Medusa Mining (ASX:MML) – Mineral resources and reserves update
Petropavlovsk (LON:POG) HOLD (TP under review) – Surprisingly good interim results beat estimates
StratMin Global Resources (LON:STGR) – US$1.5m loan for Stratmin
Miners leading recovery in FTSE100 on Better metals prices
• Renewed optimism in the mining sector and a relatively positive outlook for commodities is leading mining shares higher
• Policy makers are balancing the need to maintain low interest rates and the need to stimulate economic growth with calls for better interest for savers.
• The argument for job creation remains strong though earnings growth remains subdued.
• Inflation is increasingly being talked about with commodities a key haven and beneficiary in an inflationary environment.
• Rising cash flow at many miners is seen starting to restore earnings and dividends to levels which compare well with many other sectors
Lithium – XALT Energy to supply two largest battery powered ferries with new lithium-ion battery cells
• The battery packs being supplied to the two Scandlines Helsingborg–Helsingör ferries are for 4.16MWh battery packs.
• The ferries carry more than 7.4m passengers and 1.9m vehicles per year. The project is supported by the EU executive agency for innovation and networks with a grant of SEK120m (around $14.1m)
• XALT Energy produce the lithium cells in a facility in Midland, Michigan.
• Most ships and heavy machinery are driven by electric motors powered by diesel generators. Replacing diesel generators with battery packs and hybrid systems is a natural progression in terms of energy efficiency and emissions control.
Dow Jones Industrials +0.74% at 18,228
Nikkei 225 -1.31% at 16,465
HK Hang Seng +0.20% at 23,620 China National Day, week long holiday next week
Shanghai Composite -0.34% At 2,988
FTSE 350 Mining +1.69% at 12,399 FTSE 350 +69% since 1st January
AIM Basic Resources -0.13% At 2,463 AIM Basic Resources +51% since 1st January
WTO – cuts global trade forecasts to 1.7% from 2.8%
• The World trade Organization cut its estimated for global trade growth this year to 1.7% from from 2.8% set in April reflecting a slowdown in China and falling levels of imports into the US.
• This is the first time in 15 years that International Trade has lagged GDP growth. It normally runs at around 1.5x GDP growth long term
• The estimates may indicate a rebalancing of output with more manufacturers producing more products closer to home, though this may be partially in response to ‘creeping protectionism’.
• Alternatively, the metric may indicate a potentially severe fall in investment, confidence and potentially demand.
• Concerns over the financial state of some shipping lines may also have some effect.
Colombia - FARC leader signs historic peace agreement and asks for forgiveness
• Juan Manuel Santos, president of Colombia and Timochenko, the Farc rebel commander signed a historic peace agreement yesterday.
• Then remarkably Timochenko the Farc rebel commander apologised to victims of the Farc asking for forgiveness for all the pain they had caused during the war.
• The key to this peace deal were the families of victims which called for reconciliation. Leaders now need to work on helping the nation to come to terms with a reconciliation where so many families were so much affected by the kidnapping and killing.
Brexit vote was down to gross economic mismanagement according to Yanis Varoufakis
• We should take this seriously because Mr Varoufakis, as the former Greek minister of finance knows a thing or two about economic mismanagement. Still, the picture of Yanis sweeping up to 10 Downing St on a Harley Davidson is one to remember.
• Yanis’ recent comments, “a vote to leave the EU in the UK’s refrendum in June would lead to the disintegration of the European Union and a return to the xenophobia, racism and ultra-nationalism of the 1930s”. The EU is like the Hotel California ‘You can check out any time you like, but you can't really leave,’ And ‘I’d love to give Brussels a bloody nose’. We generally agree with Yanis on the last point.
UK ranks as 7th most competitive economy in survey by WEF
• Switzerland is the world’s most competitive economy according to the World Economic Forum ‘WEF’, which, by pure coincidence, meets in Switzerland each year.
• Sadly the WEF warns that rising global protectionism is undermining economic growth and prosperity.
• This is mainly due to a rise in non-tariff barriers.
Paris motor show – major brands missing the Paris motor show
• The once prestigious Paris motor show is missing out on a range of major brands this year.
• Ford, Mazda, Volvo, RR, Bentley, Lamborghini and Aston Martin are all missing the event.
Currencies
US$1.1205/eur vs 1.1245/eur yesterday. Yen 100.81/$ vs 100.52/$. SAr 13.468/$ vs 13.578/$. $1.299/gbp vs $1.296/gbp.
0.767/aud vs 0.767/aud. CNY 6.672/$ vs 6.669/$.
