Acacia Mining (LON:ACA) –Continuing cost reductions during Q1
Gemfields (LON:GEM) – Focus on hard rock ruby mining elevates production and grades through prolonged rainy season
Metminco* (LON:MNC) – Miraflores underground mine plan
Lonmin PLC (LON:LMI) – 2016 Sales guidance of 700,000 oz of platinum maintained
Sierra Rutile (LON:SRX) – Recommended cash offer from Iluka
Illuka’s offer for Sierra Rutile reads across to FinnAust’s project in Greenland and IronRidge’s new resource in Queensland, Australia
Dow Jones Industrials -0. 13% At 18,432
Nikkei 225 +0.40% At 16,636
HK Hang Seng +1.09% At 22,128
Shanghai Composite -0.87% At 2,953
FTSE 350 Mining +2.29% At 11,939
AIM Basic Resources +0.75% At 2,278 – AIM resource stocks rise 49% since the January low
Metal prices are up this morning as private survey PMI in China came in higher than forecast suggesting manufacturing sector registered the first increase in over year in Jul.
• US$ denominated commodities have also benefited from a 1.3% drop in the US$ index on Friday after data showed the US economy expanded at a weaker than expected rate.
• All major European equity indexes are trading higher this morning with US, German and Japanese sovereign bond prices lower.
• Iron ore futures in China are reported to have jumped 5.5% hitting the highest since Feb/15 with the Sep contract trading at $73/t on the Dalian Commodity Exchange.
• Spot prices for 62% Fe material delivered to Qingdao was at $59/t on Friday capping a 6.7% increase in Jul.
Stress test results of 51 financial institutions from EU and EEA countries showed Tier 1 capital ratio (CET1) to fall on average by 340bps (from 12.6% in 2015 to 9.2% in 2018) in the adverse scenario case over the next three years.
• Results vary between names with 14 institutions projecting an impact of more than -500bps.
• One lender recording a more than 14% decline in the ratio ending up in a negative equity (Banca Monte dei Paschi de Siena of Italy).
• The adverse scenario looked at GDP growth rates over three years over 2016-18 in the EU at -1.2%, -1.3% and 0.7%, respectively. This marked a 7.1% deviation from the baseline level in 2018.
US – The economy underperformed in Q2/16 as consumer spending picked up a slack from weak private investments, government expenditures and a fall in inventories.
• Q2 GDP (annualised): 1.2%qoq v 0.8%qoq (revised from 1.1%qoq) in Q1/16 and 2.5%qoq forecast.
• Personal Spending: 4.2%qoq v 1.6%qoq (revised from 1.5%qoq) in Q1/16 and 4.4%qoq forecast.
• Business investment posted a 2.2%qoq decline while residential investment including construction fell 6.1%qoq.
• Government spending fell 0.9%%qoq marking the weakest reading in more than tow years as military expenses were cut
• Inflation gauge stripped off food and energy costs slowed from Q1 climbing 1.7%qoq v 2.1%qoq in Q1/16.
• The dollar sank while S&P500 hit new record high on Friday as markets adjusted expectations for an extended stimulus.
Date Index Period Actual Expected (Bloomberg) Previous
Friday GDP (1st reading) Q2 1.2%qoq 2.5%qoq 0.8%qoq (revised from 1.1%qoq)
Core PCE 1.7%qoq 1.7%qoq 2.1%qoq (revised from 2.0%qoq)
Monday ISM Manufacturing PMI Jul 53.0 53.2
ISM New Orders Jul 57.0
Tuesday Personal Spending Jun 0.3%mom 0.2%mom
PCE Jun 0.2%mom/0.9%yoy 0.2%mom/0.9%yoy
PCE Core Jun 0.1%mom/1.6%yoy 0.2%mom/1.6%yoy
Wednesday ISM Services PMI Jul 56.0 56.5
ADP Employment Change Jul 170k 172k
Thursday Weekly Jobless Claims Jul 265k 266k
Factory Orders Jun -1.9%mom -1.0%mom
Friday NFPs Jun 175k 287k
Unemployment Rate 4.8% 4.9%
Av Hourly Earnings 0.2%mom/2.6%yoy 0.1%mom/2.6%yoy
Source: Bloomberg
China – Caixin manufacturing PMI rebounded in Jul to come in at above the 50.0 level for the first time since Feb/15 with output, mew orders and buying activity reported to have returned to growth.
