Acacia Mining (LON:ACA) – Continuing cost reductions during Q1
Anglo American (LON:AAL) – Lower production levels across most commodities in Q1 -2016 guidance unchanged
Chaarat Gold (LON:CGH) – Results of optimised feasibility study on the
Oil prices jump unexpectedly to >$45/bbl
• The market is long oil and has been looking for an upward move despite the recommendation of some big US brokers.
• Our intelligence suggests that this move in oil may be short term in its nature and that oil prices are still vulnerable to ongoing oversupply and overcapacity.
• A more sustainable move higher in oil is expected later this year.
• The irony is that the higher oil moves now, the more stable the oil producing nations become and the more likely the Fed is to raise rates in our view. The impact of a rise in Fed rates may then be to lower oil prices creating an opportune market for hedge funds and oil traders.
• It is interesting to see how oil prices are dragging metals prices higher despite some strength in the US dollar.
• We reckon copper and other metals prices have room to move substantially higher when the market sees Chinese manufacturers drawing down significant stocks in China
• Traders have moved metal to Chinese warehouses in anticipation of manufacturer restocking and new growth in demand. This should be driven by new construction activity as described below.
• The question is when and if this will all happen? This gives us a logical scenario, but when were markets ever logical?
China – ramping up of city infrastructure projects
We repeat this comment from yesterday – why? Because we think it is important!
• We understand china is preparing to ramp up its next phase of city infrastructure projects including a number of MTRs Mass Transport Systems
• Comments made by the head of MOFCOM, ‘Ministry of Commerce People's Republic of China’ indicate that China will have enormous demand for steel for their next stage of city infrastructure. Eg for MTRs and tunnelling.
• The implication is that China will have enormous demand for steel, copper and other metals
• Maybe this is why Chinese traders have been stocking up on copper and other metals.
• We are watching Chinese inventory levels closely to see how this metal is being drawn down.
• China may have realised that the conversion to a model driven by greater domestic consumption model will take time and are wary of global and domestic instability.
Hedge funds recorded a US$15bn funds outflow in Q1/16 with investors complaining about high fees charged by the industry amid modest funds’ performance.
• The total amount invested dropped to US$2.9tn in the first quarter making it the second quarter in a row when funds posted net outflows.
• A broad index of hedge fund performance dropped 0.7% in Q1/16, according to Hedge Fund Research.
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Dow Jones Industrials +0.24% at 18,096
Nikkei 225 +2.70% at 17,364
HK Hang Seng +1.64% at 21,584
Shanghai Composite -0.66% at 2,953
FTSE 350 Mining +1.78% at 11,007
AIM Basic Resources +0.51% at 1,908
Economic News
US – Oil prices climbed yesterday after the release of the report showing oil stocks climbed less than forecast and production fell last week.
• Crude oil inventories increased by 2.1mmbbl while output was down 24mbbl at 8,953mbbl per day.
• This week economic news:
Date Index Period Actual Expected (Bloomberg) Previous
Tuesday Housing Starts Mar -8.8%mom -1.1%mom 6.9%mom (revised from 5.2%mom)
Building Permits Mar -7.7%mom 2.0%mom -2.2%mom (revised from -3.1%mom)
Wednesday Existing Home Sales Mar 5.1%mom 3.9%mom -7.3%mom (revised from -7.1%mom)
Thursday Weekly Jobless Claims 265k 253k
Philly Manufacturing Index Apr 8.0 12.4
Friday Manufacturing PMI Markit Apr 52.0 51.5
Source: Bloomberg
China – Fitch is concerned over stimulus measures in China involving an increase in borrowing levels and start to question “the government’s commitment to structural reforms”.
• “From a credit perspective, we’d be more comfortable with China slowing more than it is,” the head of Asia Pacific sovereigns at Fitch said.
• Fitch currently rates Chinese sovereign debt at A+ with a stable outlook, a one grade lower than moody’s and S&P.
ECB – The Bank to hold a policy meeting followed by a press release later today with expectations for no rate change.
• Investors will be closely watching the Draghi press conference for clues over the assessment of Eurozone current economic and inflation outlooks of central bankers.
UK – Ian McCafferty, the only member of the BoE’s MPC who voted for a rate increase at the Jan/16 meeting but who later changed his stance joining the no hike vote in the last three meetings, explained what exactly made him change his mind.
• “It has become increasingly clear to me that the current low level of headline inflation is also having a material impact on the pace of wage growth – and it is this factor that has been paramount in the evolution of my thinking about the balance of risks around domestic cost pressures, and the appropriate policy stance.”
