Gold is the only metal rising as other base and precious metals fall as metals indices adjust their weightings
• The reweighting of oil and metals within a number of indices may be skewing prices this week
• Gold appears to be the only metal able to resist the impact of the rebalancing as investors move funds into gold on greater global volatility
Oil prices collapse to $32/bbn as inventory levels rise and world runs out of storage (see comment below)
Back to 2008
Soros reckons we are back to 2008 in market valuation terms
• Gold prices should continue to rise if we are back in 2008 territory, assuming George S. is referring to the post-Lehman part of the year
Miners share prices now comparable with 2008 - Shares have been hit hard by lower metals prices and short selling on the back of uncertainty over debt refinancing
• BHP prices at 670p/s are now below the previous low was 701p/s in November 2008, dragged down by much lower oil prices.
• Rio Tinto share are at 1763p/s is still above its 2008 low though this was due to the emergency rights issue.
• Rio Tinto fell to 1693p/s in October 2008, rallied and then fell again to a bargain price of 897p/s when they launched their rescue rights issue caused by the debt incurred by the Alcan acquisition.
• Anglo American are now at 246p/s versus a low of 926p/s in March 2009. Anglo is carrying the cost of developing the US$8.8bn Minas Rios iron ore mine in Brazil vs an original budget of $3.8bn. It is also hit by the impact of much lower than forecast prices for platinum and palladium.
Are the major mining stocks now at the bottom of this particular cycle?
China SRB buying metals in significant tonnage
• China’s State Reserve Bureau is no seen publically offering to buy metals from local producers.
• The SRB is reported to be buying copper and nickel
Chinese rail statistics – reasoning behind the fall in tonnages moved
Yesterday we reported that China rail freight falls 10.5% last year to 3.4bnt vs a fall of 4.7% a year earlier
• Chinese industry is buying more better quality higher grade material enabling industry to move lower tonnages of material for the same output.
• We know that China is buying a greater proportion of its iron ore from the Pilbara in Australia which provides much of the world’s better quality material.
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Economic News
US – The ISM non-manufacturing gauge showed a reading of 55.3 for December
• This reading was up from 53.7 last month against estimates of an increase to 56.
• Minutes from the Fed meeting in December show that most Fed policy makers expect shrinking spare capacity in the economy leading to higher inflation.
• The minutes also would suggest that the Fed is in no hurry to keep raising rates further.
China – total power consumption 4582.9bn kWh
• China ended the year with a weak final quarter of 911.4bn kWh in power consumption.
UK – car sales hit new record
• UK car sales hit a new record of 2.63m new vehicles last year partially driven by an increase in low cost finance and better deals on forecourts
• It is thought that around 180,000 new vehicles were registered last month though these figures can be bolstered by garages registering sales to qualify for their year-end bonuses
Currencies
US$1.0837/eur vs 1.0783/eur yesterday. Yen 117.45/$ vs 118.57/$. SAr 16.1692/$ vs 15.7302/$. $1.4591/gbp vs 1.4640/gbp
0.7017/aud vs 0.7088/aud
Commodity News
Precious metals:
Gold US$1,097/oz vs US$1,084/oz yesterday
Platinum US$867/oz vs US$887/oz yesteray
Palladium US$498/oz vs US$533/oz yesterday
Silver US$13.99/oz vs US$14.02/oz yesterday
Base metals:
Copper US$4,492/t vs US$4,623/t yesterday – China SRB looking to buy 150,000t of domestically produced copper
Aluminium US$1,464/t vsUS$1,469/t yesterday
Nickel US$8,355/t vs US$8,520/t yesterday – China SRB plans to buy 30,000t of nickel by June (Metal Bulletin).
• The figure is well below what was proposed by the industry last year
Zinc US$1,492/t vs US$1,550/t yesterday
Lead US$1,641/t vs US$1,705/t yesterday
Tin US$13,675/t vs US$14,900/t yesterday
Energy:
Oil US$32.90/bbl vs US$35.72/bbl yesterday – Oil prices collapse to $32/bbn as inventory levels rise and world runs out of storage
• Today's fresh lows in the oil price continue to reflect the perceived imbalance between supply and demand.
• While there is undoubtedly an excess of supply currently, what today's price does not reflect is the pending shortage that will start to feed through from the middle of the year onwards.
• What this does not reflect however, is any decline in demand due to further softening in the global economy, and with China seemingly entering a slowdown, there is now growing concern that whilst supply may fall, due to the lack of investment, so too will demand.
• In this respect, however, it must be remembered that crude oil demand is deemed to be an "inelastic demand driver" in that changes in demand tend to vary between -5% and +5%, with the extremes of decline only precipitating from catastrophic contraction in GDP. If we balance this against the fact that supply will naturally decline at between 8 to 10% if no investment is made, then on balance the further out we look, assuming we hold the current investment cycle steady, the worse we believe the supply imbalance will become.
• Whilst we cannot rule out further downward legs in the oil price, we do believe that the current oil price environment will be seen as the downward leg of what generally will be an upward progression.
• We will be revisiting our oil price assumptions for 2016 and beyond in our next edition of Wildcat..
