Anglo American (LON:AAL) - Agarwal family trust to put £2bn into new Anglo mandatory exchangeable bonds
Coal of Africa (LON:CZA) – Former COO fined for insider trading in S Africa
European Metals (LON:EMH) – Interim report and progress at Cinovec
Nyota Minerals (LON:NYO) Suspended – Bigdish acquisition terminated
Petropavlovsk (LON:POG) - Valuation under review – POX development update
Trevali Mining (TSX:TV) – US$400m expansion into African zinc
Wolf Minerals (LON:WLFE) – Interim results and Drakelands update
The US$ index fell 0.9% on Wednesday seeing gold prices jumping more than $20/oz on the back of less hawkish than expected view on future rate hikes from Janet Yellen.
• Chances of the Fed raising rates during the Jun session fell from 50% to 47% through Wednesday, according to CME FedWatch.
• With the populist far right PVV party coming in behind the PM’s VVD party saw euro climbing with local bond yields coming off suggesting the momentum may challenge the support for far right French presidential candidate Marine Le Pen campaign.
• French bond yields dipped on elections results this morning but have recovered some of its losses since then and are trading flat at 1.04% (10y paper) on the day.
• Brent is up 0.8% on the back of a weaker US$ currency and an EIA report showing that US crude inventories fell last week for the first time this year led by weaker imports.
Dow Jones Industrials +0.54% at 20,950
Nikkei 225 +0.07% at 19,590
HK Hang Seng +2.08% at 24,288
Shanghai Composite +0.84% at 3,269
FTSE 350 Mining +5.99% at 16,911
AIM Basic Resources -0.51% at 2,561
Currencies
US$1.0712/eur vs 1.0630/eur yesterday. Yen 113.43/$ vs 114.67/$. SAr 12.731/$ vs 13.090/$. $1.225/gbp vs $1.223/gbp.
0.769/aud vs 0.759/aud. CNY 6.899/$ vs 6.912/$.
Economics
US – The Fed raised rates by 0.25pp to the 0.75-1.00% range, in line with estimates; although, cautious approach towards future tightening pace lifted equities prices, dropped the US$ and helped gold to climb more than $20/oz.
China – The PBoC raised domestic money market rates following the Fed decision to increase federal funds rate by 25bp yesterday.
• The Bank increased 7d, 14d and 28d reverse repo rates by 10bp to 2.3%, 2.45% and 2.75%, respectively.
• This was the second time the PBoC raised those rates this year.
• While most loans are said to be priced from policy rates (which remained unchanged) as opposed to money market rates, we would expect a change in short term rates to feed through the system and have a credit tightening effect on the economy.
Japan – The BoJ kept rates on hold with short term rates remaining at -0.1% and 10y bond yields capped at near zero with asset purchases programme continuing at ¥80tn per annum.
• “Japan’s economy has continued its moderate recovery trend, (but) inflation expectations have remained in a weakening phase,” the BoJ said.
• Core inflation posted the first positive reading since 2015 in Jan as consumer prices excluding fresh food climbed 0.1%yoy.
Netherlands – General vote preliminary results showed PM Rutte’s VVD party securing victory over Mr Wilders’ PVV with 33 seats secured against 20 for the far right contender.
• Preliminary results are based on 95% of votes counted with 150 seats up for grabs available in the Dutch parliament.
• Euro jumped 1% against the US$ on the news hitting five-week high.
