ASA Resource Group* (LON:ASA) – Non-Executive Director appointment
Glencore (LON:GLEN) – Expect positive interims led by the Marketing business on Wednesday
Premier African Minerals (LON:PREM) – RHA tungsten plant delays and new £3.5m Darwin facility
Stellar Diamonds (LON:STEL) Suspended – Potential consolidation of diamond interests in Sierra Leone
Miners collapse as oil pulls back and US Fed comments suggest rate hike may come
• The Fed is playing cat and mouse with markets as Hawkish comments suggest September for a rate hike while others indicate later this year.
• Policymakers need to balance US economic recovery with strength in the US dollar and a need to keep US government borrowing costs down.
• Add to that a need to stem flows into the US dollar and the maintenance of growth in the emerging markets and you need to tread carefully to avoid upsetting global markets.
• Many investors are still wary of the potential for a collapse in emerging markets particularly if liquidity for local debt moves back into US Treasuries.
Gold – Olympic medals are thankfully worth more than their gold content
• Olympic Gold medals won by the British team are said to have cost £5.5m per gold medal.
• Problem is that Olympic Gold medals have almost no gold in them with just 1.2% gold and 98.8% silver.
• The gold medal is actually worth around $550 though its clearly worth much more than any form of paper money.
Dow Jones Industrials -0.24% at 18,553
Nikkei 225 +0.32% at 16,598
HK Hang Seng +0.264% at 22,998
Shanghai Composite -0.75% at 3,085
FTSE 350 Mining -3.05% at 11,660
AIM Basic Resources +0.64% at 2,465
European markets are range bound this morning as gains in non-resource stocks compensate for a weaker performance of mining and oil and gas companies.
• Both precious and base metals are trading in the red on the back of stronger US$ index.
• Brent is off around 2% trading sub-$50/bbl on the news that Iraq is looking to raise oil exports while Nigerian militants announced an end to attacks on oil infrastructure agreeing to hold talks with the government.
• The yen is off (-0.5%) with local equities up 0.6%/0.3% (Topix/Nikkei225) after BoJ Governor Haruhiko Kuroda hinted to a chance of adding more monetary stimulus in Sep.
• Iron ore futures prices for Jan unchanged at CNY 444/t ($66.7/t) on the DCE following a 2.9% gain recorded last week with falling inventories in Chinese ports (-1.52mt at 96.8mt) supporting the sentiment for the bulk commodity.
US – The US$ index is up this morning on the back of voting FOMC member hawkish comments over the weekend that core inflation was within “hailing distance” of the bank’s 2% Fed target.
• Fischer comments come on the heels of William Dudley, a New York Fed President, last week remarks that a rate hike is possible in Sep.
• The focus now shifts to the Janet Yellen speech to be held on Friday in Jackson Hole, Wyoming, with investors keeping a close eye on any hints over the timing for the first rate increase this year.
• Markets currently assign a 22% and 51% chances for a rate move in Sep and Dec, respectively.
• Economic news this week:
Date Index Period Actual Expected (Bloomberg) Previous
Tuesday Markit Manufacturing PMI Aug 52.7 52.9
New Home Sales Jul -2.0%mom 3.5%mom
Wednesday Existing Home Sales Jul -1.1%mom 1.1%mom
Thursday Jobless Claims 265k 262k
Durable Goods Orders Jul 3.5%mom -3.9%mom
Durable Goods Orders (ex Transport) Jul 0.4%mom -0.4%mom
Capital Goods Orders (ex Air) Jul 0.1%mom 0.4%mom
Friday GDP (Second reading) Q2 1.1%qoq 1.2%qoq (previous estimate)
Core PCE (Second reading) Q2 1.7%qoq 1.7%qoq (previous estimate)
Source: Bloomberg
Japan – Jul inflation numbers are due on Thursday evening (23:30 GMT) with estimates for an eighth straight monthly negative reading (-0.4%yoy) highlighting challenges the BoJ is faced with in hitting the 2% target.
Eurozone – Manufacturing and services PMIs for Aug will released tomorrow morning with expectations for a modest decline.
UK – The second Q2 GDP reading is due on Friday with estimates for no change compared to previous estimates (0.6%qoq and 2.2%yoy).
• Although, Q3 GDP numbers (27 Oct) are undoubtedly to be a more interesting set of data being the first general gauge of economic activity post the Jun Brexit vote.
Turkey – Fitch cut the Turkey’s sovereign credit rating to negative from stable but confirmed the investment grade status last week assigning the nation’s debt notes a BBB- rating.
• Fitch and Moody’s are two agencies of major three currently rating the Turkey at investment grade level with S&P having the nation at BB (cut from BB+ in last month).
Philippines – The nation should follow the Indonesian policy to ban unprocessed ore exports, according to National Development Planning Minister Bambang Brodjonegoro, Bloomberg reports.
Currencies
US$1.1296/eur vs 1.1336/eur yesterday. Yen 100.73/$ vs 100.14/$. SAr 13.597/$ vs 13.497/$. $1.312/gbp vs $1.312/gbp.
0.762/aud vs 0.762/aud. CNY 6.656/$ vs 6.644/$ unch.
