Galantas Gold (LON:GAL) 6.1 pence, Market Cap £10.5m – Development at Omagh mine resumes
Petropavlovsk (LON:POG) 7.6p, Mkt Cap £248m – Board reshuffle proposed
Serabi Gold (LON:SRB) 4.8 pence, Mkt Cap £33.2m – Q1 gold production on track to meet 2017 guidance
West African Minerals (LON:WAFM) 3.5p, Mkt cap £13.3m – Scoping study further thoughts
Base metals are trading higher this morning on the back of Chinese President announcements over $78bn in capital commitments for Belt & Road Initiative.
• Xi Jinping pledged CNY 540bn ($78bn) in financing, including CNY 100bn for China’s Silk Road Fund, CNY 380bn in new lending for participating nations and CNY 60bn in coming years to developing countries and international organisations that join the programme, Bloomberg reports.
• Copper net long speculative positions in the futures and options markets slid by 42% to 29.8k contracts last week with prices having dropped in five of the past six weeks nearly erasing all YTD gains.
• Gold climbed for a third day following softer US economic data released on Friday and North Korea’s ballistive missile launch on Sunday.
• Crude oil prices rally on speculations that a deal to cut global supply to be extended.
• Iron ore on the DCE rebounded this morning from a 7-month low on the back of reports showing steel production climbed to record in Apr.
• Chinese steel output set new monthly record in Apr with local mills producing 72.8mt, up 4.9%yoy, and taking YTD supply to 273.9mt.
Dow Jones Industrials -0.11% at 20,897
Nikkei 225 -0.07% at 19,870
HK Hang Seng +0.82% at 25,362
Shanghai Composite +0.22% at 3,090
FTSE 350 Mining +1.26% at 14,572
AIM Basic Resources +0.47% at 2,635
Economic News
China – Industrial production and FAI growth rates have come off in Apr underperforming estimates.
• These highlight slowing growth momentum as authorities decided to reduce leverage in the financial sector.
• Retail Sales (%yoy/YTD): 10.7/10.2 v 10.9/10.0 in Mar and 10.8/10.2 forecast.
• FAI (%YTD): 8.9 v 9.2 in Mar and 9.1 forecast.
• Industrial production (%yoy/YTD): 6.5/6.7 v 7.6/6.8 in Mar and 7.0/6.9 forecast.
Ivory Coast – The standoff between army commanders and mutinous soldiers continue as the discontent was sparked over unpaid bonuses as the government aims to introduced spending cuts.
• While President Alassane Ouattara said that the government reached a compromise with troops Thursday last week, shootings at the main army barracks in Abidjan early Monday were repored.
• The government is said to have revised its budget amid lower prices for the main export product, cocoa, which depressed official revenues.
Currencies
US$1.0940/eur vs 1.0860/eur yesterday. Yen 113.68/$ vs 113.67/$. SAr 13.258/$ vs 13.434/$. $1.293/gbp vs $1.287/gbp.
0.742/aud vs 0.738/aud. CNY 6.898/$ vs 6.905/$.
Commodity News
Precious metals:
Gold US$1,230/oz vs US$1,228/oz yesterday
Gold ETFs 59.6moz vs US$59.6moz yesterday
Platinum US$928/oz vs US$924/oz yesterday
Palladium US$813/oz vs US$807/oz yesterday
Silver US$16.59/oz vs US$16.44/oz yesterday
Base metals:
Copper US$ 5,590/t vs US$5,549/t yesterday
Aluminium US$ 1,899/t vs US$1,883/t yesterday
Nickel US$ 9,280/t vs US$9,335/t yesterday
Zinc US$ 2,566/t vs US$2,593/t yesterday
Lead US$ 2,137/t vs US$2,172/t yesterday
Tin US$ 19,885/t vs US$19,850/t yesterday
Energy:
Oil US$52.1/bbl vs US$50.9/bbl yesterday
Natural Gas US$3.403/mmbtu vs US$3.369/mmbtu yesterday
Uranium US$22.65/lb vs US$22.65/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$59.9/t vs US$60.5/t
Chinese steel rebar 25mm US$549.4/t vs US$548.9/t
Thermal coal (1st year forward cif ARA) US$63.4/t vs US$63.2/t yesterday
Premium hard coking coal Aus fob US$170.0/t vs US$175.0/t
Other:
Tungsten - APT European prices $212-222/mtu vs $210-219/mtu
Company News
Galantas Gold (LON:GAL) 6.1 pence, Market Cap £10.5m – Development at Omagh mine resumes
• Galantas Gold reports that mine development at its underground Omagh Gold mine in Co Tyrone is expected to resume shortly following notification that the Police Service of Northern Ireland (PSNI) is able to provide an adequate level of security cover in relation to the transport and use of the necessary explosives.
