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Today's Market View - Acacia Mining, Central Asia Metals Ltd, Golden Star Resources, Zanaga Iron Ore Company

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Acacia Mining (LON:ACA) – Metallurgical innovations at Buzwagi protecting jobs

Central Asia Metals (LON:CAML) SUSPENDED – Acquisition of Lynx Resources for $402.5m

Golden Star Resources (TSE:GSC) – Drilling confirms northward extension of West Reef at Prestea

Zanaga Iron Ore (LON:ZIOC) – Interim results give interesting update on small scale pellet potential in the RoC

 

Miners are off this morning amid weaker base metals and bulk commodities prices with the exception of Rio Tinto which is only slightly lower thanks to the provided support from the earlier announced share $2.5bn share buyback.

• Gold is steady following a sell off over the last two days on the back of hawkish Fed comments.

• The US$ is down today set to come back to its pre-Fed announcement levels.

• A decline in base metals’ complex on the back of escalated rhetoric between the US and North Korea as well as a Chinese rating downgrade may the LME index undoing its earlier gains this week and posting a third weekly decline.

• Iron ore futures together with steel prices continued to slide extending losses to seven of the last eight days now on the back of oversupply concerns and lower demand.

• Demand concerns have been further revived on speculations that local governments are checking compliance with capacity cuts at local steel mills.

 

Iron Ore – benchmark prices for 62.5% iron ore continue to fall as Chinese port stocks build and market moves to higher-quality low phos ores

• The market for iron ore is rapidly breaking into two due to China’s drive to ramp up production while creating less pollution at its steel making blast furnaces

• The premium for Direct Reduction pellets is running at over $50/t depending on grade

• Typical magnetite concentrates and blast furnace pellets are around $90/t for Fe 67% with $69.5-70/t running at >$100/t

• Zanaga expects substantial iron ore production expansions to come into the market in the second half to impact benchmark iron ore prices but does not expect a significant contraction of the attractive price premiums being achieved by high quality products.

 

Dresden Mining Conference – From Mine to Market - Dresden on Thursday 28th September

• The FAME Project, GKZ (Geokompetenzzentrum) and the Minor Metals Trade Association (MMTA). are sponsoring a mining conference in in Dresden to be attended by a range of European industrialists.

• Speeches range from minor metals to smelters and Europe’s approach to mining, metallurgy and downstream integration.

• SP Angel’s John Meyer, will delivering a key note speech on “Minor metals in mining and markets – the future has just begun”

Rocket Lab plans weekly rocket launches into space

• Rocket Lab, a New Zealand company is planning weekly rocket launches using a low cost ‘disruptor’ rocket for launching relatively small satellites into space.

• The company’s Elevation rocket reached space on its last and is targeted to cost $5m per launch.

 

Nambia – President Trump confuses followers with new nation of Nambia

• "Nambia's health system is increasingly self-sufficient," said US President Donald Trump at a lunch with African leaders in New York on Wednesday, reeling off a list of their nations' achievements.

• "I have so many friends going to your countries trying to get rich. I congratulate you, they're spending a lot of money," Mr Trump said.

• Either Trump has decided to merge Namibia and Zambia without telling them or it is possible that he may be referring to the nation represented in Eddy Murphy’s film Trading Places.

 

London Supermarket trials biometric payment system

Costco are trialling a new system which identifies the unique vein pattern in your fingertip to pay for goods.

 

Police officer – shoots himself in the foot – a role normally reserved for politicians

 

Dow Jones Industrials  -0.24% at   22,359

Nikkei 225   -0.25% at   20,296

HK Hang Seng   -0.82% at   27,881

Shanghai Composite    -0.16% at    3,353

FTSE 350 Mining   -1.33% at   16,384

AIM Basic Resources   -0.91% at    2,467

 

Economics

US – Trump ordered new sanctions on individuals, companies and banks doing business with North Korea on Thursday.

• The executive order allows the US Treasury Department to suspend operations with companies from the US financial system that do business with North Korea.

• China appears to be the largest trading partner of the pariah state.

 

China – S&P cut Chinese sovereign credit rating one notch from AA- to A+ on the back of strong credit growth which “diminished financial stability”.

