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Rio Tinto (LON:RIO) – 3540p, Mkt Cap £65.1bn – SEC goes after Rio Tinto in relation to Riversdale
Phoenix Global Mining* (LON:PGM) 4.1p, Mkt Cap £9.5m – Cobalt-copper exploration licenses secured
Stratex International* (LON:STI) 1.1p, Mkt cap £5.3m – Stratex board taking desperate steps in attempt to stave off sacking over Crusader merger proposal
Crusader (ASX:CAS) A$0.09, Mkt cap A$27.1m
Nickel price rebound gathers on electric car boom
• Nickel broke above $12,000 a tonne on Tuesday on outlook for deepening deficits, falling warehouse stocks and ultimately rising prices
• The boom in battery powered vehicle production is predicted to aggravate structural shortage as demand rises to 220,000t in 2025
Philippines - Open pit mining to restart in the Philippines
• Recommendations have been presented to lift the ban on open pit mining across the Philippines, receiving strong support from both the newly elected environmental minister, Roy Cimatu, and President Rodrigo Duterte.
• Despite closing the mines on the grounds of environmental degradation spoiling economic potential, the statement following the Mining Industry Coordinating Council recommending lifting the ban on open pit mining “provided that mining laws, rules and regulations are strictly enforced”.
• The biggest winner from the move would be the development of the $5.9 billion Tampakan copper-gold project in South Cotabato province on the island of Mindanao, which lost its operator Glencore Plc in 2015 to the mining ban.
Graphene – tattoo to monitor health
• The University of Texas has developed a wearable tattoo made out of graphene which is able to monitor your health.
• Graphene is more conductive than gold and can be made much thinner allowing it to wrinkle naturally with skin.
• Its yet another application for a material which seems to add meaningfully in so many applications.
• The challenge for manufacturers is to produce sufficient graphene to meet growing demand.
• Graphene is currently produced from large flake graphite and while some graphene may be produced by exfoliation of graphite material we remain to be convinced that this process will be the way forward for mass graphene manufacture due to cost and quality issues.
Dow Jones Industrials +0.72% at 23,442
Nikkei 225 -0.45% at 21,708
HK Hang Seng +0.41% at 28,271
Shanghai Composite +0.24% at 3,396
FTSE 350 Mining +0.72% at 17,695
AIM Basic Resources +0.13% at 2,551
Economics
US – Private sector growth accelerated to nine month high in October on the back of robust services sector performance and a pick up in activity in the manufacturing segment post hurricane related disruptions.
• Employment recorded another month of solid gains on the back of the strongest increase in payroll numbers at manufacturing companies since Jun/15.
• On a less positive front, input inflation moderated from September’s three-year peak which contributed to the weakest inflation in final goods prices in the last six months.
• PMI Manufacturing: 54.5 v 53.1 in September and 53.4 forecast.
• PMI Services: 55.9 v 55.3 in September and 55.2 forecast.
China – The Party unveiled the composition of the top leadership group called Standing Committee today.
• Both General Secretary Xi jinping and Premier Li Keqiang remain on the Committee with five new men joining nation’s top rank.
• Commentators highlight new composition of the Committee shows little signs of clear successor to the current General Secretary offering greater mandate to Xi to continue with his policies.
Germany – Business confidence continued strong in October hitting a record high pointing to a strong growth momentum remaining in place in the largest European economy, according to the latest numbers for the Ifo Institute.
• The central bank forecasts the economy to see robust upswing in economic growth continuing led by strong demand for industrial goods and strong consumer spending supported by strengthening labour market.
• Ifo Expectations: 109.1 v 107.5 in Sep and 107.3 forecast.
• Ifo Current Assessment: 124.8 v 123.7 in Sep and 123.5 forecast.
UK – The pound climbs following the release of broadly in line economic growth numbers for Q3.
• Both services and industrial production sectors climbed in Q3 while construction contracted for a second consecutive quarter.
• Preliminary numbers are based on 44% of the data that is ultimately incorporated in final estimates.
