Amara Mining (LON:AMA) – Perseus deal creates a new medium sized integrated gold player
Aureus Mining (LON:AUE) – Production building up at New Liberty
Capital Drilling (LON:CAPD) – Losses blow out as rig utilisation remains low
Sirius Minerals (LON:SXX) – DFS highlights for the North York Potash Project
China’s ghost cities – herald China’s next phase of urban migration
• China is poised for its next wave of urban and inter-urban migration
• The PRC did not build a series of ghost cities to stand idly waiting for the grass to grow.
• These cities are ready for the next wave of migration from the coal, steel and other inefficient ‘old economy’ sectors.
• Party officials are busy restructuring loss making, polluting and poorly placed industries and are working on how to incentivise millions of workers to move wholesale to these new cities.
• Mass migration does not happen overnight but in China it can and will happen much faster than might normally be the case.
• This will look like an opportunity for these Chinese workers and is also an opportunity for the industries which will be involved.
• Moving and settling millions of citizens is no easy task but the PRC has ways of making you move!
• The migration is likely to dwarf anything seen in Europe and should be far better managed than anything seen in Europe.
• Domestic demand will be stimulated by the move as the new migrants will need to buy new appliances and a whole lot of new electric cables as part of their move
Fed comments are good for gold and other metals with only two interest rate hikes now planned for this year
• Goes to show the ongoing strain of China muscling its way into the global economy
• The Fed action may be early preparation for President Trump and the potential for volatile markets in the run up to his more certain election
Perhaps Janet Yellen might follow Queen Elizabeth I in Blackadder and write the following letter:
"..I have decided to spend the money on... A Big Party,
Can't decide between between my two faves, so I've decided
to keep the money and spend it all on a Big Splash Up.
Hope you aren't too miffed. By-eee"
Economic News
US – The FOMC surprised markets yesterday after releasing a dovish statement suggesting accommodative monetary to stay for longer.
• Benchmark rates have been left unchanged at the targeted 0.25-0.50% range for a second consecutive meeting.
• The Fed scaled back the number of forecast interest rate hikes with median benchmark rate seen at 0.875%, implying two 25bp moves this year.
• This compares to four rate hikes expected previously according to the Dec meeting details.
• Changes have driven by low inflation expectations and concerns over global economic growth outlook.
• On a positive side, the Fed noted “the labour market is continuing to strengthen despite risks from abroad.”
• Economic growth forecasts have been brought down to 2.2% in 2016 and 2.1% in 2017 compared to Dec forecasts for 2.4% and 2.2%, respectively.
• Core inflation rates have been broadly left unchanged apart from the rate in 2017 (1.8% v 1.9% estimated previously) with the target of 2.0% to be reached in 2018.
• Fed remains more bullish than markets regarding the monetary policy outlook with analysts expecting onlay a 22% chance of the Fed raising rates twice this year and only 6% probability for three or more hikes in 2016, according to Bloomberg.
• Commodity prices rallied along with equity indices with the US dollar and bond yields heading in the opposite direction following the announcement.
China – Outbound investments in countries involved in the “Belt and Road” programme jumped 41.1%yoy to $2.2bn in the first two months of the year.
• The share of investment in the project as a share in the total is likely to increase from its current c.1.1%.
UK – The delivered budget is targeting more contributions from big businesses while offering more to savers and small companies.
• OBR growth forecasts have been cut for every year through 2019-20 with output growth of 2.0% expected in 2016, down from 2.4%.
• On the back of weaker growth and downwards revisions to GDP estimates Debt to GDP ratio has been revised to 82.6% for 206-17, up from 81.7%.
• Duties on tobacco and sugary drinks increased, while fuel and alcohol levies have been left unchanged.
• Corporation tax is due to come down to 17% by 2020, down from current 20%; while tax relief threshold for small business has been more than doubled to £15,000.
• Tax free allowance have been raised to £11,500 from next year and is on target to reach £12,500 by the end of the parliament.
• As an incentive to save and invest, capital gains tax has been cut to 20% from previous 28%, ISA limit raised to £20,000 from £15,000 and new lifetime ISA for under-40s introduced.
• Authorities are planning on limiting multinational tax avoidance by tightening the rules of deductibility of interest and carrying forward losses for large businesses.
• Budget surplus by 2019-20 remains the target.
Australia – A report showing a drop in the unemployment rate lifts the Australian dollar as chances of another rate cut by the RBA decline.
• The jobless rate fell to 5.8% in Feb, down rom 6.0% in Jan and expectations for no change.
• A drop in the headline number has been partly attributed to a decline in the participation rate which fell to 64.9%, down from a revised 65.1%.
Switzerland – “The global economic outlook has deteriorated slightly in recent months and the situation on international financial markets remains volatile,” the SNB said.
• The Swiss Central Bank reiterated its view that the national currency remains “significantly overvalued” while highlighting risks posed by weakening inflation expectations and weakening global growth.
• Swiss GDP growth forecasts have been brought down to 1%, down from previous expectations of 1.5%.