Commodity News
Precious metals:
Gold US$1,324/oz vs US$1,336/oz yesterday –
Gold ETFs 65.3moz unch vs 65.3moz yesterday
Platinum US$1,024/oz vs US$1,042/oz yesterday – Impala platinum refinery strike
Palladium US$703/oz vs US$697/oz yesterday
Silver US$19.10/oz vs US$19.44/oz yesterday
Base metals:
Copper US$ 4,823/t vs US$4,815/t yesterday –
Aluminium US$ 1,661/t vs US$1,668/t yesterday –
Nickel US$ 10,725/t vs US$10,685/t yesterday – News of further mine closures by the Philippine ministry of mines over environmental issues raised nickel prices but was no great surprise to the market. New nickel smelter production in
Zinc US$ 2,330/t vs US$2,213/t yesterday –
Lead US$ 1,979/t vs US$1,956/t yesterday –
Tin US$ 19,900/t vs US$19,815/t yesterday –
Energy:
Oil US$46.3/bbl vs US$46.5/bbl yesterday – Saudi Arabia oil minister is open to compromise at OPEC with Iran
• US Crude inventories fell by 0.8mbbls last week. US Government data is due later today with forecasts set for an increase of 3mbbls.
• The comment indicates that Saudi Arabia may be preparing the way to limit oil production and to allow Iran, Libya and Nigeria to produce at maximum levels that make sense.
• It is not our agenda to reach agreement in these two days according to the Iranian oil minister. The next OPEC meeting is in November
• Oil futures continue to support higher prices, (up to ~$60/bbl in Feb 2023), a fact which has been supported further by spot prices sustaining averages above ~$45/bbl more recently.
• The number of US onshore rigs continues to fall but parked rigs should also mean faster response times enabling the US to become more of a swing producer.
• This may have a noticeable effect on the US onshore market with the perceived breakeven of shale producers ~$60/bbl, is now generally accepted to be materially lower, in some instances as low as $35.bbl.
• In the near term there is unlikely to be too much pressure to bring the US rigs back on line, causing the decline in US production to accelerate.
• We are less concerned about the oversupply in the marketplace beyond 9 to 12 months, simply because the contraction in investment will see the natural decline rate associated with existing production start to impact the overall supply levels. It is important to remember that this is distinctly different from nameplate capacity, and is set at the front end engineering and design stage.
Natural Gas US$2.960/mmbtu vs US$3.001/mmbtu yesterday
Uranium US$23.50/lb vs US$23.25/lb yesterday – The Nuclear Energy Institute has asked the US DOE to release uranium from its stockpile thoughtfully and predictably so as not to damage the local uranium mining industry.
• The DOE is selling surplus enriched uranium to energy producers in return for cleanup services at the closed Portsmouth Gaseous Diffusion Plant.
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$55.1/t vs US$55.6/t –
Steel rebar, China 25mm US$387.7/t vs US$389.6/t – steel production costs likely to rise on higher iron ore and coking coal prices.
• This combined with restrictions on ‘credit’ in China might cause
Thermal coal (1st year forward cif ARA) US$61.2/t vs US$61.3/t yesterday – India looking to stop imports of thermal coal next year
• China raises thermal coal futures trading fees as volumes rise to record levels.
• China has told 74 domestic thermal coal producers to raise production by a futher 500,000tpd to ease potential supply shortages ahead of winter.
Coking coal prices $206.4/t unch vs $206.4/t FOB Australia for Premium Hard Coking Coal (The Steel Index) – Prices holding new high level
Other:
Tungsten - APT European prices vs $180-200/mtu unch ‘again’ vs $185-200/mtu two weeks ago
Company News
Medusa Mining (MML AU) A$0.73, Mkt Cap A$151.7m – Mineral resources and reserves update
• Medusa Mining have published a new ore resources and reserves statement reflecting the position as of 30th June 2016.
• At the Co-O mine, the indicated and inferred resources have declined by approximately 17% during the year to 2.77m tonnes at an average grade of 10.8 g/t gold (0.96m oz of contained gold compared to the previous estimate in June 2015 of 3.5mt at an average grade of 10.2 g/t gold (1.15m oz).
• Approximately 57% of the gold ounces in the resource are classified as “indicated” with the balance “inferred”
• The company ascribes 115,500 oz (approximately 60%) of the overall reduction of 188,000 oz to mining depletion as a result of the last year’s production. The balance of the reduction is attributed to a variety of causes including a revision of the assessment of recoverability of mineral in remnant stope areas; a revision to the geological interpretations of veins following underground drilling and revisions to the inclusion of some internal waste “to reflect the discontinuous nature of some veins, resulting in some material dropping in grade to below cut-off.” Reported cut-off grades are 3.2 g/t.
• The portion of resources at Co-O assigned to probable reserves has declined by 51,000 oz (12%) to 1.67m tonnes at an average grade of 6.99g/t for a total of 376,000 ounces. The reduction is largely attributed to depletion of the reserve as a result of the last year’s mining.
• Underground drilling at the Co-O mine has been slowed down by “mine infrastructure and production priorities, as a consequence there was limited drilling of the eastern and down plunge extensions to the deposit. Consequently there has been no overall increase in total mineral resources.”
• Elsewhere, the Indicated and inferred resource of the Bananghilig deposit is reported as 7.78mt at an average grade of 1.73g/t (435,000 oz of gold) with approximately 93% of the resource classed as “indicated”.
• At the Saugon deposit, the company reports an overall resource of 15,700 oz of gold (81,500 tonnes at an average grade of 6g/t gold) with around 70% classed as indicated.