• McCafferty expects conditions to change to warrant the start of gradual normalisation without providing exact timing on when that might be.
• “One estimate of that pace (rate hikes) is 50bp per quarter – to be truly gradual would be to undershot this with some margin to spare.”
• As of now, markets price in a 21% chance of rate cut in 2016 as opposed to 2% chance of a rate hike with 74% probability of no change in the monetary policy.
• On a separate note, the pound is trading lower this morning on sharper than forecast fall in retail sales.
• Retail sales (ex petrol): -1.6%mom/1.8%yoy v -0.3%mom/3.7%yoy in Feb and -0.3%mom/3.8%yoy forecast.
Sweden – The central bank stepped up its bond buying programme in an effort accelerate inflation.
• The Riksbank held interest rates unchanged at -0.5% and announced it is planning to buy SKr45bn (US$5.6bn) of sovereign bonds in H2/16.
• “There is still a high level of preparedness to make monetary policy even more expansionary if this is needed to safeguard the inflation target,” the Riksbank said.
Currencies
US$1.1296/eur vs 1.1334/eur yesterday. Yen 108.66/$ vs 109.32/$. SAr 14.270/$ vs 14.381/$. $1.434/gbp vs 1.432/gbp
0.782/aud vs 0.778/aud. CNY 6.477/$ vs 6.470/$ - US dollar strengthening on slightly stronger expectations for more US rate hikes this year
Commodity News
Precious metals:
Gold US$1,257/oz vs US$1,248/oz yesterday – second largest Chinese gold miner is looking at options of expanding its asset base in overseas markets.
Gold ETFs 56.5moz vs US$56.8moz yesterday – we suspect some ETF money is backing oil today
Platinum US$1,026/oz vs US$1,012/oz yesterday
Palladium US$597/oz vs US$583/oz yesterday
Silver US$17.37/oz vs US$16.96/oz yesterday
Base metals:
Copper US$ 4,989/t vs US$4,930/t yesterday – Big move in copper
• Copper Tc/Rc have risen 5.5% since end March to $86.9/t & 8.67c/lb. The rise in rates indicates to us a surplus of concentrate material.
Aluminium US$ 1,622/t vs US$1,599/t yesterday
Nickel US$ 9,340/t vs US$8,250/t yesterday –
Zinc US$ 1,920/t vs US$1,930/t yesterday
Lead US$ 1,781/t vs US$1,771/t yesterday
Tin US$ 17,265/t vs US$17,250/t yesterday
Energy:
Oil US$45.7/bbl vs US$43.3/bbl yesterday –
Natural Gas US$2.059/mmbtu vs US$2.089/mmbtu yesterday
Uranium US$27.50/lb vs US$27.50/lb yesterday
Bulk comodities:
Iron ore 62% Fe spot (cfr Tianjin) US$60.00/t vs US$61.92/t – Prices slip back following 4.1% rise yesterday
• Bullish sentiment has been driven by stronger demand in China and reports on production cuts from major producers including Rio Tinto and BHP.
• BHP cut iron ore production guidance for its Australian operations by 4% to 260mt for 2016 on the back of poor weather and rail network maintenance.
• Rio also lowered its iron ore output forecasts on the back of delays in implementing a driverless train system in the Pilbara region.
Thermal coal (1st year forward cif ARA) US$45.4/t vs US$44.6/t yesterday – coal prices appear to be following oil higher in the short term
Other:
Tungsten - APT European prices stood at $190-200/mtu vs $175-190/mtu last week – a good pick up in tungsten prices as Hemerdon continues commissioning
Company News
Acacia Mining (LON:ACA) 331 pence, Mkt Cap £1357.4m –Continuing cost reductions during Q1
• Acacia Mining reports a strong 1st quarter performance across its three Tanzanian gold operations. Production for the quarter increased 5% to 190,210 oz (2015 -181,660oz) while all-in-sustaining costs (AISC) fell 14% to US$959/oz (2015 - $1117/oz); the “best performance since 2010”. On a cash cost basis, costs of US$693/oz were 11% lower than the US$783/oz recorded in Q1 2015.
• Despite a 5% decline in the realised gold price to $1150/oz, 7% higher gold sales of 184,181 oz led to a 3% increase in revenue to $221m, while the improved costs drove a 24% increase in EBITDA to $66m and an 11% rise in operating cashflow to $52m
• The company has recognised a $70m additional provision for tax, leading to a net loss of $52m; on an adjusted basis, however, Acacia Mining is reporting adjusted net earnings of $18.1m (Q! 2015 - $10.6m).
• Net cash improved by $19m during the quarter to $124m.