• The is the second downgrade among major credit rating agencies following the Moody’s decision to take A1 (equivalent of A+ at S&P).

• Deleveraging is expected to take much longer than previously forecast while “credit growth in the next two to three years will remain at levels that will increase financial risks gradually”.

• The Finance Ministry rebuffed S&P comments saying the agency ignored the nation’s sound economic fundamentals and that authorities are able to maintain financial stability.

• Foreign investors’ ownership of Chinese sovereign debt remains low amounting to only 4% of the outstanding total at the end of August; although the announcement comes ahead of the $2bn tender of US$-denominated bonds to foreign investors due in coming weeks.

 

Eurozone – The region recorded strong growth momentum in September led by robust PMI numbers in France and German.

• Growth accelerated in both services and manufacturing sectors with new orders showing the largest monthly increase since April 2011.

• Employment climbed in both categories as well while price pressures intensified for a second successive month reaching the highest rates since Aril.

• “The survey data point to 0.7% GDP growth for the third quarter (v 0.6%qoq in Q2/17) (as) manufacturing…remains a major driver of the current upturn, export sales playing an important role in pushing order books higher and encouraging further investment in capacity expansion,” Markit wrote.

• “The stronger euro was cited as a concern among manufacturers, but as yet appears to have had only a modest impact on exports.”

• The euro was up 0.30% against the US$ on course to recover most of Wednesday losses when the Fed announced that it will start reducing its balance sheet in October.

• Markit Manufacturing PMI (Preliminary): 58.2 v 57.4 in August and 57.2 forecast.

• Markit Services PMI (Preliminary): 55.6 v 54.7 in August and 54.8 forecast.

 

UK – Theresa May is set to give her Brexit speech in Florence today amid little progress in negotiations with the bill of leaving the EU and the status of EU citizens being fiercely debated points.

 

Currencies

US$1.2001/eur vs 1.1909/eur yesterday.   Yen 111.98/$ vs 112.53/$.   SAr 13.193/$ vs 13.357/$.   $1.358/gbp vs $1.350/gbp.     

0.795/aud vs 0.797/aud.   CNY 6.593/$ vs 6.594/$.

 

Commodity News

Precious metals:

Gold US$1,297/oz vs US$1,296/oz yesterday

• Gold show small rebound follow the latest sanction announcements and an unprecedented personal rebuttal from Kim Jong-Un.

• U.S. President Donal Trump has signed new orders to target firms and financial institutions conducting business with North Korea. Trump measures single out textiles, fishing, information technology and manufacturing industries to ‘cut off sources of revenue that fund North Korea’s efforts to develop the deadliest weapons known to humankind’.

• Trump’s statement at the UN rattled the supreme leader, who interpreted the comments as ‘the most ferocious declaration of war in history’, with North Korea considering the ‘highest level of hard-line countermeasure’.

• The latest in ever increasing rhetoric over recent months was met by market movement to the safe-haven asset.

   Gold ETFs 69.0moz vs US$68.8moz yesterday

Platinum US$944/oz vs US$941/oz yesterday

Palladium US$917/oz vs US$912/oz yesterday

Silver US$17.01/oz vs US$16.99/oz yesterday

           

Base metals:   

• Metal prices tumbled following a combination of mounting geopolitical strains, anticipated U.S. interest rate hikes and Chinese debt uncertainties.

• Despite the recent strong performance on the back of robust Chinese demand and environmental-influenced supply restrictions, metals across London and Shanghai fell between 1-4.5%. In London, lead fell 4% while the worse performing metal in Shanghai was nickel.

• Yesterday, S&P Global Ratings downgraded China’s long-term sovereign credit rating. The cut from AA- to A+ follows warnings by the International Monetary Fund in August of a dangerous debt trajectory, raising considerable ‘economic and financial risks’.

