Miners continue to post gains as funds buy back into undervalued sector
China plans to stimulate spending on infrastructure again and raise bank lending
Equities are also up in general as Saudi Arabia agrees with Russia not to raise oil production further
This suggests further potential co-operation between OPEC and Russia on oil production and may slow the rate of asset sales by oil-rich sovereign wealth funds.
China – China is planning to provide more stimulus in the form of accelerated infrastructure-related spending and new measures to increase bank lending.
The planning agency is considering to make more funds available to local governments to cover new infrastructure related projects.
Authorities are likely to make CNY 400bn available in each quarter this year under special bond programme to local heads to finance those projects.
This is double the CNY 800bn offered in bonds last year.
In addition, the government is looking at bringing down the minimum ratio for provisions for bad loans.
National People’s Congress meets in Mar/16 to finalise discussions on a new five-year economic plan which envisages an at least 6.5%pa growth through 2020.
No lack of bank finance liquidity for miners (see Glencore comment)
Glencore have announced the successful refinancing of their revolving credit facility ‘RCF’ this morning
37 banks are part of the financing of the new RCF – terms have not been disclosed
Mining project finance still appears broadly available from the specialist project finance banks according to recent conversations with bankers
Investors have been concerned that bank finance had dried up, but the environment is not like the banking crisis of 2008
Equity prices have been forced down to 2008 levels by asset sales from Sovreign Wealth Funds which have dumped their more liquid equity investments first
Iron ore hits 3-month high as prices recover to $46.1/t in Tinajin port, China
The rationalisation of Chinese steel production may be having a positive impact on iron ore prices
While this may seem to run contrary to the normal price – supply/demand relationship we believe there is a rational explanation to this
In short, inefficient steel producers are closing down and cancelling contracts for poor quality iron ore
More efficient steelworks are taking up the slack and may be importing more, better quality material in a natural progression towards using high-grade, less toxic feedstock
Meanwhile, the iron ore majors, may, at long last be working to raise iron ore prices at the request of their long suffering shareholders.
Potential slowdown in US manufacturing indicated in 600 Group (SIX LN) trading update
The news indicates more reason for a slower than expected progression in raising US interest rates this year
The 600 Group point to a general slowing in machine tool demand, particularly in the US
Much of this may be related to a marked slowdown in capex for oil & gas production which uses specialist steels and other hard alloys
Automotive, aerospace and power generators (turbines) are also big drivers for machine tool demand.
Economic News
Japan – Chances of an additional stimulus in Mar are building up.
An adviser to the government said it is “possible that extra stimulus could come as soon as Mar/16”.
Machinery orders, a proxy for businesses’ capital expenditure, declined 3.6%yoy in Dec/15.
This compares to a 1.2yoy increase in Nov and a 2.8%yoy decline forecast.
South Africa – Inflation accelerated at the fastest pace in 17 months in Jan breaching the central bank’s target corridor.
The inflation rate jumped to 6.2%, up from 5.2% a month earlier and 6.0% forecast by markets.
Depreciating currency (-8.7% since the start of Dec) and the worst drought in more than a century that drove food prices higher are leading gains in inflation.
Finance Minister is planning to announce the nation’s new forecast for GDP growth when he presents his budget on Feb 24.
Kazakhstan – The economy heavily relying on resources based income is reported to have expanded 1.2%yoy in Q4/15, breaking the deteriorating growth trend through 2015.
GDP climbed 2.3%yoy and 1.7%yoy in Q1/15 and Q2/15, respectively, before contracting 1.2%yoy in Q3/15.
The outlook remains challenging with the economy suffering from soft commodity prices and recession in neighbouring Russia.
Company News
600 Group (LON:SIX) - Potential slowdown in US manufacturing indicated in 600 Group (SIX LN) trading update
The news indicates more reason for a slower than expected progression in raising US interest rates this year
The 600 Group produce machine tools, including Colchester and Harrison lathes which are exported to the US and around the world.
What is interesting in the 600 Group statement is the market research comments.
