Berkeley Energia (LON:BKY) – Half year report and project update
Kibo Mining (LON:KIBO) – Timetable update for Mbeya coal to power project
PolyMet* (PLM US) – FQM sale of $712m Kevitsa polymetallic mine in Sweden indicates higher valuation for Polymet
Wolf Minerals (LON:WLFE) – Interim Report and progress update
Is China now usurping the dominance of the US dollar
Are China’s policymakers now acting to break the dominance of the US dollar as the world’s principal reserve currency?
• China is strengthening the yuan in an unexpected move.
• The Euro strengthened against the US dollar on fresh ECB QE and lower interest rates
• The US dollar weakened unexpectedly following the ECB announcement.
• If China is able to erode the value of the US dollar and denigrate its dominance as the world’s global reserve currency then we could be in for some interesting times
• If the US dollar starts to weaken over the longer term then gold and other commodities will look increasingly attractive in dollar terms, though maybe we will be looking at metals more often in ‘yuan’ terms going forward.
Chinese miners stage protest in Shuangyashan
• Thousands of Chinese miners from Longmay Mining Holding Group Co Ltd in China are protesting after the provincial governor claimed that no miners were owed any back wages.
• The move reminds us of events before the collapse of the Soviet Union when miners and other industry workers received no pay for months from government companies.
• The government has set aside Rmb100bn ($15bn) to assist state industry restructuring.
• Longmay Mining, is the largest state-run mining company in Heilongjiang recently cut its work force by 22,500 out of a total of 80,000 miners recently
• Longmay is said to owe Rmb800m ($123m) in back pay representing 3-6months in unpaid wages for many employees
• We are not forecasting the collapse of China but the situation does indicate that China is struggling to continue to support the restructuring of uneconomic state industries.
Copper – demand looks set to continue to grow in China from key sectors
• China manufacturing of electrical goods which represents some 49% of China’s copper consumption is growing at 4.5%.
• Construction which uses 25% of China’s copper saw floorspace growth fell to 1.3% in December but most construction is seen as underwired requiring additional cabling in fitment.
• Consumer products at 11% should also see ongoing growth due to government policy to stimulate domestic demand
• Ongoing growth of autos, 10% of China’s copper, is still good and spending in the construction of China’s electrical grid looks strong
• Industrial use of copper is just 5% of China’s copper demand and may not see so much growth
We conclude that China should continue to drive much of the world’s new copper demand and that China’s consumption growth should continue to outstrip other nations despite a pull back in growth in new construction in the nation.
Iron ore prices – driven up last week by extraordinary speculation in the Dalian futures exchange
• Volumes on Wednesday hit 978mt of iron ore, representing just over one year’s imports of the ore by China.
• While these sorts of figures are not large for trading on futures exchanges the sudden rise in interest in iron ore futures indicates two points in our view.
o 1. The ongoing development of trading in this relatively new instrument on the exchange.
o 2. Speculation on the potential for a statement from China’s National People’s Congress on further construction and infrastructure support
• We are not saying that the speculation is correct but investors don’t normally buy $55bn worth of iron ore futures without some idea of where demand may be going?
Dow Jones Industrials +1.28% at 17,213
Nikkei 225 +1.74% at 17,234
HK Hang Seng +1.17% at 20,435
Shanghai Composite +1.75% at 2,859
FTSE 350 Mining +2.33% at 9,103
AIM Basic Resources +1.38% at 1,764
Economic News
China – Chinese equities gain on the back of the new head of the market regulator comments that it is early to remove central government support for the market.
• On Saturday, a number of economic reports have been issued painting a mixed picture.
• Both industrial production and retail sales growth slowed in Feb coming in below market estimates.
• On a positive note, the pace of investments accelerated marginally beating forecasts for a further contraction.
• Industrial production (YTD): 5.4%yoy in Feb v 6.1%yoy in Jan and 5.6%yoy forecast.
