European equities extended declines for a second day in a row with miners and banks among the worst performers.
• Italian lenders were particularly hard hit falling for a third day as the government is considering a €3bn bailout plan.
• Gold and silver are down for the first time in at least a week, while Brent slid sub-$50/bbl and all base metals trading lower this morning.
• Safe haven assets such as the Japanese yen and bonds posting gains today.
Dow Jones Industrials 17,949 Bank Holiday on Jul 04
Nikkei 225 -0.67% at 15,669
HK Hang Seng -1.46% at 20,751
Shanghai Composite +0.60% at 3,006
FTSE 350 Mining -2.65% at 10,765
AIM Basic Resources +2.36% at 2,005
Economic News
US
Date Index Period Actual Expected (Bloomberg) Previous
Monday Bank Holiday
Tuesday Factory Orders May -0.8%mom 1.9%mom
Factory Orders (ex Auto) May 0.5%mom
Wednesday ISM Services PMI Jun 53.3 52.9
FOMC Minutes
Thursday ADP Employment Change Jun 160k 173k
Weekly Jobless Claims 267k 268k
Friday NFP Jun 175k 38k
Unemployment Rate Jun 4.8% 4.7%
Av Hourly Earnings Jun 0.2%mom/2.7%yoy 0.2%mom/2.5%yoy
Source: Bloomberg
China – An accelerated growth in the services sector hitting the strongest in 11 months level through Jun compensated for a drop in the manufacturing sector with the general level of economic activity recording only a marginal slowdown in growth.
• Each index category recorded an improvement with new business orders rising to the highest level since Jul/15.
• Caixin Services PMI: 52.7 in Jun and 51.2 in May.
• Caixin Composite PMI: 50.3 v 50.5 in May.
• Previous reports showed manufacturing output declined at the sharpest pace since Feb.
Japan – Services sector slides into a contraction territory in Jun on the back of the stronger yen and Apr earthquakes’ aftermath.
• Markit/Nikkei Services PMI: 49.4 in Jun v 50.4 in May.
• MarkitNikkei Composite PMI: 49.0 v 49.2 in May.
Eurozone – Q1 GDP growth is expected to come down to 0.3%qoq from 0.6%qoq in the first quarter, according to Markit data.
• “The Eurozone failed to gain momentum in Jun, rounding off a disappointing second quarter.”
• “Faster manufacturing growth was countered by a slowdown in the service sector, leaving the overall pace of expansion of business activity unchanged since May.”
UK – The Brexit vote leads an increase in the proportion of businesses with a pessimistic outlook, according to the latest survey.
• The study carried out between Jun 28 and Jul 1 showed that 49% of surveyed firms have weak forecasts over domestic sales, exports and investments over the next 12 months.
• This compares to 25% recorded in the pre-Brexit survey.
• UK business confidence index fell to 105 from 112.6 in the three days ended Jun 23, based on the YouGov and Centre for Economics and Business Research data.
• 3/4 of economists surveyed by Bloomberg are expecting the UK to slide into recession.
Australia – The RBA left the benchmark rate unchanged at 1.75% today, in line with market estimates.
• The A$ climbed slightly on the announcement before sliding back and trading 0.25% lower on the day.
• The Bank left room for a manoeuvre should one come necessary saying “over the period ahead, further information should allow the Board to refine to its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”
Philippines – Consumer prices growth increased 1.9%yoy in Jun compared to a 1.6%yoy reading in May.
• This is the second month of stronger inflation reading following a pause in Apr.
• Excluding volatile food and energy prices, core inflation was up 1.9%yo v 1.6%yoy in May.
Currencies
US$1.1138/eur vs 1.1107/eur yesterday. Yen 101.74/$ vs 102.68/$. SAr 14.752/$ vs 14.560/$. $1.314/gbp vs $1.326/gbp.
0.750/aud vs 0.751/aud. CNY 6.671/$ vs 6.666/$.
Commodity News
Precious metals:
Gold US$1,345/oz vs US$1,350/oz yesterday
Gold ETFs 63.0moz v 63.0moz yesterday
Platinum US$1,057/oz vs US$1,057/oz yesterday
Palladium US$599/oz vs US$602/oz yesterday
Silver US$19.85/oz vs US$20.20/oz yesterday
Base metals:
Copper US$ 4,848/t vs US$4,931/t yesterday
Aluminium US$ 1,639/t vs US$1,665/t yesterday
Nickel US$ 10,075/t vs US$10,300/t yesterday
Zinc US$ 2,106/t vs US$2,155/t yesterday
Lead US$ 1,825/t vs US$1,867/t yesterday
Tin US$ 17,830/t vs US$17,800/t yesterday
Energy:
Oil US$49.0/bbl vs US$50.5/bbl yesterday
Natural Gas US$2.926/mmbtu vs US$2.901/mmbtu yesterday
Uranium US$26.50/lb vs US$26.50/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$51.2/t vs US$51.2/t – Iron ore exports from Australia hit the highest level since Dec/04, in A$ terms,
• Value of iron ore shipments climbed to A$4.7bn in May.
• This compares to the value of coal exports of A$2.9bn, the highest since Nov, and the value of gas exports of A$1.0bn, the lowest monthly reading since May/15.
Thermal coal (1st year forward cif ARA) US$58.4/t vs US$58.9/t yesterday
Steel – The government dismissed allegations that it is encouraging cheap steel exports saying the growth pace has significantly come down this year compared to 2015.
• Exports climbed 6.4%yoy to a record 46.3mt in the first five months of the year.