The 600 Group point to a general slowing in machine tool demand, particularly in the US
Much of this may be related to a marked slowdown in capex for oil & gas production which uses specialist steels and other hard alloys
Automotive, aerospace and power generators (turbines) are also big drivers for machine tool demand.
Spectris (LON:SXS), a global producer of measurement instrumentation, yesterday noted at its Full Year results that in the US it is seeing firm demand from electronics and pharmaceutical producers but is also experiencing some slowing in demand for its measurement instrumentation used by the producers of equipment for shale gas extraction.
600 Group quote: “As was reported at the beginning of December in our interim results for the six months ended 26 September 2015, market conditions were difficult and customer confidence to commit to purchases was a concern. These adverse conditions have continued into this year and the weakness we experienced in the European markets is now also being encountered in the USA market, principally in the machine tools division.
The latest Oxford Economics Global Machine Tool Outlook Survey's figures for machine tool consumption for the year to December 2015 showed Europe negative by 18.8% with the USA flat. Whilst the forecast for both was modest growth for the coming year at 4.6% and 2.6% respectively other trade bodies and commentators are reporting more negative figures and we have seen continued weakness within Europe and the UK and a marked fall in confidence in the USA. Figures recently released for machine tool orders from the AMT (Association for Manufacturing Technology) in the USA recoded a negative 17.5% for the year to end December 2015. With general economic and in particular manufacturing forecasts being weak, customers are leaving purchasing decisions until the last minute and consequently order books overall are at a little over one month and visibility of future trading is difficult to predict and subject to monthly fluctuations.”
Glencore (LON:GLEN) 109 pence, Mkt Cap £15.65 bn – Refinancing on Revolving Credit Facility shows strong demand from the banks
Glencore has signed a RCF which will refinance and replace the existing US$8.45bn facility.
Glencore has received commitments of US$8.4bn which was a US$3bn increase from 37 banks in the syndicate.
The facility which has been oversubscribed has been scaled back to US$7.7bn.
The company will look to launch a general syndication with 30 additional banks in Q2 2016.
The new RCF is unsecured and contains a 12 month extension option and a borrowers term out option (ie which allows the borrower to convert into a term loan).
Active book runners on the deal were ABN Amro, Bank of Tokyo Mitsubishi, HSBC, ING and Santander.
Conclusion: The appetite for the RCF albeit syndicated out to 37 banks sends a strong signal that the credit markets are happy to take Glencore risk. Interestingly the RCF also carries an option for the company to convert into a term loan. This could suggest some of the worries over the banks may be overdone and also the perceptions of credit worthiness of the paper of mining companies.
Metminco * (LON:MNC) 0.175 pence, Mkt Cap £5.2m – Drilling starts at Los Calatos TD2 target
Metminco have announced that drilling has started at the Los Calatos TD2 target.
The program aims to test an area around a structural bend on a fault which constrains the known Los Calatos porphyry complex.
Surface mapping shows the presence of copper oxides over a strike length of >250m in the area and geophysical surveying also indicates sub surface anomalies.
The team expect to intersect mineralisation at a depth of around 200m.
The identification of additional exploration opportunities in close proximity to Los Calatos stems from the detailed re-examination of the historic drilling and exploration data which has enabled the team to establish a smaller, less expensive and economically more robust development plan.
• Updated study parameters:
o Mining of a total of 134m tonnes of ore at an average grade of 0.89% copper and 0.036% molybdenum over a 22 year period using sub-level caving.
o Pre-production capital expenditure of US$655m and net cash operating costs (C1) of US$1.29/lb of copper.
o After tax, ungeared NPV of US$477m at an 8% discount rate and assuming copper price of $3.00/lb; gold price of $1250/oz; silver $19/oz and molybdenum $11.16/lb.
o Assuming 60% gearing after tax NPV at an 8% discount rate of US$456m based on US$ LIBOR of 0.33% plus 4% per annum.
o Payback 4.85 years.
o We understand Metminco is in ongoing discussion with potential third party partners over the development of Los Calatos with a number of groups running “due diligence” including site inspections.
