SP Angel morning note readership numbers rise significantly since introduction of new MiFID II regulations
- Restrictions on the publication of research under the new MiFID II regulations appear to have significantly increased readership of our morning note
Anglo American (LON:AAL) – H1 recovery and dividend resumption as net debt almost halved in a year
Golden Star Resources (LON:GSC) – 2017 results confirm the operational turnaround resulting from the underground strategy
Kodal Minerals* (LON:KOD) – Drill results confirm continuity, high-grade and potential of Bougouni lithium project
Mkango Resources* (LON:MKA) 8.9p, mkt 9.3m - EV Automakers look to optimise use of rare earths on forecast demand growth
Rainbow Rare Earths Ltd (LON:RBW) – 13.9p, mkt cap £24.2m – Results
Xpediator PLC* (LON:XPD) – Buy, Target price 44p – Full Year trading update shows strong growth in line with market expectations
Miners reward shareholders with cash returns while slashing debt
- The four major London-listed mining companies have released earnings this month and its clear they are doing what shareholders have demanded of them by rewarding shareholders through pay-outs and pay down debt
- Glencore impressed investors with a $2.9bn in dividends, Rio Tinto is offering $5.2bn plus a $1bn buy-back facility, Anglo are paying $618m and BHP Billiton paid $2.9bn in interim dividends.
- Free Cash Flow generation from the majors of $26.7bn is made up of: BHP $11.1, Anglo $4.9bn, Rio Tinto $9.5bn, Glencore $1.2bn (after adjusting for $5.0bn changes in working capital)
- Funds which are short of the miners are likely to continues to show lesser returns as the sector continues to outperform in terms of cash generation and strong earnings
Dow Jones Industrials
-0.67%
at
24,798
Nikkei 225
-1.07%
at
21,736
HK Hang Seng
-1.31%
at
31,020
Shanghai Composite
+2.17%
at
3,269
FTSE 350 Mining
+2.08%
at
18,941
AIM Basic Resources
-0.01%
at
2,550
Economics
Currencies
US$1.2273/eur vs 1.2313/eur yesterday Yen 107.47/$ vs 107.67/$ SAr 11.723/$ vs 11.704/$ $1.389/gbp vs $1.396/gbp 0.780/aud vs 0.785/aud CNY 6.359/$ vs 6.342/$
Commodity News
Precious metals:
Gold US$1,322/oz vs US$1,328/oz yesterday
- Spot gold continues to retreat, falling 1.7% this week so far as the last US Fed Reserve meeting showed policymakers are confident in the need to keep raising interest rates. The more upbeat take on inflation in the minutes of the Jan. 30-31 policy meeting has convinced market participants that the new Fed chief Jerome Powell will lead his colleagues in raising interest rates next month. The USD rose to an over one-week peak to extend its weekly recovery, helped by the Fed minutes and higher short-term Treasury yields.
Gold ETFs 72.1moz vs US$72.1moz yesterday
Platinum US$988/oz vs US$997/oz yesterday
Palladium US$1,023/oz vs US$1,027/oz yesterday
Silver US$16.44/oz vs US$16.43/oz yesterday
Base metals:
Copper US$ 7,025/t vs US$7,043/t yesterday
- Investors withdraw from global equities and commodities into the safety of the dollar ahead of the release of the minutes from the US Federal Reserve’s most recent policy meeting. The Bloomberg dollar index continued its positive surge against the basket of currencies to 1% this week so far, with global stocks falling for the third consecutive trading day and as the two-year US Treasury yield touched its highest since 2008.
- Crucial January US data highlights higher than expected US wages and inflation, driving up the USD and US yields, with the Fed minutes signaled the potential for additional increases in interest rates this year on the back of an expanding US economy. The policy meeting minutes “increased expectations for further rate hikes”, boosting the dollar and hurting metals, said an analyst with Guotai Junan Futures Ltd.