Copper US$ 6,429/t vs US$6,463/t yesterday

Aluminium US$ 2,133/t vs US$2,171/t yesterday

Nickel US$ 10,615/t vs US$11,060/t yesterday

Zinc US$ 3,037/t vs US$3,099/t yesterday - Trevali Mining Corp which recently bought Rosh Pinar, Namibia and Perkoa in Burkina Faso reports the smooth integration of the businesses

• The acquisitions add to the company’s Canadian and Peruvian mines to position Trevali as an zinc intermediate producer with a strong base to build from

• The integration is expected to complete by year end, to increase throughput, lower costs.  Most notably changes to the flotation plants are expected to lead to recovery and concentrate grade increases.

Lead US$ 2,450/t vs US$2,464/t yesterday

Tin US$ 20,515/t vs US$20,550/t yesterday

           

Energy:           

Oil US$56.4/bbl vs US$56.1/bbl yesterday

• Oil prices remain flat ahead of today’s OPEC panel discussion to an extension of last year’s oil supply cut deal. Extending the pact beyond March 2018 aims to limit output by 1.2 million barrels per day to help clear the global oil supply glut and give stability to prices.

Natural Gas US$2.957/mmbtu vs US$3.079/mmbtu yesterday

Uranium US$20.25/lb vs US$20.30/lb yesterday - Enertopia says round two of Clayton Valley lithium processing underway

• Enertopia’s lithium project in Nevada is reported to be showing remarkably high lithium recovery numbers

• The project is targeting recovery rates >80% and minimum purity of 99.5% for battery grade product

• If technique proved economically viable, the project could be fast tracked to production in months rather than the years

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$62.9/t vs US$66.7/t

Chinese steel rebar 25mm US$637.5/t vs US$647.2/t

• Chinese domestic stainless-steel prices have fallen around 7.6% in the since the beginning of September on increased delivery and softening demand. Tsingshan Holding Group, who operate a recently opened 1 million-tpy stainless-steel slab mill in Indonesia, is expected to increase product to China’s domestic market.

• Strengthening of Chinese environmental laws has lead thousands of small factories across the country to jostle for capacity on heavily congested rail networks. In an aim to diminish air pollution, the shelving of diesel trucks will create additional steel demand as expansions to the countries rail networks will be essential.

Thermal coal (1st year forward cif ARA) US$81.4/t vs US$83.2/t - US Coal output continues to slip

• US coal production slipped for the fourth consecutive week but at 16.5 million still higher than same week of 2016

• Coal has benefited from a rebound in exports as well as a slight reduction in natural gas output

Premium hard coking coal Aus fob US$203.0/t vs US$205.6/t

 

Other:  

Tungsten APT European US$310-335/mtu vs US$310-335/mtu

Graphite:

• Rapidly tightening supply and rising graphite prices are creating sourcing issues for steelmakers; where electrodes are necessary to melt scrap in electric arc furnaces.

• Prices have rocketed nine-fold on environmental restrictions. This shortage of electrode production is leaving major Asian producers unable to handle orders due to the tight supply, leaving ‘a year-long waiting period for electrodes from manufactures’ according to CRU’s Brooks.

 

Company News

Acacia Mining (LON:ACA) 184 pence, Mkt Cap £756m – Metallurgical innovations at Buzwagi protecting jobs

• Acacia Mining reports that trials of additional reagents in the leaching circuit at its Buzwagi mine in Tanzania have delivered gold recovery rates of around 85% opening the way for the mine to increase its production of saleable gold dore.

• Prior to the Tanzanian Government’s imposition of a moratorium on sales of gold concentrate in March 2017, Buzwagi produced around 65% of its gold in the form of a copper/gold concentrate with only 35% as dore.

• As a result of the changes introduced “the mine has been unable to export and sell its concentrate, and as such has only been selling approximately 35% of its gold production, whilst incurring 100% of the cost of production”.

• The capacity to increase production of dore “will result in Buzwagi being able to sell an additional 8,000-10,000 ounces per month for the remainder of the year” and the mine “will solely produce doré from now until the end of its life in 2020”.

• This is expected to “more than double” Buzwagi’s revenue for the remainder of the year and the company believes “that the changes will move the mine from a monthly cashflow negative position to a monthly cashflow positive position, strengthening Acacia’s balance sheet and helping to protect thousands of direct and indirect jobs that the Company supports.”