Conclusion: The potential discovery of additional mineralisation could add meaningfully to the value of the Los Calatos mine plan. While this should not be essential for its future development it should add to its value to the market and to joint venture partners. We look forward to the results of the drilling program at TS2.
*SP Angel act as joint-broker to Metminco
Obtala Resources (LON:OBT) 6.75 pence, Mkt Cap £17.8m – US$3m investment in forestry division
The company has had commitments for a total of US$3m from three different investors looking to invest in timber.
US$1.2m has been received with the balance due by 30 June 2016.
Funds are to be used to build two kilns on site to improve timber quality and recovery rates.
A new sales and distribution centre is also being set up in Mozambique for export markets.
Investments are being made through three different SPVs representing the interests of the different investors.
Investors involved are Global Timber Investment with a total investment of US$900,000, George Miller a private investor in the US with C$1.61m and Basic Materials with a total investment of US$900,000.
The investments are linked to offtake agreements with a 5% per annum payable.
5% of profits will also be paid into a fund to support social programmes to benefit local Mozambique communities.
Conclusion: It looks as if this investment will now give the company more time to decide on options for the assets held within the group which include a mixture of agricultural, forestry and retail operations none of which are particularly well understood by the market.
Kibo Mining (LON:KIBO) 4.125 pence, Mkt Cap £14.0m – Metallurgical Testing on Mbeya coal
Kibo Mining reports that metallurgical test results on the Mbeya coal resource in Tanzania have shown that it is “within specifications for use with fliudised bed technology” in terms of both its abrasion characteristics and grindability.
Sulphur contents are reported to be “well within tolerance” and “Lime injection technology will be able to comfortably keep Sulphur Dioxide emissions within required international emission standards”.
The coal’s ash content is reported to be within “tolerance levels for similar coal deposits in Southern Africa” and ash fusion temperatures are well above typical boiler operating temperatures.
The test results come from a total of 44 composite samples derived from eight diamond drill holes designed to test the geotechnical characteristics of the deposit and assess the key metallurgical features of the coal.
The Mbeya coal deposit has a total resource of 109mt, of which 71mt is classed as “indicated”, and is part of an integrated US$640-760m power supply project which aims to exploit this resource to generate around 250-300Mw of power using circulating fluidised bed technology.
Establishing that the metallurgy is appropriate for the power plant’s proposed fluidised bed technology is an important step forward for the project and Kibo Mining’s CEO, Louis Coetzee commented that ”with these latest test results the Mbeya coal resource has now passed all the technical and economic requirements to qualify as a suitable long term fuel source to the Mbeya Power Plant. We can now focus all our attention and resources on concluding the remaining mostly administrative and commercial aspects of the MCPP DFS”. [ Mbeya Coal to Power Project Definitive Feasibility Study].
Conclusion: The company’s website indicates that Tanzania currently has less than 1,000Mw of operating electrical power generating capacity “out of the 2,000 MW it requires and with a projected growth rate of 7% per year in the medium term (IMF projection), it is facing increasing power-generation under-capacity to meet its economic development needs.” Delivery of the Mbeya power supply project has the potential to make a significant contribution to Tanzania’s power deficit in the future.
Stellar Diamonds (LON:STEL) 10.5 pence, Mkt Cap £2.7m – Environmental approvals for Tongo Mine Licence
Stellar Diamonds reports that it has “received a letter of approval for its Environmental, Social and Health Impact Assessment (“ESHIA”) from the Environmental Protection Agency (EPA) in relation to the mining licence application for its 100% owned Tongo Dyke-1 project (“Tongo” or “the Project”) in Sierra Leone”.
The company now plans to “schedule a meeting with the EPA to discuss and agree on the fee relating to the issuing of the environmental licence.”
Stellar Diamonds also reports that it has recently reached agreements over the surface rental with the local landowners and other “key stakeholders.”
Conclusion: In late January, the company announced that it had submitted the ESHIA to the authorities for approval and it is encouraging that it has received approval so quickly, and it is to be hoped that the negotiations over the fees will not excessively delay the issue of the formal permits.