- However, sentiment continues to be positive for metals as “the bullish fundamentals haven’t changed”, while advice that “investors should buy on the dips” remains. Banks including Goldman Sachs Group Inc and JP Morgan Chase & Co. have reiterated that renewed inflation as the economy expands may boost commodity prices and raw materials will do well in the late stage of the economic cycle. Synchronised global growth and constrained mine supplies are also supporting metals. In the near-term, Chinese demand is set to recover as manufacturers return after the Lunar New Year holiday.
Aluminium US$ 2,167/t vs US$2,168/t yesterday
Nickel US$ 13,440/t vs US$13,440/t yesterday
Zinc US$ 3,460/t vs US$3,521/t yesterday
Lead US$ 2,526/t vs US$2,569/t yesterday
Tin US$ 21,530/t vs US$21,500/t yesterday
Energy:
Oil US$64.9/bbl vs US$64.6/bbl yesterday
Natural Gas US$2.655/mmbtu vs US$2.609/mmbtu yesterday
Uranium US$22.00/lb vs US$21.75/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$77.9/t vs US$77.3/t - Glencore iron ore trading volumes rise to 47.7mt as EBIT rises to +$7m from a loss of $9m yoy
- Said that iron ore trading volume increased marginally in 2017 as it rebounded to profit for the business among a widening in pricing by grade with less low grade demand in China expected
- Traded 47.7mt of ore in 2017, up from 47.1mt in 2016, booked adjusted EBIT of $7m for iron ore, from a loss of $9 million in 2016 on the same basis
- Glencore said while the overall supply of iron ore may increase in 2018, a decrease in low grade cargoes exported to China may be seen, as steel margins incentivised purer less-polluting grades
Chinese steel rebar 25mm US$636.6/t vs US$638.3/t
- The most-active steel rebar futures fell almost 2% as investors return from a week-long Lunar New Year holiday, touching its weakest level in five weeks at 3,841 yuan ($605)/tonne. While steel demand is expected to firm when construction activity resumes at full swing, but is not expected until next months with many workers still away. “Traditionally, most of the construction workers will stay at their hometown until early March” according to a Shanghai-based trader.
- The peak season in China’s construction begins next month with encouraging order books at steel plants and traders for February and March. Low steel inventories along with abundant liquidity across China following a substantial increase in new loans in January “will fuel steel demand”.
- Chinese steel producers are actively restocking raw material inventories, eager to unleash full mill capacity following the winter’s output curb ending next month, with hopes for a repeat of last year’s record margins. BHP Billiton Ltd. Forecast mills to boost run rates through the second quarter to make up for the curtailments. Chief Commercial Officer Arnoud Balhuizen forecasts a gradual resumption as provinces step back from restrictions designed to fight air pollution, noting “our base case is that the winter restrictions expire in staggered fashion across localities, with the blast furnace fleet expected to return to the high utilisation rates that prevailed prior to the winter curtailments sometime in the June quarter. This is required due to the gap in construction steel supply left by the permanent closure of induction furnaces”.
- The move toward air emission improvements also brought a focus on higher-grade ore, with demand expected to remain high following the output lift, although average prices may drop as China’s demand growth may fall this year given a slowdown in housing and autos. “While it will be challenging to maintain the same average prices as those achieved in the half year just concluded, we are optimistic that the 62% index price can be relatively resilient”. Support for lower-grade ore has fallen, as the discount on 58% content ore has widened to more than 40%, from less than 15% in 2016.
