Bacanora Minerals (LON:BCN) – Questions on Orr-Ewing 3% lithium royalty issue
Premier African Minerals (LON:PREM) – Zulu Scoping Study
Savannah Resources (LON:SAV) – Further drilling results from Mina do Barroso
Rio Tinto and Chinese private equity firm GSR Capital are preparing to bid for a stake in Chilean lithium producer SQM
• Rio Tinto and GSR Capital considering bid for 32% stake in SQM, approximated to be valued at around $4.8bn
• However, size of stake would not provide operational control, which some analysts said undermined the logic of any deal for Rio Tinto
South Africa’s parliament delays passing key mining law
• Parliament will miss December target to pass changes to mineral resource laws seen as key for greater investor certainty
• MPRDA bill passed back in 2014 but sent back over concerns over its constitutionality due to elevating the countries mining charter to status of legislation
Zimbabwe – Robert Mugabe resigned as president ending a 37-year long rule following a vote by lawmakers to impeach the head of state.
• The move comes days after his party ZANU-PF fired him as its leader and demanded him to step down.
• Previously ousted Emmerson Mnangagwa will take over as an interim leader and is set to become ZANU-PF presidential candidate in elections scheduled for next year.
• Events conclude a battle for control between two factions including a military-backed former vice president Mnangagwa and the one called Generation-40 supporting Mugabe’s wife Grace.
Dow Jones Industrials +0.69% at 23,591
Nikkei 225 +0.48% at 22,523
HK Hang Seng +0.64% at 30,008
Shanghai Composite +0.59% at 3,430
FTSE 350 Mining +0.62% at 17,365
AIM Basic Resources -0.40% at 2,650
Economics
US – The S&P500 briefly broke the 2,600 level yesterday marking an all-time intraday high supported by the technology and healthcare sectors.
• The US$ index is down slightly today on stronger euro which shrugged off latest German political turmoil.
• Fed meeting minutes are due later today (19:00 GMT) with one thing to watch closely is the current assessment of the weak inflation numbers amid strong growth and falling unemployment.
• December rate hike remains largely priced in with a 97% chance of that happening as seen by markets with the next one expected in Mar/18 (61%).
China – Private survey of more than 2,000 companies in China showed business sentiment worsened in Q3/17.
• The headline index came in at 47 dragged by weak run in the private companies sector while state enterprises recorded an increase.
• Firms mentioned overcapacity and rising raw material costs as factors driving poor business outlook.
• Companies reporting oversupply in the domestic market came in at 64% of respondents with 52% characterising it as severe excess capacity.
• Investments, a barometer for business confidence, came in particularly weak with only 1% of firms surveyed suggesting it is good time to invest and only 10% of companies made investments during the period.
UK – Philip Hammond is due to deliver the budget today as self-imposed fiscal rules to cut fiscal deficit to below 2% of GDP in 2020-21 are being challenged by estimates for falling productivity and slowing economic growth.
• Four voting members of the MPC backed current forward guidance strategy subject to the economy evolving as the BoE expects.
• Members told Parliament yesterday that providing definite path on borrowing costs would be offering “false precision”.
• “Its tempting to think the bank could promise where rates will be in future, but this would create more uncertainty… Monetary policy responds to what the economy does. Its not possible to forecast the economy with perfect certainty,” Michael Saunders, an MPC member said.
Currencies
US$1.1765/eur vs 1.1748/eur yesterday. Yen 112.04/$ vs 112.54/$. SAr 13.898/$ vs 14.118/$. $1.325/gbp vs $1.325/gbp
0.757/aud vs 0.754/aud. CNY 6.617/$ vs 6.634/$.
Commodity News
Precious metals:
Gold US$1,283/oz vs US$1,280/oz yesterday
• Gold price traded in a narrow range as investors await the release of minutes from the US Federal Open Market Committee’s (FOMC) November meeting. The release is expected to provide an insight into the US central bank’s outlook for monetary policy, with investor caution surrounding the aggressiveness of future rate increases from the FOMC.
• CME FedWatch Tool identifies a 91.5% chance of December’s target rate rising to 125-150 basis points (bps) and 8.5% chance of increase to 150-175 bps.
