Atalaya Mining (LON:ATYM) – Tailings disposal suspension lifted – expansion plant commissioning underway
BHP Billiton (LON:BLT) – Operational Review – Samarco dam failure update
BlueRock Diamonds* (LON:BRD) – Director confirms allocation of >1m shares in placement
DiamondCorp (LON:DCP) – DiamondCorp heads towards production. Publishes 2015 year-end results
Gemfields (LON:GEM) – Quarterly production update
Glencore (LON:GLEN) 145.4 pence, Mkt Cap £20.93bn – Production cuts hit Q1 report
Lucara Diamonds (CVE:LUC) – Generating strong margins and recovering high value stones.
Steel and Iron ore futures trading in China hit new highs recently as local investors piled into the market
• Traders have been warned off selling equity markets last year and appear to have turned their attention to iron ore futures.
• There is no smoke without fire in our view and Chinese traders may be betting on the restart of new infrastructure projects.
• Traders are now referring to the impact of investment by an army of Mrs Chans (used to be Mrs Watanabe in Japan) and the development of an investment bubble in these markets
• Problem is the marked rise in iron ore futures prices driven by rampant speculation is causing some less efficient steel producers to avoid closure against government policy.
• The authorities moved to double the cost of futures trading in an attempt to limit the speculation and may need to take further action to hold back futures prices in the face if this new trend for personal investment into commodity markets in China.
• Interestingly the once infamous China Chaos fund is said to be running relatively small positions which may be due to having their wings clipped or stories of recent losses.
Mark Mobius advises to buy commodity stocks as rebound is just beginning (Bloomberg)
• Mark Mobius, a legend in emerging market investment by any standard is advising investors to buy commodity stocks
• Mobius who has run the Templeton emerging markets fund for more years than we can remember is reported to be piling into commodity stocks in China.
• He reckons the rebound in raw materials markets is only getting started and that China’s commodity producers are leading this year’s recovery.
• We agree with Mobius in that we believe the Chinese government is working to kick start dozens of local rail infrastructure projects which will consume most or all of China’s excess steel production. We note China still plans to close inefficient capacity in its smokestack industries.
• Traders have stocked up metal and ore inventories in China in anticipation of the new demand but we wonder if parts of the government are resisting orders to free up cash to feed the new projects.
• We might well be in for another ‘bull’ run in commodities but we won’t know for sure till we see inventory the draw down needed to feed the development of a significant number of new projects.
• Copper, steel (iron ore), nickel, zinc, tin and aluminium should all gain as manufacturers ramp up production of cables, rails, fixings and new trains.
South32 - CEO sees commodity prices easing through the Q3-Q4 period suggesting a recent rebound is temporary, Bloomberg reports.
Economic News
US – Auto sales climbed in Apr driven by low borrowing costs, weak oil prices and rising consumer confidence.
• Seasonally adjusted annualised pace totalled 17.3m units recovering from a nadir of 16.5m units in Mar.
• All major auto makers reported stronger sales during the month, apart from GM (-3.5%yoy).
• This week economic news:
Date Index Period Actual Expected (Bloomberg) Previous
Monday ISM Manufacturing PMI Apr 50.8 51.4 51.8
Tuesday Auto sales Apr 17.3m 17.4m 16.5m
Wednesday ADP Employment Apr 195k 200k
Factory Orders Mar 0.6%mom -1.7%mom
Factory Orders (ex Transport) Mar -0.8%mom
Trade Balance Mar -$41.2bn -$47.1bn
Thursday Weekly Jobless Claims 260k 257k
Friday NFP Apr 200k 215k
Unemployment Rate Apr 4.9% 5.0%
Labour Force Participation Apr 63.0% 63.0%
Av Earnigns Apr 0.3%mom/2.4%yoy 0.3%mom/2.3%yoy
Source: Bloomberg
China – Beijing will release 3.1m kilos of frozen pork from its reserves in the next two months in an effort to calm prices which had risen 50.6%mom.
• In addition, authorities agreed to offer subsidies of up to 35% (CNY 9/kg given the average CNY 26.5/kg price) incentivising farmers to raise supply and drop prices.
• Nationwide spot prices are reported to have climbed 24.4% since the start of the year.
• With the deficit in local market, Chinese importers stepped up purchases of pork from abroad.
