is almost certainly set to induce a schizophrenic view on commodities;
Everyone knows that a strong Dollar would be seen as a negative for commodities, however, the problem I see in a finely balanced market, such as copper, is that the rationale for a change in policy is because of a fundamental improvement in an economy. Whilst China settles on 6.5% pa growth and the US consumer continues to be the engine for growth, absolute consumption in tonnes will increase.
Taking into account the reduction in confirmed global production rates and the impact of the capital expenditure cuts in recent years, the red metal could be a very interesting place to be over the next couple of years.
This week: Aluminium: +2.3%, Copper: (2%), Lead: (2.5%), Nickel: (3.6%), Tin: (3%), Zinc: (3%).
Bulk commodities:
Horrendous scenes coming in from Brazil where the JV between Vale (operator) and BHP at the Samarco iron ore mine in Brazil has experienced a catastrophic failure of a tailings dam wall.
More news to come once day breaks but from a financial perspective the mine was expected to contribute around $300m to FY16 earnings (c3% of NPV). Inevitably the mine will now close for at least a couple of years, taking with it around 21Mt of annualised production (30Mt capacity post expansion). Clean-up costs can reasonably expect to reach $1bn (100% basis)
Company announcements/news/meetings:
Following the Lace Diamond Mine update this week, I still like these and genuinely see the recent weakness as a lovely opportunity to stick a few away, much the same as my view on PDL last week.
"The DiamondCorp operational update on 03 November, in our opinion, marks an important turning point for the Lace Mine project. Development progress within the challenging ground conditions that epitomised the lower grade K6 transitional kimberlite, has moved into higher grade K4 kimberlite, in the centre of the pipe. As the conveyor belts prepare for full commissioning, the company's has engaged in positive discussions with their primary lenders and BEE partners for support in alleviating cash flow pressures during the early months of production. We remain excited by the potential the Lace mine offers investors and reiterate our Buy recommendation and 16.5p target price"
Flash note available upon request.
Gemfields (LON:GEM)
We had a quarterly update from the co this week, which frankly, given the time of year, contained no fireworks. Boom!
"Gemfields' Q1 update was very much in line with our expectations for the period and is trending as we expect for the full year. However, despite Gemfields' extra efforts to maintain an open dialogue with buyers, and our confidence in the long-term growth characteristics of gemstone demand, we believe that in the near term the market is likely to resist further price increases. As a result, we maintain our Buy recommendation on Gemfields, as we continue to believe in the long term opportunity, but lower our near term price target to 60p from 75p, based upon our NAV/EPS assumptions."
I have to be clear here, this is not a downgrade because I dislike Gemfields, to the contrary, I remain a huge fan, but I just cannot see above-average price increases given that other precious stones are under pressure.
Q3 trading update from the default gold stock for large cap UK investors. Again Mr Bristow was talking of preparing the company's operations at $1,000/oz Au. Prepare you may, but how prepared are investors to see such a large name generating minimal returns?
"Randgold Resources’ Q3 update saw the company achieve another quarter of record production of +3% to 305.3koz. However, the decline in the average gold price received from $1,189/oz. to $1,122/oz. inevitably impacted overall returns. We believe that despite the undoubted quality of Randgold’s assets, the immediate focus will remain on the underlying gold price. Following a recent change of analyst, we maintain our Hold recommendation but reduce our price target slightly to 4300p from 4400p."
In light of the wider view on bullion and given the chart looks to have rolled over, being a buyer here would be nothing short of... brave.
Major movers this week:
Glencore +10%
Randgold (7%) - Hold
Acacia (10%) - Hold
DiamondCorp (12%) - Buy
Shanta Gold (13%)
Lonmin (25%)
Next week:
Lonmin, Anglogold, Wolf, First Quantum, Centamin, Mountain Province.