Commodity News
Precious metals:
Gold US$1,334/oz vs US$1,347/oz yesterday –
Gold ETFs 65.2moz unch vs 65.2moz yesterday –
Platinum US$1,110/oz vs US$1,118/oz yesterday
Palladium US$708/oz vs US$705/oz yesterday
Silver US$19.00/oz vs US$19.57/oz yesterday
Base metals:
Copper US$ 4,749/t vs US$4,792/t yesterday –
Aluminium US$ 1,661/t vs US$1,682/t yesterday
Nickel US$ 10,205/t vs US$10,300/t yesterday –
Zinc US$ 2,283/t vs US$2,278/t yesterday
Lead US$ 1,873/t vs US$1,884/t yesterday
Tin US$ 18,500/t vs US$18,390/t yesterday –
Energy:
Oil US$49.9/bbl vs US$50.6/bbl yesterday
Natural Gas US$2.630/mmbtu vs US$2.661/mmbtu yesterday
Uranium US$25.75/lb vs US$26.05/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$59.5/t vs US$58.9/t – A Brazilian court upheld injunctions issued in Dec against Vale prohibiting the Company from disposing of stakes in its Brazilian iron ore mines.
• The lawsuit is part of the general claim by federal authorities for a BRL 20bn ($6.2bn) compensation for a dam spill at Vale’s Samarco JV.
• The Company is looking at a streaming deal with Chinese that would allow to sidestep the limitations involved in the embargo, Bloomberg reports.
Steel rebar 25mm US$400.1/t vs US$399.6/t –
Thermal coal (1st year forward cif ARA) US$55.4/t vs US$57.0/t yesterday –
Other:
Tungsten - APT European prices vs $185-200/mtu unch vs $190-200/mtu –
Company News
ASA Resource Group* (LON:ASA) 0.975 pence, Mkt Cap £16.5m – Non-Executive Director appointment
• ASA Resource Group has announced the appointment of Mr David Murangari as a non-executive director with immediate effect.
• Mr Murangari, who is already Deputy Chairman of the ASA Group’s Bindura Nickel Corporation and also serves on the Board of ASA’s Freda Rebecca Gold Mine, is an experienced geologist with “has been influential in the mining industry in Zimbabwe for many years.”
• Mr Murangari is a former CEO of the Zimbabwe Chamber of Mines and is “currently Chairman of the Zimbabwe Mining Development Corporation, the state body that plans, coordinates and implements mining development projects on behalf of the government. It’s responsible for prospecting, exploration, mining and mineral beneficiation programmes.”
Conclusion: The appointment of an experienced, well-connected Zimbabwean mining professional with in depth experience of the Group’s Bindura and Freda Rebecca operations strengthens and broadens the experience of the ASA Board where the company comments that “the profile of the non-executive board is more independently balanced than at any time in the past with experience in mining, metallurgy, auditing and investor relations.”
*SP Angel act as Nomad and broker to ASA Resources
Glencore (LON:GLEN) 184 pence, Mkt Cap £26.5bn – Expect positive interims led by the Marketing business on Wednesday
• Glencore’s interim results due on Wednesday will make interesting reading.
• We expect Glencore to report good numbers from their marketing / trading division as conditions appear to have been relatively good for trading from our perspective. Eg we have not seen a re-run of the co-ordinated bear raid on the copper market by Chinese funds.
• Oil prices have traded steadily better with no big surprises.
• Base metals have generally traded better with nickel and zinc performing very well ahead of copper and aluminium.
• Even prices of thermal coal are going better as China, at long last, closes local uneconomic and underperforming mines
• The suspension of significant copper, zinc and coal production will impact sales but should not overly damage margins as most of this production was marginal/loss making at the time of its suspension and work done at affected mines should improve the operations when this production restarts.
• Debt levels should reduce further following $3.2bn of disposals in H1 and with streaming deals adding to cash receipts.
• Costs: should continue to fall due to weaker currency rates vs the US dollar in many of Glencore’s key areas of operation, eg Australia, Kazakhstan, South Africa and the DRC.
• We also expect to see further benefits from ongoing restructuring though there is likely to be a cost to the closure of coal production in South Africa due to ongoing local coal pricing issues.
• Relatively low oil prices through the period should also be a significant benefit.
• The potential suspension of mining at Glencore’s McArthur River lead, zinc mine in Australia may cost $1bn but could be offset by higher lead and zinc prices and may see Glencore restart other zinc production.
• Outlook: There is evidence in markets that China has forced through rationalisation of uneconomic mines cutting back on production of coal, iron ore and a number of base metals. This is very good news for Glencore and suggests prices should continue higher so long as demand growth in China remains in place.
• Demand and prices for steel within China led by resurging construction and the development of some new infrastructure projects has surprised the market indicating potential for ongoing demand growth for other materials so long as stimulative policies remain in place.
Conclusion: We expect a mixed but slightly positive set of interim results for Glencore led by the marketing side of the business, though this is partially supported by the underlying production units within the Industrials group.
