European Metals (LON:EMH) – Update in response to movement in shares
Shanta Gold (LON:SHG) BUY – Target price 12.2p (down from 13.8p) – Valuation update
Strongbow Exploration (CVE:SBW) – Water treatment trials completed at South Crofty
Miners fall on lower base metals prices and a continuing correction in the iron ore market with the FTSE 350 Mining Index on course to post a second monthly decline in Mar (-3.6%) reducing YTD gains to 4.8%.
• Gold is off slightly with the US$ index trading at the highest level in the last two weeks.
• The rand is off 4.1% against the US$ since Thursday evening on the back of the news that Zuma dismissed its finance minister Pravin Gordhan alongside other eight ministers.
• This took currency losses to 7.4% from the beginning of the week when rumours over the potential dismissal hit the market.
• Copper is off on the back of the news of a strike resolution at Cerro Verde, the largest copper mine in Peru.
• Freeport is reported to have accepted miners’ demands over family medical assistance, holidays and safety and agreed to review targets used to estimate their share of profits.
• Iron ore futures capped the worst monthly loss since May.
South Africa – Zuma sacks finance minister and eight other cabinet members
• The South African president has probably made his last round of sackings before he is removed from office.
• The sacking of Pravin Gordhan, the respected finance minister is reported to be an unpopular move within the government and serves to degrade the already shaky reputation of South Africa as an investment destination.
Trump presents German with £300bn fake NATO invoice representing Germany’s underspend on the alliance over the past 12 years
• It’s interesting that the principal protagonist of fake news is now offering fake invoices to world leaders.
• Nato countries pledged to spend 2% of GDP in 2014 so the Trump team simply backdated the shortfall to 2002 when Chancellor Schroder pledged to spend more on defence and added interest. One German minister described the reported move by Mr Trump as "outrageous".
• We wonder how outrageous the figure will look if Russia decides to support the liberation of the People’s Democratic Republic of East Germany
Dow Jones Industrials +0.33% at 20,728
Nikkei 225 -0.81% at 18,909
HK Hang Seng -0.76% at 24,115
Shanghai Composite +0.38% at 3,223
FTSE 350 Mining -1.51% at 15,652
AIM Basic Resources +0.89% at 2,665
Economic News
US – Q4 GDP revised upwards by 0.2pp on the back of stronger-than-expected consumer spending.
• This brought 2016 growth rate to 2.0% marking a recovery in the pace of economic expansion from 1.3% recorded in the middle of last year.
• Consumer spending growth was brought up to 3.5%, up from 3.0% reported, on the back of revisions in consumption of non-durables and services.
• Net exports drag climbed while government spending was lowered slightly.
• Business investments remained modest posting a 0.9%yoy increase versus 1.3%yoy estimated previously.
China – Official PMIs show stronger business activity in both services and manufacturing sectors in Mar pointing to a good start to the year on the back of a momentum from growth-related initiatives implemented last year.
• Manufacturing production pace hit the highest level in nearly five years,
• Services PMI increased to a two-year high.
• New orders growth accelerated to a three year high; while new export orders grew only marginally (index reading of 51), it is promising to see a recovery in the overseas demand.
• Private PMI report is due over the next few days.
• Manufacturing PMI: 51.8 v 51.6 in Feb and 51.7 forecast.
• Services PMI: 55.1 v 54.2 in Feb.
Germany – Unemployment grinds lower beating expectations in Mar.
• “With the onset of spring activity, the number of unemployed people has declined, employment growth is continuing unabatedly, and demand for new employees continues to be high,” the labour agency said.
• A sharp deceleration in the CPI in Mar is led by a decline in gasoline prices and holiday packages, according to Bloomberg.
• Growth in prices for holidays-related services is estimated to have come down to 0.6%yoy from 1.1% in Feb as Easter holidays came earlier than normal last year.
• Prices at pump are estimated to have dragged the headline number by 0.1pp making it the second largest driver this month.
• Unemployment Change: -30k v -15k in Feb and -10k forecast.
• Unemployment Rate (%): 5.8 v 5.9 in Feb and 5.9 forecast.
• CPI (%mom/yoy, EU Harmonised): 0.1/1.5 v 0.7/2.2 in Feb and 0.5/1.9 forecast.
Japan – Consumer spending contracted to a 12th consecutive month in Feb despite labour stats showing a continuing improvement in the market with unemployment hitting new record lows.
• Household Spending (%yoy): -3.8 v -1.2 in Jan and -1.2 forecast.
• Unemployment Rate (%): 2.8 v 3.0 in Jan and 3.0 forecast.
UK – House prices dropped for the first time in nearly two years in Mar, according to the Nationwide data.
• No detailed breakdown was provided but the report said the south of England continued to post slightly stronger price increases than the north; although the difference has been narrowing.
• The spread in the annual rate change between the weakest and strongest performing regions narrowed to the lowest level since 1978.
