Metals and shares take a further beating from Chinese data and Fed Rate Rise concerns
• Following the resurgence for prospects of a Fed Rate rise this year, commodity prices have drifted down again with the US$ strengthening by 1.2% since Friday’s US payroll data.
• Copper now below the US$5,000/t level where it had been holding up.
• This has caused the move down in Glencore which is down at 108 pence,14% below the 125 pence recent placing price.
• Anglo American now looks vulnerable with debt of US$18.94bn against a market cap of US$9.72bn and could become a candidate for a cash call or further restructuring.
• Anglo’s assets look like a mixed bag except for De Beers which holds first tier diamond assets.
• Anglo paid US$5.1bn to acquire 40% of De Beers in Nov 2011 putting a value of US$12.5bn on De Beers.
• This compares with Anglo’s current market cap of US$9.72bn and its 85% ownership of De Beers.
• Debt is becoming a painful lesson for over leveraged companies at this point in the cycle.
• Companies that have been working hard to reduce debt and costs include AngloGold Ashanti which reported quarterly results yesterday.
• Net debt is down by US$800m helped by the disposal of Cripple Creek and cash cost down from US$1,000-1,050/oz to US$950-980/oz.
Economic News
China – Inflation has come down more than forecast in Oct highlighting risks to the demand outlook in the second largest economy.
• CPI: 1.3%yoy v 1.6%yoy in Sep and 1.5%yoy forecast.
• Producer prices continued to decline registering a 44th consecutive monthly fall reflecting excess supply in housing and raw materials as well as an overcapacity in heavy industry, FT report.
France – Industrial production growth came in line with estimates albeit the pace remained at relatively modest levels.
• Industrial production: 0.1%mom/1.8%yoy v 1.7%mom/1.4%yoy in Aug and -0.4%mom/1.8%yoy forecast.
Australia – The mining sector to lose 40k jobs in coming years as the economy “rebalances”, ANZ estimates.
• This will come on top of 50k already shed since a peak in 2012.
• New estimate suggests an upwards revision to previous numbers released in Jul/14 as a global decline in commodity prices led to contraction in the industry
Currencies
US$1.0740/eur vs 1.0769/eur yesterday. Yen 123.14/$ vs 123.88/$. SAr 14.3078/$ vs 14.258/$. Sterling $1.5098/gbp vs 1.506/gbp
0.7057/aud vs 0.705/aud – yesterday
Commodity News
Precious metals:
Gold US$1,092/oz unch vs US$1,094/oz yesterday –
Platinum US$913/oz vs US$938/oz yesterday -
Palladium US$608/oz vs US$606/oz yesterday –
Silver US$14.51/oz vs US$14.77/oz yesterday
Base metals:
Copper US$ 4,940/t vs US$4,981/t yesterday –
Aluminium US$ 1,498/t vs US$1,519/t yesterday –
Nickel US$ 9,565/t vs US$9,590/t yesterday –
Zinc US$ 1,623/t vs US$1,664/t yesterday –
Lead US$ 1,645t vs US$1,664/t yesterday –
Tin US$ 14,500/t vs US$14,615/t yesterday –
Energy:
Oil US$47.02/bbl unch vs US$47.8/bbl yesterday –
Natural Gas US$2.309/mmbtu vs US$2.344/mmbtu yesterday
Uranium US$36.00/lb unch vs US$36.00/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$47.7/t vs US$47.9/t – yesterday
Thermal coal (1st year forward cif ARA) US$47.40/t vs US$47.30/t – yesterday
Other:
Tungsten - APT European prices $165-195/mtu unch vs $165-185/mtu
Ferrochrome – Benchmark charge chrome price for delivery in Europe at US$1.04/lb its lowest level since Q1/10.
Company News
AngloGold Ashanti Zar10148, Mkt Cap ZAR 41.3bn – Third quarter production results exceed guidance
• AngloGold Ashanti reports production for the quarter ending 30th September of 974,000 oz of gold at a cash cost of $735/oz. This performance exceeded guidance of 900-850,000 oz at a cash cost of $770-820/oz.
• In the light of these results, the company has now revised its guidance for the full year to 3.8-4m oz of gold production at a cash cost of $720-770/oz (formerly $770-820/oz) an all-in-sustaining cost of $950-980/oz (previously $1,000-1,050/oz).
• The company has also been maintaining tight control of capital expenditure which “is now expected to be about $900m, from a range of $900m to $1bn previously forecast.”
• The improvements in operational performance benefit from “strong showings from the company’s mine in South America, the Geita operation in Tanzania and Tropicana in Australia.”
• The group’s lowest cost operation for the quarter was the Geita mine in Tanzania which produced 138,000 oz at a cash cost of $483/oz and an AISC of $ 752/oz. This cost performance was matched by the operations of AngloGold Ashanti Meneracao in Brazil which produced 123,000 oz during the quarter at a cash cost of 483 and AISC of $778/oz.