• “The Chinese economy has begun to show signs of stabilising due to the gradual implementation of proactive fiscal policy. But the pressure on economic growth remains, and supportive fiscal and monetary policies must be continued,” the report said.
• The data showed a step up in new business was driven by local demand while export sales declined marginally in Jul.
• Input prices increased at the second-fastest pace since Sep/13 (behind Apr/16) led companies to cut staff while raising prices charged for final products.
• Caixin Manufacturing PMI: 50.6 v 48.6 in Jun and 48.8 forecast.
• Official Manufacturing PMI: 49.9 v 50.0 in Jun and 50.0 forecast.
• Official Services PMI: 53.9 v 53.7 in Jun.
Eurozone – Manufacturing activity growth has slightly improved from previous estimates in Jul as stronger numbers from Germany made up for slower growth in Italy and Spain.
• Germany Markit Manufacturing PMI: 53.8 v 53.7 (estimated previously) and 54.5 in Jun.
• Italy Markit Manufacturing PMI: 51.2 v 53.5 in Jun and 52.5 forecast.
• Spain Markit Manufacturing PMI: 51.0 v 52.2 in Jun and 51.5 forecast.
Currencies
US$1.1163/eur vs 1.1094/eur last week. Yen 102.26/$ vs 103.69/$. SAr 13.811/$ vs 14.176/$ $1.319/gbp vs $1.316/gbp.
0.758/aud vs 0.750/aud. CNY 6.641/$ vs 6.655/$.
Commodity News
Precious metals:
Gold US$1,349/oz vs US$1,332/oz last week
Gold ETFs 64.5moz v 64.4moz last week – ETF buying continues
Platinum US$1,150/oz vs US$1,130/oz last week
Palladium US$713/oz vs US$697/oz last week
Silver US$20.50/oz vs US$20.05/oz last week
Base metals:
Copper US$ 4,950/t vs US$4,880/t last week –
Aluminium US$ 1,657/t vs US$1,615t last week –
Nickel US$ 10,720/t vs US$10,535/t last week –
Zinc US$ 2,270/t vs US$2,204/t last week –
Lead US$ 1,844/t vs US$1,801/t last week
Tin US$ 17,945/t vs US$17,780/t last week –
Energy:
Oil US$43.1/bbl vs US$42.0/bbl last week
Natural Gas US$2.834/mmbtu vs US$2.862/mmbtu last week –
Uranium US$26.00/lb vs US$26.75/lb last week –
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$55.5/t vs US$59.2/t – iron ore prices seem more volatile than usual perhaps due to cargos of different specs arriving in China
• High grade iron ore continues to command – prices range from $73/t for iron ore futures to $55/t for physical cargo
Steel – EU sets anti-dumping duties on HFP ‘high fatigue performance’ rebar from China – HFP steel is widely used for rebar steel for concrete reinforcement
• The move shows how the EU manages to take decisions around six-nine months after the US imposed anti-dumping duties
• Rebar accounts for around 16% of the steel delivered in the UK
• China comments that EU steel tariffs are unfair and are based on higher targets for profit margins at EU steel producers
• China is hosting G-20 talks in Hangzhou this month. China is trying to soothe
• China may create two giant steel producers to consolidate and better manage China’s seemingly insatiable steel industry
Thermal coal (1st year forward cif ARA) US$61.8/t vs US$61.0/t last week –
Other:
Tungsten - APT European prices $180-190/mtu vs $175-185/mtu on last week –
Company News
Acacia Mining (LON:ACA) 587 pence, Mkt Cap £2407.2m –Continuing cost reductions during Q1
• Acacia Mining reports it has consolidated its exploration position in the Liranda Corridor of western Kenya through increasing its ownership of two key licences from 51% to 100%. Acacia Mining has purchased the interests of its partner, a subsidiary of Lonmin (see below) for US$5m.
• Acacia is “approximately 30% of the way through a 40,000 metres drilling programme in the northeast of the licence area” and if it is successful in demonstrating the continuity of mineralisation, expects to generate an initial, inferred resource, early in 2017.