• Inflation is seen running at -0.8% at the end of the year, down from -0.5% forecast in Dec.
• The Bank left the deposit rate unchanged at -0.75%.
Currencies
US$1.1327/eur vs 1.1090/eur yesterday. Yen 111.29/$ vs 113.69/$. SAr 15.498/$ vs 16.069/$. $1.433/gbp vs 1.413/gbp
0.765/aud vs 0.747/aud. CNY 6.480/$ vs 6.518/$ unch.
Commodity News
Precious metals:
Gold US$1,269/oz vs US$1,233/oz yesterday – – Strikes by jewellers in India enter their third week as the industry stepped up protests taking rallies in the capital.
• Local traders protest an excise levy of 1% on ornaments produced and sold in India.
• The strike is on course to become the longest ever after a similar closure in 2012 for three weeks was successful in getting the government to drop plans.
Gold ETFs 55.9 moz yesterday vs 55.8moz yesterday – ETF holdings continue to rise
Platinum US$986/oz vs US$966/oz yesterday
Palladium US$586/oz vs US$567/oz yesterday
Silver US$15.69/oz vs US$15.29/oz yesterday
Base metals:
Copper US$ 5,054/t vs US$4,950/t yesterday –
Copper – Market fundamentals remain tight in medium- to long-term given an expected supply shortfall and steady demand with prices likely to remain depressed during the coming two years, Antofagasta said.
• “We are currently enjoying a rally in the copper price, but this seems to be driven more by financial investors than by any change in fundamentals,” CEO said.
• Fundamentals suggest a market deficit by the end of 2017 and 2018 assuming 2-3%pa growth in demand.
• LME inventories (170kt) have been trending downwards on the way to hit the lowest since mid-14; while SHFE stockpiles (350kt) are posting new record highs.
Aluminium US$ 1,534/t vs US$1,515/t yesterday –
Nickel US$ 8,685/t vs US$8,495/t yesterday –
Zinc US$ 1,808/t vs US$1,745/t yesterday
Lead US$ 1,815/t vs US$1,778/t yesterday
Tin US$ 16,845/t vs US$16,820/t yesterday
Energy:
Oil US$41.0/bbl vs US$39.3/bbl yesterday
Natural Gas US$1.905/mmbtu vs US$1.866/mmbtu yesterday
Uranium US$29.50/lb vs US$29.15/lb yesterday
Bulk comodities:
Iron ore 62% Fe spot (cfr Tianjin) US$54.9/t vs US$53.2/t –
Thermal coal (1st year forward cif ARA) US$41.30/t vs US$40.30/t yesterday –
Peabody coal faces Chapter 11 with thermal coal prices at $43/t
• Peabody Coal has missed interest payments on $1.6bn of bonds.
• The company is struggling to find additional financing even though it was responsible for around 20% of all US power demand five years ago.
• Foresight Energy defaulted earlier this week while Cloud Peak Energy is reported as hanging on by its fingertips.
• New shale gas supply in the US has combined with raised regulatory and emissions costs from Obama’s Clean Power Plan has made life tough for US coal producers
• The UK plans to close all coal power plants within 10 years, though its tough to see what is going to replace the lost power generation.
• China is also cleaning up its act through the closure of coal mines and polluting industries though China is still likely to import more coal.
Other:
Tungsten - APT European prices stood at $165-180/mtu vs $168-185/mtu last week
Ferrochrome – ASA Metals, a South African ferrochrome producer, entered business rescue in late Feb.
• The Company is the third local producer to have filed for the rescue programme in the last seven months.
• The capacity of ASA operations is estimated at 400ktpa of charge chrome.
Company News
Amara Mining (LON:AMA) 13.25 pence, Mkt Cap £55.7m – Perseus deal creates a new medium sized integrated gold player
• In a meeting with Amara Mining’s management, the logic of the merger with Australia’s Perseus Mining was outlined. The transaction, under which Perseus will issue 0.68 new Perseus shares and 0.34 unlisted warrants for each Amara Mining share, delivers pro-forma ownership of the enlarged Perseus Mining to the Amara shareholders and creates a mid - range, west African focussed, miner and mine developer.
• Perseus Mining’s existing Edikan mine in Ghana provides an existing operating base while the enlarged company moves ahead with the construction and development of the Yaoure deposit in Cote d’Ivoire and the enlarged business can advance a portfolio of other exploration properties.
• The combined entity will have a measured and indicated resource base of 14m oz of gold and ore reserves of 7.1m oz of gold. The company presentation indicates that although the volume of the combined mineral resources rates close to the likes of B2Gold and Endeavour Mining, the current valuation they attract at around an EV of $12/oz is substantially lower than the $ 82/oz of B2Gold and $70/oz of Endeavour Mining.
Conclusion: We believe that there is an appetite for a mid-range, gold producer in the London market. Prior to its acquisition by Eldorado Gold in 2012, this niche was filled by European Goldfields and the emergence of a new growth oriented gold producer may be attractive as we see a recovery in gold prices.
