Anglo American (LON:AAL) – Interim Report highlights stronger balance sheet
BHP Billiton (LON:BLT) 977 pence, Mkt Cap £57.3bn – Samarco update
Caledonia Mining (LON:CMCL) – Increased ore resource at the Blanket mine
Herencia Resources (LON:HER) – Herencia complete sale of Paguanta in nick of time
Gemfields (LON:GEM) BUY, Target 82p – shares look good value following pullback in stock
Savannah Resources (LON:SAV) – Exploration underway at lithium projects in Finland
Tesla opens Gigafactory, states factory is two years ahead of schedule
• Video of Tesla’s Gigafoactory shows the factory is tooled up and ready to go in a matter of weeks according to a BBC report
• The $5bn factory which has $2bn of funding from Panasonic is not scheduled for full production till 2020 and will have the largest physical footprint of any building in the world.
• Panasonic will work on cell construction on one side of the factory before handing the cells over to Tesla for incorporation into its own battery packs
• Elon Musk reckons the scale of the factory should cut battery costs by 30%.
• We reckon battery manufacturing is entering a new era of innovation and development and we expect Tesla’s new batteries to be better, more reliable, longer lasting thank existing lithium batteries.
• The plant aims to produce 35GWh of battery power by 2018 more than total global battery production in 2014. Production should continue to grow to 150GWh. Improvements to battery capacity could lead to incremental growth in the plant’s per GWh capacity in future years.
Dow Jones Industrials -0. 01% At 18,472
Nikkei 225 -1.13% At 16,477 - Japanese stock are up today on press reports the BoJ will issue a Yen 28tr ($268bn) stimulus package
HK Hang Seng -0.20% At 22,174
Shanghai Composite +0.08% At 2,994
FTSE 350 Mining +1.71% At 11,822
AIM Basic Resources +0.41% At 2,255 – AIM resource stocks rise 48% since the January low
Miners pick up on the back of stronger metal prices driven by a fall in the US$ index as chances for the Fed to hike rates before year end remain below 50%.
Brent is flat this morning following a sharp decline on Wednesday following an unexpected increase in US crude stockpiles last week.
Sovereign bond yields finished lower yesterday.
US – In line with market expectations the Fed left rate unchanged at 0.25-0.5% while leaving the door open for a potential hike in one of the three remaining meetings scheduled for this year.
• The central bank pointed out that near-term risks to the economy have subsided, consumption was strong and the labour market regained momentum following a poor May report.
• Overall, “the labour market strengthened and that economic activity has been expanding at a moderate rate,” the statement read.
• Chances for a rate hike have been little changed hovering around 50% that the Fed will tighten before year end.
• On a separate note, durable goods orders fell more than forecast coming in below 0 for a second consecutive month in Jun and capping what have been a weak quarter for capital and durable goods.
Date Index Period Actual Expected (Bloomberg) Previous
Tuesday S&P/CS Property Prices May -0.1%mom/5.2%yoy 0.1%mom/5.5%yoy -0.2%mom/5.4%yoy
Consumer Confidence Jul 97.3 96 97.4
- Current Situation Jul 118.3 116.6
- Expectations (next 6 months) Jul 83.3 84.6
New Home Sales Jun 3.5%mom 1.6%mom 0.0%mom
Wednesday Durable Goods/Core Jun -4.0%mom/-0.5%mom -1.4%mom/0.3%mom -2.8%mom/-0.4%mom
Capital Goods Orders Jun 0.2%mom 0.2%mom -0.5%mom
FOMC Rate 0.25%-0.50% 0.25%-0.50% 0.25%-0.50%
Thursday Weeklyt Jobless Claims 263k 253k
Friday GDP (1st reading) Q2 2.6%qoq 1.1%qoq
Core PCE 1.7%qoq 2.0%qoq
Source: Bloomberg
Germany – Inflation reports coming from different states point to an acceleration in inflation rates in Jul.
• Nationwide numbers are due later today.
• CPI: 0.2%mom/0.3%yoy forecast and 0.1%mom/0.3%yoy in Jun.
• A separate report showed unemployment continued to fall in the largest European economy marking the 10th consecutive monthly decline.
• Jobless rate stood at 6.1%, unchanged on the previous month.
• Central bank President reiterated that growth in Gemrany will pick up in the current quarter and that Brexit has not changed the outlook.
• Economic growth accelerated in Q2 to 0.6% from 0.4% in Q1.