• Retail sales (YTD): 10.2%yoy v 10.7%yoy in Jan and 11.0%yoy forecast.
• Investments (YTD): 10.2%yoy v 10.0%yoy in Jan and 9.3%yoy forecast.
Japan – The BoJ monetary policy announcement is tomorrow with estimates for the Bank to stay put (Policy Rate -0.1%; Annual QE pace ¥80tn).
• A separate released report showed machine orders had a strong start to the year.
• A volatile proxy for business spending climbed 15%mom/8.4%yoy in Jan, up from a 4.2%mom/-3.6%yoy in Dec and a 1.9%mom/3.8%yoy forecast.
India – A continuing decline in wholesale prices helps the Reserve Bank of India offering room for more monetary stimulus.
• Wholesale prices fell 0.9%yoy in Feb compared with a 0.9%yoy decline in Jan and a 0.2%yoy fall forecast.
• This is the 16th consecutive decline in prices helped by weak oil prices.
UK – The trade deficit narrowed by £200m to 3.2bn in Jan on the back of stable exports and slowing imports.
• A decline in the deficit was led by weaker imports from non-EU countries while inbound shipments from the EU jumped partly due to an increase in the value of imported chemicals.
• The economy recorded a £7.9bn surplus in trade of services while posting a £11.1bn deficit in the trade of goods.
• The BoE is due to release its policy announcement on Thursday with estimates for no change in rates for the 84th consecutive month (0.5%).
Australia – Credit card spending is holding up well on the back of record low benchmark rates.
• Purchases came in at A$21.9bn in Jan, down from A$27.6bn in Dec, an all-time high boosted by Christmas-related spending.
• Credit card spending has been growing since 2010 from the mid-teens (A$bn).
Currencies
US$1.1117/eur vs 1.1116/eur yesterday. Yen 113.66/$ vs 113.83/$. SAr 15.351/$ vs 15.269/$. $1.435/gbp vs 1.427/gbp
0.754/aud vs 0.749/aud. CNY 6.495/$ vs 6.499/$ unch.
Commodity News
Precious metals:
Gold US$1,258/oz vs US$1,265/oz on Friday – The Japan’s biggest bullion retailer says negative rates boost demand for gold.
• Retail prices jumped to their highest since Jul after the BoJ surprised markets by cutting deposit rate to -0.1% in Jan this year.
• “Many customers are wagering that it’s better to turn their savings to gold as a safe asset rather than deposit money at banks that offer low interest rates,” the Company said.
Gold ETFs 55.9 moz yesterday vs 55.8moz on Friday
Platinum US$970/oz vs US$978/oz yesterday
Palladium US$572/oz vs US$571/oz yesterday
Silver US$15.67/oz vs US$15.55/oz yesterday
Base metals:
Copper US$ 4,962/t vs US$4,940/t yesterday –
Aluminium US$ 1,548/t vs US$1,562/t yesterday – The world’s biggest producer is planning to expand existing capacity while global aluminium market remains in surplus.
• China Hongqiao surpassed Rusal as the world’s largest aluminium producer last year after posting a 40%yoy increase in production to 4.4mt (v 3.6mt at Rusal).
• The Company is looking to grow the capacity to c.6mt (+16%yoy) winning market share from marginal producers in the region.
• The latest data showed aluminium production has come down in the first two months of the year.
• “Aluminium consumption is quite stron and I think the market right now calls for more supply, not less,” CEO of the Company said.
Nickel US$ 8,770/t vs US$8,810/t yesterday
Zinc US$ 1,808/t vs US$1,791/t yesterday
Lead US$ 1,847/t vs US$1,841/t yesterday
Tin US$ 16,900/t vs US$16,775/t yesterday
Energy:
Oil US$39.7/bbl vs US$40.7/bbl yesterday
Natural Gas US$1.806/mmbtu vs US$1.802/mmbtu yesterday
Uranium US$28.50/lb vs US$28.50/lb yesterday
Bulk comodities:
Iron ore 62% Fe spot (cfr Tianjin) US$55.7/t vs US$55.0/t – Moody’s cut Fortescue credit rating further into the junk category (Ba3 from Ba2) with negative outlook.