EU – German prosecutors have raided Audi and VW sites in probe into Cheat devices on their vehicles
• Extraordinarily the EU has yet to investigate Audi and VW, as far as we are aware
• In the meantime VW has already settled $21bn in the US
Commodity News
Precious metals:
Gold US$1,224/oz vs US$1,204/oz yesterday
Gold ETFs 58.6moz vs US$58.4moz yesterday
Platinum US$963/oz vs US$943/oz yesterday
Palladium US$767/oz vs US$747/oz yesterday
Silver US$17.44/oz vs US$16.93/oz yesterday
Base metals:
Copper US$ 5,937/t vs US$5,867/t yesterday
Aluminium US$ 1,908/t vs US$1,874/t yesterday
Nickel US$ 10,320/t vs US$10,235/t yesterday
Zinc US$ 2,850/t vs US$2,781/t yesterday
Lead US$ 2,284/t vs US$2,246/t yesterday
Tin US$ 19,980/t vs US$19,880/t yesterday
Energy:
Oil US$52.4/bbl vs US$51.7/bbl yesterday
Natural Gas US$2.957/mmbtu vs US$2.935/mmbtu yesterday
Uranium US$25.25/lb vs US$25.00/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$88.5/t vs US$88.7/t
Chinese steel rebar 25mm US$580.5/t vs US$579.6/t
Thermal coal (1st year forward cif ARA) US$65.0/t vs US$64.5/t yesterday
Premium hard coking coal Aus fob US$158.6/t vs US$158.6/t
Other:
Tunsgten APT European US$212-217/mtu (from the 10Mar week) v US$210-217/mtu (from the 03Mar week)
Company News
Anglo American (LON:AAL) 1306p, mkt cap £16.8bn Agarwal family trust to put £2bn into new Anglo mandatory exchangeable bonds
• Mr Anil Agarwal, founder of Vedanta is taking up to £2bn worth of bonds in Anglo as part of a, JP Morgan arranged, exchangeable bond issue through a vehicle called Volcan.
• This is a strange and interesting financial structure which we will attempt to explain below. Don’t blame us if we get some part of this wrong.
• The bonds if exchanged for shares could convert into around 12% of Anglo American at the end of the term
• Vedanta is not part of the bond purchase through the Agarwal family which holds 69% of Vedanta have pledged 21.65% of Vedanta shares to JPMorgan as part of the financing and have also pledged $123m worth of Vedanta bonds.
• As we understand it:
o We understand the convertible bond is sold as a SWAP whereby a hedge fund or convertible desk agrees to hand over a proportion of Anglo shares in return for taking the bond. In this case we believe JP Morgan requires the delta which we reckon is 0.8 of the shares required to back the issue. So if 180m shares are needed to back the bond, the investors are required to hand back around 145m shares with JP Morgan buying the rest in the market to make up the shortfall.
o JP Morgan will then buy the remaining shares either today or over the next 15 days to back the convertible bond.
o The fund or desk is likely to borrow the stock from the market. This is not a problem for Anglo stock which is ‘GC’ General Collateral and is cheap to borrow.
o The interesting part is that the bond is effectively backed by borrowed stock. This gives Volcan the voting rights and will give Volcan the full stock at the end of the bond period.
o The convertible pays a coupon of 3.75-4%.
o This is a devious and creative way to acquire stock in our view and is a bit like using a poacher to catch your game for you and we wonder what would happen if the cost of borrowing stock in the market were to rise materially.
• Volcan should rank just behind the South African Public Investment Corporation which holds 15% of Anglo and The deal will give the Agarwal family an interesting and potentially influential position over the company. Cynthia Carroll, Anglo’s ex ceo is currently on the Vendata board and maybe giving advice.
• Anglo American also announced an offering of a $15bn Euro Medium Term Note Programme yesterday arranged by Barclays.
o Anglo American reported in February attributable profits of US$1,594m for 2016 reversing a loss of US$5,624m in 2015 while debt was cut by 34% to $8.5billion
Coal of Africa (LON:CZA) 3.3 pence, Mkt Cap £72m –Former COO fined for insider trading in S Africa
• South Africa’s Financial Services Board (FSB) has levied a fine of R350,000 on the former COO, Michiel Jakobus Bronn, of Coal of Africa in relation to the purchase of 117,000 shares in the company “at mostly 84 cents per share” three days before the company announced, on 18th May 2015, that it had been granted a mining right for the Makhado project.
• The FSB statement makes clear that “This was despite the fact that he had been specifically instructed by the Chief Executive Officer of Coal not to trade in Coal shares until such time that the SENS announcement had been published.”
• “The Enforcement Committee determined that Bronn committed insider trading in circumstances where he had been made aware of Coal’s trading policy on various occasions. The Enforcement Committee found that Bronn’s conduct in dealing with the case against him was less than frank and was often disingenuous, and therefore ordered that in addition to the administrative penalty Bronn must pay the costs incurred by the Directorate in investigating his conduct and the costs associated with bringing the matter before the Enforcement Committee including the costs of constituting the panel that heard the case against him.”