UK – economy grew faster than forecast before Brexit vote (Bloomberg)
Jul house prices post a 0.5%mom increase, although Nationwide warns of “softening ahead”.
• The increase took the annual increase for home average prices to 5.2%yoy, a little stronger than in Jun.
• Jul survey is reported to have been based on prices at the “mortgage offer stage” which may underestimate the effect of referendum and “may not be fully evident in Jul’s figures”.
Japan - Helicopter money – BoJ announces larger than expected stimulus
• Japan’s prime minister is compiling a stimulus package of $265bn to reflate the economy.
• Central banks are reported to be adding some $180bn to the global economy every month
• The stimulus should be good for equities and eventually raise inflation
Italy – Consumer confidence bounced back in last month breaking the downward trend recorded since the start of the year while manufacturing sentiment hit the highest level since Jan.
• Consumer confidence:111.3 v 110.2 in May and 109.2 forecast.
• Manufacturing sentiment: 103.1 v 102.9 in May and 102.0 forecast.
• Despite positive Jun numbers, as previously highlighted by Markit, sentiment and activity in manufacturing and services sectors “quarterly average was the lowest” in over a year while “business confidence towards the outlook softened further, suggesting GDP growth has eased from the 0.3%qoq seen in Q1/16”.
Turkey – Jun numbers show a 41% decline in trourist traffic marking the single worst monthly drop on record.
• Lower tourist numbers were attributed to increased number of terrorist attacks and a fall out with Russia which led to a 88% drop in people traveling to the country for a holiday.
• Tourism accounts for voer 10% of the nation’s GDP.
• Given the failed coup in Jul, numbers are likely to fall further through summer.
Currencies
US$1.1099/eur vs 1.0994/eur last week. Yen 104.76/$ vs 105.54/$. SAr 14.240/$ vs 14.280/$ $1.318/gbp vs $1.311/gbp.
0.754/aud vs 0.749/aud. CNY 6.657/$ vs 6.671/$.
Commodity News
Precious metals:
Gold US$1,342/oz vs US$1,320/oz last week
Gold ETFs 64.3moz v 64.2moz last week –
Platinum US$1,149/oz vs US$1,096/oz last week
Palladium US$706/oz vs US$689/oz last week
Silver US$20.34/oz vs US$19.60/oz last week
Base metals:
Copper US$ 4,873/t vs US$4,896/t last week –
Aluminium US$ 1,602/t vs US$1,598t last week –
Nickel US$ 10,555/t vs US$10,355/t last week – Sherritt reckons lenders will defer payments on$1.6bn of debt on its Ambatovy mine in Madagascar by the 5 August deadline.
• Sherritt reckons the industry needs a long term nickel price of $17,600-20,000/t to sustain the industry.
Zinc US$ 2,188/t vs US$2,221/t last week – zinc supply / deficit expected to rise to 221,000t from 25,000t in Q4 according to Reuters survey.
• Zinc futures prices are up around 50% this year
Lead US$ 1,810/t vs US$1,829/t last week
Tin US$ 17,765/t vs US$17,745/t last week –
Energy:
Oil US$43.4/bbl vs US$44.6/bbl last week
Natural Gas US$2.668/mmbtu vs US$2.676/mmbtu last week – US raising its share of LNG production as Shale Gas producers add to global production
Uranium US$26.25/lb vs US$25.50/lb last week –
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$58.0/t vs US$56.4/t – Chinese iron ore miners are complaining that hundreds of domestic iron ore mines have been forced to close.
• They accuse Australian producers of dumping iron ore into China in order to squeeze them out of business.
• We feel sure that Australia’s iron ore majors ship in accordance with demand. Chinese producers need to understand the reality of being higher cost producers.
• Rio Tinto reckon around 125mt of Chinese iron ore was displaced by imports last year representing around 25% of total domestic production.
• Many local producers face the reality of rising costs, falling grades / quality and lack of investment in ageing iron ore mines which can not compete with better quality and lower cost imports.
• It is likely that China will look to support some of these mines but will also continue to let the smaller enterprises go to the wall.
Steel – China is dedicating more funds to enable steel producers rationalise production and meet targets of capacity cuts of 45mt this year and 140mt by 2020.
• China currently produces a surplus 300mt pa and has so far achieved around a third of its planned cuts for this year.