• The company advises that “PSNI has agreed to cover blasting operations at the mine for 3 days per week, 2 hours per day. Whilst insufficient to sustain development or operation of the Omagh Gold Mine on more than a short term basis, it will form the basis for the PSNI and the Company to review matters after a period of operation.”
• The decision to allow limited blasting operations “has enabled the Company to retain some existing employees”, though we infer that the company’s decision to suspend further hiring and possibly to press ahead with some of the previously announced redundancies may still remain in force.
• Welcoming the PSNI’s decision to provide this level of cover Galantas Gold’s President & CEO, Roland Phelps, commented that “I hope this will allow the parties to find efficient ways to satisfy PSNI’s requirements and resourcing issues in regard to anti-terrorism security.”
Conclusion: The resumption of development of the underground Omagh Gold Mine, even on a limited basis, provides some hope that ultimately the 130 new jobs and the wider economic boost the mine could bring to the local community will be delivered. The security issues should, however, not be underestimated and there is clearly a delicate balance to be struck between the need to contain threats of terrorism and to facilitate an important economic stimulus to Northern Ireland’s economy.
Petropavlovsk (LON:POG) 7.6p, Mkt Cap £248m – Board reshuffle proposed
• Petropavlovsk proposed changes to the existing Board ahead of the AGM as an alternative to recently announced requisition requests by major shareholders.
• Proposed Board changes include:
o Peter Hambro will step down as Executive Chairman but remain as Executive Director on the Board;
o Andrew Vickerman, currently an independent Non-Executive Director, will become interim Non-Executive Chairman before the Board funds a permanent Non-Executive Chairman;
o Additionally, the Board is planning to add fourth independent Non-Executive Director taking the total number of Board members to seven (three executive and four independent non-executive including the proposed Non-Executive Chairman).
o The proposal comes in response to the latest notification submitted by major shareholders including Renova Asset Holding (14.8%), Sothic Capital European Opportunities Master Fund (10.6%) and M&G Debt Opportunities Fund II (5.2%) suggesting to vote down Peter Hambro and three Non-Executive Directors if they stand for re-election at the AGM meeting.
o The group of shareholders proposed to replace voted down members of the Board with four appointees including Bruce Buck and Vladislav Egorov (both proposed by Renova Group) as well as Ian Ashby and Garrett Soden (appointees of Sothic and M&G).
o The AGM is scheduled for 20 Jun/17.
Serabi Gold (LON:SRB) 4.8 pence, Mkt Cap £33.2m – Q1 gold production on track to meet 2017 guidance
• Serabi Gold reports that it produced 9,861 oz of gold at a cash cost of US$800/oz (AISC US$1,043/oz) during the three months to 31st March 2017. This keeps the operation on track to meet its 2017 gold production target of approximately 40,000 ounces in 2017 though minor improvements will be necessary to achieve the AISC target of US$950-975/oz for the year.
• The company comments that the relative strength of the Brazilian Real contributed to the costs and that “We estimate that had we experienced the same exchange rate as prevailed in the first quarter of 2016 our AISC for the first quarter of 2017 would have been reduced by approximately US$170 per ounce.”
• As part of the company’s drive to increase production in order to spread costs over a wider production base, CEO, Mike Hodgson, commented that “I am keen to re-start the exploration programmes on both the Sao Chico and Palito orebodies, which were suspended late last year due to the wet season.” Results from the exploration to date have been encouraging with “some excellent new targets identified within 500 metres of the current operation.”
• The expansion of the production base at the Palito mine is continuing with “production now coming from eight veins from the 25 included in the geological resource.” The main ramp at Palito has now reached the -50m level enabling development to start on the G3 Vein.
• At Sao Chico, mine development is well advanced on 5 separate levels with “development well ahead of production.”
Conclusion: Serabi Gold is diversifying and expanding its production base at Palito and Sao Chico which should help to contain costs despite local currency strength. The diversity of sources will, however require close mining supervision to ensure that the benefits of increased production are not watered down through mining dilution.
West African Minerals (LON:WAFM) 3.5p, Mkt cap £13.3m – Scoping study further thoughts
AVOID
• West African Minerals published the results of a scoping study on Friday which raised some eyebrows.
• We highlight and list a number of issues below which we feel investors should be aware of:
o $112/t price used for iron ore concentrates – this is well over the current price and way beyond any premium we would expect in our view. Our view is that a long term of $65/t is more realistic for 62% iron ore with a smaller premium for new material to the market. The consultants have used a price of $94/t and then added a $19/t premium to this to achieve the $112/t.
o Spot iron ore price is around $60/t: we are surprised not to see a valuation based on the spot price or something close to it.
o The consultants long-term price of $94/t is calculated using a five year historic price which they reckon is a "through the cycle" price (as captured by the 5-year average which includes periods of both strong and weak market conditions). Given that this includes some particularly unusually high iron ore prices we see the use of this average as aggressive and not at all conservative as we would normally expect within this sort of study.
