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Avesoro Resources (LON:ASO) – New Liberty Q3 performance update
Caledonia Mining (LON:CMCL) – Increased gold production lifts earnings
Scotgold Resources (LON:SGZ) – Scotgold Chairman underwrites 2 for 3 Rights Issue at 25p/s to raise £2.65m in new funds
Canadian investor anger as stock halted on concerns over collapse of announced deal (Bloomberg)
• The collapse of a $750m Canadian mining deal has sparked criticism of Canada’s light-touch regulation.
• “Canada’s investment regulator won’t be reversing the trades on West High Yield (W.H.Y.) Resources Ltd. from Oct. 5, when the Calgary-based penny stock surged almost 1,000 percent on a deal to sell its main assets to an unknown buyer. The announcement “did not contain information which was either misstated or inaccurate,” according to a letter obtained by Bloomberg News that the Investment Industry Regulatory Organization of Canada sent to an investor in the company.” According to Bloomberg.
• “West High Yield had continued to trade on Oct. 5 as more red flags appeared. Its filing stated Gryphon’s legal representative was Baker McKenzie, yet the law firm said later it had no knowledge of the deal. Google searches showed that Gryphon operates from a modest two-story, beige clapboard apartment in Janesville, Wisconsin and that CEO Stephen Cummins had a previous run in with the Colorado Securities Commissioner for operating without a license.” (Bloomberg)
Elliott Management founder Paul Singer warns ‘ingredients for a market crash are all in place’
• Elliott manages some £34bn. The fund is warning clients:
o "ominously overpriced assets financed by too much debt;
o "a tightly wound matrix of highly leveraged trading positions;
o "technical or situational accelerants (in 1987, 'portfolio insurance; today, all kinds of negative gamma strategies, the false liquidity of ETFs, volatility selling, massive leveraged bond ownership at the highest price for duration in history, financial institution balance sheets that remain completely opaque and highly leveraged).".
Dow Jones Industrials -0.17% at 23,422
Nikkei 225 -1.32% at 22,381
HK Hang Seng +0.34% at 29,219
Shanghai Composite +0.44% at 3,448
FTSE 350 Mining -0.05% at 17,529
AIM Basic Resources +0.59% at 2,626
Economics
A number of central banks’ governors are due to speak this week at the ECB panel featuring Fed Janet Yellen, Mario Draghi, BoJ Kuroda and BoE Carney tomorrow.
• Additionally, the week features two FOMC voting members including Chicago Fed head Charles Evans and Fed board member Lael Brainard.
Junk rated emerging market sovereigns are raising debt at record pace so far this year, Dealogic reports.
• YTD bond issues by non-investment grade sovereigns totalled $75bn in sundicated bonds, up 50%yoy.
• Latest deals included Bahrain $3bn and Tajikistan $500m deals, both issued in September.
• The government of Iraq raised $1bn this summer while Ukraine raised $3bn.
• Offered yields are also low compared to historical standards with Tajikistan 10y bonds yielding 7.125% and Ukraine 15y debt priced at 7.375%.
US – Equities posted the first weekly drop following an eight-week winning streak, the longest since 2013, as Senate Republicans argued a delay in corporate tax cut until 2019.
China – Authorities slowed money supply growth substantially in October a sign that government policy of financial deleveraging may be gaining traction.
• New yuan loans almost halved from September while aggregate financing measures also fell significantly coming in below market estimates.
• New Yuan Loans (CNY bn): 663 v 1,270 in September and 783 forecast.
• Aggregate Financing (CNY bn): 1,040 v 1,820 in September and 1,100 forecast.
• M2 Growth (%yoy): 8.8 v 9.2 in September and 9.2 forecast.
UK – The pound is down 0.8% this morning following the report in the Sunday Times that 40 MPs had agreed to sign the letter of no-confidence over Mrs May’s handling of the Brexit process.
