Metal prices hammered down on stalled Chinese demand and US dollar rises due Fed rate hike expectations
• Expectations for the US Federal Reserve to start to raise interest rates in December is strengthening the dollar and causing metals prices to fall in dollar terms.
• Chinese demand is significantly weaker than expected as China stamps on corruption and sweeps cash back into central government coffers.
• Many Chinese infrastructure projects are stalled waiting for the resumption of funding to restart construction. We expect new anti-corruption procedures to slow the tendering process for state-sponsored projects going forward. China eased credit conditions to help restore demand with little overall effect.
• This feels like a rerun of the ‘Asian Crisis’ but currencies have not yet fallen over and we have not seen any dramatic, public corruption scandals outside China.
• China is also a far larger economy than it was back in 1999-2001 and its economy is far from recession
• Even weak Oil prices are not helping to restore global demand .
Economic News
US – FOMC voting members argued the policy should be tightened gradually once the first rate hike is implemented.
• New York Fed President William Dudley said the conditions for liftoff “could soon be satisfied”.
• Dudley speech followed comments by the Chicago Fed’s Charles Evans, Richmod’s Jeffrey Lacker and St Louis head James Bullard.
• Charles Evans, one of the committee’s most dovish members, argued that lift-off should be delayed until 2016.
• “Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher,” Evans said.
• “I favour a somewhat later lift-off than many of my colleagues.”
• Janet Yellen spoke at a conference at the Fed Board in Washington, but did not discuss the policy outlook.
• Economists adjust expectations for the first rate increase with The Wall Street Journal saying c.92% of its survey respondents point to a rate hike at the 15-16 Dec policy meeting.
ECB – Mari Draghi pointed out “downside risks” to its 2% inflation target stemming slowing global growth, soft commodity prices and stronger euro earlier this year.
• “Signs of a sustained turnaround in core inflation have somewhat weakened”.
• There is increasing expectation the ECB will add to its €60bn per month asset purchases during its 3 Dec meeting.
• “We have always said our purchases would run beyond end-Sep/16 in case we do not see a sustained adjustment in the path of inflation is consistent with our aim of achieving inflation rates below but close to 2%”.
Germany – Economic growth slowed by 0.1%pp during the quarter registering a 0.3%qoq increase.
• Growth was in line with market estimates.
• Annual increase totalled 1.7%yoy led by strong business and household spending while a contraction in investments and an increase in imports dented momentum.
France – Economy returned to growth following no change recorded in the second quarter.
• GDP increased 0.3%qoq with the nation on target to reach its lacklustre growth target for at least 1%yoy in 2015.
• The target remains below the 1.5%yoy level economists argue required to cut the nation’s 10% unemployment rate.
• Consumer spending (+0.3%qoq v 0.0%qoq in Q2), manufacturing production (+0.3%qoq v -0.6%qoq in Q2) and services (+0.6%qoq v +0.3%qoq in Q2) posted an increase while the construction sector remained in a contractionary mode (-0.8%qoq).
Finland – The economy contracted 0.6%qoq in Q3/15 extending the nation’s recession to three years now.
• A fall in GDP is partly explained by a fall in trading volumes with Russia, the biggest trading partner, which is also going through a period of severe recession.
Currencies
US$1.0758/eur vs 1.0710/eur yesterday. Yen 122.73/$ vs 121.96/$. SAr 14.320/$ vs 14.158/$. Sterling $1.522/gbp vs 1.519/gbp
0.714/aud vs 0.714/aud – yesterday. US dollar gains and commodity price falls likely to further weaken currencies in producing nations
Commodity News
Precious metals:
Gold US$1,084/oz unch vs US$1,087/oz yesterday – Demand growth in Q3/15 cut YTD fall in consumption led by gains in jewellery and investment purchases, latest World Gold Council numbers show.
• Jewellery demand climbed 6%yoy/-3%ytd in Q3/15 with purchases in India (+15%yoy/+5%ytd) and China (+4%yoy/-3%ytd) both up.
• Investment jumped 27%yoy/+5%ytd on physical demand for bars and coins.
• Central banks remained net purchasers of gold (-3%yoy/-7%ytd) with orders in Q3/15 nearly equal to the Q3/14 record of 179.5t.
• On the supply side, mine production came off in Q3/15 from peak levels recorded in Q3/14.
• Although, total supply recorded a 1%yoy (-1%ytd) increase on growing hedging from producers.
• Recycling continued to fall hitting the lowest level since 2008.
Platinum US$879/oz vs US$881/oz yesterday -
Palladium US$554/oz vs US$577/oz yesterday –
Silver US$14.33/oz vs US$14.38/oz yesterday
Base metals:
Copper US$ 4,827/t vs US$4,929/t yesterday –
Aluminium US$ 1,496/t vs US$1,524/t yesterday – Rusal cut its demand forecasts leading to an upwards revision in market surpluses.