• "The downgrade reflects Moody's expectation of weaker performance over the next two years resulting from the significant drop in iron ore prices experienced in 2015 and our expectation that prices will not likely experience any meaningful and sustained recovery through to 2017," Moddy’s said.
Steel – Chinese production remains in the contraction mode with crude steel output in the first two months of the year down 5.7%yoy at 121.1mt.
• Steel products output slid 2.1%yoy to 162.28mt.
• Annual steel production recorded the first decline last year after falling 2.3%yoy to 804mt with demand posting a 5.4%yoy decline.
• Estimates are for steel demand to record another annual decline this year (-3.0%yoy), according to the Chian Iron & Steel Association.
Thermal coal (1st year forward cif ARA) US$40.60/t vs US$41.50/t yesterday – Local authorities in the Heilongjiang province are reporting Longmay Mining Group has been delaying salary payments to miners, reversing ealirer comments by the Governor local workers are being paid on time and using the Company as an expamle of reform.
• The miner is facing significant losses and is running out of money to pay workers, the Heilongjiang government said.
• “We will learn the lesson of reporting incorrect information,” authorities said.
• The statement was released after local miners went out to protest Governor Lu Hao’s comments.
• The government is planning to cut 1.3m coal and 0.5m steel jobs as part of its economic restructuring programme and battle against overcapacity in mining and steel sectors.
Other:
Tungsten - APT European prices stood at $165-180/mtu vs $168-185/mtu last week
Company News
Berkeley Energia (LON:BKY) 23.5 pence, Mkt Cap £42.7m – Half year report and project update
• Berkeley Energia, which is developing the Salamanca Uranium Project in western Spain reports a pre and post-tax loss for the 6 months to 31st December 2015 of A$5.8m (2014 loss A$4.0m).
• The company held a cash balance of A$8.4m at 31st December 2015.
• Summarising the highlights of the half year, the company points to the impact of the Zona 7 deposit, which lies within ten kilometres of the proposed process plant and which has exhibited “impressive metallurgical characteristics.”
• “The inclusion of the Zona 7 deposit has lifted the after tax net present value of the project to US$353.5 million (£235.7 million) with an internal rate of return of 54% based on a discount rate of 8%…”.
• The company notes that “estimated operating costs have decreased from US$24.60 to US$15.60 per pound of uranium produced during steady state operations, making it one of the lowest cost producers in the world once developed. … In addition to the reduction in operating cost, the capital cost to initial production has been reduced from US$95.1 million to US$81.4 million making it one of the lowest capital cost projects of those currently being considered for development.”
• The project has secured all the major “European Union, National, Regional and Provincial level approvals required for the initial infrastructure development of the project.”
Conclusion: Berkeley Energia continues to make solid progress on the development of the Salamanca Uranium Projects and is delivering improved economics on what is already a robust project in western Spain.
Kibo Mining (LON:KIBO) 3.5 pence, Mkt Cap £11.9m – Timetable update for Mbeya coal to power project
• Kibo Mining reports that although it expects a slight delay on reaching financial close for its Mbeya coal-to-power project in Tanzania, this “does not impact on the overall timeline … Both the Mining and Power Definitive Feasibility Studies (“MDSS” and “PDFS”) are still on schedule, with the PDFS still expected at the end of Q1 and the MDFS shortly thereafter, subject to the timely receipt of the various Government permits / licences relevant to the MDFS.”
• The company ascribes the changes to the timetable to the “eleven month delay in receiving funds from the February 2015 Hume placing” which prevented the company from commissioning some of the feasibility study works and secondly to permitting certain of the required work.
• Kibo Mining now expects the Integrated Bankable Feasibility is “during the latter part of Q2 2016”.