• Q1/16 pork imports were up 90.3%yoy at a record 286kt, according to the General Administration of Customs.
• Controlling for prices is a major focus of local authorities given the meat’s status of a major component in the average consumption basket with changes in meat prices directly feeding into changes in CPI.
• Pork prices contribute 0.6pp to 2.3% increase in official CPI in Mar this year when meat prices were up 28.4%yoy.
UK – The pound continued to trade around 1.45 this morning following a sharp decline recorded yesterday morning driven by worse than forecast manufacturing PMI data.
• Markit Manufacturing PMI: 49.2 in Apr v 51.0 in Mar and 51.2 forecast.
• That was the first sub-50 reading in three years with the report pointing to a sharp decline in employment levels, weak domestic demand and soft foreign orders.
• “New export orders fell for the fourth straight month in Apr, albeit only marginally, as global economic growth continued to slow.”
• On a more positive, deflationary pressures are reported to have “continued to ease” with average producer prices falling at the slowest pace since Jun/15.
• Based on the report, manufacturing has been falling at around 1%qoq through Apr putting pressure on Q2/16 GDP growth rates.
• Estimates are for GDP to keep growing at 0.4%qoq in Q2/16, same rate as reported in Q1/16, before accelerating to 0.5-0.6% in Q3-Q4/16.
Spain – Unemployment contracted by 83,600 in Apr beating estimates for a 81,700 drop and driven by gains in service sector and construction industry.
• The jobless rate remains one of the highest in the Eurozone standing at 22.1%.
• King Felipe VI signed a decree yesterday dissolving Parliament paving way for a second general election in six months after failed attempts to form a government.
• New elections are scheduled for Jun 26; although, opinion polls suggest the outcome might be close to the one seen previously with no single party close to majority.
• Without new government in the office the economy continued to post better than expected growth rates through Q1/16 (0.8%qoq v 0.7%qoq forecast).
Currencies
US$1.1474/eur vs 1.1589/eur yesterday. Yen 107.07/$ vs 105.83/$. SAr 14.800/$ vs 14.342/$. $1.449/gbp vs 1.470/gbp
0.748/aud vs 0.758/aud. CNY 6.500/$ vs 6.479/$. – US dollar bounces off 15-month low. South African rand moves weaker again.
Commodity News
Precious metals:
Gold US$1,282/oz vs US$1,297/oz yesterday
• Gold ETFs 57.4moz unch vs 57.3moz yesterday – ETF holdings continue to rise
Platinum US$1,059/oz vs US$1,083/oz yesterday
Palladium US$603/oz vs US$620/oz yesterday
Silver US$17.33/oz vs US$17.62/oz yesterday
Base metals:
Copper US$ 4,908/t vs US$4,948/t yesterday
Copper – Chinese copper production is likely to be flat yoy in 2016 as announced output cuts (c. 400kt) are expected to be matched by new operations coming online, Jiangxi Copper said.
• The nation produced 8.0mt last year, according to Antaike Information Development numbers.
• BHP Spence copper operations in Chile on course to produce 170-180kt of copper this year (Jun YE) reported a stoppage due to labour union related issues.
• Union members halted all activities and plan to meet with the management to discuss “a series of problems”.
Aluminium US$ 1,633/t vs US$1,656/t yesterday
Nickel US$ 9,490/t vs US$9,580/t yesterday – Canada may scrap the nickel coin within 5 years according to local reports
Zinc US$ 1,886/t vs US$1,916/t yesterday
Lead US$ 1,753/t vs US$1,777/t yesterday
Tin US$ 17,310/t vs US$17,305/t yesterday
Energy:
Oil US$44.9/bbl vs US$45.4/bbl yesterday –
Natural Gas US$2.085/mmbtu vs US$2.056/mmbtu yesterday
Uranium US$27.65/lb vs US$27.65/lb yesterday
Bulk comodities:
Iron ore 62% Fe spot (cfr Tianjin) US$58.4/t vs US$62.2/t – Huge pull back in iron ore prices as China clamps down on rampant speculation by thousands of investors
• Iron ore prices continue to trade sub-US$60/t as rapidly ascending steel prices in China take a break following a more than 30% since start of the year.
• Chinese domestic steel rebar spot average price stood at CNY 3,021/t this morning, slightly off CNY 3,150/t hit in the last week of Apr, the highest in more than a year.