Thermal coal (1st year forward cif ARA) US$81.7/t vs US$83.3/t - Adani Group facing renewed claims of $600m fraud in India
- India’s customs office has revived allegations of a US$600m financial fraud against the Adani Group, challenging an order clearing the mining giant last year as “erroneous, illegal and improper”
- Adani has been fighting allegations for the past four years that it used a shell company in Dubai to siphon hundreds of millions of dollars from the company’s books into Adani family companies based in overseas tax havens
- Adani has plans to build one of the world’s largest coal mines in Australia though their ability to finance and run the operation may now be in some doubt
Premium hard coking coal Aus fob US$231.6/t vs US$231.6/t
Other:
Tungsten APT European US$319-325/mtu unchanged
Cobalt LME 3m US$81,250.0/t unchanged
- Chinese cobalt companies rally as much as 10% with Apple Inc. becoming the latest major consumer to seek long-term supply deals for the battery metal. China Molybdenum Co., which has operating mines across the world’s largest producer, the Democratic Republic of Congo, climbed as much as 10% in Hong Kong, with mainland stocks Zhejiang Huayou Cobalt Co., GEM Co., Nanjing Hanrui Cobalt Co. following suit.
- “Even Apple is trying to secure cobalt supply for its mobile batteries (direct from miners)” according to Argonaut Securities Asia analyst, and “it indicates that future global demand for cobalt from electric vehicles will be really huge”. While consumption from individual electronic devices remains relatively low compared to Tesla vehicle batteries, the favoured Lithium-Cobalt-Oxide (LCO) compounds represent up to 60% cobalt, compared to the 6-19% for Nickel-Manganese-Cobalt (NMC) variations.
- Benchmark cobalt metal price rose yesterday to its highest since 2008, climbing 145% last year.
Company News
Anglo American (LON:AAL) 1726.8 pence, Mkt Cap £22.3bn –H1 recovery and dividend resumption as net debt almost halved in a year
- Anglo American has reported a doubling of attributable profit during 2017 to US$3,166m (2016 US$1,594m). Earnings per share doubled to $2.48/share from US$1.24/share in 2016.
- The company reports that it “exceeded our cost and volume improvement target for the year, achieving $1.1 billion of underlying EBITDA benefit.”
- Attributable free cash flow almost doubled to US$4,943m from US42,562m in 2016 and, as a result, the group net debt almost halved to US$4.5bn at the year-end (2016 – US$8,487m) reducing gearing from 26% to 13%.
- In terms of EBITDA, the contribution of Anglo American’s coal operations, which generated an EBITDA margin of 46%, rose by over 70% to US$2,868m (2016 – US$1,646m) and contributed 33% of the total US$8,823m. Metallurgical coal dominated with sales of 19.8mt generating US$1,977m of EBITDA from revenue of US$3,675m at a 54 % margin.
- Coal sales of 10.6mt from Cerrejon in Colombia generated a further US$385m of EBITDA at a margin of 49% while to lower margin South African coal business sold 18.6mt at a margin of 32% to generate US$588m from sales revenue of US$2,746m
- The second largest contributor were the iron ore and manganese businesses which contributed US$2,357m of EBITDA from revenues of US$5,831m (2016- US$1,536m EBITDA from revenues of US$3,426m). The S African iron ore business of Kumba dominated providing over 60% (US$1,474m) of EBITDA at a margin of 42% on sales of 44.9mt.
- Anglo American’s copper business recovered strongly rising from EBITDA of US$903m in 2016 to US$1,508m with what were described as “solid performances at Los Bronces and Collahuasi partly offset by the impact of lost production at El Soldado, owing to temporary suspension of mining operations in the first half.”
- The De Beers diamond business improved both sales and margins to deliver EBITDA of US$1,435m (2016 – US$1,406m) at a margin of 25% (2016 – 23%) despite lower sales revenues as a result of the anticipated destocking of the middle part of the supply chain.
- The company is declaring a final dividend 54 cents bringing the total to US$1.02/share (2016 – nil).
- Commenting on the results, Chief Executive, Mark Cutufani, said “These strong financial results benefit from transformed productivities and efficiencies across our business” and went on to highlight that “Over the last five years, we have now delivered a $4.2 billion annual underlying EBITDA improvement. While we have already driven a material operational turnaround, we believe there is significant additional upside within the business both through further operating gains and from selected organic growth options”.
