Commodities
Diamonds and precious stones
I am not sure what happened in Las Vegas, but maybe one or two of the attendees failed to make it out of their hotels/casinos/dance establishments, but attendances were certainly lower than anticipated. Fortunately though, for those there, a decent bit of business could be made although concerns over US retail sales meant that quality was again the buzz word.
Rough prices are holding up well with decent demand at De Beers Sight 5 providing some confidence into the summer months but considerations of a Goods and Services Tax in India being imposed on each level of the supply chain would again hang as a dark cloud over the industry, although to be fair, the GST in gold proved to be much lower than feared.
And for those of you that like big boy’s toys, DB has launched its long awaited diamond exploration and sampling vessel, the SS Nujoma, the largest of its kind in the world.
Precious metals
It has not been a great week in the precious metals space to be honest, but then given the concerns over the anticipated rate rise a retrace of recent performance is understandable.
One area to interest me this week has been the chatter around how the Indian trade and finance ministries are looking to improve transparency within the gold jewellery market, estimated to be worth around $19bn per annum, as a follow on from the demonetisation efforts last year.
Domestic demand slumped fell from c800t to around 600t in 2016, a seven-year low. But recently the government announced a 3% goods and services tax, better than the feared 5% levy whilst also removing more than a dozen domestic levies in the process. Import taxes of 10% are set to be reduced to support a proposal for a new spot gold exchange and a new dedicated bank for the jewellery industry.
In all, Indian demand is expected to increase to around 700t in 2017, with some optimistic forecast of up to 1,000t by 2020.
Bulk commodities
It has been a while since we discussed some of the bulk commodities, frankly because there was little to interest me if I am honest.
But given the move by Nippon Steel & Sumitomo Metal Corp to ditch the process of their secretive quarterly discussions with producers in favour of a price linked to published prices is interesting. Many of you will remember that the original annual contract discussions were scrapped in 2010 in favour of the quarterly pricing process but after seven years, limited price transparency and arguably an increase in volatility. It is worth noting that a settlement price for Q2 could not be reached after prices jumped above $300/t.
In the meantime, coking coal prices are at an 8 month low despite Chinese imports +16.6% year on year through to the end of May.
Another factor to consider is that buyers are also considering diversifying their sources with Mozambique and the US top of the list right now.
Company announcements/news/meetings:
Quite a few of you have been asking questions about the Polyus issuance and the comparison to Polymetal’s valuation. I appreciate the need for brevity here, so to summarise: I believe Polyus is an attractive opportunity for those that can invest into GDR’s with a c5.5% yield to support at the minimum pay out level.
But…
Some of the comments regarding Polymetal (LON:POLY) I have seen are long way off the mark. I understand the need to successfully market a deal but claiming Poly is trading on a DCF multiple of 1.7x in a graphic with a * and then noting it is actually derived from a weighted DCF and an EV/EBITDA multiple is pretty low quality, and this from a Tier 1 Bank… naughty, naughty.
For reference, I have Polymetal trading on 1.1x NPV using a 7% discount rate and $1,200/oz Long term gold…
In conclusion, it’s a bit like choosing between Rolls Royce or a Bentley. Given the choice though, I would probably own both and reduce exposure to the African producers to pay for it.
Gem Diamonds* (LON:GEMD) , (Buy): Large stones coming back
I think it is worth discussing the two large stones announced by Gem on Monday. We have been banging on about the return of large diamond recoveries at Letšeng for some while and it now looks to be finally bearing fruit.
Given the 104.73ct D-colour type IIa and the 151.52ct yellow follow so closely after the 80.58ct and the 98.4ct stones, the latter sadly being cleaved from a much larger stone itself, and the qualities are now again improving, given the influence of the K6 ore and the migration to the northern areas of the main pipe.
Given the company has seen an improvement in quality as well as size fractions, would it be too much to ask for prices to recover from their lows? I think not.
I know many have concerns over the balance sheet, but I believe the corner has been turned and below a 100p, Gem looks like a good trade in the near term.
That's enough from me today
Stay strong
Kieron