Currencies
US$1.1639/eur vs 1.1629/eur yesterday. Yen 113.50/$ vs 113.57/$. SAr 14.428/$ vs 14.273/$. $1.310/gbp vs $1.314/gbp.
0.765/aud vs 0.767/aud. CNY 6.645/$ vs 6.642/$.
Commodity News
Rebel violence closure escalates tightening copper supply
• Diminishing global copper market supply is further hampered as fresh rebel violence forces $21 billion Freeport McMoRan to close the main route to its Papua site. Threatening violence at the world’s second largest producer is building to highest level in years as longtime disputes surround labour problems and an ongoing mine right dispute with the Indonesian government triggered 15 weeks of disruptions this year as exports were blocked.
• The closure only serves to highlight the fragility of mine supply in a market forecast significant demand growth linked with the transition to the electric economy, boosting usage in electric cars, renewable energy and infrastructure.
Environmental swing sees Rio Tinto going coal free
• Rio Tinto Group, the world’s second-largest miner, looks to completely exit from the harmful fuel with the sale of its remaining coal mines in Australia. Mining companies are increasing considering the environmental impact of their operations, while “The big diversified miners are all trying to work out which commodities are going to be most disadvantaged in the future, and the low-carbon transition is one of the big uncertainties that they and other companies are facing” according to Helen Wildsmith, head of climate change at CCLA Investment Management.
• However, CEO Jean-Sebastien Jacques claims the sale focuses managerial talent and money on more productive assets, allowing the proceeds of the coal mines to provide cash to be returned to shareholders.
• Indicative bids are expected by early December as the London-based miner aims to shed the last of its energy division assets. The move represents a stark contrast to its rivals, with Glencore increasing its exposure to the world’s dirtiest fuel by agreeing to pay $1.1-billion plus royalties for a large stake in Australian assets sold by Rio, while BHP Billiton and Anglo American keep coal as one of their main strategies.
Precious metals:
Gold US$1,276/oz vs US$1,283/oz last week
• A subdued metal price pauses ahead of US October inflation data due on Wednesday. According to the National Australia Bank, “Anything less than the expected 1.7% year-on-year reading on the core measure will prompt some renewed doubts on a December Fed rate rise and hurt the US dollar.”
• Steadily rising US Treasury yields hampered gold’s advance despite market hesitation following delays to the US Senate Republican tax cut plan into 2019.
Gold ETFs 69.3moz vs US$69.1moz last week
Platinum US$931/oz vs US$936/oz last week
Palladium US$999/oz vs US$1,011/oz last week
Silver US$16.89/oz vs US$17.00/oz last week
Base metals:
Copper US$ 6,826/t vs US$6,837/t last week - India’s only copper miner plans to triple production at largest mine
• Hindustan copper plans to invest around $700m in 6 expansion projects, increasing production at its largest mine from 2m tonnes to 5.2m
• Mine contains almost 70% of India’s copper reserves
Nzuri Copper – Cobalt drill campaign kicks off in DRC
• Nzuri Copper has begun drilling out number of satellite copper-cobalt prospects – fast tracked development that could generate cash just 12 months after development approval
• Project based on high grade deposit that would support an initial 7 year life mine
Aluminium US$ 2,106/t vs US$2,085/t last week
• Despite partially regaining losses on Friday’s session, Aluminium recorded its worst week since May 2016 as the scale of Chinese capacity cuts weighs in on investor commitment. The price retreat follows a lack of actual policy translation as smelters fail to cut as much capacity as initially expected.
• The cautious investor sentiment follows positive price movement to push the metal to five-year highs last month, as stocks in LME-approved warehouses fell to their lowest since September 2008, down 3,600 tonnes to 1.2 million tonnes.
Nickel US$ 12,355/t vs US$12,340/t last week
Zinc US$ 3,217/t vs US$3,195/t last week
Lead US$ 2,517/t vs US$2,538/t last week
• LME stocks fell to their lowest in almost two years at less than 150,000 tonnes, for a metal which is expecting global demand for refined lead to exceed supply by 125,000 tonnes this year. Weekly prices swelled 3% as the International Lead and Zinc Study Group expect the deficit to extend to 45,000 tonnes in 2018.