• Underground mine production at Bulyanhulu increased by 20%, largely as a result of higher mined grades, helping to increase overall mine production by 27% to 78,426 oz, while AISC fell by 32% to US$983/oz.
• At North Mara, production of 74,271 oz was in line with the 75,614 oz produced in Q1 2015 as the positive impact of higher trouughput and recovery rates were offset by a 10% decline in head grade as a result of lower open pit grades. The inclusion of around 125,000 tonnes of higher grade underground ore at 10.6 g/t gold helped to drive an 11% decline in AISC to US$737/oz.
• Higher volumes of waste stripping at the Buzwagi mine led to a planned reduction in head grades to 1.1 g/t as mining focussed on “lower grade splay zones” and resulted in a 16% reduction in gold output and an 11% rise in AISC to $1246/oz.
• The company continues to focus on costs and capital expenditure of $36m during the quarter ($42.6m in Q1 2015) was directed mainly at capitalised development ($24.8m) and tailings facilities and the associated infrastructure ($5.5m).
• Exploration close to Bulyanhulu and on the Nyabirama underground extension at North Mara is continuing while the Nyanzaga joint-venture with OreCorp resulted in the latter announcing a JORC compliant resource of 2.78m oz in March. Scoping studies are underway to “assess the technical and economic viability of open pit and/or underground development” at Nyanzaga. Elsewhere, exploration is continuing in west Kenya, in the south and central Hounde belt of Burkina Faso and in Mali.
Conclusion: Acacia Mining’s cost reduction strategy has continued to deliver strong cash generation - the improvement in underlying earnings has been masked by additional tax provisions announced in March.
Anglo American (LON:AAL) 784 pence, Mkt Cap £10.12bn – Lower production levels across most commodities in Q1 -2016 guidance unchanged
• Anglo American reports lower Q1 production across all product groups except at Minas Rio iron ore and in the nickel division.
• Diamond production fell by 10% to 6.9m carats (Q1 2015 7.7m) as a planned response to “reduce production in response to trading conditions in 2015.” Debswana cut output by 5% to 5.3m carats from the Botswana operations while Namibia reduced by 4% to 400,000 carats with sharper reductions in South Africa and in Canada. The company is maintaining its full year guidance of 26-28m carats suggesting that further changes in output are unlikely this year.
• Platinum guidance remains unchanged at 2.3-2.4m oz following a 4% rise in output during the quarter to 567 koz. Higher production at the Amandelbult, Mogalakwena nd Unki operations was partially offset by lower production at Rustenburg where output declined by 15,000 oz to 106,000 oz as a result of difficult ground conditions and lower grades.
• Copper output from the retained operations excluding the Norte assets sold in September last year was relatively flat at 146,500 tonnes (Q1 2015 – 146,800t) with a 10% grade-related reduction in the contribution from Los Bronces (85,200t) offset by an 11% rise in production from Collahuasi to 51,100t as a result of improved plant operations and reliability. The El Soldado operation increased production to 10,200 tonnes “due to the increasing availability of high grade ore, in line with the revised mine plan.” Guidance is unchanged at 600-630,000 tonnes.
• “Nickel production increased by 67% to 11,200 tonnes following the successful rebuild of the Barro Alto furnaces.”
• Iron ore production from Kumba fell by 27% to 8.9mt. Guidance remains intact at 27m tonnes.
• Australian export metallurgical coal and South African thermal coal production declined by 9% and 8% respectively, while Cerrejon in Colombia reduced output by 12%. Full year guidance ids unchanged at 21-22mt for export metallurgical coal and 28-30mt for export thermal coal.
Chaarat Gold (LON:CGH) 13.75p, mkt cap £34.4m – Results of optimised feasibility study on the
• Chaarat Gold have published the results of the optimised feasibility study on the Tulkubash project in Kyrgyzstan
o Ordinarily we would work through the numbers and give a view but anecdotal evidence of companies continuing to lose assets in Kyrgyzstan causes us to focus our time elsewhere.
o An IRR of 25% and NPV of $615m might normally look attractive but in our view it goes nowhere near compensating for the risk of being shaken down in Kyrgyzstan
o Charrat might have the wherewithal to hang on to the Tulkubash project in this wild-west of a country, but the histories of Aurum Mining and Oxus Gold who brought in Tony Blair in an attempt to hold onto their assets suggests otherwise. Though we note there are always two sides to every story.
o Note: Having travelled round Kyrgyzstan with travel writer Johnny Bilby and the Wild Frontiers team and having stayed with the nomads in their Yurts near lake Issyk-Kul we can confirm the country is one of the most beautiful and geologically fascinating nations to visit.