Natural Gas US$2.317/mmbtu vs US$2.322/mmbtu yesterday
Uranium US$35.00/lb vs US$35.00/lb yesterday
Bulk comodities:
Iron ore 62% Fe spot (cfr Tianjin) US$38.58/t vs US$38.58/t yesterday
Thermal coal (1st year forward cif ARA) US$40.30/t vs US$40.65/t on 30 December
Other:
Tungsten - APT European prices $170–190/mtu unch on last year
Ferrochrome – Benchmark prices collapsed to 92c/lb in December for Q1/16 marking a 11.5% decline.
Company News
Alix Resources (CVE:AIX) 66.5 pence, Mkt Cap £766m - Discovers Lithium in project next to Bacanora’s Sonora project
• Alix Resources reports the discovery of lithium-bearing clays at its Electra project on the Tecolote Concession in Mexico.
• The project lies 5km from Bacanora’s Sonora lithium project (Buenavista Concession)
• Grades show 211.0, 162.5, and 71.2 ppm of lithium and are comparable with grades recovered by US Borax (Rio Tinto) in the northern part of the Buenavista Concession though they do not match the much higher >1,000ppm lithium values seen in the central part of Bacanora’s project
• Alix also reports the discovery of sedimentary beds on its Tule Concession similar to, on trend and correlating with, geological units which host Bacanora’s La Ventana deposit. Sampling is said to have returned moderately anomalous lithium values.
Conclusion: its good to see other companies working to identify lithium in the area around Bacanora’s prospects. Bacanora remains the lithium company of choice in the area and is a long way ahead in terms of resource definition and pilot plant testwork. Alix Resources is not reporting some of the higher grades seen on Bacanora’s properties but stands to benefit in time from its proximity to Bacanora’s projects and the metallurgical testwork being done.
Berkeley Energia (LON:BKY) 24.5 pence, Mkt Cap £44.5m – Positive resource update for the Retortillo uranium deposit
• Berkeley – recently rechristened as Berkeley Energia to reflect its Spanish operational focus - has updated its grade estimates for the Retortillo deposit within its Salamanca Uranium Project in western Spain.
• The overall resource at Retortillo (at a cut-off grade of 200ppm) is now reported as 15.6mt at an average grade of 422ppm U3O8 compared with the October 2015 estimate of 16.6mt at an average grade of 367ppm. This represents a 15% increase in grade, partially offset by a 6% reduction in the resource tonnage, resulting in an overall increase of 7.4% in the contained content of uranium oxide.
• The “Retortillo deposit is located adjacent to the proposed processing plant and along with the Zona 7 deposit will be the first to be mined.”
• We note that only 0.2mt of the resource in both the October 2015 resource report and today’s announcement is classified as “inferred”, highlighting the relative robustness of the estimate. Around 31% of the combined resource for the Salamanca Uranium Project as a whole is classed as inferred but the two initial deposits scheduled for mining are now, apparently well understood and have resources at a level which should support detailed mine planning.
• The upgrade at Retortillo brings the overall resource of the Salamanca Uranium project to 83mt at an average grade of 495 ppm U3O8 compared to the 84.1mt at a grade of 483ppm reported last October.
• The upgraded resource estimate for Retortillo has resulted from a detailed geostatistical examination of the data produced from the existing drillhole information rather than as a result of additional drilling. This detailed examination presumably forms part of the continuing work on the Definitive Feasibility Study (DFS) which is due in May 2016 and underlines the gains to be achieved through painstaking work at the Feasibility Study stage of the project.
• Commenting on the potential for a positive impact on the project economics from the increased grade at one of the first deposits to be mined, Managing Director, Paul Atherley, pointed out that “The steady operating costs of US$15.60 per pound are already less than half the current uranium price and with the optimisation studies well underway this very healthy margin is expected to increase.”
Conclusion: The upgraded resource estimate results from a re-evaluation of existing data at Retortillo and underlines the professionalism of Berkeley’s reinvigorated management team as it pushes forward with the DFS.
Centamin (LON:CEY) 66.5 pence, Mkt Cap £766m – Q4 Production brings production to upper end of production guidance for the FY
• Production for the quarter was up 117,644 oz up 12% bringing full year production nto 439,072 oz.
• Guidance for the full year had been 430,000 to 440,000 oz.
• Ore production from the open pit was 2,229 kt slightly up on the previous quarter with the underground ore down 4%.
• Throughput through the process plant was up 3% to 2,758 kt on the previous quarter in line with a target rate of production of 11 Mt.
• For FY 2016 the company is guiding to production of 470,000 oz at a cash operating cost of US$680/oz amd am all in sustaining cost of US$900/oz.
Conclusion: Centamin has delivered to the top end of guidance with guidance for next year for further volume growth of around 7% - all in cash cost at US$900/oz gives them scope to continue to generate cash flow at current spot gold prices with scope for cash flow to improve with any upside in the gold price. With the markets looking jittery and unleveraged gold producer such as Centamin continues to remain a good bet in the sector.
The company trades on an a forward EV/EBITDA multiple of 5.4 x coming down to 4.4x which is still offers scope for outperformance.