S&P cuts Kinross Gold debt to Junk bond status
• Looks like everything in the mining sector is being downgraded to junk bond status.
• Not that this should surprise anyone
• But, thankfully, the banks were lining up to refinance Glencore’s new Revolving Credit Facility
• Freeport was cut to Junk S&P last week along with Anglo American
• The downside of being cut to Junk is that banks will feel they can charge more for debt
• We see the current environment as offering similar value opportunities as last seen in 2008/9 and 2000/2001 but without much of the risk seen in the market back then
• As we like to say in the mining sector – “where there’s Muck, there’s Brass”
ABN AMRO reverse their gold price forecast to $1,300/oz from $900/oz previously
• What has changed their view so dramatically?
• They reckon lower oil prices are weakening emerging markets and the global economy to such an extent that this should raise gold prices.
• Our view is different. We reckon ongoing wealth creation in China, HK, India and elsewhere will cause further investment in
Lithium - Saft – profit falls 72% on slow takeup of Lithium-ion batteries
• Saft, the French manufacturer of lithium-ion batteries has been forced to take a significant writedown on the cost of its lithium-ion battery factories.
• Customers have been slow to change technologies and held on with lead-acid batteries for longer than expected.
• The company has written down value at its Jacksonville plant in the US and at Nersac in France.
• Losses at the two plants rise to €21.3m from a loss of €13.1m in 2014.
• Aviation and automotive companies have been slow to move to lithium-ion due to safety concerns.
• With the Global X Lithium ETF (LIT) which is based on the most liquid battery producers, miners and refiners through tracking the Solactive Global Lithium Index down 21% over the past year it is perhaps not surprising that Saft has not done so well.
• Maybe someone should start a Lithium carbonate or Lithium Hydroxide ETF?
Economic News
Global – the OECD cut word growth forecasts to 3.0%, down from 3.3%, in 2016 arguing governments should act “urgently” and “collectively” to improve business activity.
• Global growth prospects had “ practically flatlined”, the OECD said.
US – Weekly jobless claims performed better than forecast despite a build-up in concerns over US economic growth rates for 2016.
China – The PBoC is planning to impose higher reserve requirements on smaller sized banks which posted a significant increase in credit portfolio in Jan/16.
• Latest data released by the PBoC showed a surge in credit reported in Jan/16 was driven by smaller lenders.
• Individual creditors with less than CNY 2tn of assets made a combined CNY 1.45tn of new loans in Jan, accounting for 60% of the toal increase.
• The market share of the four largest banks dropped to 20% last month from almost 40% in Dec.
• While higher reserve requirements limits the risks of excessive lending to subprime borrowers, a selective approach favours larger lenders at the expense of smaller competitors.
Japan – The All Industrial Activity Index, a proxy of monthly GDP, fell 0.9%mom in Dec adding to evidence the economy had a poor year end.
• Estimates were for a 0.3%mom fall compared with a 1.1%mom fall in Nov/15.
• Earlier released GDP data showed the national output contracted 1.4%yoy in the final quarter of the year.
ECB – Jan policy meeting minutes show Draghi has got support of the governing council for more stimulus.
• Members agreed that current policy “needed to be reviewed and possibly reconsidered” in Mar.
• Current estimates are for the deposit rate to be cut by another 10bp to -0.4% with a respective increase in the €60bn per month asset purchases programme.
• The programme is currently designed to expire in Mar/17 or later.
Germany – Sliding producer prices add to deflationary pressures in the largest European economy.
• PPI fell 2.4%yoy coming below market estimates for a 2.0%yoy decline and marking a 30th consecutive month of negative readings in Jan.
Norway – The government needs to control the pace of spending of the nation’s oil income given uncertain outlook for oil prices amid slowing global economy, Norway central bank governor said.
• The nation is facing larger-than-forecast withdrawals from the wealth fund amid crashing oil prices.
• Wealth fund managers argued withdrawals may be covered with dividends and interest payments of around $23bn per annum; thus, avoiding any need to sell equities or bonds into the market.