Conclusion: The Mbeya integrated power and coal mine project is moving towards the completion of feasibility work and we look forward to the results of this work later in the year.
PolyMet* (NYSEMKT:PLM) US$0.90, Mkt Cap US$244m – FQM sale of $712m Kevitsa polymetallic mine in Sweden indicates higher valuation for Polymet
• PolyMet Mining may benefit from comparison with First Quantum Mineral’s $712m sale of its Kevitsa polymetallic mine in Sweden.
• Kevitsa is a similar type of mine to Polymet’s NorthMet polymetallic mine which is due to produce concentrate containing copper, nickel, cobalt, platinum, palladium, gold and some other rare metals.
• Comparison with Kevista’s latest available resource statement the NorthMet project has around 1.8x to 2.8x contained copper and 0.7x to 1.1x contained nickel based on Measured and Indicated and Measured, Indicated and Inferred resources respectively.
• Polymet NorthMet’s annual production should be around 1.4x that at Kevitsa for copper and 0.44x for nickel based on the proposed EIS mine plan.
• NorthMet also produce substantially more by products within its concentrate and has potential to double or triple production rates, subject to additional environmental review and permitting.
• Even a doubling should raise NorthMet’s metal output to 2.8x copper production and 0.9x nickel production.
• The $712m for Kevitsa implies a total value of $1.35m for NorthMet. Deducting our estimated capital cost and netdebt of $650m gives a valuation of around US$2.35 per share.
• Kevitsa had a very limited number of seriously interested buyers in a depressed market situation causing the sale price to miss its $1bn target
• Had the sale achieved the $1bn price tag then the read across to Polymet should be $1.3bn or $4.65 per share.
• The valuation supports Glencore’s long running support and commitment to the project.
Conclusion: The Kevitsa sale gives a useful benchmark valuation for Polymet’s NorthMet project when in production. Investors can hope for a multiple uplift in valuation once the project is built. We see North American mining operations potentially attracting a location premium and given slightly better market conditions we reckon Polymet could realise a significantly greater multiple than that applied at Kevitsa.
*SP Angel act as advisors and UK brokers to Polymet
Wolf Minerals (LON:WLFE) 8.25 pence, Mkt Cap £66.8m – Interim Report and progress update
• Wolf Minerals’ interim financial report for the 6 months ending 31st December 2015 shows a pre and post-tax loss of A$24.25m as the company brings its Drakelands tungsten mine in Devon into production.
• The company took full operational control of the process plant from the contractors during September and is working with the contractors to resolve a small number of outstanding issues as it ramps up the plant to full production. “Throughput tonnages are increasing steadily, as are recoveries, and high quality tungsten concentrate is being produced.”
• Teething troubles at the plant included unplanned down time during late December as a result of “manufacturing faults in a number of pieces of equipment” …The faults are covered under warranty and are being rectified in conjunction with the manufacturers and GRES.”
• Wolf Minerals is currently testing out 7-day per week operations and if this change to the operating permits can be established on a permanent basis it will represent an effective improvement of over 25% in the plant’s operating capacity for virtually minimal additional capital.
• In the pit, the company successfully completed a series of trial blasts during October in order to establish data on ground vibration and noise impact in preparation for the implementation of regular blasting during the March quarter.
• The company’s balance sheet shows net debt of A$97.4m at the end of December (June 2015 A$63.0m) and gearing (net debt:net debt + equity) of 32% (June 2015 – 21%)
• The benchmark ammonium paratungstate price (APT) on Friday was down slightly at US$165/180 per metric tonne unit which remains close to the lowest levels seen since at least early 2010.
Conclusion: As the processing plant beds down and the mine moves into fresher rock, which should behave more consistently in the plant than the weathered upper levels of the deposit, we would expect the improvement in recoveries to accelerate at the same time as the plant moves towards full capacity. Wolf Minerals has committed support from its main shareholders and lenders and is well placed to benefit from any upturn in APT prices.