• “During the Q3/15, the aluminium industry was under significant pressure from sliding prices and premiums due to a higher-than-expected surplus owing to weaker demand in some emerging markets and capacity growth in the Middle East, India and China.”
• “In light of these factors, we have further reduced our initial global aluminium demand growth forecast for 2015 from 6% to 5.6% and increased the surplus forecast to 373kt [up from 277kt] in 2015.”
• Demand climbed 5.6%yoy in the first nine months of the year led by gains in North America, India, Middle East and the EU more than offsetting declines in Japan, Russia and South America.
• Strong auto sales in North America (+3.2%yoy in Jan-Sep) and the EU (+9.8%yoy in Sep) helped aluminium metal orders.
• Slowing demand in China weighed on orders in the region.
• Despite low all-in prices (c.53% or 14mt of ex-China production is estimated as unprofitable and at risk of closure), Chinese continue to bring on new capacities.
• “While 2.5mt of capacity has been cut year-to-date, 3mt of new capacity has been commissioned and 616kt of operating capacities were resumed,” Rusal said.
Nickel US$ 9,414/t vs US$9,620/t yesterday –
Zinc US$ 1,617/t vs US$1,638/t yesterday –
Lead US$ 1,612t vs US$1,633/t yesterday –
Tin US$ 14,655/t vs US$14,880/t yesterday –
Energy:
Oil US$44.8/bbl unch vs US$46.0/bbl yesterday –
Natural Gas US$2.313/mmbtu vs US$2.279/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$47.8/t – yesterday
Thermal coal (1st year forward cif ARA) US$45.90/t vs US$46.10/t – yesterday
Steel – Steel production in China is set to tumble, Noble Group estimates.
• “At current steel and raw-materials prices, China’s steel mills are realizing negative margins,” Noble said.
• Mills are estimated to lose of around US$50/t on every ton of steel produced.
• Crude steel production fell 3.1%yoy in oct and was down 2.2%yoy in the first 10 months of the year.
• “Global crude-steel production ended the third quarter by recording its twelfth consecutive month of year-on-year declines.”
Other:
Tungsten - APT European prices $165-175/mtu - $165-195/mtu as of last week – spreads narrow at lower level indicating ongoing imbalance between supply and demand.
• The tungsten market may return to balance quite quickly
Ferrochrome – Benchmark charge chrome price for delivery in Europe at US$1.04/lb its lowest level since Q1/10.
Ferro-alloys – The mood at the International Ferro-Alloys Conference in Prague earlier this week is reported to have the most depressing in decades, Metal Bulletin reports.
• Despite a number of producers struggling to make a margin in current markets, price continue to fall.
• At the conference, prices for chrome ore, ferro-chrome, manganese and silico-manganese were forecast to fall further.
Company News
Aureus Mining (LON:AUE) 14.8 pence, Mkt Cap £54.3m – Q3 Results
• The company reported an operating loss for nine months of US$4.347m and US$1.57m for the quarter.
• Cash outflow from operations was US$15.24m for the nine months in 2015 with a rise in working capital reflecting the commissioning phase.
• Inventories reflect US$2.7m of gold in circuit and US$6.7m in ore stockpiles.
• Cash and cash equivalents at the end of the period stood at US$5.85m.
• Long term borrowings including a financial lease stand at US$88.08m.
• The senior debt facility’s first repayment is on Jan 31 2016 and repayable in 9 semi-annual payments.
Conclusion: Commercial production has been held back at the New Liberty mine as a result of mechanical failure during ramp up. Dore has been shipped from site in Q4 and should generate revenues. The company need to continue with a smooth ramp up to start generating cash flows to cover up-coming obligations.
BHP Billiton (LON:BLT) 900 pence, Mkt Cap £49.5bn – Update on Samarco Tailings Failure
• At this stage 9 fatalites have been confirmed and 19 people remain unaccounted for.
• 637 people have been evacuated with temporary accommodation provided.
• The tailings extended 440 km downstream affecting 11 communities.
• Operations remain suspended with Samarco employees on paid leave with longer term options being considered.
Conclusion: Operations do not look like they are likely to re-start any time soon and with the tailings extending for 440km, damage needs to be cleared up with the rainy season round the corner.
Lucara Diamonds (CVE:LUC) C$1.84, C$698m – US$30m on exceptional stone tender in line with expectations
• The company netted US$29.7m from 13 single stones totalling 1,440 carats of US$20,625 per carat.
• 10 diamonds sold for more than US$1m each with 5 stones in excess of US$2m.
• A 336.3 carat Type IIa diamond sold for US$8.18m, an 8.03 carat pink for US$911,911 and another 83.5 carat Type IIa diamond for US$4.13m.
• Including this sale year to date revenues are US$188.2m against guidance for the full year of US$200-$220m.