Conclusion: The increased leaching capacity, albeit at “limited additional operating costs” offers Buzwagi the opportunity to ameliorate the impact of the concentrate export ban, repair its balance sheet, restore the payment of royalties and other local charges, and help preserve jobs.

 

Central Asia Metals (LON:CAML) SUSP – Acquisition of Lynx Resources for $402.5m

• Central Asia Metals has agreed, conditionally, to purchase Lynx Resources, the operator of the SASA lead/zinc mine in Macedonia for $402.5m.

• The mine, which is reported to have produced 22,515 tonnes of zinc and 28,955 tonnes of lead in concentrates during 2016 “is a low cost operation with strong operating track record and a reserve base supporting production until at least 2032”.

• The transaction which will be classed as a reverse takeover under AIM rules and hence subject to shareholder approval at a meeting scheduled for 11th October, will be financed by a combination of equity, debt and a deferred consideration as follows:

o Equity financing:

 $153.5 million in CAML ordinary shares via an Accelerated Book Build ("ABB") expected to be launched shortly

 $50 million in CAML ordinary shares to Orion via an equity subscription   

o Debt financing:

 $120 million senior debt facility with Traxys (4.75% + LIBOR, 5 year term)

 Roll over of estimated $67 million of existing Lynx net debt (5% + LIBOR, 5 years remaining)

o Deferred Consideration $12m

• The SASA underground mine is located approximately 150km east of Skopje and has been mined for more than 50 years following its discovery during the 1950s. The cash costs (C1) of production for 2017 are estimated at US$0.39/lb of zinc and US$0.29/lb of lead placing the operation “at the lower end of the second quartile of the zinc industry cost curve and in the lowest quartile of the lead industry cost curve”.

• Published resource estimates for the mine show an overall indicated and inferred resource of 23.37mt (13.3mt are indicated) at an average grade of 4.14% lead, 2.81% zinc  and 20.3g/t silver. The recent production history  indicates a mining rate of approximately 800,000tpa.

• The orebody is described as “a shallow dipping, stacked, variable thickness, lead-zinc-silver lens system” currently mined by sub-level caving though “the cut and fill method … should be reassessed to determine whether this is a more suitable method from a dilution, recovery, safety, production rate and economic perspective.”

• Based upon the existing ore reserve, and excluding any inferred resources, the SASA mine is reported to have an NPV(10%) of US$413m.

• Historical accounts indicate that in 2015, SASA generated a profit of US$40.2m so CAML is buying the asset on a multiple of 10x historic earnings.

• CAML also report interim earnings for the six months to 30th June of US$15m (13.2cents/share) based on the sale of 6870 tonnes of copper.

Conclusion: CAML’s purchase of Lynx provides it with an established, long life, lead/zinc/silver mine at a price of 10x historic earnings and close to an assessed NPV10% valuation estimate. Indications that there may be scope to improve mining practices through the implementation of a safer, less dilutive mining method may provide scope for an incoming management to introduce operational improvements and efficiencies.

 

Golden Star Resources (TSE:GSC) C$0.89, Mkt Cap C$335m – Drilling confirms northward extension of West Reef at Prestea

• Golden Star Resources reports that infill and extension drilling has confirmed that the West Reef extends towards the north beyond the currently defined mineral reserve providing potential for additional reserve ounces of gold and the possibility of increased production from the Prestea underground mine.

• The drilling reported today comprises results from 4 holes, of the five drilled, to investigate the extension of the West Reef and a further 7 infill holes which “confirm the previously modelled high grade nature, simple geometry, strong continuity of gold mineralisation and thickness of the West Reef ore body (averaging 1.1 metres.)”

• The company reports that drilling is expected to accelerate during the rest of 2017 and into 2018 with the deployment of a second underground exploration drill rig.

