First Quantum Minerals (LON:FQM) 340 pence, Mkt Cap £2.34bn – US$712m Sale of the Kevitsa mine
Gold – investor interest seen driving prices
• Gold prices are edging cautiously higher as investors regain interest in the metal
• Ongoing low interest rates, warnings of financial armageddon on the value of paper money are all driving investors in the direction of gold
• Deflation potential in Europe, inflation after further QE and after a prolonged period of
• Warnings on potential for further financial failures and the ineffectiveness of central banks to rescue the financial system sound ever louder in the press
• India raised taxes as a barrier to gold imports to help its trade balance but traders know Indian buyers will still want to buy the metal creating yet more pent-up demand
• Chinese investors wary of their own financial markets and the political system under which they live continue to buy physical and financial gold
• US investment funds are buying back into ETF alongside private investors raising ETF holdings to >55moz
• New physical and financial demand for gold is pushing ETF holdings higher with ETFs now worth $70bn
• Gold buying in China as risen in recent years encouraged by further liberalisation of China’s physical and futures gold markets
China – “Navigate the New Silk Road” Bloomberg Conference review
Mike Bloomberg opened the followed the “Navigate the New Silk Road” conference in London on Tuesday with representatives from The Chinese Embassy, Peoples Bank of China, Bank of China and City of London Corporation and E Fund Management (a $7bn HK based fund)
Key messages:
• China’s economic mix has changed over the years:
o Services grew over 8% in 2015 and account for 50% of GDP (vs. 80% in the U.S.), manufacturing grew by 6%.
o Growth in services is linked to industrial production.
o Manufacturing Gross Value Add was 29% of GDP in 2013 vs. 12% for the U.S.
o “One Belt, One Road” strategy utilising China’s finance, steel and concrete to build out transport infrastructure including road, rail and ports also pipelines across a list of countries that China is seeking to expand trade with.
o Capital flows: Encouraging free flows of capital and easing exchange rate controls – measuring yuan performance against baskets of currencies
o FOREX: London, with 40% of global forex trade, is seeking to become the largest trader of RMB, Hong Kong still dominates
Falls in the RMB broadly blamed on US dollar strength rather than specific underlying yuan weakness
Slower growth ratethrough over capacity, rising labour rates, aging workforce, the shift from export to domestic demand led economy.
State enterprises have been underperforming and have been increasing leverage.
Investment in productive enterprise and a consumption led economy has been stifled by too much property investment, 17% of the nation’s total.
Local governments have for years issued land to developers, the banks have lent the money profitably and the local government has received property sales related taxes.
Property prices are holding in Tier 1 and 2 cities but not Tier 3 and 4 and this is a concern
New initiatives: to cut taxes, focus investment on increasing productivity inc. Technology, Artificial Intelligence and Clean Energy products/services for Aging Society.
Urbanisation ongoing: Need to increase urbanisation from 56% in 2015 to 60% in 2016 to drive incomes
Diversification: Seeking further economic diversification and looking to invest in infrastructure (One Belt, One Road)
China – Inflation accelerated to a 18-months’ high of 2.3%yoy in Feb, up from 1.8%yoy in Jan and 1.8%yoy forecast.
• The increase is attributed to a surge in food costs amid the week-long Lunar New Year holidays and increased consumption of pork, duck, seafood and vegetables.
• Food prices climbed 7.3%yoy with non-food prices posting a 1.0%yoy increase.
• Analysts expect inflation to stabilise moving forwards, significantly below the 3% PBoC target inflation rate, offering room for more accommodative monetary policy if needed.
• Producer prices continued to decline falling 4.9%yoy last month compared to a 5.3%fall in Jan.
• This marks the run of negative readings to 48 months.
• Mining and raw materials remains a drag on producer prices.
Eurozone – Investors are awaiting the ECB announcement with many expecting both a cut in the deposit rate and an expansion in monthly bond purchases rate.
• The deposit rate is forecast to come down 10bp to -0.4%, a record low in the single currency’s block history. The ECB cut the rate to -0.3% in Dec last year.
• QE currently running at €60bn/month may be extended to €75bn/month with the deadline on the programme to be potentially moved to Q4/17 v Q1/17 currently envisaged.
Germany – Jan exports numbers disappoint recording a second consecutive decline with current account surplus halving during the month.
• Outbound shipments fell 0.5%mom v -0.7%mom in Dec (revised from -1.6%mom) and 0.8%mom forecast.
• Imports favoured better recovering from a sharp decline at the end of last year (1.2%mom v -1.6%mom in Dec and 0.8%mom forecast).
South Korea – The BoK decided to stay put ahead of the ECB and the FOMC decisions due this and next week.