Premier African Minerals (LON:PREM) 0.525 pence, Mkt Cap £9.9m – RHA tungsten plant delays and new Darwin loan
• Premier African Minerals reports further delays to its optimization programme at the RHA tungsten mine in Zimbabwe. Although the improvements to the crushing circuit, combined with increased grades from underground mining is leading to a “significant increase in the concentrate grades being produced”, continuing issues with the underperformance of the screening section will necessitate the replacement of 6mm sized screens with larger 10mm screens. Fortunately, the replacements should be installed before the end of August.
• The company reports that recovery rates of up to 70% are being achieved and that it is producing concentrates at a grade of 65% tungsten trioxide. Shipments of concentrate are expected to resume in September.
• Premier African Minerals also describes results of its underground sampling programme which should feed into a revision to resource estimates in September 2016. Although the mineralised quartz vein is identifiable in underground workings, “the wolframite mineralisation does not show the same level of consistency. Tungsten grades show extreme variability and range from sub-economic to more than 300kg per ton over short strike distances. This variability in wolframite mineralisation may make application of normal geostatistical methodologies unreliable”.
• The company comments that “RHA is profitable when the recovery is 70% and the selling price of Ammonium para-tungstate (APT is US$180 per metric ton unit (mtu).” The APT price is currently standing at US$185/200 per mtu.
o New Debt: Premier African Minerals has subscribed for yet another £3.5m worth of those ghastly Darwin loan notes.
o Each loan note has a face value of £25,000 and are repayable at a rate of eight loan notes per month.
o The notes carry an interest rate of 16%pa, which might not be a bad rate for Zimbabwe but it’s the other costs you’ve got to watch out for.
o The funding is said to be for the provision of general working capital for the company and to support exploration and development at the Zulu Lithium and Tantalum project. We would not generally advise a company take up this sort of facility for the funding of a new and unproven exploration project.
Conclusion: The RHA Tungsten Mine is overcoming some of the operational issues and seems to be improving recovery rates, however APT prices continuing to languish around the level the mine requires to be profitable. The variability in underground ore grades will present a challenge to grade control as well as for resource estimation purposes and may make it difficult to provide consistent feed to the plant.
When it comes to considering risk we see the adoption of the Darwin notes as potentially more risky from a shareholder perspective than the politics of Zimbabwe or the risk of mining. Surely it would be better to fix up the tungsten mine and when this is done to then use the cash flow for the exploration?
Stellar Diamonds (LON:STEL) Suspended – Potential consolidation of diamond interests in Sierra Leone
• Stellar Diamonds has released further information concerning the possible reverse takeover which led to the suspension of trading in the company’s shares on Friday.
• The company “has agreed a proposed transaction with Octea Mining Limited (“Octea”) to combine Stellar’s Tongo kimberlite diamond project with Octea’s adjacent kimberlite diamond project, Tonguma, and to bring both assets into production under the same production infrastructure … in Sierra Leone.”
• The proposed transaction, which remains subject to a number of conditions and may not necessarily be completed, would combine the current 1.45m carats of JORC inferred resource at Tongo grading 165 cpht (carats per hundred tonnes) with Octeas’s 3.45m carats of inferred JORC resources at Tonguma at a grade of up to 290 cpht. The estimated value of diamonds from Tongo has been reported at US$270/ carat while those at Tonguma are valued at US$193 per carat.
• Additional exploration areas within the Tonguma licence area have been assessed by “independent consultants” to contain “a potential exploration target of a further 8 million carats.”
• The company reports that “Once in production the combined diamond mining operations will be the second largest in West Africa with an estimated maximum output at full production of approximately 250,000 carats of high value diamonds.” The company expects mining “to commence within the first 12 months post completion of the proposed transaction.”
• Under the proposed transaction, Stellar Diamonds would hold 100% of the voting “A” shares in a “NewCo” holding the combined assets and giving Stellar fill legal and management control. Octea would hold 100% of the non-voting “B” shares in “NewCo” which will entitle Octea’s existing shareholders to receive “royalty payments of between 5% to 10% of the combined revenues of Tonguma and Tongo (the “Enlarged Project”) and a 25% economic interest in the net cash flows of the Enlarged Project.”
• The two companies will be entitled to preferential repayment of their investment in the respective projects with Stellar’s contribution to Tongo assessed at “at least US$25m” and Octea’s investment on Tonguma set at “a maximum of US$5m during the same period.” “Any royalty payments and net profit share due to Octea under the Agreement will only commence once the total initial investment amount of both parties has been fully repaid by NewCo. There is therefore no upfront acquisition cost to Stellar in terms of the Potential Transaction.”
• One of the conditions required for completion of the Transaction is that Stellar raises “a minimum of US$25 million (through a combination of equity, debt and other hybrid products to fund the combined project into production.” We note, however, that initial estimates prepared by the company’s consultants suggest that initial capital required to develop the combined mining operation are approximately US$40m.
Conclusion: The proposed transaction to combine two adjacent diamond resources in Sierra Leone is still subject to a number of conditions including Stellar being able to fund the capital to develop the mine and the approval of the Sierra Leone authorities. The concept of combining the two resources seems eminently sensible but there may be some difficult negotiations ahead if an agreement acceptable to all sides is to be achieved. Meanwhile, the shares remain suspended.