o Bank finance: We believe economic studies should normally be determined on scenarios which are reasonably close to numbers which banks are likely to accept for project financing for capital costs of this sort of scale. We do not know of any banks which would financing a project of this scale in Cameroon based on these price projections.
o Bank pricing: We understand the banks may be prepared to use US$50/t on a longer term basis as a financing assumption but that because the market is experiencing further short term weakness they are looking for projects which are sustainable and also able to repay capital at slightly lower long-term price assumptions. Wood Mackenzie are forecasting US$60/t longer term
o Premium: The company’s consultants then appear to justify a whopping US$19/t premium over the standard 62% iron ore price. This assumes the quality of magnetite produced in Cameroon will be good enough to justify such a premium price from the outset.
o Metal Bulletin currently quote a price for 66% concentrate fe fines at US$66.6/t CFR China landed at Qingdao and $82/t for Pellets at 65% fe content CFR Qingdao. These prices suggest to us that premiums are currently running at around $1/t per percentage point over the standard price for 62% fe content and suggest to us that iron ore premiums have fallen since the consultants determined the price levels for this report, though we feel sure there must have been a moment in time when the consultant’s premiums applied.
o Resource statement: 15.8mt of Oxidised Cap grading 37.3% Fe + 67.1mt of Magnetic Gneiss grading 30.8% Fe. Is this JORC or is it just CIM standard? The statement mentions JORC but this is not mentioned in the table heading or in note 3 to the table where it states this is a CIM (2010) standard. So what happened to the JORC bit?
o Cut-off grade: it’s unusual for no cut-off to be applied to grade for optimisation in our view.
o One of the problems seen in iron ore mines in West Africa is the variability of mining ore grades in the ground which appears to leave piles of lower grade material in favour of higher grade ores. This would appear to reduce the effective scale of resources to be processed and sold.
o Transport: Barging or Pipeline: Trucking, barging and then transhipping is hugely expensive in terms of handling costs and takes the operating cost to well over the current iron ore price. The pipeline idea for a number of reasons. The $298m cost is a non-starter in our view while the idea of carving up Cameroon with a pipeline serving this project is another.
o Discount rate: the consultants have used a 10% discount rate for their valuation. This is way too low for a smallish scale iron ore project in a corrupt West African nation with no real history of generating shareholder returns from mining.
o The Corruption Perceptions Index (2014) by Transparency International ranked Cameroon as the 34th most corrupt country in Africa and 136 out of 175 countries overall.
o Transport: The press release does not give details on the viability of barging or using the slurry pipeline. Barging on African rivers is often subject to seasonal rainfall while the construction of a pipeline to the coast will incur many challenges.
o Energy: the upgrading of iron ore to a premium-quality magnetite requires substantial amounts of energy. We believe there may be surplus gas and gas power generation capacity near the coast powered by offshore oil & gas fields. The project will still need to negotiate offtake terms and connection in a country which is short on infrastructure and long on corruption.
o Costs: US$83.2/t CFR China for barging and US$76.6 if the more expensive pipeline is built. Both these costs are above the current spot price for iron ore though the cost using the pipeline is marginally better than the iron ore price + the assumed $19/t premium. Any slippage in the premium applied due to quality and or impurity issues could also render the pipeline option sub economic on a cash flow basis.
o Scoping study numbers:
NPV US$262-292m based on a 10% discount rate.
IRR 29-37% with 29-46 month payback.
Capex, US$194-298m not including ongoing capital costs.
Production 2.4mtpa premium grade 69% fe concentrate.
Life of Mine 16-17 years.
Strip ratio 1.48.
24 month build and commissioning time.
Risk: history tells of massive risk with regard to other listed iron ore mines in West Africa have gone into liquidation or been subject to fire sale. We are not aware of any other iron ore mines in the region which have been developed since iron ore prices collapsed with even large mining companies preferring to focus their attention elsewhere.
Consultants: the consultants are Royal HaskoningDHV. Their estimated cost scenarios sound reasonable and we reckon their work is well done but we are surprised that they have allowed their work to be presented under the price assumptions above. We suspect this will do little for their credibility in the market.
Conclusion: There is nothing wrong with using a higher iron ore price within a particular scenario but we feel it is inappropriate to show this as the ‘only’ iron ore price scenario presented to non-expert investors through the use of the RNS news system. The use of such an elevated iron ore price suggests to us that the project may not reasonably justify the raising of project, debt or equity financing in the current environment and we feel the major specialist lending banks may not support these price levels for some years to come.
The scoping study numbers ‘just about justify’ development of the Sanaga project on the consultant’s assumptions but are unlikely to support financing or development on lower price scenarios in our view.
If the world changes such that $94/t iron ore looks like a more reasonable long term price then WAFM should offer value as a leveraged investment but investors may also wish to consider buying Rio Tinto, BHP Billiton and Vale for their portfolios as well.
*An SP Angel analyst has previously visited Cameroon with management.