• Exiting Fed Chair Janet Yellen said the Fed is “reasonably” close to its targets and should keep gradually raising US interest rates to avoid the dual pitfalls of letting inflation drift below target for too long, and of driving unemployment down too far.
• US economic data showed strengthening as easing hurricane-related disruptions drive higher than expected US home sales. However, an enduring shortage of housing is elevating prices beyond first-time buyers, highlighting the need for broad US housing investment.
• The dollar index slipped as increased investor risk appetite fails to translate into rising US Treasury yields.
• In a bid to resolve nuclear tensions with North Korea, the US unveils fresh sanctions against the nation designed to stop its funding of nuclear and ballistic missile programmes.
Gold ETFs 69.5moz vs US$69.5moz yesterday
Platinum US$936/oz vs US$929/oz yesterday - Platinum industry expects supply deficit in 2018
• Predicted deficit of 275koz of precious metal for 2018 caused largely by industrial demand from petroleum and glass sectors
• Whilst demand for EV’s expected to lead to decrease in demand for the metal, this isn’t expected for many years and tighter regulations on petrol cars will mean more of the metal will be needed.
Palladium US$1,005/oz vs US$991/oz yesterday
Silver US$17.01/oz vs US$16.96/oz yesterday
Base metals:
Copper US$ 6,938/t vs US$6,836/t yesterday
Aluminium US$ 2,099/t vs US$2,075/t yesterday
Nickel US$ 11,780/t vs US$11,620/t yesterday
• Rising nickel prices are translating into increased Chinese nickel pig iron (NPI) production as operators look to capitalize on positive price movements. The NPI output rose for the fifth consecutive month in October to the highest levels since 2014, increasing 8.9% y/y to 39,554 tonnes.
• NPI provides a lower-grade alternative to refined nickel for use in stainless-steel, but global supply disruptions have hit output this year, particularly by the Philippine environmental open-pit mining ban and Indonesian unprocessed ore export limitations.
• The world’s largest supplier of nickel is under threat from Maoist rebels waging a protracted guerilla war to overthrow Philippine President Rodrigo Duterte. The nation has been attempting to find closure and peace with the National Democratic Front (NDF) and the armed wing of the communist party, the New People’s Army since 1986. Duterte has said attacks from the rebels have been rising, with some mines paying “revolutionary taxes” in exchange for allowing rebel operations in remote areas, and has threatened prosecution and closure of supportive companies. With a nation hosting an estimated $840 billion of untapped mineral wealth (Mines and Geoscience Bureau), and 43 operating mines the closures could have a distinct impact on nickel, gold, copper, chromite and coal exports.
Zinc US$ 3,228/t vs US$3,157/t yesterday
• Despite weak demand for the metal, mine supply is weaker as tightening market conditions boost Shanghai zinc as much as 2.7%.
Lead US$ 2,481/t vs US$2,460/t yesterday
Tin US$ 19,375/t vs US$19,430/t yesterday
Energy:
Oil US$63.3/bbl vs US$62.5/bbl yesterday
Natural Gas US$3.008/mmbtu vs US$3.027/mmbtu yesterday
Uranium US$26.00/lb vs US$25.50/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$63.6/t vs US$63.1/t
Chinese steel rebar 25mm US$663.6/t vs US$661.9/t
• Chinese steel futures continue to rise on support from tightening raw material supply and strong recovery in consumption in the world’s top user following the end of winter production cuts in March. The most-active rebar contact for May delivery increased 1.7%, with stocks of rebar among Chinese traders having fallen to the lowest levels in a year to 3.61 million tonnes.
• Elevated steel prices have translated into higher raw material costs, with coking coal rising to a two-month peak and iron ore contracts rising 0.7% to touch a two-week high of 498.5 yuan.
Thermal coal (1st year forward cif ARA) US$83.8/t vs US$83.6/t
Premium hard coking coal Aus fob US$193.7/t vs US$189.4/t
• Australian coking coal operations, the largest supplier to the Chinese market, have been strongly impacted by Beijing’s efforts to restrict pollution and meet tough air quality targets. As the nation broadly closes excess capacity during the winter heating period, exports from Australia fall 21% in October as cleaner domestic supply is favoured.