• The overall trend points to a cooling of the property market.
• Nationwide House Prices (%mom/yoy): -0.3/+3.5 v 0.6/4.5 in Feb and 0.3/4.0 forecast.
Currencies
US$1.0684/eur vs 1.0753/eur yesterday. Yen 111.79/$ vs 111.01/$. SAr 13.368/$ vs 12.935/$. $1.246/gbp vs $1.242/gbp.
0.766/aud vs 0.765/aud. CNY 6.889/$ vs 6.892/$.
Commodity News
Precious metals:
Gold US$1,243/oz vs US$1,251/oz yesterday
Gold ETFs 58.9moz vs US$58.9moz yesterday
Platinum US$946/oz vs US$957/oz yesterday
Palladium US$794/oz vs US$790/oz yesterday
Silver US$18.10/oz vs US$18.16/oz yesterday
Base metals:
Copper US$ 5,900/t vs US$5,876/t yesterday
Aluminium US$ 1,969/t vs US$1,960/t yesterday
Nickel US$ 10,095/t vs US$10,000/t yesterday
Zinc US$ 2,831/t vs US$2,852/t yesterday
Lead US$ 2,328/t vs US$2,331/t yesterday
Tin US$ 19,970/t vs US$20,050/t yesterday
Energy:
Oil US$52.9/bbl vs US$52.5/bbl yesterday
Natural Gas US$3.216/mmbtu vs US$3.223/mmbtu yesterday
Uranium US$24.15/lb vs US$24.40/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$78.6/t vs US$81.1/t
Chinese steel rebar 25mm US$557.1/t vs US$555.4/t
Thermal coal (1st year forward cif ARA) US$66.0/t vs US$65.5/t yesterday
Premium hard coking coal Aus fob US$151.6/t vs US$150.2/t
Other:
Tungsten - APT European prices $187-198/mtu vs $187-198/mtu
Company News
European Metals (LON:EMH) 79 pence, Mkt Cap £102m – Update in response to movement in shares
• We love watching the professionals working at publicising their stocks in the market using only the loosest of reasons to make their promotional announcements.
• This time European Metals which has the Cinovec lithium project in the Czech Republic on the border with Germany.
• The company tells us that all reports pertaining to its imminent PFS have been completed and are currently being collated in preparation for announcement in April 2017.
• It is unusual to make this sort of statement, normally one reports that a PFS is underway as has already been done and you leave it at that.
• The next given reason for the announcement is; “The Company notes the recent increase in its share price on ASX, AIM and the German bourses today and draws shareholders' attention to the article published in Automotive News Europe within the past 48 hours discussing BMW's plans with regards to securing lithium supplies in Europe.”
• We are surprised the company did not attach a link to make it easier to find the article, so we will do it for them https://europe.autonews.com/article/20170328/BLOG15/170329876
• Problem is that while the article is positive on lithium it does not say anything about BMW securing lithium supplies in Europe. It does indicate that BMW may be willing to “join forces to secure a sufficient supply of lithium, a crucial raw material for battery-electric vehicles and plug-in hybrids?” however securing supplies of lithium isn’t mentioned.
• We also note that European Metals’ lithium is contained in Li-micas which we are told can be concentrated by magnets and that lithium carbonate was produced on an industrial scale during mining in the 1970s. Given the region was in the midsts of the cold war at that time and the lithium industry almost exclusively existed in the region to support Russian nuclear proliferation we wonder what ‘industrial scale’ actually was. Normal economic rationality did not exist in the FSU at that time with respect to lithium and the nuclear proliferation at the time.
• The separation of lithium from micas with tin-bearing ores requires roasting and hydrometallurgical processing along with the cost this incurs. This is in addition to the cost of underground mining. There is some new technology in Australia which might and we use the word, ‘might’ advisedly, help with this but we are not sure this is proven in a commercial and industrial environment as yet.
• Cinovec has a 28mt inferred resource grading 0.4% tin (0.6% tin equivalent when allowing for lithium and tungsten credits) and 37mt grading 0.38% Li making Cinovec look more like a tin project with a convenient lithium co-product.
• We will read the company’s PFS with interest when it comes out, in particular the bit about the processing of Li-micas. Till then we are still wondering what actually caused the shares to move?
• The company had a cash balance of A$3.37m at end December having raised A$3m in October.
Shanta Gold (LON:SHG) 9.0p, Mkt Cap £53m – Valuation update
BUY – 12.2p (down from 13.8p)
• A quick recap on updated mineral reserves and mine plan:
ü Mineral reserves estimated at 3.6mt at 4.4g/t for 516koz including 71koz at 1.8g/t (open pits) and 445koz at 5.8g/t (underground);
ü New reserves replace some 150koz of contained gold depleted from the previous update (Sep/15) with most of the increase led by the release of the maiden Ilunga underground reserve (118koz at 5.6g/t) and the balance attributed to increases at open pit deposits;
ü NLGM LoM production (2017/23) increased 39% to 500koz, up from 359koz;
ü Full utilisation of the 600ktpa plant extended by four years through 2022;
ü LoM cash costs are estimated to average $577/oz and $736/oz in C1 and AISC;
ü Ilunga underground is expected to start ramping up from 2019 with Bauhnia Creek and Luika running through 2021;
ü First ore from stopes at Bauhinia Creek remains on target for Q2/16 with NLGM annual guidance reiterated at 80-85koz at AISC $800-850/oz.
