Commodities
Diamonds and precious stones
The week certainly started on a positive note with Anglo treating us to what can only be described as a positive Sight 1 update. The provisional $720m value compares very well to the $545m in 2016 and the $450m in 2015 and is more akin to 2014 Sight values. The narrative did somewhat dampen the enthusiasm a little, pointing to the extended period between this and the final Sight of 2016 and that demand for lower quality rough remains under pressure. However, Anglo’s Q4/FY16 production update really did help to remind us of the scale of the market recovery in 2016 with rough sales up to 32Mcts vs. the 19.9Mcts in 2015.
Average prices, declined 10% to $187/ct and the price index (100 @ Dec 2006) fell 13% to 118.
Hopefully, as the retailers in China roll start to face weaker comparatives, the messaging from that part of the world will continue to improve, sadly Chow Sang Sang didn’t want to play ball. However it is important to note that their “profit warning” was accentuated by the one offs in ’15. So maybe not all that bad…
I want to believe…
Precious metals
Did you see our gold note this week?
In what we hope will turn out to be a regular publication, Simon French and I are tasked with putting our heads together to consider the major factors that, we believe, are driving, or are likely to drive, the performance of bullion over a range of time periods.
“The Economic Uncertainty Index (EUI) has now breached its historical maximum. This is a record dating back to 1935. This is set to be a key catalyst in moving the spot price for Gold higher and we upgrade our 2017 forecast to $1,300/oz. 2016 contained the big electoral decisions but 2017 will see the implications. Investors in gold should profit from the contagion risk associated with the UK's exit from the EU, the impact of the Trumponomics on US inflation. While a more protectionist stance to multilateral trade deals from the US is set to hurt emerging economies. There is also the risk of further political upheaval during the upcoming European elections”.
Key Drivers
Supportive ( ▲ )
Unsupportive ( ▼ )
Rationale
Economic Uncertainty
▲
US economic uncertainty, A50, EZ Politics, Chinese credit mkts
Global Inflation
▲
Inflation leading indicators pointing to near term pick up
US Dollar
▼
Protectionism & corporate tax changes set to raise USD
Trading Positions
▲
Net Longs approaching near-term low
Central Banks
▲
CBs marginal buyers of gold for first time since 2012
If not yet received, please do let me know and I will forward accordingly and of course, I would recommend a chat with Mr French if you have the time.
Probably more supportive than anything else we have to say is that World Bank coming out as a bear with a $1,150/oz average for 2017, yet highlights higher risks in 17 than ever before….
Company announcements/news/meetings:
Acacia Mining, Centamin, Randgold Resources - Summary of our changes in the Nugget
“We upgrade to Buy recommendations for Centamin (LON:CEY) and Randgold Resources (LON:RRS). We retain our Hold recommendation for Acacia Mining (LON:ACAA). As result of the changes to our commodity forecasts and recent trading updates from Acacia and Centamin, we are upgrading our estimates for Centamin (TP: 209p from 167p) and Randgold (TP: 8309p from 7291p). For Acacia (TP: 509p from 459p) we have increased our target price given the longer term value opportunity but given the uncertainty over the outcome of the Endeavour Mining combination we retain a neutral stance. We discuss near term catalysts and provide a full valuation breakdown for each company in this report”
Ariana Resources* (LON:AAU), (Buy): Interesting targets identified at Salinbaş
“Positive drilling results from its Phase Two drilling programme, we believe, provide a solid platform for Ariana to aim towards providing investors with an improved resource statement now mineralisation under the cap rocks at Arzu Central between Arzu North, Derya and the existing open pit operation at Arzu South has been confirmed. We believe this is further positive for Ariana, ahead of first production at Kiziltepe which has been amended to Q1 2017. We reiterate our Buy recommendation”.
Firestone Diamonds (LON:FDI), (Buy): Q4 update
Company updated shareholders yesterday on activities at Liqhobong. And as far as we are concerned, everything seems to be going better than we had hoped.
Project construction is now completed with throughput increasing towards nameplate capacity (3.6mtpa), in fact, the company has already hit nameplate capacity for short periods on a couple of occasions. Recoveries of 58kcts are a bonus on our numbers and the fact that >20 specials have been recovered, including one 37ct white and some fancy yellows serves to remind me of the quality of the orebody. Operational costs of $12/t are better than we imagined at this stage and available cash of $18m (plus $15m in a standby facility) would seem to be more than adequate to cover the operations through to a consistent sales process.
First sale in Antwerp from 6-10 February will be interesting. Whilst I don’t assume pricing to be at the upper end of guidance, a solid benchmark to build upon could be set (excluding factors outside of the company’s control, of course).
Petra Diamonds (LON:PDL), (Hold): Interim trading update
“Petra on Monday announced a continuation of improving diamond recoveries as Kimberley, Finsch and the Cullinan operations ramp up output. Near term though, industrial actions have caused a slight delay in the commissioning schedule of the new plant at Cullinan with a marginal reduction in tonnes targeted. With both positives and negatives in the statement, we retain our Hold recommendation and 152p target price”.
I will be visiting the Cullinan operation on 4 February, and will be able to see the progress made to date.
Polymetal (LON:POLY) , (n/c): Q4 update. Wobble on cost guidance, but was it justified?
Going into numbers on the back of a very good share price performance meant the stock was probably priced for perfection, but given the abrupt reversal in bullion, Polymetal was always going to struggle a little. The market has taken fright with the uptick in costs to an AISC of $775-825GE/oz, driven by high diesel costs and the appreciation of the rouble. Frustratingly this should not have come as too much of a surprise, as the company has on many occasions, most recently at the investor day, highlighted these two factors and their impacts.
Overall forward guidance for ’17 and ’18 remains at 1.4Moz and 1.55Moz GE, skewed to H2 as per normal. Given our forecast for higher gold in the medium term and the solid production growth from a suite of world class assets, I would expect cash returns to remain higher than industry averages, even after incorporating the noted cost increases.
Keep an eye open next week for Centamin, Gem Diamonds, Glencore and Vedanta.