Tin US$ 19,510/t vs US$19,505/t last week
Energy:
Oil US$63.5/bbl vs US$63.8/bbl last week
Natural Gas US$3.169/mmbtu vs US$3.215/mmbtu last week
Uranium US$22.90/lb vs US$22.75/lb last week
Lithium - Altura lithium plans to double capacity
• Announced plans for immediate feasibility study to double capacity to 440,00 tonnes at its Pilgangoora lithium project following positive scoping results
• Recent estimates indicated 34.2 million tonnes of ore in total and 357,000 of lithium oxide
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$62.1/t vs US$62.0/t
Chinese steel rebar 25mm US$645.6/t vs US$638.6/t
Thermal coal (1st year forward cif ARA) US$86.5/t vs US$85.1/t
Premium hard coking coal Aus fob US$187.6/t vs US$180.5/t
Other:
Tungsten APT European US$270-280/mtu vs US$275-285/mtu last week
Company News
Avesoro Resources (LON:ASO) 1.95pence, Mkt Cap £104m – New Liberty Q3 performance update
• Avesoro Resources reports gold production of 19,885 oz during the quarter ended 30th September 2017 which, we estimate, brings year-to-date gold output to 50,615oz. The company is maintaining is (revised) 2017 production guidance of 70-80,000oz, implying that output in Q4 should at least match the performance of Q3.
• The improved output reflects an improvement in plant feed grades, which rose by 30% during the quarter to 2.59g/t as well as an improvement in recovery rates to 91% compared to the 88% achieved in the previous quarter. The company highlights that it achieved recovery rates “in excess of 92% … throughout September 2017”.
• “Operating cash costs of US$877 per ounce, an improvement of 15% compared to the prior quarter mainly due to higher mined ore grades, improved gold recoveries and the realisation of operational efficiencies implemented earlier in the year;” and “All-In Sustaining Costs ("AISC") of US$1,447 per ounce sold, a 10% improvement from Q2 2017, but a slightly lower rate of improvement than achieved for operating cash costs due to the continued focus on waste stripping.”
• The company notes that the reduction in cash costs achieved during the quarter delivered “the third consecutive quarter of positive EBITDA” of US$5.5m. Borrowings syttand at US$107.9m at the end of the quarter with cash facilities of US$18.2m.
• The company notes that the quantity of ore processed during the quarter declined by 15% compared to Q2 “due to a lack of run of mine ore feed for a short period of time caused by pit flooding as a result of heavy rain which disrupted mining operations” and that “Total material movement of 3.2 million tonnes, a decrease of 15% on the prior quarter, due to the impact of heavy rain towards the end of the wet season that caused periods of in-pit flooding”.
• Commenting on the improving overall performance at the New Liberty mine which delivered a “further improvement in EBITDA margin to give us our third consecutive quarter of positive EBITDA and quarter on quarter increase in production levels.”, Chief Executive, Serhan Umurhan, noted that “We expect Q4 2017 to deliver further improvements across all these metrics, including a continued reduction in unit mining costs which were inflated this Quarter due to stoppages and inefficiencies arising from heavy rains during the tail end of the wet season. We expect to end the year with a strong final quarter and to deliver against our production guidance which is maintained at 70,000 - 80,000 ounces of gold.”
• Reiterating the previously announced revised life-of-mine plan the company highlights the “updated LOM schedule reflects the existing and planned further increase in process plant throughput rate of 140ktm by the end of the year. As a consequence, the future mining rates at New Liberty will also increase to provide this extra plant feed, reducing New Liberty's current LOM to 4.5 years based on existing Reserves.”
Conclusion: Despite setbacks arising from flooding during the wet season, production at New Liberty is on an upward trend and EBITDA is improving, although with all-in-sustaining costs of $1447/oz of gold sold, there remains a significant amount of work still to be done. The revised life of mine plan reduces mine life but is expected to deliver a positive NPV from the production of an average 149,000oz of gold per year to 2021.