• We brought annual throughput rates and processed grades broadly in line with the current mine plan.
• Updated valuation reflects a downwards revision to reserve grades at Bauhinia Creek (253koz at 6.2g/t v 251koz at 7.1g/t estimated previously), an adjustment to the NLGM life of mine production estimate over 2017-23 (503koz v 524koz before; excluding tailings retreatment ozs) and upwards revisions to our capex estimates;
• To enable “like-for-like” comparison with our previous earnings estimates we did not include additional ounces contained outside the mine plan which are estimated at 683koz at 2.24g/t and in line with Company forecasts base NGLM LoM on available reserves, mineralised waste material and stockpiles;
• Once underground operations are established drilling at Bauhinia Creek is expected to restart at the end of this year/early next followed by more exploration works at other targets like Luika and Ilunga. With current reserves enough to feed the plant at full capacity for six years, there is little urgency to accelerate exploration and management is expected to take a paced approach to drilling, extending underground reserves on a rolling basis. In this instance, we view our valuation as a base case with further upside available on the successful expansion of reserves at the NLGM and neighbouring licenses (e.g. recent drilling results at Nkuluwisi, only 12km away from the plant).
• Recommendation remains a BUY with a target price of 12.2p (from 13.8).
(Dec year end) FY2014 FY2015 FY2016e FY2017e FY2018e
Gold price (spot) US$/oz 1,266 1,160 1,249 1,175 1,150
Gold sales Koz 87.8 80.6 86.3 80.7 86.3
AISC US$/oz 941 845 661 879 742
Revenue US$m 114.9 95.7 105.3 99.7 101.6
EBITDA US$m 33.8 32.0 54.8 34.2 39.4
PAT US$m 8.9 -17.3 3.9 8.6 10.9
Basic EPS USc 1.9 -3.7 0.5 1.5 1.9
FCF US$m 11.7 1.1 -19.1 -4.8 18.1
EV/EBITDA x 2.9 2.8 1.9 3.2 2.8
PER x 11.0 - 20.9 7.7 6.1
PE and EV/EBITDA multiples calculated using price as of 30/03/17 of 9.2p
Source: SP Angel, Company
Strongbow Exploration (CVE:SBW) CAD0.14, Mkt Cap CAD7.8m – Water treatment trials completed at South Crofty
• Strongbow Exploration report they have successfully completed water treatment trials at the South Crofty tin mine in Cornwall.
• The company is now working on filing an application to the UK Environment Agency for a mine waste permit with water discharge consent within a month.
• Once the Company receives a mine waste permit with water discharge consent, the South Crofty project will be fully permitted with a valid mining license till 2071, planning permission to construct new surface process facilities and the ability to dewater the mine.
• The team working on the waste water process designed and built the treatment facilities at the Wheal Jane mine which has been running for 15 years.
• The system is being designed to pump and treat some 25,000m3/day for 18-24 months followed by 5,500-6,500m3/day thereafter for normal mine waste water.
• The interesting thing is that the water in South Crofty does not sound as if it is particularly contaminated as it has a PH of 6.5 which is virtually neutral. This suggests to us that water is constantly flowing through the mine either through old workings into other mines in the region or through fissures in the host rock.
• The treatment therefore focusses on the removal and precipitation of any solids.
• This is all good news from South Crofty’s perspective. While it will take some time to fully dewater the mine there is much that can be done while the water levels lower.
• The Preliminary Economic Assessment ‘PEA’ released last month shows robust economics for the mine indicating the project should be relatively straightforward to finance.
• Key parameters are:
o NPV US$130.5m after-tax NPV – assuming 5% discount, tin at $10/lb, copper $2.65/lb, zinc $0.90/lb
o IRR 23.4%
o CAPEX US$118.7m inc contingency
o Sustaining capital $83.8m
o Cash cost $3.36/lb of tin equivalent for life of mine
o Throughput 2.575mt on 1,000tpd plant throughput
o Grade average 1.55% tin equivalent
o Recovery rates 88-90% for tin
o Construction over 24-36 months
Conclusion: Today’s report marks a key milestone in the redevelopment of the South Crofty tin mine. Much work can be done in terms of preparing the site, the plant, the mine plan, the upper mining levels and the mine financing before the mine is fully dewatered and we wonder if it is theoretically possible for South Crofty to get a significant proportion of its work done by the time the mine is fully drained.