• Highlighted results from the extension drilling include:

o A 0.9m wide intersection, interpreted as 0.5m true width, at an average grade of 67.2g/t gold from a depth of 182.3m in hole WR17-24-274S19; and

o A 1.3m wide intersection, (0.8m true width), at an average grade of 11.6g/t gold from a depth of 192.4m in hole WR17-20-274S20; and

o A 1.9m wide intersection, (1.5m true width), at an average grade of 13.7g/t gold from a depth of 159.3m in hole WR17-22-274S22; and

o A 0.6m wide intersection, (0.5m true width), at an average grade of 132.4/t gold from a depth of 174.1m in hole WR17-25-274S19.

• The relatively narrow intersections seem consistent with the comment that the ”average true in situ thickness of the vein is approximately 1.8 m, ranging from 0.8 to 2.8 m” which was reported in the Technical Report on the Prestea Underground Gold Project authored by  the consultants, SRK, in November 2015. In our opinion, the high grades reported in individual drill hole intersections are likely to be diluted to values closer to the current 14 g/t reserve grade in future reserve/resource estimations  after dilution and minimum mining width criteria have been applied.

• Higher grade results from the infill drilling comprising 7 holes totalling 947m of drilling include:

o 0.5m (0.5m true width) at an average grade of 87.6 g/t gold from a depth of 141.1m in hole WR17-24-274S16; and

o 1.6m (1.5m true width) at an average grade of 64.5 g/t gold from 144.2m in hole WR17-24-274S17; and

o 1.2m (1.1m true width) at an average grade of 23.7 g/t gold from a depth of 152.7m in hole WR17-24-274S18.

• The company has also confirmed that it expects “to blast the first stoping ore at Prestea Underground before the end of the third quarter of 2017 and remains on track to commence commercial production during the fourth quarter of 2017.”

• Our independent collation of published reserve data, though not purporting to be comprehensive, tends to support the company’s assertion that it believes “that Prestea is one of the highest grade gold development projects in West Africa.”

Conclusion: The successful drilling programme at Prestea has improved the understanding of the West Reef and expanded its known extent towards the north. Commercial production from the Prestea underground mine is expected to start during Q4 2017 and the company is maintaining its 2017 production guidance of 255-280,000 oz of gold production at a cash cost of US$780-860/oz.

 

Zanaga Iron Ore (LON:ZIOC) 4.1 pence, Mkt Cap £11.4m – Interim results give interesting update on small scale pellet potential in the RoC

(Zanaga Iron Ore hold 44.99% of the Zanaga Iron Ore project in joint venture with Glencore)

• Zanaga Iron Ore which has a 50:50 joint venture with Glencore in the Republic of Congo provides an interesting update on its iron ore project.

• Sensibly the team are looking at an early stage pellet opportunity which could start the project with a “small-scale, low capex, low opex project utilising road and potentially rail transportation solutions as well as existing port infrastructure.”

• This sounds like a good way to go given volatility in iron ore price.

• The statement goes on to say:

• “On the supply side, we expect substantial production expansions to enter the market in the second half of the year, with only a small number of these acting as replacement projects for mines entering the final phases of their lives.  It is difficult to forecast the net new tonnage expected to enter the seaborne market in the next few months, but guidance from the major iron ore mining companies indicates that these tonnages will continue to provide net overall increases in global seaborne supply. This should result in a reduction in benchmark iron ore prices, but Zanaga does not expect a significant contraction of the attractive price premiums being achieved by high quality products - the product market on which we are focused.”

• “From a demand perspective, we are pleased to see robust consumption of high quality iron ore products, but are concerned by the continuing build up in Chinese iron ore port stocks which may have a negative effect on iron ore pricing through the end of the year if Chinese steel mill consumption slows..”

• Zanaga had a cash balance of US$4.2m as of 31 August.

• Zanaga’s potential contribution to the Zanaga project through the rest of 2017 is US$0.9m plus 49.99% of all discretionary spending approved jointly with Glencore.

• The company reported an interim loss of US$0.6m vs a loss of US$1.6m yoy with general expenses running at a slightly lower rate than last year.

Conclusion: Zanaga offers leveraged investment potential to future iron ore pellet prices. We look forward to further news on progress towards the construction of the potential early stage pellet opportunity.  We see this as offering a potentially good route to de-risking the project for future larger scale expansion

*A SP Angel Analyst has visited the Zanaga Iron Ore project

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