• GDP (%qoq/yoy): 0.4/1.5 in Q3/17 v 0.3/1.5 in Q2 and 0.3/1.5 forecast.
Australia – Weaker than expected inflation in Q3/17 saw the currency falling to the lowest level since mid-July.
• With two meetings left this year, expectations are for the RBA to leave the benchmark rate at 1.5%, unchanged from mide-16.
• Turning of the monetary policy trajectory to tightening in major economies (US, Eurozone and China) may see a dampening effect on growth momentum in Australia next year which further adds support to the RBA to leave low rates in place, Bloomberg Intelligence reports.
• CPI (%yoy): 1.8 v 1.9 in Q2/17 and 2.0 forecast.
Saudi Arabia – Crown prince Mohammed unveiled plans for development of a more than 25,000km2 city in the NW of the country on banks of Red Sea.
• The project called Neom is expected to cost $500bn funded by the state sovereign wealth fund as well as private investors.
• “Its easy to dream… making it a reality is difficult,” Prince Mohammed said highlighting ambitious scale of the project.
• Plans for a futuristic technology focused city project have been presented during a panel discussion at a conference that intended to represent Saudi Arabia as a target for rather than as a source of investment capital.
• The city is the latest case in a series of ambitious initiatives suggested by an economic plan called Saudi Vision 2030 to diversify the economy away from the resourced focused model.
Currencies
US$1.1766/eur vs 1.1749/eur yesterday. Yen 113.83/$ vs 113.65/$. SAr 13.746/$ vs 13.721/$.
$1.312/gbp vs $1.320/gbp. 0.772/aud vs 0.779/aud. CNY 6.641/$ vs 6.635/$.
Commodity News
Precious metals:
Gold US$1,274/oz vs US$1,280/oz yesterday
• The dollar inched higher amid growing speculations over the next U.S. Federal Reserve chief selection of Stanford University economist John Taylor. U.S. President Donald Trump used a lunching opportunity to assess Senate Republicans opinions of the hawkish favoured candidate Taylor or current Fed Governor Jerome Powell. The market reacted favorably to the news, with Taylor supporting higher interest rates which would boost the dollar, equities and bond yields (rising to their highest in more than five months yesterday). The news also fuels the ongoing possibility of a third interest rate hike at the end of the year.
• Improving market appetite also rose off stronger-than-expected corporate earnings results, driving gold prices toward October lows of US$1,260.16.
Gold ETFs 69.5moz vs US$69.5moz yesterday
Platinum US$918/oz vs US$924/oz yesterday
Palladium US$958/oz vs US$966/oz yesterday
Silver US$16.89/oz vs US$17.07/oz yesterday
Base metals:
Copper US$ 6,992/t vs US$7,082/t yesterday
• Copper price faced resistance against a strengthening dollar index boosted by speculations of a hawkish Fed Reserve chief election John Taylor, who would favour higher interest rates.
• The International Copper Study Group identified diminishing market deficit moving into 2018, with current 151,000 tonnes this year contracting by 45% to 104,000 tonnes.
• A remarkable increase in bullish bets in Chinese copper futures is orchestrated by a single private coal mining industry investor in Shanxi province who are betting on strengthening global copper demand on the back of carbon-reducing technologies.
Aluminium US$ 2,153/t vs US$2,144/t yesterday
• China’s ongoing war on smog is expected to cut 30 percent coal power plant production of aluminium in an effort to promote “blue skies”. Aluminium demand is rapidly matching the electric vehicle growth as automotive manufacturers look to reduce weight in a bid to extend range. The impact of the winter output limitations across the world’s largest producer and exporter of semi-manufactured aluminium products are unclear, with potentially significant disruptions to global supply chains as up to 1 million tonnes of production is at potential risk.
Nickel US$ 11,865/t vs US$11,985/t yesterday
• Global nickel market balance is expected to remain in deficit for the third consecutive year, as demand from the stainless steel industry and nickel-hosting batteries expands. The International Nickel Study Group noted a 5% rise in demand moving into 2018, increasing to 2.259 million tonnes. Despite rising 7.5%, supply still falls behind the forecast demand with a market deficit of 53,000 tonnes next year. INSG identify the rapidly accelerating emerging market for electric vehicle batteries responsible for the tightening global market.