Thermal coal (1st year forward cif ARA) US$45.8/t vs US$46.2/t yesterday –
Other:
Tungsten - APT European prices stood at $205-215/mtu vs $188-210/mtu last week
Company News
Atalaya Mining (LON:ATYM) 108.5 pence, Mkt Cap £126.6m – Tailings disposal suspension lifted – expansion plant commissioning underway
• Atalaya Mining reports that the temporary suspension of permissions to deposit tailings, which was announced on 25th April, has now been lifted and that the officials of the Junta de Andalucia “are satisfied for the Company to continue to use the tailings facilities with immediate effect.”
• The company has also announced that commissioning of the Expansion Project, which will increase throughput to 9.5mtpa started yesterday.
• “The Company believes that the earlier start-up of the new, expanded plant will offset any lost production resulting from the temporary suspension.”
Conclusion: Although the cause of the temporary suspension remains unclear, with the Authorities having reviewed the paperwork and conducted an on-site inspection, there should be no further disruption. Meanwhile, the start of commissioning of the expansion paves the way for almost doubling production.
BHP Billiton (LON:BLT) 815.4 pence, Mkt Cap £48.4bn –Operational Review – Samarco dam failure update
• BHP Billiton reports that the Federal Prosecution Service in Brazil has announced the commencement of proceedings against Samarco Mineracao, jointly owned by BHP Billiton and Vale, in relation to the failure of its tailings dam in November last year.
• BHP Billiton states that the claim is for approximately US$43 billion at current exchange rates and that “BHP Billiton has not received formal notice of claim.”
• The partners in Samarco have previously announced in March this year the establishment of a long term compensation fund, expected to amount to US$1.7-2.3 billion, to address the remedial and compensation issues arising from the dam failure and “We believe that the Agreement (once approved by the Court) provides the long-term remedial and compensation framework for responding to the impact of the Samarco tragedy and the appropriate platform for the parties to work together.”
BlueRock Diamonds* (LON:BRD) 13.5 pence, Mkt Cap £4.3m – Director confirms allocation of >1m shares in placement
• BlueRock Diamonds report that Tim Leslie has confirmed his acceptance of 1,036,363 shares taking his holding to 5,322,077 shares representing 13.72% of the company.
• BlueRock has raised £700,000 to improve its mine and process plant, to raise recovery rates and improve cash flow .
• We believe the investment should be transformational for the company.
*SP Angel acts as Nomad & Broker to BlueRock Diamonds
DiamondCorp (LON:DCP) 6.875 pence, Mkt Cap £30.6m – DiamondCorp heads towards production. Publishes 2015 year-end results
(DiamondCorp holds 74% of the Lace diamond mine)
• DimondCorp have published final results for the year to end December though the numbers are academic in our view given the relatively late publication of the figures.
• Highlights include:
• Operating costs of £1.9m reflect the cost of running the company and managing the development of the Lace diamond mine.
• Exchange differences of £2.9m added to a loss of £2.4m to report a total comprehensive loss of £5.3m for the year on diamond sales of £23,311.
• Mine development is all but complete with full commercial production expected to rise to 30,000t per month from July.
• A new underground conveyor system is now commissioned and ready to transport ore to surface.
• The company resolved a strike by AMCU members with a four-year wage agreement around an 8%pa wage increase.
• Management raised £3.18m plus £2.09m worth of new shares into the market following the failure of an agreement to sell a 3% royalty for $7m (£4.5m)
• Poor ground impeded mining causing additional expense and requiring the placement of a further £4m worth of stock at 6 pence per share.
• Management are looking to produce >75,000cts from kimberlite in 2016 and in >125,000cts in 2017.
Conclusion: DiamondCorp are ramping up production from their block caving operation at the Lace Diamond mine. It will be interesting to see how well the block caving operation works and if the geo-statisticians and rock mechanics experts have got their numbers right. We hope all goes well but investors should note there is a risk that the block cave might not work according to plan.
*SP Angel analysts have previously visited the Lace Diamond mine
Gemfields (LON:GEM) 43 pence, Mkt Cap £233.9m – Quarterly production update
• Gemfields reports lower emerald production and higher ruby output for the quarter ended 31st March 2016 compared to the March quarter of 2015.