• This compares to a more than 20%yoy increase last year.
Other:
Tungsten - APT European prices dropped to $185-210/mtu v $200-220/mtu from the previous week
Company News
ASA Resource Group* (LON:ASA) 0.5 pence, Mkt Cap £8.9m – Benefitting from improving nickel prices
• Recent share price strength at ASA Resources may be the result of the decision of the Philippine Government’s new administration to review mining licences in the world’s largest nickel producer.
• The new President in Manila, Rodrigo Duerte, is reported to have told a meeting of business leaders in Davao last week that all mining claims are to be reviewed causing falls of up to 10% for leading Filipino mining companies on the Philippine Stock Exchange. He has also appointed a new Minister of Environment and Natural Resources, Regina Lopez, who is believed to be keen to eradicate more environmentally controversial mining practices in the country.
• Long term uncertainties over mining licence issues have, in the past, created uncertainty for investors and, among other consequences may in part have prompted Glencore’s decision to withdraw from the major Tampakan copper/gold project, announced last summer.
• Despite a significant overhang of nickel metal, thought by some commentators to represent as much as 6 months demand, nickel prices have been risen more than 8% so far in July on fears that the largest supplier of nickel to China may impose controls on mining.
• Following these initiatives, the 3 month nickel futures contract on the Shanghai Futures Exchange is reported to have hit its 6% daily upside limit by 9:30am Shanghai time on Monday.
• As we commented last week, ASA Resources’ 74.7% owned, Bindura Nickel in Zimbabwe has achieved cost cuts of around 20% to $6818/tonne during the last year as a result of focusing on processing higher grade ores. The restart of the nickel smelter later this year should help to capture more of the nickel value chain and expose the company to any further improvements in nickel prices.
Conclusion: Nickel price rises in recent days, possibly as a result of fears over a government review of mining licences in the Philippines, appear to be driving share price appreciation for ASA Resources.
*SP Angel act as Nomad and broker to ASA Resources
Aurasian Minerals (LON:AUM) 0.6pence , Mkt Cap £2.5m – Option exercised on Gokcinica gold project, Serbia
• The company reports that following the completion of its “due diligence” it has decided to exercise its option to acquire up to 80% of the Gokcinica gold project in southern Serbia from the Rockstone Group.
• The agreement with Rockstone comprises an initial €10,000 payment and the issue of 2m Aurasian shares within a 30 days period. In addition, Aurasian will pay a finder’s fee of €20,000 and 5 million shares to an un-named party.
• Following the initial payments, Aurasian can earn a 51% interest by completing a minimum of US$500,000 of exploration , including at least 1000m of reverse circulation or diamond drilling plus mapping, trenching sampling and geophysics / geochemistry as appropriate, within 2 years.
• Aurasian may earn an additional 19% interest, taking its holding to 70%, on completion of a pre-feasibility study within 5 years.
• The company may then earn a full 80% interest if it completes a Bankable Feasibility Study “within the time frame of the exploration permits, their renewals or conversion to a mining permit.”
• Work is now focussed on the identification of initial drill targets for both epithermal vein mineralisation and possible porphyry targets. Little has been disclosed so far on the details of Gokinica, however there is particular interest in “high grade arsenic rich veins which previous sampling has defined up to 67 g/t Au.” The reported arsenic content suggests that the company will need to examine the metallurgical characteristics of the ore at an early stage and consider the environmental implications of waste disposal in its pre-feasibility work under stage 2 of its earn-in.
Conclusion: Aurasian Minerals has identified a potentially high grade gold exploration target in southern Serbia. We look forward to further information as exploration proceeds.
Caledonia Mining (LON:CMCL) 78.5 pence, Mkt Cap £41.0m – Dividend increase provides a robust signal
• Caledonia Mining has announced an increased quarterly dividend of US$1.01375 per share, equivalent to an annualised 5.5 US cents per share or a22% increase on the previous rate of 4.5 cents which has been in place since 2014.
• The decision to increase the quarterly dividend while the company is in the process of a major engineering project at its Blanket mine in Zimbabwe to deepen, increase production and extend the mine life, reflects growing management confidence that the engineering work is proceeding well.
• Chief Executive, Steve Curtis, is quoted commenting that “The declaration of the increased dividend reflects the Company’s confidence that its earnings and cash generation will increase. … I am now increasingly confident that the projected production targets of 50,000 ounces in 2016 and 65,000 ounces in 2017 will be realised. … Notwithstanding the increased dividend, Caledonia intends to retain a robust balance sheet so that it can take advantage of further investment opportunities.” The Blanket mine produced 42,800 ounces of gold in 2015 and is targeting approximately 80,000 ounces per annum by 2021.
• The company reports that production has now started from depths below the 750m level at the mine following completion of the No 6 winze (internal shaft) and extension of the decline to depth. These developments should provide for both increased flexibility within the mining operation and also an opportunity to prove up additional ore resources at depth extending the mine life.
• The company points out that this additional operational capacity should provide opportunities to reduce unit costs (cash cost US$689/oz in Q1) as increased levels of gold output allow the 80% of fixed costs at the mine to be absorbed across higher levels of gold production.
• At 31st March, 2016, Caledonia Mining held cash of US$8.8m.
Conclusion: The dividend increase at Caledonia is a robust signal to investors of management’s confidence in the success of its strategic plan for the Blanket mine. We comment that, with dividends denominated in US$, UK shareholders should also benefit from the post-Brexit realignment of the currency.