Chinese funds continue to sell / short commodities
Chinese funds are reported to be shorting commodities following a government ban on shorting Chinese equities and other instruments on Mainland China.
Falling commodity prices are causing traders and stockholders to unwinding positions as prices fall through key levels exacerbating the problem
The nature of recent commodity price falls suggest to us that prices could recover relatively quickly in the new year when we expect confidence and demand to return.
Economic News
China - Manufacturing fell to the lowest level in more than three years adding to pressures over the state target for an around 7% growth in 2015.
Official manufacturing PMI: 49.6 v 49.8 in Oct and 49.8 forecast.
Caixin/Markit manufacturing PMI: 48.6 v 48.3 estimated previously.
Readings of production, new orders, inventories and employment all fell from Oct.
On a more positive note, services industry continued to grow at accelerated pace through nov (53.6 v 53.1 in Oct).
Germany – Good employment numbers and better than expected manufacturing data released this morning.
Unemployment contracted more than forecast (-13k v -6k in Oct and -5k expected) taking down the jobless rate by 0.1pp to 6.3%.
Markit/BME Manufacturing PMI: 52.9 v 52.1 in Oct and 52.6 estimated previously.
“Strongest increase in new export business since Feb/14”.
“Output and new orders both continue to rise at modest rates”.
UK – Manufacturing expanded at a weaker rate than expected in Nov as growth eased from the recent peak reached in Oct.
Manufacturing PMI: 52.7 v 55.2 in Oct (a 16-month high) and 53.6 forecast.
“The trend in new export business at UK manufacturers continued to improve in Nov, as inflows of new work from overseas clients rose for the third straight month. Companies reported improved intakes of new business from clients based in the USA, Germany, Sweden, Turkey, the Middle-East, Japan, China and other Asia Pacific nations.”
The BoE indicated it may force local lenders to start building a new capital buffer from Mar/15.
The countercyclical capital buffer (CCP) which currently is non-existent may by set at 1% of risk-weighted assets, the BoE’s Financial Policy Committee said.
The FPC is likely to move in 0.25% increments towards the 1% target which would be equivalent to £40bn of capital across the UK banking system.
India – Central bank left interest rates unchanged following four cuts this year in a move widely expected by markets.
The rate was kept at 6.75%.
Inflation accelerated to 5% in Oct on the back of a surge in food items pushing up inflation expectations.
Australia – Central bank decided to keep rates unchanged for a seventh consecutive month, in line with market estimates.
The rate remained at 2.0% following an improvement in consumer confidence and an increase in employment in Oct.
“While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year,” Governor said.
Russia – Manufacturing is stagnating with the respective PMI index at 50.1 in Nov, down from 50.2 in Oct and slightly better forecast (50.0).
The index climbed to 50.2 in Oct following 10 consecutive months of contraction.
Currencies
US$1.0606/eur vs 1.0581/eur yesterday. Yen 122.91/$ vs 123.03/$. SAr 14.379/$ vs 14.377/$. Sterling $1.512/gbp vs 1.501/gbp
0.729/aud vs 0.720/aud – yesterday. US dollar pulls back. Non-Farm payrolls due Friday, Fed rate decision on 16 December
Commodity News
Precious metals:
Gold US$1,071/oz unch again vs US$1,056/oz yesterday –
Platinum US$839/oz vs US$827/oz yesterday -
Palladium US$547/oz vs US$548/oz yesterday –
Silver US$14.18/oz vs US$14.10/oz yesterday
Base metals:
Copper US$ 4,572/t vs US$4,589/t yesterday –
Aluminium US$ 1,444/t vs US$1,457/t yesterday –
Nickel US$ 8,790/t vs US$8,840/t yesterday –
Zinc US$ 1,546/t vs US$1,562/t yesterday –
Lead US$ 1,636t vs US$1,617/t yesterday –
Tin US$ 14,850/t vs US$14,900/t yesterday –
Energy:
Oil US$44.7/bbl vs US$44.9/bbl yesterday –
Natural Gas US$2.237/mmbtu vs US$2.214/mmbtu yesterday –
Uranium US$36.10/lb unch vs US$36.10/lb yesterday –
Bulk comodities:
Iron ore 62% Fe spot (cfr Tianjin) US$40.8/t unch vs US$46.1/t – yesterday – Big fall in iron ore prices following price fall in Singapore yesterday
Thermal coal (1st year forward cif ARA) US$46.60/t vs US$46.50/t – yesterday
Other:
Tungsten - APT European prices $165-175/mtu unch again
Ferrochrome – Chinese contract prices went lower as stainless steel mills are pushing bid prices down on continuing oversupply and weak demand.
MB charge chrome index (cif Shanghai) fell 3c to 66c/lb last week.
Ferrochrome – Benchmark charge chrome price for delivery in Europe at US$1.04/lb its lowest level since Q1/10.
Company News
Condor Gold (LON:CNR) 31.5p, Mkt Cap £14.4m – Submission of application for Environmental approval at La India
Condor Gold reports that it has submitted an application to the Nicaraguan Ministry of Environment and Natural Resources for an Environmental Permit to develop an open pit mine and CIL gold processing plant on its La India property. It is unclear how long the Ministry’s deliberations may take.
The application indicates an operation to produce and treat between 800,000 to 1 million tpa of ore to produce around 100,000 oz pa of gold at an all-in-sustaining cost below $700/oz.
Condor Gold points out that the “Environmental Permit is the key permit for mining in Nicaragua. Many other permits, such as the water management permit, are conditional upon the grant of an Environmental Permit.”
The company notes that “two feeder pits and underground production will be permitted at a later stage and could increase annual gold production by over 50%”.