Caledonia Mining (LON:CMCL) 420p, Mkt Cap £44.4m – Increased gold production lifts earnings
• Caledonia Mining’s Q3 results show a 7% increase in quarterly gold production (14,396oz - Q3 2016 - 13,428oz) lifting year to date output by 8% to 39,710oz (2016 – 36,760oz). The quarterly production, which represents a record for the mine, is attributed to “higher grades, which was due to the improved mine flexibility as a result of the measures taken in previous quarters.”
• As a result, reported earnings per share rose by 85% during the quarter to 40.8 cents (Q3 2016 – 22.1 cents) and year to date earnings increased by 34% to 87.3 cents (2016 – 65.4 cents).
• A reduction in administrative expenses to $1.6m for the quarter (Q3 2016 - $2m) and $4.5m year to date (2016 – $5.2 export) incentive credits contributed a 23% quarterly decline in all – in sustaining costs (AISC) to $773/oz (Q3 2016 $1,004/oz) and a 15% reduction in year- to- date AISC to $827/oz (2016- $971/oz).
• The company reports a cash balance at 30th September of $11.8m (30th June 2017 - $10.8m) following the payment of a quarterly dividend totalling $964,000 and capex of approximately $8.1m during the quarter.
• Despite the positive operating and financial performance, the quarter was, however, marred by a fatality at the Blanket mine during July.
• The company maintains its production guidance of 80,000 oz pa of gold production from the Blanket mine by 2021.
Conclusion: The increased gold output and reducing cost profile at the Blanket mine underlines the success of the long term strategic plan to access deeper level mineralisation through the new Central Shaft development and associated underground infrastructure. Last week the company announced that it was targeting a deeper Central Shaft than previously planned as a means to add at least a further 4 years to the mine’s life.
Scotgold Resources (LON:SGZ) 27p, Mkt Cap £4.3m (£7.2m fully diluted) – Scotgold Chairman underwrites 2 for 3 Rights Issue at 25p/s to raise £2.65m in new funds
• Scotgold Resources Chairman, Nat le Roux has fully underwritten a two for three non-renounceable rights issue at 25 pence per share.
• The offer also included a free option exercisable at 40 pence per share on or before 31 December 2019 for every five shares subscribed in the offer.
• The funding brings in around 30% of the total funds to be raised to bring Phase 1 of the Cononish Project into production.
• It is a shame the rights issue is non-renounceable as this does not give investors the option to sell their rights to other investors at the lower price of the issue.
• The issue is being done at an approximate 7.4% discount to the company’s closing share price on Friday.
• Scotgold updated its feasibility study on 15 March this year highlighting an improvement in the pre-tax NPV at a 10% discount rate to £43m from an earlier figure of £23m as a result of an increase in the assumed gold price to $1150/oz from $1100/oz and modifications to the TSF (tailings storage facility) from valley fill to a dry stack disposal plan.
• The exchange rate assumption also changed from $1.60/£ in the earlier study to $1.25/£ in the update, though we note the $:£ rate is now $1.314/£.
• The company’s revised plan phases the build-up of throughput to an interim rate of 3,000tpm in Phase 1 before it moves to the full 6,000tpm planned rate in phase 2.
• The total capital cost of the processing plant increased to £10.3m from £7.2m in the phased approach due to the installation of an interim reduced capacity plant for Phase 1.
• A recent presentation highlights a peak funding requirement of £7.4m
• The presentation gives a Post-tax NPV@10% of £36m and a post-tax IRR of 75% assuming a gold price of £920/oz ($1,200/oz)
• Scotgold Resources is currently preparing a planning application which the company states has been received and validated. The company hopes the determination can be validated by end December.
Conclusion: The Cononish project is heading slowly towards production. It will be interesting to see how much of the underwriting the Chairman will end up with.