European Metals (LON:EMH) 66 pence, Mkt Cap £85m – Interim report and progress at Cinovec
• European Metals, which is working on a preliminary feasibility study (PFS) for the Cinovec lithium project in Czech Republic, has reported an increased loss of A$3.16m for the six months to 31st December 2016 (2015 – loss of A$1.31m).
• Activities during the period have concentrated on additional drilling of, particularly, the shallower levels of the deposit which lies close to the Czech German border. The drilling, which has already yielded a “significant increase [up 420%] in the indicated resource at Cinovec” contributes to an updated PFS which is expected to be completed “at the end of March 2017.”
• Work on the PFS has already identified pre-production capital cost savings of 33% for the development of the Cinovec lithium project to US$169m.
• The company has also successfully produced battery grade lithium carbonate at >99.5% purity under test conditions using an established “industry proven sodium sulphate roast based flowsheet from mica concentrate from the Cinovec Project.”
• The exercise of warrants and options during the period has left European Metals with a 31st December cash balance of A$3.37m
Conclusion: The previously announced resource increases and capital cost savings should all be reflected in the forthcoming PFS – we look forward to its release providing an insight into the details of the Cinovec project.
Nyota Minerals (LON:NYO) Suspended – Bigdish acquisition terminated
• Poor old Nyota is not having much luck. First it loses its mine in Ethiopia over difficulties in paying an in-country VAT bill.
• Then it feels forced to terminate its proposed acquisition with Australian firm Bigdish.
• If the deal had proceeded it would have amounted to a reverse takeover and this would have incurred substantial costs relating to the ASX and AIM listings.
• Management have pulled the plug before further costs are racked up and are converting a £200,000 Bigdish loan into shares into Nyota. The shares will be priced at the price of the next Nyota fundraising. Bigdish will also issue £200,000 of new Bigdish shares to the company.
• One analyst commented that this leaves Nyota “up creek and without a paddle” though we would remind investors that shell companies do have value in this market and that there are a number of mining assets looking for suitable new homes.
• A number of smaller resources companies have reinvented themselves in recent years offering substantial returns to shareholders when the right deal is struck.
• It is now up to management to find a suitable deal before time runs out under the AIM listing rules.
Petropavlovsk (LON:POG) 6.0p, Mkt Cap £196m – POX development update
Valuation under review
• The Company released a progress update and reviewed economics on the pressurised oxidation project (POX).
• POX development works have been restarted from Jan/17 with commissioning expected to start in Q4/18 and production ramping up through 2019.
• Total remaining capex is estimated at $152m which includes $32m to be spent on completion of the floatation circuit at Malomir.
• Completion of the POX is estimated to double the Company’s average life of mine to more than 15 years taking advantage of ample refractory ore reserves/resources available at Malomir and Pioneer as well nearby exploration targets.
• On sequencing of development works, Malomir flotation plant will start off with 3.6mtpa capacity in Q1/18 (Stage I) with produced concentrate to be stockpiled before being transported to the POX Hub ahead of the autoclave commissioning in Q4/18.
• Malomir Stage II involving the expansion of the capacity to 5.4mtpa is scheduled for completion and commissioning in 2019.
• Pioneer flotation plant is scheduled for construction in 2021 and ahead of the start of production from 2023 (capex for Pioneer flotation circuit is not part of the highlighted $$152m, as we understand, but should not be a large number given the 6mtpa milling infrastructure in place at the RIP plant).
• Updated production, costs and NPV estimates build on the 2010 Feasibility Study, but are adjusted for the wealth of data generated through trials at the in-house Blagoveshchensk metallurgical test plant (operational since 2011) and new FX rate and gold price forecasts.