Thermal coal (1st year forward cif ARA) US$62.0/t vs US$60.3/t last week – India state ports received 27.2mt of thermal coal from April to June up 3.8% yoy (Platts)
• Coking coal shipments fell 3.7% to 13mt
Lithium – Airbus is working with FAA for approval to use lithium batteries in its A350 aircraft
Other:
Tungsten - APT European prices $180-190/mtu vs $175-185/mtu on last week –
Company News
Anglo American (LON:AAL) 849 pence, Mkt Cap £10.95bn – Interim Report highlights stronger balance sheet
• Anglo American reports that the company is on course to reduce levels of net debt to below US$10bn by the end of 2016.
• At 30th June 2016, the net debt has already been reduced from US$12.9bn at the start of the year to US$11.7 billion reflecting the impact of US$1.1bn of attributable free cash flow.
• The US$1.5bn of cash disposal proceeds from the sale of the Brazilian phosphate and niobium businesses to China Molybdenum should be received during the second half of 2016.
• The company also highlights the “significant reduction in inventories at De Beers [down $0.5bn from $1.5bn at the start of the year], gains from the bond buy-back process and falling capital expenditure” (capex down to US$1.2bn vs H1 2015 – US$2.0bn) as important factors in bringing down its debt levels.
• Further asset disposals, including the group’s nickel business and the Moronbah and Grosvenor metallurgical coal operations, are progressing though “Any final decisions on sale will depend on value.”
• Based on weaker than expected commodity prices, the Moronbah - Grosvenor operations have, incurred impairment charges of US$1.2 billion “to reflect management’s best estimate of future metallurgical coal prices.”
• EBIT of US$1.38bn during the half year is dominated by the contribution ($585m or 42%) of De Beers, with the iron ore/ manganese operations (US$390m), coal (US$160m), platinum (US$134m) and copper (US$113m) all making significant contributions. Among the operating divisions, only the nickel business generated a loss (US$12m).
• The dominance of De Beers is further underlined by its US$379m (54%) contribution to the total US$698m of underlying earnings.
• The Minas Rio iron ore operation in Brazil continues to ramp up production, with a 128% increase in output to 6.8mt. The company comments that “The constrained pit and ongoing licence processes have resulted in lower than anticipated quality run-of-mine material. A provisional approval has been granted for the next phase of licencing which has allowed immediate access to the next tranche of reserves.” The company has now revised its 2016 production guidance for Minas Rio down to 15-17m tonnes from 15-18mt.
Conclusion: Anglo American has had a mixed first half on the operational front but has achieved some success in implementing debt reduction and with its disposal programme underway is on track to bring levels of net debt below US$10bn by the end of the year.
BHP Billiton (LON:BLT) 977 pence, Mkt Cap £57.3bn – Samarco update
• BHP Billiton reports that it will “recognise a provision in the range of US$1.1 billion to US$1.3 billion” to fund its 50% share of the Framework Agreement relating to setting up the Foundation to fund compensation and remedial work relating to the failure of the tailings dam at Samarco in Brazil.
• “The associated income statement charge will be recognised as an exceptional item in the June 2016 half-year, together with direct cost of approximately US$100 million (post tax).”
• Billiton has also agreed US$134m to fund the Foundation’s activities in providing “reparatory and compensatory programs.” This sum will, however be offset against the amount of the provision.
Caledonia Mining (LON:CMCL) 89.5 pence, Mkt Cap £46.7m – Increased ore resource at the Blanket mine
• Caledonia Mining has announced an increase to the ore resource base of its 49% owned Blanket mine in Zimbabwe.
• The new estimates, which refer only to the Blanket section of the mine, show that 343,000 tonnes of ore at a grade of 5.19 g/t gold (representing 47,700 oz of contained gold) has been upgraded from “inferred“ status to “indicated” as a result of recent diamond drilling.
• In addition, “1.276mt of new “inferred” resources at an average grade of 5g/t gold have been identified at depth paving “the way for the phase 2 expansion program to extend mining below the current target depth of 990m level.”
• The company points out that the “upgraded Indicated Resource of 343,000 tonnes, combined with the resources upgraded during 2015, have increased the quantum of reserves and indicated resources that may be used in the life of mine plan from 2,934,000 tonnes used for the the Technical Report prepared by Minxcon in December 2014, to 4,889,000 tonnes currently and represents an increase of 67% in terms of mineable tonnes and hence in the life of the mine.”
• Caledonia Mining expects to release further resource upgrades covering other areas of the mine during the second half of the year.