Conclusion: The company has been unable to replace the reserves and resources mined at Co-O during the last year because of delays to resource estimation drilling. Although there are adequate reserves for current levels of production, we are encouraged to learn that “Current development is focussing on establishing the planned drill chambers on Level 8 targeting additional strike extensions to the east and down plunge extensions of the current resource base down to Level 12 and then Level 16” and look forward to news of drilling which could lead to replenishment of the reserves and resources over the coming months.
Petropavlovsk (POG LN) 7.0p, Mkt Cap 232m – Surprisingly good interim results beat estimates
HOLD (TP under review)
• Revenues totalled $254m (H1/15: $297m) on a 15% reduction in gold sales (195koz v 230koz in H1/15) and a slightly lower gold price ($1,194/oz v $1,221/oz in H1/15).
• EBITDA was little changed at $88m (H1/15: 90m) despite a reduction in gold sales highlighting improved EBITDA margins of the business (35% v 30% in H1/15).
• Unit costs measures are down across the board (TCC: $663/oz -14%yoy; AISC: $762/oz -21%yoy) on the back of a 21% depreciation in the USDRUB exchange rate (70.5 v 58.1 in H1/15) and operational improvements.
• Admin costs came down 17% to $13.1m (H1/16: $15.7m).
• Capex was cut 33% to $11.9m (H1/15: $17.8m) with c.65/35 split between exploration and development spend and focus areas being underground exploration at Pioneer and expansion of tailings dams at Pioneer and Albyn.
• The Company highlighted lower RUB-denominated costs with subdued inflation pressure with power costs posting a decline (-1%yoy in RUB terms; -18% in USD). Prices for diesel remaining little changed (-18% in USD).
• Net profit came in at $9.2m (H1/15: -$28.9m (ex IRC)) with basic EPS at $0.00 (H1/15: -$0.03).
• Operations generated $30.0m (H1/15: $19.8m) in net CFO (post WC, tax and interest) and $18.1m (H1/15: $$2.0m) in FCF.
• Annual production is guided to come in at a the lower end of the 460-500koz range at $700/oz TCC as mining operations were affected by severe flooding in H1/16.
• Net debt target reiterated at $570m at $1,285/oz gold price, down from $598m.
• The Company received preliminary term sheets from its major lenders regarding the debt restructuring including a relaxation of existing covenants and debt repayment holidays until 31 Oct/16 when process is expected to be completed.
• Pioneer underground: underground mining contractors started decline development works at the North-East Bakhmut zone at Pioneer with first ore expected to be processed in 2017.
• Malomir underground: Engineering study has been launched at Quartzitovoye (Malomir) deposit ahead of future underground operations development.
• The Company noted that debt restructuring is its top priority at the moment with the Company expecting to update on the course of its proposed corporate transactions including the POX JV with GMD Gold and a potential acquisition of Amur Zoloto and Kamchatka Gold assets after restructuring is complete.
Conclusion: The Company is on course to hit $700/oz TCC cost target in FY16 with interims highlighting management progress in cutting operating costs helped by a favourable exchange rate move. Better than forecast production costs ($762/oz v $917/oz SPA estimates) translated into a positive FCF versus a negative number on our previous forecasts ($18.1m v –$3.1m). The company outperformed our estimates at Pioneer ($654/oz in TCC (adjusted for deferred stripping) v $854/oz SPA estimates).
Given TCC guidance the Company should continue generating positive FCF in H2/16 paying down outstanding debt. We have previously estimated net debt to come down to $511m by YE16 assuming $35m POX-related capex covered by GMD and $546m, otherwise (437koz production, TCC $751/oz and AISC $843/oz).
We continue to rate POG as a HOLD and will be releasing updated earnings estimates shortly.
StratMin Global Resources (STGR LN) 1.75p, Mkt Cap £2.9m – US$1.5m loan for Stratmin
• StratMin Global Resources has announced that it has arranged a US$1.5m, 12-month, non-recourse, interest free loan facility for US$1.5m secured against its holding of 75m shares in Bass Metals Limited.
• “The Company has agreed to assign security and voting rights over its entire Bass holding to the lender, in return for a 12-month non-recourse loan facility. The loan will be repaid in some or all of the Bass Shares, with no cash amounts payable.”
• “The redemption amount of the Loan is set at 120% of the amount drawn down (the “Basic Redemption Value”), plus 50% of the value of the Bass Shares in excess of the basic Redemption Value, all to be settled by part or all of the Bass Shares”.
• The company notes that, in the event that the shares are worth less than the Basic Redemption Value, no further amounts are payable.
• Stratmin acquired the Bass Shares as payment for the sale of their Graphmada graphite mine in Madagascar in July. The company retains a 2.5% royalty on Graphmada’s production, capped at A$5m as well as exposure to a further payment of up to A$8m in Bass shares, subject to Graphmada achieving production milestones.
• The company’s CEO, Brett Boynton, commented that the transaction “gives us capacity to fully fund our commitment to our joint venture partner without any delay to the planned development of the Vatomaina project. … Now that Vatomaina is funded, we will work with Tirupati to release a detailed project review and update for shareholders within the week.”
Conclusion: The company has used the proceeds of its sale of the Madagascar graphite mine to advance its new project. We await the promised update with interest.