• The Bank of Korea kept the benchmark rate at a record low of 1.5%.
• Respondents to a Bloomberg survey split between no-action and a 25bp cut decisions as 60/40.
New Zealand – The central bank surprised markets by cutting its benchmark rate by 25bp to 2.25%.
• The decision was led by the effects of slowing growth in China and “challenges” in its important dairy market.
Currencies
US$1.0966/eur vs 1.0970/eur yesterday. Yen 113.40/$ vs 112.51/$. SAr 15.209/$ vs 15.430/$. $1.421/gbp vs 1.423/gbp
0.749/aud vs 0.748/aud. CNY 6.514/$ vs 6.513/$ unch.
Commodity News
Precious metals:
Gold US$1,250/oz vs US$1,258/oz yesterday
Gold ETFs 55.6 moz yesterday vs 55.4moz the previous day
Platinum US$980/oz vs US$979/oz yesterday
Palladium US$565/oz vs US$556/oz yesterday
Silver US$15.32/oz vs US$15.36/oz yesterday
Base metals:
Copper US$ 4,918/t vs US$4,921/t yesterday
Aluminium US$ 1,566/t vs US$1,568/t yesterday
Nickel US$ 8,790/t vs US$8,795/t yesterday
Zinc US$ 1,796/t vs US$1,809/t yesterday
Lead US$ 1,848/t vs US$1,846/t yesterday
Tin US$ 16,750/t vs US$16,750/t yesterday
Energy:
Oil US$40.8/bbl vs US$40.2/bbl yesterday
Natural Gas US$1.771/mmbtu vs US$1.725/mmbtu yesterday
Uranium US$29.70/lb vs US$30.65/lb yesterday
Bulk comodities:
Iron ore 62% Fe spot (cfr Tianjin) US$56.6/t vs US$55.2/t
Thermal coal (1st year forward cif ARA) US$41.50/t vs US$40.50/t yesterday
Other:
Tungsten - APT European prices stood at $168-185/mtu vs $165-185/mtu a very small further tick up
Company News
First Quantum Minerals (LON:FQM) 340 pence, Mkt Cap £2.34bn – US$712m Sale of the Kevitsa mine
• First Quantum Minerals has announced the US$712m sale of its Kevitsa nickel/copper mine to Boliden.
• The mine, located approximately 140km north-east of Rovaniemi in northern Finland produced approximately 8,800 tonnes of nickel and 17,200 tonnes of copper in 2015 and First Quantum’s recent guidance indicates 2016 production of 13,000 tonnes of nickel and 22,000 tonnes of copper with 17,000 oz of gold, 30-40,000 oz of platinum and 24-30,000 oz of palladium.
• The mine treats around 6.7mtpa of ore and as of 31st December 2014 reported proven and probable ore reserves of 145.4m tonnes at an average grade of 0.3% nickel,0.41% copper, 0.12 g/t gold, 0.17g/t palladium and 0.23 g/t platinum.
• The sale, which is subject to approvals by the relevant competition authorities and a number of “other typical closing conditions”, is expected to close during May 2016.
• First Quantum’s Chairman and CEO, Philip Pascall commented “This transaction is one of the initiatives within our plan, announced in October 2015, aimed at strengthening the Company’s balance sheet and improving its capital structure to better suit the development timetable of the Cobre Panama project. We are continuing to advance other strategic initiatives which are expected to be finalised at various times over the next several months, to meet those objectives.”
• At the end of last year, First Quantum’s balance sheet carried net debt of approximately US$4.7bn representing gearing (net debt:equity plus net debt) of just below 31%.
• Cobre Panama contains a proven & probable ore reserve of 2.1bn tonnes at an average grade of 0.41% copper (with minor gold, silver and molybdenum). Development is expected to cost around $6bn to produce around 320,000 tpa of copper (with 100,000 oz pa of gold, 1.8m oz pa of silver and 3500 tpa of molybdenum by-products) over a 34 year mine life. The company’s presentation in December 2015 indicated that the project is currently on course for commissioning and ramp-up during 2018.
Conclusion: The sale of Kevitsa and Mr Pascall’s comments regarding other “initiatives” to strengthen the balance sheet as the development of the Cobre Panama project proceeds will no doubt prompt speculation concerning which of the company’s other assets are available for sale. To add SP Angel’s voice to the speculation, perhaps the company’s other Finnish operation, the Pyhasalmi copper zinc mine; the Cayeli copper / zinc mine in Turkey; and the Guelb Moghrein copper / gold mine in Mauritania; and perhaps some of the more advanced exploration projects could all be available – at the right price.