• The increased resource base at the Blanket mine, follows the announcement earlier this month that the new mine plan was delivering increased production to achieve 2016 guidance of 50,000 oz of gold (2015 -42,800 oz) and maintaining the planned growth path towards 65,000 oz of production by 2017 and 80,000 oz pa by 2021.
Conclusion: The increased resources and mine life at Blanket should reassure doubters that the new mine plan can deliver the long-term future of the mine. We look forward to further resource updates for the AR Main, AR South and Eroica sections of the mine later this year and for news on the progress of the shaft sinking programme.
Herencia Resources (LON:HER) 0.04p, mkt cap £1.5m – Herencia complete sale of Paguanta in nick of time
• Herencia Resources report the last minute sale of their 70% stake in the Paguanta project in northern Chile for a total consideration of US$2.3m.
• GMR also agreed to pay up to an additional US$2.1m towards various contingent liabilities.
• “The US$2.3 million is payable in $1.5 million cash and a total of US$0.8 million in fully paid ordinary GMR shares (Shares) to Herencia at an issue price equal to the 20 day volume weighted average price, in the event a decision to mine is made at Paguanta.”
o The sale needed to be completed by tomorrow to avert a working capital crisis and to keep the company trading.
o Golden Rim Resources ‘GMR’ is paying US$800,000 today and a further US$413,000 within 30 days plus another US$50,000 within 60 days.
o A final payment of US$800,000 will be made in the event that a decision is made to mine at Paguanta. GMR is also paying transaction taxes of up to US$50,000
o “Completion under the Proposed Transaction was due to take place prior to 4 July 2016, however due to delays with the flow of information; the parties agreed to extend the date of completion to no later than 29 July 2016. On 15 June 2016, the Company made a further announcement with the execution of formal documentation following which GMR provided Herencia with the second tranche of the deposit, totalling US$0.1 million.”
o Exploration: the Company also has the Guamanga Copper Project in Chile.
Conclusion: Herencia operates its Chilean projects from a corporate office in Perth and a technical and management office in Santiago. We suspect the cost of running offices in Perth and Santiago will drain much of the sale proceeds if management are not careful.
To be fair Herencia have already slashed costs declaring total directors remuneration of £137,664 in 2015 vs £315,271 in 2014. We hope the team can make good use of the new funds at their disposal.
Gemfields (LON:GEM) 34.3p, mkt cap £186.4m – shares look good value following pullback in stock
BUY 82 pence
• Gemfields shares look good value given what look like solid fundamentals in the market.
• The company expects to continue to see good demand at its forthcoming emerald and ruby auctions.
• Management continue to invest in the Kagem and Montepuez mines using local borrowing which has the benefits of higher than normal currency depreciation.
• The company has debt facilities for $30m worth of Zambian Kwacha in Zambia and $45m of metical in Mozambique paying an average rate of Libor + 4%
• Sales are in dollars, head office costs in sterling and borrowings in kwacha (Zambia) and ‘new metical’ (Mozambique)
• We believe the trend for using coloured stones in jewellery and for investment should remain firm.
• Exploration, the company is looking to acquire and develop licenses in Colombia which is now at peace with the FARC and in Sothern Ethopia near the Kenyan boarder.
Conclusion: Gemfields looks to us like a solid company with potential for the discovery of ‘superstar’ rubies and emeralds to enhance returns. While it is possible that liquidity issues in gemstone markets could impair auction sales and values we believe Gemfields could do better than many diamond producers in the event of a liquidity squeeze.
Savannah Resources (LONLSAV) 4.4 pence, Mkt Cap £16.9m – Exploration underway at lithium projects in Finland
• Savannah Resources has expanded its exploration horizons into Finland focussing on two new lithium prospects.
• The exploration is to target pegmatites with known lithium minerals of spodumene. Lepidolite and petalite with the aim of generating drill targets.
• The projects are early stage by the sounds of the announcement.
• With record temperatures recorded this week in the Middle East its good to know the geologists are able to work in a cooler climate.
• Kuait recorded 53.9 degrees Celsius (129 Fahrenheit ) yesterday equalising with Death Valley’s 54 degrees C. seen on 30 June 2013 as the world’s hottest reliably measured air temperature on Earth. We note that other hotter temperatures but none of these are said to be credible.
• We look forward to further news on progress at Savannah’s copper properties in Oman when temperatures cool.