• The company has also recently recovered a 348 carat and a 255 carat stone.
• Recovery of the 348 carats diamond is from the high value south lobe and is the largest stone recovered from the Karowe mine to date.
• The installation of the XRT equipment is helping in the recovery of these exceptional stones.
Conclusion: Exceptional stones continue to make a significant contribution to revenues for Lucara. While the CEO remarks the market is becoming more selective for large but more complex stones, the market for high value stones remains buoyant.
Results in the recent Sothebys and Christies auctions which saw record prices being achieved for the Blue Moon from Cullinan of US448.5m for a 12 carat and US$28.5m for a pink diamond shows this end of the market remains buoyant.
Minera IRL (LON:MIRL) SUSPENDED – Yet another RNS from the board of Minera IRL Limited
• Minera IRL have issued yet another RNS press release under the name of Eric Olson who is the company coo but is not a director.
• The press release comments on meetings with the Ollachea community between Minera IRL SA, the local subsidiary run by Diego Benavidez.
• The Minera IRL board, which rather unusually does not have any executive directors, is waiting to receive minutes from the meeting with the community.
• This begs the question, why have the directors of the Minera IRL board not had their own meeting with the Ollachea community?
• We believe the real reason for the press release is to tell us that the Minera IRL Limited request for an EGM to sack Diego Benevidez from the Minera IRL SA board was incorrectly applied for.
• Minera IRL SA have issued their own press release to state that this EGM will be held on 3rd December, which is ‘unfortunately’ after the date of the EGM in Toronto where we expect shareholders to vote off the entire board of Minera IRL Limited and replace it with a set of more respectable directors who appear better aligned with longer term shareholder and company interests.
• The press release goes on to explain why the company has not issued its interim financial statements. It is our view that the board should have sufficient information from their subsidiary to normally issue an interim statement and that the board are using the excuse of potential impairments and estimates for environmental remediation costs as an excuse to avoid issuing these statements causing the suspension of the stock so that investors can not trade and that the stock might be delisted from the Toronto and London exchanges. We could speculate further as to possible reasons for this and we believe that this would not be in shareholder’s interests.
• We have spoken to a number of employees of Minera IRL Limited and Minera IRL SA enabling us to form a fair view of how the company has arrived at its current situation and we believe the interests of shareholders will be better served by the election of an entirely new board to Minera IRL Limited on the 24th November.
• It is our view that Diego Benavides is working to secure a better future for the company and that shareholders should support his action to replace the board of Minera IRL Limited at the EGM in Toronto on 24 November.
• We recommend investors in the UK stock should ensure that their votes are cast with “Computershare Investor Services (Jersey) Limited, c/o Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZY, United Kingdom, by not later than 3:00 pm on 24 November 2015.
* SP Angel analysts are expressing their own views and opinions in this analysis. SP Angel has no corporate connection with Minera IRL or its subsidiaries. SP Angel holds no shares in Minera IRL and does not have any current financial arrangements with the company.
North River Resources (LON:NRRP) 0.08pence, Mkt Cap £1.8m - Update on Namib Project
• Following the recent fund raise of US$4m and against a more uncertain timing of receipt of the licence, the company are revising the work plan at the mine.
• The fund raise was originally based to progress construction works premised on receipt of the permit.
• With the timing of the later now more uncertain, funds will be to fund a longer phase of overheads and development costs.
• In the meanwhile, funds will be prioritised for front end engineering works and an accelerated drill programme to increase both the size and confidence in the resource and reserve base.
• The overall drill programme is for 3,500m for infill and exploration drilling with initial drill results expected in Q1 2016.
• Development of the 5-level drive will continue during the drill programme.
Conclusion: Without permits in site, the company are using funds raised to progress works towards construction – this will mean more money spent while they wait and a further funding round once permits are in place. We wonder why permits are taking such a long time to come through for this brownfield project.
Polymetal (LON:POLY) 553 pence, Mkt Cap £2.3bn – Increases interest in Lichkvaz in Armenia
• The company has purchased an additional 75% in Lichkvaz and now owns 100% of this project.
• US$9.7m was paid through the issue of 1,084,853m new shares which is 0.26% of the increased share capital.
• The acquisition is based on successful drilling during the 2015 season.
• The project has a non JORC compliant resource estimate of 2.4 Mt at 6.9 g/t gold.
• The strike length of the system is estimated at 800m with a series of near vertical shears and steep westerly dipping vein sets ranging up to 4-5m.
Savannah Resources (LON:SAV) 1.9 pence, Mkt Cap £5.4m – Update on drilling programme at Mahab 4 in Oman
• The company has started a 4 hole diamond drilling programme at the Mahab 4 deposit.
• The current resource estimate is for 1.5 Mt at 2.1% copper with drilling targeted to increase this.
• Holes are being targeted to intersect mineralisation 20m from previous drilling.