• Previously reported high grade results include a 5.8m intersection at an average grade of 24.9 g/t god from a depth of 334m in borehole LCD0076 and a 3m intersection at 125 g/t gold in LCD 0079.
Gemfields (LON:GEM) 34.3p, mkt cap £186.4m – Focus on hard rock ruby mining elevates production and grades through prolonged rainy season
Results for FY end June 2016
BUY 82 pence
• Rubies:
• The Montepuez ruby mine had a massive quarter with 6.2mcts of rubies and corundum produced vs 0.7mcts yoy.
• Production was elevated by mining the lower grade amphibolite resources raising grades to 75ct/t vs 9ct/t yoy
• Costs rose at the mine to $7.4m vs $7.0m yoy
• Unit costs per carat fell dramatically as you would expect to $1.19/ct vs $10/ct yoy though this number is not so meaningful
• Cash rock handling costs rose to $7.14/ct vs $6.13/ct as a result of mining the harder amphibolite resource rather than waste and due to the prolonged rainy season
• Emeralds:
• Gemfields delivered record revenues at auction in the financial year to end June.
• Four emerald and beryl auctions brought in 101.3m bolstered by a $14.3 auction in Jaipur in May.
• The average overall price for emerald and beryl for the year was $12.22/ct.
• The average value for commercial quality emerald and beryl reached record average value of $5.15/ct, better than we would have expected and a good sign for the development of the industry as it proves the popularity of commercial material with buyers.
• Production data (emeralds).
• Kagem emerald production lower at 7.2mcts in the June quarter vs 8.1mcts yoy due to variable grades in the mineralised sections being mined. This is to be expected and the difference was compounded by a particularly good quarter a year ago.
• Average emerald grade 185ct/t vs 222/t due to a proportion of lower grade bulk sampling pits.
• Total operating costs fell to US$12.6. vs $12.8m
• Unit costs rose to $1.75/ct vs $1.58/ct yoy. On a cash basis unit costs fell to $1.13/ct vs $1.3/ct yoy
• Rock handling costs fell to $2.62/t vs $2.92/t .
• Full year production to end-June hit 30.0mcts vs 30.1mcts yoy .
• Grades for the year came in at 241ct/t vs 242ct/t yoy.
• Total operating costs of $47.3m were slightly higher than $44.5m yoy for the year.
Conclusion: Gemfields produced a mixed fourth quarter with higher production on rubies offset by slightly lower production of emeralds. It is the value of the stones produced and the average prices paid at auction which will drive margins. Costs also rose as grades fell at Kagem, though this was attributed to bulk testing. The timing of auctions makes Gemfield’s sales lumpy but generally better prices achieved could offset higher production costs for FY 2017.
The million dollar question is on the ongoing average value of production of emeralds from Kagem and the massive production of rubies and corrundum from the amphibolite portion of the Montepuez mine in Mozambique.
Metminco* (LON:MNC) 0.165 pence, Mkt Cap £6.4m – Miraflores underground mine plan
• Metminco has announced that its consultants, SRK have prepared a preliminary mine plan for the development of the newly acquired Miraflores gold project in Colombia using underground mining alone.
• The preliminary development scheme envisages extracting a total of 3.8m tonnes of ore at an average grade of 3.66 g/t gold (and 2.91g/t silver) to produce a total of approximately 450,000 oz of gold over a nine year period.
• The mine would operate at a production rate of 1300 tpd of ore and the company advises that although this would require a significant amount of pre-production development work, it offers a number of significant advantages over the large scale open pit mining scheme developed by the previous owners of the project.
• Capital costs are reduced through the elimination of a requirement for pre-stripping of the waste material to allow for open-pit mining and through the deployment of a leased fleet of smaller sized underground mining equipment.
• Environmental benefits are expected to accrue from the decision to replace the disposal of wet tailings from the processing of the ore by dry-stacked tailings, a proportion of which should be used to backfill underground voids as mining progresses, which should significantly reduce the overall footprint of the project.
• Additional capital cost-savings are likely to be derived from recent depreciation of currencies both in Colombia and in the suppliers of major capital equipment items such as Australia, Canada and South Africa.