Company News
First Quantum Minerals (LON:FQM) 226 pence, Mkt Cap £1.56bn – 2015 Results
• First Quantum Minerals reports a 2015 loss of US$0.77/ share compared to a profit of US$1.40/share in 2014. The result reflects a sharp, 24%, decline in sales revenues “principally due to lower copper and nickel prices and sales volumes, partially offset by higher gold sales volumes. The average LME cash prices for copper and nickel were 20% and 30% lower, respectively, in 2015 compared to 2014.”
• The company did, however, manage to achieve a 6% fall in the cost of sales. The company notes that the majority of the costs savings in 2015 came through during the second half of the year and “Costs savings of $113 million, excluding the impact of foreign exchange, achieved in Q4 2015 compared to the same period in 2014 equate to annualised cost savings of $452m.”
• First Quantum notes that the net attributable loss of $496m “includes a $514m deferred income tax charge on the revaluation of the Company’s Zambian net deferred tax liability triggered by the Zambian government’s reinstatement of corporate tax to 30% effective July 1 2015”.
• Comparative EBITDA of $773m ($1,417m 2014) fell by 45%, however, we estimate that cash outflow before financing reduced from $2,014m in 2014 to $448m in 2015 reflecting improved operating cash flows of $1,191m (2014 - $744m) and a sharp reduction in investment cash flows as a result of a $1,018m reduction in capital expenditures to $1,565m)
• The company achieved a net repayment of debts of $776m during the year and as a result, net debt fell to $4.7bn from $5.4bn in 2014 and gearing (net debt:net debt + equity) declined to 31% (35% in 2014)
• Chairman and CEO, Phillip Pascall commented that “Our plan to strengthen the balance sheet was progressed with the advancement of a number of strategic initiatives, which are expected to be finalized at various times over the next several months.”
• As we noted yesterday, First Quantum Minerals is proceeding with the Cobre Panama copper mine development at a cost of some $1.35bn over the next three years and commissioning is expected in 2018 with commercial production targeted for the end of the year. First Quantum has a well-deserved reputation for the effectiveness of its project development team and the cost efficiency of its development projects; Cobre Panama will be amongst the largest challenges it has set itself.
Tertiary Minerals* (LON:TYM) 1.4p, Mkt £2.9m – Storuman mining permit approval
• Tertiary Minerals reports that the Swedish Mining Inspectorate has approved the mining permit for its Storuman fluorspar project.
• Although Swedish permitting procedures allow for an appeal against the decision up until 24th March, the Inspectorate’s approval is a significant step forward for the company’s plans to develop the Storuman deposit.
• Storuman contains a resource of 28mt at an average grade of 10.2% fluorspar, with approximately 90% classed as indicated. The scoping study prepared by the consulting firm, Scott Wilson, envisaged open pit mining at a rate of 1mtpa for 18 years to produce 103,000 tpa of acid grade fluorspar at an overall capital cost of US$46m to generate a pre-tax NPV of US$33m (discounted at 8%) and an IRR of 24%.
Conclusion: Tertiary Minerals has achieved one of its “Target Milestones for 2016” with the approval of the Storuman mining permit the other targets the company has set itself for the Storuman project this year are the completion of the metallurgical test work and an updated Scoping Study and Preliminary Feasibility Study. We look forward to the results of this work as they become available.
*SP Angel act as Nomad and broker to Tertiary Minerals
Tri-Star Resources* (LON:TSTR) 0.09pence, Mkt Cap £7.6m – new website
Buy
• Tri-Star has made the dramatic announcement that it has launched a new Website.
• https://www.tri-starresources.com/
• The website gives details of the antimony roaster project in Oman for which the company awarded an EPCM contract earlier this week.
• The contract to WorleyParsons Oman is for a planned schedule of work is for 18 months targeting commissioning in September 2017.
• We expect the build and commissioning of the roaster to be within the original budget set of US$70m.
• We see good reason for price recovery in antimony as China cleans up its mining and processing industries and with high cost supply due to close.