We assume that these additional facilities will be the subject of separate applications at a later date, though if this initial permit is granted the Ministry will have acquired a detailed knowledge of the project and created a precedent which may well expedite subsequent applications.
Conclusion: Submitting an application for an Environmental Permit for La India is a landmark event for Condor Gold’s plans to reopen the mine. In September this year, the company indicated that securing the development capex of $110-169m was proving difficult in the current financing climate for junior miners and that it was considering options including a possible joint-venture or sale. Securing an Environmental Permit should advance the project whether the company seeks to develop La India on its own, or in joint venture, or sells the property to a third party developer.
International Ferro Metals* (LON:IFL) Delisted following long suspension – Offer from Samancor agreed at R720m (US$50m)
International Ferro Metals has agreed an offer of ZAR720m for the sale of its assets to Samancor in South Africa.
The offer comprises ZAR650m for the business assets of IFMSA and ZAR70m for certain receivables of Sky Chrome though a number of conditions remain to be satisfied before completion.
Eg. competition authority and other regulatory approvals and consent from other groups for material contracts.
The company will release further details in due course.
Debt: IFL had fully drawn ZAR500m debt facility with Bank of China which expired on September 16th this year and financial lease of ZAR58m as of December 2014. The company had a co-operative agreement with JISCO, the Chinese ferrochrome group who hold 29% of the shares.
Conclusion: IFL is a casualty of intense competition among ferrochrome producers. The company’s very professional team led by Chris Jordaan and Jannie Muller and overseen by Tony Grey and Stephen Turner have battled falling ferrochrome prices, power supply interruptions, industrial incidents and labour disruption. In the end the costs of running an environmentally beneficial ‘closed’ ferrochrome furnace combined with limited scale has proved too much for the company and its partners. A weaker South African rand is insufficient to offset the impact of significantly lower ferrochrome prices and the cost of running the business in South Africa.
*SP Angel act as joint broker to IFL alongside Numis Securities who act as lead broker
Kaz Minerals (LON:KAZ) 100.8 pence, Mkt Cap £450m – Initial copper production from Aktogay oxide project
The company has announced the production of its first copper cathode from its Aktogay oxide copper project in eastern Kazakhstan.
Production using SX/EW is forecast to run at around 15,000 tpa prior to the commissioning of the sulphide concentrator in 2017 when the operation is expected to increase production from both sulphide and oxide ores to an average of approximately 105,000 tpa for an initial period of 10 years.
Kaz Minerals is currently producing at an annual rate of around 80-85,000 tpa of copper so the initial 15,000 tpa from Aktogay is a relatively small increase in the company’s output until the sulphide concentrator is operational in 2017.
Metals Exploration* (LON:MTL) 4 pence, Mkt Cap £63.3m – Update on Permitting at Runruno Project
Work if progressing well to clear up the areas affected by the typhoon.
A programme to improve the tailings dumps to meet the requirements of the Mines and Geosciences Bureau is also going well.
Works which are being done in accordance to a third party geotechnical study are expected to be completed in December.
Once works have been completed, the partial suspension order is expected to be lifted.
Majority of the plant is now permitted for operations.
The processing plant has completed wet commissioning with ore commissioning which can only start when work on the RSI has been completed.
The company now expects full commissioning will start in the second half of January 2016.
Conclusion: Progress is being made towards getting the plant into operation with clearance expected by the end of December on the tailings facility which has held up full commissioning and production. We look forward to further news flow at the end of the month on full permitting. In the meanwhile the company has raised funds to see them through this period.
*SP Angel act as Broker to Metals Exploration
Petra Diamonds (LON:PDL) 69.5 pence, Mkt Cap £322.8m – Acquisition of interest in Kimberley Mines and waiver on debt covenant
Petra with Ekapa Minerals have acquired Kimberley mines which own a number of old tailings dumps in Kimberley.
Petra will have a 49.9% interest and Ekapa Mining 50.1%.
The acquisition is for Zar 102m or US$7.2m funded by their pro-rata ownership.
Kimberley mines also owns a 6 mtpa new plant which was commissioned by De Beers in 2002.
The plant is said to be able to treat a range of material from tailings to ROM ore.
The tailings resource is estimated at 2.8m carats with potential for a further 4.4m carats.
The grade is said to be 11 cpht for the first three years falling to 6 cpht from then.
Ekapa mine expect to produce around 700,000 carats in the first three years of operation.
Revenues are estimated at US$65m per annum on an estimated diamond price of US$95/carat.
Working capital of US$14m is to be 100% funded by Ekapa mine with the operation expected to be cashflow positive in the first year of operation.
The transaction will be subject to Competition Commission conditions expected to be met by Q3 FY 2016 or first quarter of calendar 2016.
Yesterday, the company also announced that had its covenant on its 2.5 net debt to EBTIDA cover waived to Dec 2015 from its banks.
Conclusion: This is a good transaction for Petra – with a small investment they can take part in revenues from tailings treatment with a plant in place. This will add around US$32m from tailings revenue which is a useful addition to our estimate of tailings revenue from Petra of US$28m in FY 2017 without having to use their own plant capacity.
The impact of this acquisition is not expected to come through till FY 2017 but should then start providing a small additional revenue stream – we estimate total revenues for Petra of US$556m in FY 2017 based on their own operations and our current forecasts.
The waiver of the net debt to EBITDA covenant to Dec 2015 by the banks is also helpful as Petra is undergoing more difficult trading conditions in the first half of FY 2016.
We continue to see good value in Petra at these levels. We are at the upper end of concensus numbers and will review our numbers after the first half results.