Other:
Tungsten APT European US$271-285/mtu vs US$275-285/mtu last week
Cobalt LME 3m US$61250/t vs US$60750/t yesterday
Company News
Bacanora Minerals (BCN) 99p, Mkt Cap £131.5m – Questions on Orr-Ewing 3% lithium royalty issue
• Why are Bacanora taking action to strike out a royalty to “void ab initio, a 3% gross over-riding royalty held by the Estate of Colin Orr-Ewing over certain of the Company's lithium assets in Sonora, Mexico” which they claim does not exist?
• Surely, if the royalty does not exist then there should be no doubt as to its claim on the cash flow of lithium projects in the company and not need to treat the royalty as invalid from the outset?
• And if the royalty does not exist then why has the company been negotiating for so long over the buying of the royalty and why has the royalty been so often mentioned in so many financial reports and presentations?
• We are told by the company, that shareholders, Blackrock, Capital Group, M&G and Igneous Capital are all backing the company in their action to remove the royalty. But why are they backing an action to remove a royalty that has for so long been considered to be a feature of the company?
• If the royalty is stuck out what does this mean for other royalties registered in Canada and what does this mean for royalty companies with royalties based in the region?
• And if this royalty is declared “void ab initio” or ‘invalid from the outset’ then how can we invest in companies buy royalties?
• How too can companies then sell royalties and streaming agreements to help fund projects going forward?
• Should we only be concerned about royalties and other agreements for companies incorporated in Alberta, which is considered to be a bit like the Wild West at the best of times, or should we be concerned about agreements set in other jurisdictions?
• Why is all this important today?
• Is it because Bacanora Minerals may seek to finance the construction of a larger scale pilot plant to better prove the production process?
• Is it so that the company can more easily finance a full-scale (phase 1) mine and production plant?
• Is it that the company needs to get rid of the royalty before it can sell itself? Maybe to a Chinese buyer?
• “The basis of the Company's claim is that the Royalty was originally granted based on the misrepresentation of Colin Orr-Ewing that he held a pre-existing royalty granted prior to the acquisition of the lithium properties by the Company.”
• I personally recall directors of the company referring to the Orr-Ewing lithium royalty, though as an analyst I never saw the paperwork.
• So why does Bacanora’s AIM admission document make the following royalty references?
• https://www.bacanoraminerals.com/investor-relations/aim-rule-26/
• https://www.bacanoraminerals.com/pdfs/Companys-AIM-admission-document.pdf
• From the 2014 AIM Admission document
• Page 18
• “Royalty Agreements
• In return for Mr. Colin Orr-Ewing, a Director of the Company, providing financial support to the Company and its subsidiaries in its earliest stages of development, in 2008 and 2010, the Company (or wholly-owned subsidiaries thereof) entered into royalty agreements with Mr. Orr-Ewing. As a result, sales of products from the Company’s lithium and borate assets are subject to a 3 per cent. gross overriding royalty payable to Mr. Orr-Ewing. In addition, sales of products from the Company’s San Francisco concessions in the Magdalena basin are also subject to a 3 per cent. gross overriding royalty payment to MSM, a subsidiary of Rio Tinto. Further information on the Company’s royalty agreements is set out in paragraph 14.2 of Part V of this Document.”
