Commodities
Diamonds and precious stones
Anyone that has ever been on a cruise ship around the Caribbean has probably heard the Tanzanite investment case, only found in Tanzania, limited supply, prices going to the moon, blah blah blah.
Well, maybe, just maybe, those stones may just actually make you some money.
As part of his Governments attempts to scare off all foreign investors for the next 20 years, President Magufuli has ordered “walls” to be built around the mines with checkpoints and security cameras and that the Central Bank start buying the gemstone to build foreign reserves. Whilst one should always be wary of any financial calculation involving this government, the claim that the country only receives 5% of the value of the global trade probably has some merit to it, although unless the country starts to beneficiate, manufacture and then establish a retail chain at various ports, I doubt overall revenues will increase that significantly, unless of course, you are the chap at the check point…
As the Carat roadshow continues lots of talk on the outlook for production beyond 2019. It is worth reiterating that given our global production models, we are not expecting to see a significant decline in global supplies, although the number of exceptionally large, high value diamonds being recovered continues to decline vs. what we saw in 2015 and early 2016.
Precious metals
After a few days of Fed induced weakness, Rocket Man reaffirmed his instability with a threat to detonate an H-Bomb in the Pacific in a direct response to the recent UN sanctions and the latest rhetoric from the world’s most prominent Tweeter giving gold a lift back around the £1,300/oz level.
Talking of the Fed, from our Chief Economist, Simon French:
“As expected the US Federal Reserve announced the start of Quantitative Tapering (QT) – at an initial run-rate of $10bn/month from October. The major take away from the minutes and projection materials was increased confidence by FOMC that the current bout of below-target PCE Inflation is transitory – and there is sufficient economic momentum to return inflation to target. Specifically alongside QT the FOMC’s median estimate is for four additional 25bp increases in US interest rates by the end of 2018.
We are less convinced amid on-going deflationary bias in the global economy (from which the US economy is not immune) and uncertainty over US fiscal policy. As a result we expect just two 25bp increases by December 2018.
But then - When everyone says “3 hikes in 2018”; “3 in 2019”. Remember there is a Fed Governor who reckons zero – and zero.
Base metals
The theme of the day has certainly put the base metal space into reverse gear with the worst affected being nickel, losing c7% over the last two days. Whilst we have discussed a pullback for the last few weeks, partially driven by fears of a significant supply-side response to ever higher prices, there is now real-world evidence to back up those fears.
In a sign that copper supply ahead of Q4 will not be an issue, Chinese smelters overnight increased their treatment and refining charges by as much as 10%. Treatment and refining charges are paid by mining companies to turn concentrate into metal and provide a clear picture of the current supply situation. Rising charges imply a well-supplied market whereas in times of need, charges are dropped to attract increasing volumes.
The 10-member China Smelters Purchase Team (CSPT) set the minimum level for treatment fees at $95 per tonne and increased refining charges to 9.5c/lb., up from $86 in Q3 and noticeably more than the $75/t in Q2 when the latest run up in pricing began.
I have to be clear, concerns of a massively oversupplied market are wide of the mark and these charges, roughly back at the three year average of c$100/t, indicate a pretty well balanced market at this time. This is clearly against the bullish thesis that drove prices to within touching distance of $7,000/t and more than likely will see the red metal continue to drift lower back towards some technical support around the $6,000/t level.
Bulk commodities
The S&P downgrade has really put the icing on a bad week for anyone long the bulks or even the miners significantly exposed.
The benchmark 62% is now back at $70.04/t after falling ~14% so far in September, we had expected to see prices trend back towards the $60-65/t range, but to be fair, with prices still +27% over the last quarter, there is no need to press the panic button yet even if we are now 10% for the year as a whole.
Noted before and more frequently now, it seems, is the performance of higher grade materials, vs. the benchmark (down 10% in 2017, higher grade materials are +25%).
I remain of the view that the flight to quality on iron ore will remain a key support for higher grade ore vs. the lower grade stockpiles currently blocking the sun at various docksides in China. Tighter pollution controls in China and the need for more efficient production, the theme of robust demand for higher quality feed is one that is likely to remain for a significant period of time.
This is not a short term theme and will only become more relevant as the nights draw in…
Company announcements/news/meetings:
Daily company commentary is now covered in our Boom Ore Bust publication (sent by Jamie Campbell). I will reiterate some of interesting updates or comments that I feel may have been missed/underappreciated.
Naturally, if you wish to discuss any of these names in more detail, do get in touch.