• The removal of a three-year ban on raw material exports in Indonesia has allowed state-controlled PT Aneka Tambang Tbk (Antam) to receive a recommendation for supplementary 1.25 million tonnes of nickel ore exports over the next 12 months, in addition to the awarded 2.7 million tonne allocation from April. Chief Executive Arie Prabowo Ariotedjo reported “demand is good and prices are high”, with the additional ore having already found buyers in China.
Zinc US$ 3,153/t vs US$3,157/t yesterday
Lead US$ 2,459/t vs US$2,499/t yesterday
Tin US$ 19,750/t vs US$19,735/t yesterday
Energy:
Oil US$58.5/bbl vs US$57.4/bbl yesterday
Natural Gas US$2.984/mmbtu vs US$2.990/mmbtu yesterday
Uranium US$20.20/lb vs US$20.15/lb yesterday
Lithium - AVZ Minerals to start drilling world class lithium project in Africa
• Entered into contract to complete initial 20,000m of drilling at Manono Lithium Project in Democratic Republic of Congo – expected to take 3 months to complete
• Initial drill results indicate could be one of largest hard rock surfaces of lithium in the world
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$62.9/t vs US$61.7/t - China’s iron ore imports from North Kora sink after U.N. Sanctions
• Imports of iron ore and lead concentrate plunged to lowest in 6 years after penalties came into force banning Pyongyang from selling iron ore, coal and lead ore abroad
• Iron ore shipments plunged 98% and lead ore 84%
Chinese steel rebar 25mm US$634.1/t vs US$634.1/t
Thermal coal (1st year forward cif ARA) US$85.0/t vs US$82.8/t - Ukraine plans to raise coal imports from US as shortages loom
• Winter coal stocks have dropped to lowest in 3 years after main coal producing regions now controlled by pro – Russian separatist groups had shut down trade with rest of country
• DTEK, largest private power producer said would import 150,000 mt of US thermal coal
Premium hard coking coal Aus fob US$177.9/t vs US$177.9/t
Other:
Tungsten APT European US$280-285/mtu vs US$280-285/mtu last week
Company News
Rio Tinto (LON:RIO) – 3540p, Mkt Cap £65.1bn – SEC goes after Rio Tinto in relation to Riversdale
• Court papers issued by the Southern District of New York court show details of the SEC vs Rio Tinto, its former CEO and CFO.
• The papers concern “a course of deceptive conduct, a fraud, by Rio Tinto” and the rapid and dramatic decline in value of the Riversdale coal business.
• https://www.sec.gov/litigation/complaints/2017/comp-pr2017-196.pdf
• The papers describe much of what we already know about the reasoning for buying the business and the reasons for its sale as an embarrassing failure.
• The SEC suggests that Albanese and Elliott bypassed a number of internal controls to buy the business and that they had been “reckless and profligate” with shareholder capital.
• The papers go on “Defendants engaged in a series of misrepresentations, misleading omissions and deceptive acts to conceal from the market RTCM’s devastating loss in value” and their own terrible decision to acquire RTCM for more than $3bn.
• While we agree the decision to buy RTCM was a bit of a disaster we believe Albanese was under pressure to show he could do a deal which might look better than the Alcan acquisition.
• We recall, at the time, Rio’s business was recovering from the ‘Sub-Prime’ crisis caused by the miss-selling of US mortgages and near collapse of the US and global banking systems.
• Albanese is alleged to have been convinced that Riversdale could produce and ship some 30mtpa of coal by 2020 rising to 45mtpa by 2030 and that much of this would be high-quality coking coal which is now selling for a significantly higher price than thermal coals.
• The plan was to barge the coal down the Zambezi and trans-ship from there which sounds simple but was always going to be fraught with issues.