• New estimates are provided below:
Flotation and POX plant technical parameters
Flotaion plant Malomir Pioneer
Ore processed Kt 5,400 6,000
Ore grade g/t 1.04 0.91
Flotation recovery % 86% 82%
Sulphur content % 25% 21%
Concentrate yield mass % 5.50% 2.90%
Concentrate grade g/t 24 24
POX Hub
Concentrate processed kt 300-330 150-170
Gold recovery % 93% 98%
TOTAL POX Hub recovery % 79% 80%
Operating costs
Total operating costs (incl flotation) 615-675 785-865
Mining costs US$/m3 2.5 2.6
Transport costs US$/t conc 26.0 1.7
Flotation costs US$/t treated ore 4.6 4.6
POX costs US$/t conc 78.2 78.1
Economics
Project NPV (10%), (US$m) 603
Project IRR (%) 65
Revenue 2018-2032 (US$m) 3,965
Avg production 2018-2032 (koz pa) 220
Assumptions used
USDRUB 60
Gold price 1,200
Source: Company
Conclusion: Updated economics of the project show an improvement on previous estimates and our forecast numbers. Improved economics of the project reflect both the effect of a weaker exchange rate (USDRUB traded at c.30 when previous Company estimates were released v 60 assumed in the current study) and optimisation on the processing side at POX. The Company will hold a presentation on 29 Mar/17 where the management is expected to provide more details on the POX project and underground works development at Pioneer and Malomir.
Trevali Mining (TSX:TV) C$1.30, Mkt Cap C$507m – US$400m expansion into African zinc
• Trevali Mining, the zinc focussed mining group which operates zinc mines in Canada and Peru has expanded its footprint into Africa with the US$400m acquisition of Glencore’s 80% interest in the Rosh Pinah zinc mine in Namibia and its 90% interest in the Perkoa mine in Burkina Faso as well as various Namibian and Canadian exploration assets.
• The transaction comprises a US$244m cash consideration and Trevali is to issue approximately 175m new shares at C$1.20/share as the balance of the purchase consideration.
• Based on Glencore’s published reserve and resource reports, which, on a 100% basis) show a total measured/indicated/inferred resource of 12.9mt at a grade of 7.4% zinc, 1.4% lead and 15g/t silver at Rosh Pinah and 5.9mt at an average grade of 14.1% zinc at Perkoa, and excluding the silver and lead content of Rosh Pinah, we estimate that Trevali is buying attributable in-situ resources of zinc, in operating mines, at around US$265/t of contained metal in resources.
• Glencore’s latest annual report does not disclose the individual production levels of its smaller zinc operations and hence estimation of the purchase price of the current zinc production in this transaction remains obscure.
Conclusion: The closure, last year, of Australia’s largest open cut zinc mine, Century, and of the underground Lisheen zinc mine in Ireland as well as reductions in Indian supply has prompted industry observers to expect a supply deficit in the zinc market. Statistics from the trade organisation the International Lead and Zinc Study Group show that in 2016 mine production of 13.2m tonnes of refined zinc fell behind consumption of 13.9m tonnes. While much of this shortfall is addressed through recycled metal, Trevali’s move to secure additional producing assets may prove prescient if the market tightens further.
Wolf Minerals (LON:WLFE) 5.1p, Mkt Cap £55.6m – Interim results and Drakelands update
• Wolf Minerals has announced an increased loss of A$37.69m for the six months to 31st December 2016 (2015 – loss of A$24.25m) despite a sharp rise in revenue to A$10.94m (2015 – A$ 1.86m).
• The company reports an increased level of net debt of A$119m at 31st December (30th June 2016 – A$75m) leaving, we estimate, gearing of approximately 46%. The subsequent increase of loans from RCF, announced earlier this week suggests that gearing may now be approaching 50%.
• The company’s principal shareholder has recently released a further £10m of its bridging facility as work proceeds to improve recoveries in the plant which, during the reporting period has produced a total of 55,200 metric tonne units (mtu) of tungsten concentrates from the processing of over 968,000 tonnes of ore.
• The recovery of tungsten from the relatively fine-grained weathered material in the upper levels of the Drakelands orebody has proved problematic however, the company comments that “A gradual transition from the soft ore currently being experienced to the harder granite is expected in the second half of the year and should result in improvement in recoveries and plant throughput.”
• The company has secured the permission of Devon County Council to extend, on a permanent basis, the seven day per week operation of the mine and has extended the duration of the planning consent to 2036.
• Work on the £7.5m diversion of a 5km stretch of the Lee Moor Road in order to accommodate future expansion of the waste disposal area is proceeding “on track for completion in early 2017”.
Conclusion: Wolf Minerals’ H1 loss is not unexpected, however there are indications that as mining moves deeper into un-weathered ore the operating situation may start to improve gradually although the company is indicating that the tangible results may not become apparent until the second half of the year – which we assume to be the calendar year rather than the financial year