Acacia – Buzwagi processing change confirmed (LON:ACA, Mkt cap: $995m)
Company today confirms the positive results from the processing trial designed to switch production to solely gold doré from a mix of doré and a gold/copper concentrate (with over 90% of the value of the concentrate being gold). Historically concentrate has accounted for ~60% of gold production with 2017 averaging 65% of total gold production meaning since the ban, only 35% of its gold production has been sold despite incurring 100% of the cost of production. As a result of this change, the company now believes gold recoveries can increase to 85% through the additional use of reagents in the leaching circuit at limited additional operating costs, albeit without the revenue from the copper content. Mine life will now extend to gold doré through to the end of its life in 2020 as opposed to the original intention to end concentrate production in Q2 2018 – albeit that could have been extended given prevailing commodity prices.
The additional 8-10koz /month will, we believe provide some much needed support today, albeit with no clear guidance on costs the commentary confirming a switch to positive cash flow is enough for now. Thinking further along, we do wonder how the government will react to a company, who they clearly do not share the best of relationships with, undertaking a workaround to the concentrate ban to get the operation back into production, but that is for another day.
Centamin – Roadshow with management – Positive times ahead (LON:CEY, Mkt cap: $2.1bn)
We were fortunate enough to spend some time with management yesterday. A full write up is available upon request.
Conclusion: Weakness in recent weeks has been concerning many and with the need to print two record months back to back has allowed the bears to take control.
I am confident the company will produce what it needs and given the gold price remains above internal budgets of $1,250/oz, Centamin will also be producing significantly more cash than originally planned. Additional catalysts relating to the planned reserves report, we believe offer further upside support.
Time to take another look.
Petra Diamonds – FY2017 results: A tough year, but good times ahead? (LON:PDL, Mkt cap: $607m)
Petra Diamonds announced full year results to 30 June 2017 on 18 September 2017. Revenue of $477m was preannounced; EBITDA declined 4% to $157.2 million. We forecasted EBITDA of $157.4 million vs. consensus of $183 million. As a result of the previous impacts, plus additional costs incurred from the redemption of the bond notes in April, PBT fell 38% to $46.5 million vs. our forecasted $50.4 whilst net profit fell 70% to $20.7 million vs. our forecasted $22.7 million; consensus was $105 million and $43 million respectively. EPS of 3.5c came close to our 4c target, albeit consensus was 9c. Net Debt of c$620 million (incl BEE) was also close to our assumed $630 million level with positive cash generation expected in H2 FY2018.
From an operational perspective, Petra Diamonds released its FY2017 Trading update for the year to 30 June 2017 on 24 July and we look to the Q1 update in October for more information on the progression at Cullinan and Finsch. For FY2017: Total production increased 8% to 4Mcts, but missed original guidance of 4.4-4.6Mcts, impacted by lower production rates. Total capital expenditure for the year, ex capitalised borrowing costs amounted to $254.6 million in line with our forecasts. Gross Diamond Resources (inclusive of Reserves) fell by 2% to 304.9Mcts (30 June 2016: 312.2Mcts) due to depletion and a re-estimation of resources at Finsch, Koffiefontein and Williamson, positively reserves increased 7% to 51.1Mcts due to additional tonnages from Cullinan and Finsch – Nothing particularly significant here.
No change to our Hold recommendation, we moved to a hold some time ago now (with the shares around 150p) and Kieron’s approach to valuing Petra Diamonds utilises the same methodology as our gold equity valuations by using a blended average of NAV per share, earnings per share and cash flow per share. Our target price remains unchanged at 141p. The rationale for this change is to reflect, what we believe will be a step change in Petra’s operational profile from the cash consumptive, capital intensive operator, into a relatively capital light, cash generative operator of diamond production assets.
Typically we would be more positive at this time but recent events in Tanzania and the subsequent notice of further covenant concerns means, in our view, whilst Petra looks good value, significant risks remain until the Williamson situation is resolved.
Petra Diamonds – Further industrial action – not a surprise really (LON:PDL, Mkt cap: $482m)
Yesterday afternoon Petra Diamonds Limited confirmed it has received a notice from the National Union of Mineworkers ("NUM") indicating the intention to strike at the Koffiefontein mine in South Africa from Friday 22 September 2017. This coincides with the on-going disruption at Finsch and Kimberley. Whilst these strikes have been few and far between for Petra (the last was five years ago at Cullinan), they are sadly more frequent nationally around wage negotiation time than many of us are aware of. .Operationally, underground operations are limited but plant treatment is continuing at near normal capacity treating surface material and available stockpiles.
Whilst there will undoubtedly be some impact, depending on the extent of disruption, at this time, we are not panicking and in fact given the positive reports emanating from Tanzania, are struggling to see much more downside at these levels. Petra is indeed far more interesting now, than it has been for many months and certainly worth starting a discussion.
That's enough from me today
Stay strong
Kieron