• The plan failed on two major points:
o First, the coal reserves were not such good quality or as consistent as first thought which makes us question what representations were made by the Riversdale board.
o In fact the whole Moatize coal belt is characterised by difficult and poor quality geology, and low grade coal. Far from being the great repository of coking coal claimed, barely 5% of the coal in resource had coking properties, albeit at high strip ratios, and then the washing yield on that to a saleable (sub10% ash air dried) quality typically ranged around 20-25% - extremely low and sub economic. Even then, for the high selling index, the product was not a particularly good coking coal.
o Second, the proposal to barge quantities of coal down the Zambezi met with a number of fairly obvious objections. The zambezi has never been easily navigable from our simple perspective and we believe there are a number of studies which share this view.
• We are only simple mining analysts at SP Angel but we recall our bemusement at the news of Rio’s purchase of Riversdale and the colossal sum paid for the assets which makes us wonder why Rios never went after the Riversdale board and their consultants in relation to representations made in relation to the sale.
• The implications of this are many and troubling:
o There are issues relating to the extent and quality of the coal with potentially helpful “independent” geologists signing off geological models that, we wonder why others have not questioned the several independent geological experts and their reports. We understand that a number of executives who raised issues may have been ignored and subsequently left Rios and that at least one Sydney based analyst who spotted that the narrative was not accurate, may have been subject to a complaint by Riversdale demanding his retraction or dismissal which is employer to their credit refused to do.
o Riversdale management, board and shareholders nevertheless made off with substantial money – and we wonder why no authority has launched an investigation into what some may conceivably describe as potentially fraudulent actions. Not quite on the scale of Bre-X but certainly worthy of some investigation.
• The extraordinary thing is that the same team have a new coal company based on coking coal assets a long way from the port in Alberta, Canada. Almost unbelievably the company is called, you guessed it “Riversdale Resources” which proves that hubris is alive and well.
• We note that set against the billions being in other parts of the group that the Riversdale deal was a relatively small issue, though it was a massive embarrassment from start to finish.
• While we see the timing of the Riversdale collapse as unfortunate in relation to the bond fund raising mentioned by the SEC we feel this is particularly unfair as the Riversdale writedown was a relatively minor issue when compared with the billions in cash flow at stake in relation to capital investment in other parts of the business and movements in iron ore, copper, aluminum and coking coal prices.
• It is interesting that the SEC, is an organisation with oversight of the Sub-prime and Global Financial crisis as well as the collapse of Lehman Bros, all of which wiped billions off the market capitalisation of Rio Tinto causing it to refinance at the expense of its shareholders. That the SEC is now coming after the company in relation to what we see as a relatively minor issue by comparison is an interesting turn of events.
• We look forward to seeing Rio Tinto’s robust repost to the SEC if it is ever published and if the SEC might also look further into the representations made by Riversdale to Rio Tinto at the time.
Phoenix Global Mining* (LON:PGM) 4.1p, Mkt Cap £9.5m – Cobalt-copper exploration licenses secured
• The Company secured two copper cobalt licenses along the Idaho Cobalt Belt in close proximity to historical operations and current development projects.
• Bighorn license (2.3km2) includes 29 lode unpatented claims and is located 22 miles NW of the local town called Cobalt which is 130m north of the Empire Mine.
• The asset is adjacent to the previously producing Salmon Canyon copper cobalt mine, while Cobalt Solutions, a TSX listed explorer/developer, is currently working on the ICP project in the area with having just completed the FS and targeting production in 2020.
• Redcastle license (2.4km2) consist of 30 lode unpatented claims and is located 11 miles NE of Cobalt.
• The property is located next to the Iron Creek Mine project currently held TSXV listed US Cobalt.
• Both licenses are reported to have good road access and are found on a single NW/SE trending cobalt rich part of the Idaho Copper Belt.
• Licenses are held by the wholly owned subsidiary Borah Resources with the management having set early exploration budgets in 2018 to identify drilling targets.
• “The geological team based at the Empire Mine identified these properties following their previous experience of working on the Cobalt Belt north of the Empire Mine and were aware of highly prospective areas that had not yet been claimed by the Canadian juniors who currently dominate this historic copper-cobalt belt,” the Company commented on the announcement.