• Page 68
• “1.4 Sonora Lithium Project
• The Sonora Lithium Project consists of ten contiguous mineral concessions. Bacanora through its wholly-owned Mexican subsidiary, MSB, has a 100% interest in two of these concessions: La Ventana and La Ventana 1, covering 1,820 hectares. Of the remaining concessions, five will be owned 100% by Mexilit S.A. de C.V. (“Mexilit”). The Mexilit concessions consist of: El Sauz, El Sauz 1, El Sauz 2, Fleur and Fleur 1 and cover, in total 6,333 hectares. Mexilit is owned, on a 70:30 basis, by Bacanora and Rare Earth Minerals PLC (“REM”) respectively under the terms of REM agreement 1. The remaining three concessions: Buenavista, Megalit and San Gabriel cover 89,235 hectares and will be owned 100% by Minera Megalit S.A. de C.V. (“Megalit”). Under the terms of REM Agreement 2 between Bacanora, MSB and REM, REM has earned a 10% interest in Megalit and will earn a further 20% in Megalit by providing funding of $US1 million on or before November 23, 201 4. Under the terms of REM Agreement 1 and REM Agreement 2, REM has the conditional right to negotiate to acquire up to 49.9% of Mexilit and Megalit. There is a 3% royalty in favor of Colin Orr-Ewing on all of the concessions.”
• Page 81
• “The concessions making up the Sonora Lithium Project are subject to a 3% gross overriding royalty (“GOR”) to Colin Orr-Ewing. There are no other royalties payable or back-in rights, payments or other agreements or encumbrances to which the concessions are subject - with the exception of the previously mentioned first rights of refusal.”
• Page 102
• “Preliminary economic analysis of the project is based on an annual production rate of 35,000 tonnes of lithium carbonate, with a mine life of 20 years and run-of-mine feed to the processing plant averaging 0.3% Li. The project is subjected to an annual royalty of 3% of net profits and a government taxation rate of 34%.”.
• The table on Page 102 in the AIM prospectus states that the Royalty value at US$7,000/t is projected to be worth some US$147m in Cash Flow on a total project NPV of US$1,064m and an IRR of 170%. So with lithium at US$15,000m the royalty
• Page 166
• “Table 38. La Ventana: Cash Flow and Net Present Value Analysis Projected Over Life of Mine”
• The table shows a Lithium Carbonate Price Senario of $US7,000/t and an estimated Royalty Cash Flow US$147m.
• Lithium Carbonate prices have risen since then to around $15,000/t and if Bacanora produces good quality concentrate then it may receive a premium to this base case price level.
• The NPV of the project was calculated to be US$1,064m in the 2014 Admission document assuming the US$7,000/t lithium prices and an 8% discount rate. While we might expect the value of Bacanora to be significantly higher than this today margins are likely to be constrained by significantly higher operating costs.
• Page 197
• “Sonora Lithium property
• During the year ended 30 June 2011, the Company, through its subsidiary MSB, acquired all rights, title and interests in certain lithium claims from a related party who is an officer of the Company. As consideration for the assets, the Company issued 600,000 common shares at C$0.25 per share. In addition, the Company paid cash payments of US$40,000 to reimburse the vendors for acquisition and preliminary assessment costs. The property consists of four exploration licenses, covering approximately 4,050 Ha in the Sonora State of Mexico. The Lithium property is subject to a 3 per cent. gross overriding royalty payable to a director of the Company on sales of products produced from this property.”
o This statement is also repeated on page 213
o The Company’s Sonora Lithium Project concessions are owned by the Company’s subsidiary undertakings Mexilit, Megalit and ‘MSB’ (Minera Sonora Borax S.A. de C.V., a company incorporated in Mexico).
o There are numerous further references to the Orr-Ewing royalty on the Sonora Lithium project in relation to ‘MSB’ on Pages 213, 237 as well as many other royalty references to other assets within the Bacanora portfolio.
Conclusion: The 2014 AIM Admission document which has been verified by teams of lawyers and the company’s NOMAD firm would have conducted due diligence on all the company’s material assets and liabilities for the purposes of the AIM Admission document. If this is wrong then can we believe the legal advice and words of these documents going forward?
If Bacanora succeeds in invalidating the Orr-Ewing royalty then shareholders of royalty companies, Anglo Pacific and others should perhaps reconsider the strength and validity of the royalties on which their valuations rely.
*SP Angel is completely independent of Bacanora Minerals and the Orr-Ewing Family estate. The above text represents the author’s independent and personal views as a mining analyst and an observer of the company over many years. Note, we are not advising investors to buy or sell this stock.
Premier African Minerals (PREM) 0.48p, Mkt Cap £29.7m –Zulu Scoping Study
• Premier African Minerals has announced highlights of its scoping study on its Zulu Lithium and Tantalum project in Zimbabwe.