• Net debt has been further reduced to $2.32bn from $3.08bn at the end of June. This was largely the result of the “successful repurchase of $779m of the 8.5% high yield bonds, which mature in 2020 and originally had a principal amount outstanding of $1.25bn.” The repurchase was financed “using cash from the sale of CC&V [Cripple Creek & Victor mines], will lower the overall interest burden by about $66m a year”
Conclusion: AngloGold Ashanti has made further advances on cost cutting and debt reduction through deploying the proceeds of the sale of its high cost N American mines.
Horizonte Minerals (LON:HZM) 1.8 pence, Mkt Cap £11.5m – Results from pilot plant campaign
• The pilot plant campaign has confirmed production of high grade ferronickel tested under commercial conditions
• The main objective of the pilot plant campaign was to confirm the smelting behaviour of the Araguia ore, the mode of operation of the dryer/agglomerator kiln electric furnace as well as production of ferro-nickel and slag at temperatures and quality under commercial production.
• 160 wet tonnes were processed through the pilot plant.
• Wet ore with 42% moisture was first air-dried to about 30% moisture and then crushed to less than 30mm.
• The crushed ore was then dried and agglomerated in a rotary drier to reduce the free moisture content to around 20% while producing agglomerated particlces.
• The dried and agglomerated ore was mixed with coal as reductant to produce calcine.
• This hot calcine at 800 degrees centrigrade was transferred to the electric furnace for smelting to ferronickel.
• The ferronickel was periodically tapped and either cast into ingots or granulated.
Conclusion: The pilot campaign has been successful in demonstrating that commercial grade ferronickel can be produced using the rotary kiln electric furnance (RKEF) process. The company should be able to use the technical information garnered from this campaign to further their feasibility work on the project. Against the current pricing environment for nickel the company have been working towards optimising plant and costs as well as acquiring the adjacent nickel project which should enhance long term project economics.
Mkango Resources (CVE:MKA) C$0.03, Mkt Cap C$3.6m – Initiation Note
• We initiated on Mkango Resources yesterday – Mkango has an advanced rare earth project in Malawi – Songwe Hll.
Key highlights:
• A deliverable low capital /low operating cost advanced rare earth project at Songwe Hill in Malawi.
• After Tax IRR of 37% among the highest of advanced rare earth development projects is generated from the lowest pre-production capex.
• Uncomplicated, quarry style, mine development with a low temperature process route underpins the project’s low cost structure.
• Independent market analysis shows the potential for the basket price of the prospective output from Songwe Hill to double by 2020.
• In a market dominated by China, we speculate that some consumers may welcome the entry of a new supplier to diversify the market.
• Rare earths’ key role in high tech defence, industrial and renewable energy technology leads a number of countries to consider them strategic raw materials.
• Demand for the suite of light & heavy rare earth elements used in high intensity magnets whichrepresent around 80% of the value at Songwe Hill is expected to grow strongly until at least 2020.
Petropavlovsk* (LON:POG) 5.6p, £188m – Renova increases its interest in voting rights to 10.5%
• Lamesa Group Holding SA is reported to have increased its stake in the Company to 5.3% from 2.3% last week.
• In addition, Polo Company is said to be the owner of recently issued convertibles amounting to 5.2% in voting rights.
• Both companies are reported to be wholly-owned by Renova Group, an investment vehicle of its major shareholder and chairman Viktor Vekselbeg.
• Renova is a well-diversified investment group with interests in metals and mining, construction, transport, telecommunications, energy and many other sectors in Russia and abroad.
• The Group owns strategic stakes in UC Rusal (one of the world’s largest aluminium producers), Sulzer (a Swiss engineering company), SCHMOLZ-BICKENBACH (a high quality steel producer with operations in Europe and North America) and Oerlikon (a global high-tech industrial group).
• A point to note, BoD of SCHMOLZ-BICKENBACH is chaired by Edwin Eichler, who is also CEO of Sapinda Holding, an activist fund that was pushing Petropavlovsk to re-consider the latest refinancing plan back in Feb/15 and offering an equity injection with potential to negotiate different conversion conditions of the outstanding US$310.5 convertible at the time.
• Zoloto Komchatki (Gold of Kamchatka), a subsidiary of Renova, is currently developing Ametistovoye gold silver project on the Kamchatka Peninsula targeting a 130koz gold at 600ktpa throughput.
• The Company currently produces 60kozpa at the Aginskoye project commissioned in 2005 and located in the same region.
Conclusion: We see a decision to increase the stake in the Company by Renova, a Group with a track record of long term strategic investments, as a positive that further diversifies the shareholder base. Petropavlovsk continues with de-leveraging of the business focusing on cash generative ounces targeting US$600m in net debt by YE15.
We change our recommendation from Hold to Buy with target price unchanged at 7p as the share price has come down since the latest Q3/15 operations update.