Conclusion: Acquisition of licenses secures claims to copper-cobalt properties along the prolific trend of cobalt mineralisation of the Idaho Cobalt Belt and provides exposure to the commodity supplied in the rapidly developing market for electric vehicles’ batteries.
*SP Angel acts as Nomad to Phoenix Global Mining
Stratex International* (LON:STI) 1.1p, Mkt cap £5.3m – Stratex board taking desperate steps in attempt to stave off sacking
Crusader (CAS AU) A$0.09, Mkt cap A$27.1m
(Stratex’s offer: 6.6 new Stratex shares for each Crusader share giving Crusader shareholders 81% of the enlarged company and valuing Crusader at A$0.127/s)
(Thani Stratex merger proposal gives Stratex shareholders 56% of the new group, see Thani Stratex presentation for more details)
• The Rebel leaders/shareholders against Stratex have published details of what looks to us like a better proposal for Stratex Shareholders. See presentation in link below:
• https://newstrat.co.uk/new-presentations - we recommend you click down to the third presentation for the Thani Stratex proposal.
• The Rebels are proposing to merge Stratex in with Thani Stratex in which Stratex already holds a significant stake.
• Merging Thani Stratex with Stratex makes great sense from a shareholder perspective to us as it consolidates the group and gives Stratex shareholders 56% of the enlarged group structure.
• There is no premium to be paid as the proposal is priced at the same valuation at which other major investors put money in earlier this year.
• If anything this now represents a discount as value has been added through work done on the properties though much cash remains within Thani Stratex.
• Crusader shares are currently trading on the ASX at a significant discount to the Stratex offer indicating that Crusader shareholders are desperate to get out of the stock before the deal even goes through or goes sour as looks likely to us.
• The new merger proposal with Thani Stratex is as fair as you are going to get from our perspective and it looks a whole lot better than paying a 63% premium on Crusader shares and suffering 81% dilution for a low grade gold asset in Brazil and an unproven exploration project in a country where Stratex has had no previous infrastructure.
• Better still, the assets in Thani Stratex are developing well and their cash demands should not overstretch Stratex’s cash resources as they stand.
• Thani Stratex also has cash and unlike Crusader does not need loans from Stratex to enable its auditors to sign off on the company as a going concern.
• Crusader appears to be on the verge of insolvency with its auditors only able to sign off on the company as a going concern with the support of loans from Stratex or some other lender/funder.
• Thani Stratex has a small but good quality management team of well-respected directors including Graham Brown, a former group head of Exploration at Anglo American.
• The Thani Stratex assets look promising and offer good value from our perspective as well as a route to future mine development.
• Curiously we are told that no director of Stratex has bothered to visit the assets despite Stratex’s 30% stake in the business.
• Thani Stratex’s Egypt and Djibouti projects have been more recently visited by executives from mid-tier and major companies who continue to support the projects due to their future potential.
• These are seen as relatively low risk and low capex assets include former mines with the added potential for tailings retreatment which can be simply processed using modular plant
• The board of Stratex are apparently offering to pay the proxy fees for shareholders offering to vote against Resolutions proposed by the rebel shareholders according to a posting on the advfn bulletin board.
• We repeat, “for shareholders voting against the resolutions”. No one we know can ever remember this sort of targeted inducement in relation to a listed company and we question the appropriateness of this sort of behaviour.
• At the very least this must surely contravenes some form of corporate governance practice?
Conclusion: We conclude that Thani Stratex are offering a fairer, better priced and more appropriate deal for shareholders which should lead to the lower risk generation of shareholder value with lesser dilution and potentially greater upside potential.
The Stratex General Meeting will be held at the offices Grant Thornton UK LLP, 30 Finsbury Square, London EC2P 2YU at 9.30 a.m. on 1 November 2017.
Latest time and date for receipt of Forms of Proxy for the General Meeting is 9.30 a.m. on 30 October 2017
*SP Angel are completely independent with regard to Stratex, Thani Stratex, Crusader Resource or any of their directors, staff and advisors.