• The published plan envisages producing 1mtpa of ore at an overall waste:ore ratio of 5.55:1 at an overall grade of 0.9% Li2O for a period of 15 years. C1 costs over the mine life are estimated at US$485.54/t of concentrate production.
• Based on producing an estimated 84,000tpa of spodumene concentrate and 32,500tpa of petalite concentrate over a 15 years mine life, the company estimates that an initial capital investment of US$64m generates a pre-tax NPV10% of US$127m and an IRR of 85.9%.
• At the after-tax level, the NPV10% is 92m with a 65% IRR on the assumption that spodumene concentrate commands a price of US$800/t and petalite concentrate is sold at US$400/t. We note that in a recent presentation, Galaxy Resources, the operator of the Mt Cattlin mine, reported a Q3 2017 selling price of US$843/t for its spodumene product.
• Sensitivity analysis published in the company’s announcement suggests that at a spodumene concentrate price of US$600/t the after tax NPV10% fall to US$5.7m, suggesting the project is sensitive to future pricing of spodumene concentrate.
• The company also evaluated the possibility of producing a lithium carbonate product at a plant in Bulawayo, in preference to saleable concentrate. Based on a higher capital cost of US$238m and a product sales price of US$15,000/t of LiCO3, the Zulu project is estimated to generate a pre-tax NPV10% of US$719m (post-tax US$524m) and an IRR of 80% (post tax 63%).
• Commenting on the results of the scoping study, CEO, George Roach, said “The Company considers the Scoping Study economics for both the concentrate sales option as well as the lithium carbonate plant option are attractive and is firmly of the view that additional detailed study work and exploration in and around the existing Resource base will further enhance the value of the project.”
Conclusion: The Zulu project has been advanced rapidly to the scoping study stage and, although more detailed work will be required to firm up the development plan, it provides encouraging economic indicators at this early relatively stage, though it appears sensitive to commodity pricing.
Savannah Resources (SAV) 5.5p, Mkt cap £35m – Further drilling results from Mina do Barroso
• Savannah Resources reports that it has completed 27 holes totalling 2566m of its current drilling programme at its Mina do Barroso lithium project in Portugal. Assay results from the first 11 holes are reported to confirm extensions to the existing mineralisation.
• At the Reservatorio deposit a further 12 holes have been completed of which assays have been returned for six holes. The drilling “significantly extends lithium mineralisation over 400m strike length, with good down dip extensions of at least 150m.” Previous announcements by the company in September this year indicated mineralisation extending over 200m of strike length at Reservatorio.
• Among the results highlighted for Reservatorio in today’s announcement are:
o A 29m long intersection at an average grade of 1.07% Li2O from a depth of 43m in hole 17RESRC10 and
o A 35m long intersection at an average grade of 1.06% Li2O from a depth of 56m in hole 17RESRC11
• Further infill drilling is planned in the eastern part of the Reservatorio deposit where faulting and shearing has resulted in weathering and near surface depletion of the mineralised body.
• At the NOA deposit, initial drilling has identified lithium bearing pegmatite in 10-15m wide zones extending over a strike length of around 100m and down dip to a depth of around 50m. “A further 5 RC hole are planned to test a further 200m of the strike of the NOA prospect focussing on areas where surface outcrop suggests widths of pegmatite over 20m may be present.” Among the results highlighted today are:
o A 13m long intersection at an average grade of 1.19% Li2O from a depth of 7m in hole 17NOARC03 and
o An 11m long intersection at an average grade of 1.23% Li2O from a depth of 46m in hole 17NOARC04
• At the Grandao prospect, where drilling is targeted at a flat lying pegmatite body, assay results have yet to be received from the 10 holes completed so far.
Conclusion: Since acquiring its interest in the Mina do Barroso project in May and undertaking its initial drilling programme in July, Savannah Resources has pressed ahead to evaluate and extend the known lithium mineralisation where it has been able to report a number of intersections in excess of 1% Li2O. We look forward to the remaining results of this second drilling campaign as they become available.