• At the 75% owned Kagem emerald mine in Zambia, total production of 7.1 million carats of emerald and beryl (Q1 2015 – 9.9 million crats) is attributed to “the fluid nature of the mineralisation and a higher-grade zone having been encountered during the previous comparative period.”
• The 16% decline in the reported grade of 297 carats per tonne (vs 355 carats per tonne Q1 2015) does not fully reflect the 22% decline in overall output, however, the company reports that total operating costs have only risen by around 5% to $10.3m (US$1.45/carat) for the quarter while revenues from the Lusaka auctions generated US$33.1m or US$70.68 per carat. Lower quality material is scheduled to be auctioned in Jaipur during May.
• The Montepuez ruby operation in Mozambique produced 2 million carats during the quarter (Q1 2015 – 1.4 million carats), with the effect of higher grades of 30 carats per tonne (vs 18 carats per tonne) partially offset by the impact of prolonged and heavy rainfall.
• The higher throughput and production helped to reduce unit costs by around 12% to US$2.90/ carat. The next ruby auction is due to take place in Singapore in June.
• Commenting upon the market for coloured gemstones, Gemfields’ CEO, Ian Harebottle, commented that “The coloured gemstone market remains robust, … and is further supported by improving customer demand within the US.”
Conclusion: Gemfields is continuing to generate increasing customer support and robust margins from its coloured gemstone operations.
Glencore (LON:GLEN) 145.4 pence, Mkt Cap £20.93bn – Production cuts hit Q1 report
• Glencore’s Q1 production report reports unchanged EBIT guidance for 2016 in the range US$2.4bn to US$2.7bn.
• As part of its moves to tailor its production to the commodity cycle, Glencore reports lower production for copper, zinc, lead, coal and oil.
• Overall copper output declined by 4% or 15,700 tonnes to 335,000 tonnes “reflecting the suspensions / reductions in Africa (particularly at Mopani) , partly offset by increased production from South America.” [at Punitaqui].
• Zinc production of 257,100 tonnes for the quarter was 28% (99,100 tonnes) lwer than Q1 2015, while lead output was 6% (4,800 tonnes) lower at 71,000 tonnes. The production cuts were implemented in Australia (36 % lower zinc and 12% lower lead output vs Q1 2015), Peru, Kazakhstan and North America.
• Glencore’s nickel operations showed a 16% increase (3,800 tonnes) to 27,600 tonnes for the quarter, with increase at Raglan, Sudbury and Murrin-Murrin.
• Coal output was 17% lower at 29.7mt in the quarter with S African domestic and export thermal coal down 28% and 44% respectively reflecting the closures at Middelkraal and Witbank and the loss of control at Optimum Coal which took effect in August 2015. Against the overall trend, Australian domestic thermal coal production more than doubled from 800,000 tonnes to 1.7mt.
Lucara Diamonds (LON:LUC) C$3.20, Mkt Cap C$1218.7m – Generating strong margins and recovering high value stones.
• Lucara Diamonds produced a total of 90,697 carats of diamonds from it Karowe mine in Lesotho during the quarter to March 2016 (Q1 2015 90,077 carats).
• Diamond sales of 77,990 carats generated US$50.6m of revenue giving a sharp rise in the unit value of production from $278/ct in Q1 2015 to $649/carat. The higher value reflects the “larger volume of higher quality south lobe production compared to the north and centre lobe in the prior year.”
• The company points out that it recovered 165 “special” stones larger than 10.8 carats in size, including 8 stones larger than 100 carats.
• The company is continuing to forecast revenues for the full year in the range $200-220m. These revenue estimates exclude the planned sale later in the year of the 1,109 carat Lesedi La Rona (reported to be the second largest diamond ever recovered) and an 813 carat stone.
• The company reports earnings for the quarter of $0.05/share (Q1 2015 $0.02/share) and currently has a net cash balance of $144.3m compared to $87.5m in March 2015 and $134.8m at the end of 2015.
Conclusion: Lucara’s Karowe mine is proceeding well with waste stripping to open the pit at depth in line with forecast. The quality of the diamonds is improving as mining moves into the south lobe and Lucara is recovering significant numbers of large high value diamonds. The forthcoming sale of the Lesedi La Rona diamond is likely to attract wide interest in June.