Aureus Mining (LON:AUE) 7.375 pence, Mkt Cap £40.0m – Production building up at New Liberty
• Aureus Mining reports that its New Liberty mine in Liberia produced approximately 4,500 ounces of gold during the first 14 days of operations in March, bringing the total for the year to date to 19,200 ounces.
• The company also confirms that “The process plant has continued to operate at a stable run-rate in line with original design specifications, and recovery levels in excess of 90% continue to be achieved.”
• On the mining side, the company is working on completion of a protective flood bund (barrier) along the southern margin of the pits to protect the mining operations in advance of the onset of the wet season which we believe would typically start around May with the heaviest rainfall between July, when we understand the capital Monrovia can receive in excess of one metre of rain, and October.
Conclusion: New Liberty’s production during the first two weeks of March equates to an annualised 117,000 oz of gold production – broadly in line with the company’s February 2016 presentation which indicated that annual production over the first 6 years of the mine’s life was expected to average 120,000 ounces. Putting protective measures in place to safeguard operations during the coming wet season is an essential precaution when monthly rainfall at the site could be 10 times the annual amount recorded for Britain’s wettest city (Cardiff apparently).
Capital Drilling (LON:CAPD) 32 pence, Mkt Cap £43.1m – Losses blow out as rig utilisation remains low
• Capital Drilling report a widening loss as their rig utilisation rate fails to pick up through the second half.
• The company reports it will pay a final dividend of 2.5c/s on top of the interim of 1.9c/s despite the losses.
• Fleet utilisation remains at just 34% on 97 rigs.
• The Average Revenue Per Operating Rig fell slightly to $188,000 for the year vs $189,000 see in the first half.
• Earnings fell as the cost of sales rose to $56.3m FY, $30.8m in H2 a 21% increase in costs on the $25.5m seen in H1 despite no increase in the rig rate or fleet utilisation.
• Administration expenses rose by 12% to $6.94m in H2 from $5.55m in H1
• Depreciation costs were steady at $7.3m as you would expect
• The result is that Pre-Tax profit blew out to a loss of $5.5m for the full year from a small profit of $0.03m in H1
• Post-Tax losses then widened to $10.1m for the year vs $3.2m in H1.
• Restructuring the head office to Mauritius from Singapore should make meaningful savings
• Focus on their blue-chip client base has provided a steady base in Southern Africa with growth likely to be seen in Latin America as the business expands in Peru
• “The current year will see Capital Drilling return to revenue growth and profitability as we seek to further our market share in emerging markets, increase our suite of drilling services and enter into strategic partnerships. We believe that 2015 has built a strong platform to return our business to growth despite the ongoing challenges which our industry continues to face.”
Conclusion: Capital Drilling are well placed to take advantage of an upturn in the mining sector and in the resumption of drilling activity. We believe drilling rates are lower than they were but reckon an improvement in the rig utilisation rate should improve returns for Capital Drilling. Gold miners in weaker currency regions have new life margin growth and capital benefits as service providers compete to make sales. Capital’s final dividend indicates to us confidence in new orders and a potential return to profit this year.
Sirius Minerals (LON:SXX) 19 pence, Mkt Cap £436.0m – DFS highlights for the North York Potash Project
• Sirius Minerals DFS describes a US$3.56bn project to be completed in two phases of financing to deliver a 10mtpa capacity operation producing a polyhalite fertiliser product.
• Initial production is expected in 2021 “followed by completion of fit out and ramp-up with 10Mtpa rate anticipated in 2023.”
• The company indicates that it expects average cash operating costs of US$27.20/tonne at a 20mtpa production rate (and US$33.10/t at the initial 10mtpa rate) to produce cash margins in the range 70-85% and deliver a “Project net present value … of US$15 billion today at a 10% discount rate.” The project NPV is reported to rise to US$27bn when production commences.
• The DFS assumes average real prices for the first 10 years of production of US$166/t (real 2016) and average mine life equivalent prices of US$186/t”. The prices are derived from forecast by the well regarded commodity forecasting group of CRU.
• The DFS has been prepared by an impressive array of expert consultants under the overall management and coordination of the company’s team and the project management study consultant, Bechtel.
• The mining, shaft, transport infrastructure and port facilities have all been designed with the capacity to expand capacity from the initial 10mtpa rate to 13mtpa and ultimately to 20mtpa.
• The 13mtpa rate is the current production limit imposed as a condition to the Planning Consent by the North York Moors National Park Authority, however, “The Company is confident that, given the expansion to 20Mtpa will largely be achieved through utilising the infrastructure for the initial capacity, there will be limited environmental impact arising from the tonnage increase and therefore an application to vary the planning condition to allow for the increased tonnage would be granted as required.”
• The company estimates that the project will be completed in 4.8 years and if it were able to commence the initial works in April 2016, would therefore generate initial production in early 2021. Site preparation and pre- sinking is expected to take 22 months and the main shaft sinking activity a further 36 months.
Conclusion: Sirius Minerals has now formalised its DFS and outlined a clear path towards initial production by 2021. The engineering task is now well defined and the market’s attention is likely to turn to the financing.