• Work is continuing, in conjunction with SRK, to identify further capital and operating cost savings and to refine the underground mine development plan.
• In addition to the update on plans for the Miraflores mine development, Metminco has provided a quarterly update on the status of a number of its other projects.
• The company identifies the Tesorito area, also in Colombia and acquired with Miraflores as an area of significant exploration interest where the previous owners have conducted limited work which included a frill-hole intersection of 384 metres at an average grade of 1.01g/t gold with minor silver and copper from the surface.
• As previously announced, the company has signed a binding term sheet with CD Capital Natural Resources Fund for the injection of US$45m to fund pre-feasibility and feasibility studies of the Los Calatos project in Peru.
• The company has also reported that the disputes over access to the Mollacas project in Chile have been settled with the landowner and that all outstanding disputes have been settled. Metminco is “assessing all development options available in relation to this project and its Chilean asset portfolio.”
Conclusion: Metminco’s reassessment of the Miraflores project is identifying opportunities to streamline the costs of developing a mine which can deliver 50,000oz pa of gold production and deliver the company with a source of sustainable cash-flow.
SP Angel act as joint-broker to Metminco. An SP Angel analyst has visited the Miraflores mine site in Colombia
Lonmin PLC (LON:LMI) 242.5 pence, Mkt Cap £684.1m – 2016 Sales guidance of 700,000 oz of platinum maintained
• Lonmin reports that it produced 173,512 oz of refined platinum in Q3 ending 30th June 2016. Output was 3,932 oz or lower than in the preceding quarter, but “the fourth quarter of our financial year which has the most uninterrupted working days, is our strongest” and consequently the company expects to achieve its annual sales guidance of 700,000 oz of platinum for the year and deliver unit costs of between R10,400 to R10,700 per PGM ounce.
• The company’s capital expenditure guidance remains unchanged at $105 million, “although this cost could be impacted by currency fluctuations.”
• Lonmin’s restructuring programme, which has seen a “rationalisation of the workforce by 19% (compared to people as at 30 June 2015)” has, no doubt, been challenging but now seems to be delivering some productivity gains and the company’s drive to concentrate on its more productive “Generation2” (K3, Rowlad, Saffy and 4B/1B) shafts at the expense of less profitable production units is proving effective.
• Overall, the company estimates that productivity in these key areas have improved by 6% this ytd.
• Challenges remain, however, and though the Company reports that the annual wage negotiations “have started well and have been constructive” the labour relations record of South Africa’s platinum industry has been particularly volatile in recent years.
• Operationally, Lonmin is rightly proud that its concentrator recovery rates of 87% lead the industry and that its unit cost decline of 2.2% has been achieved despite increased stoppages due to safety issues under Section 54 of the Mine Health Safety Act, which cost an estimated 243,000 tonnes of production, and a 6.3% rise in S African CPI.
• Lonmin reports net cash of $91m as at 30th June 2016 (31st March $114m) reflecting capital expenditure and working capital of $51m during the quarter.
Conclusion: Lonmin has continued to implement its rationalisation programme delivering productivity improvements. We hope that the promising start to the wage negotiations is maintained.
Sierra Rutile (LON:SRX) 35p, Mkt Cap £208.5m – Recommended cash offer from Iluka
• Sierra Rutile reports that it has reached an “agreement on the terms of a recommended acquisition of all of the issued and to be issued shares of SRL” by fellow mineral sands producer, Iluka.
• Iluka is offering 36pence per share in cash for each SRL share in an offer which represents a 32.3%premium to the 27.2pence VWAP of SRL for the last month and an 80% premium to the 14th April share placement by Sierra Rutile at 20p/share.
• The Board of Sierra Rutile “intends unanimously to recommend that SRL Shareholders vote in favour … and has irrevocably undertaken to vote in favour of the resolutions to approve the Acquisition”
• In addition, major shareholders Pala (53.39%) and Neon (5.79%) have also irrevocably undertaken to vote in favour.
• The formal approval of shareholders is to be sought at a Shareholder Meeting, however the irrevocable undertakings to accept the terms represent 60.15% of the shares in issue making the meeting a formality.