Golden Star Resources (NYSEAMERICAN:GSS) C$0.92, Mkt Cap C$350.5m – 2017 results confirm the operational turnaround resulting from the underground strategy
- Reporting a reversal of the US$39.6m loss in 2016 to an attributable profit of US$38.8m in 2017, Golden Star Resources underlined that it had met or exceeded its guidance for gold production cash and all-in sustaining costs and capital expenditure.
- Gold production of 267,565oz during the year included a contribution of 137,234oz from Wassa and 130,331oz from Prestea and exceeded 2016’s 194,054oz by 38%.
- Consolidated cash costs declined by around 13% to US$763/oz, below the 2017 guidance range of US$780-860/oz, with Wassa declining by 6% to US$880/oz while Prestea delivered a 21% reduction to US$632/oz.
- Consolidated all-in sustaining costs fell by 14% to US$944/oz which was also below the guided US$970-1070/oz.
- Capital expenditure during the year of US$69.6m represents a decline of around 17% compared to 2016.
- The company’s production guidance for 2018 is for 230-225,000oz of gold production at an average cash cost of US$650-730/oz. In detail, Wassa is expected to produce 137-142,000oz of gold at between US$600-650/oz while Prestea is forecast to produce 93-113,000oz of gold at a cash cost in the range US$740-880/oz.
- Capital cost guidance for 2018 shows a substantial reduction to US$36.5m, of which US$18.8m is classed as development capital and US$17.7m as sustaining capital. The breakdown by operating unit is for US$20.6m to be spent at Wassa (US$5.9m of development capital with the balance to sustain operations); US$9.3m at Prestea (US$6.3m development) and the remaining US$6.6m on exploration.
- At 31ST December 2017, the company held cash of US$27.8m leaving net debt of US$67.8m (December 2016 US$83.1m).
Conclusion: Golden Star’s move away from its historic low grade, high cost open-pit mining operations to focus on higher grade, lower cost underground mining has reversed 2016’s losses and delivered a profit of US$38.8m. As the transition continues following the milestone of commercial production at the Prestea underground mine which was achieved on 1st February, a reduction in expected capital expenditure and continuing cost reduction at both Wassa and Prestea, the trend looks set to continue.
Kodal Minerals* (LON:KOD) 0.18p, mkt cap £12m – Drill results confirm continuity, high-grade and potential of Bougouni lithium project
Click link for Flash Note
- Kodal Minerals continues to report good quality drill results from the Ngoualana prospect at its Bougouni Lithium project in Southern Mali.
- The drilling indicates that the scale, grade and continuity of the project now make Bougouni look like a potentially viable prospect.
- Work done nearby by Birimian Limited gives some indication as to the economic potential of the region for lithium production.
- Significantly, results from metallurgical work indicate that Kodal’s Bougouni project may produce cheaper and more viable Lithium Carbonate concentrate product directly in country.
- High-purity spodumene: Kodal’s ‘naturally’ high purity spodumene formed in massive pegmatite intrusions hosted in metasediments which may be bulk mined to enable extraction of the whole pegmatite with particularly high grades seen where pegmatite dykes intersect. The pegmatite veins are spodumene rich at 20-30% spodumene content in low mica pegmatite bodies.
- So far drilling shows a strike length of some 850m of remarkably consistent spodumene in pegmatite with a number of associated parallel veins.
- Drilling is done at around 50 degrees to the vertical to give good intersections of the vertical or near vertical vein material. Intersections show the major vein to have a true width of around 20m.
- Drill spacing’s are around 50m apart with infill drilling closing this up to 20m in some areas. Consistency of the vein material may enable a JORC resource to be done on the current drill pattern.
- A newly discovered vein some 250m to the south also appears to provide a further zone of material.
- Drill results: today’s results show high grade lithium of up to 1.75% in Li2O.
- The team have drilled some 45 RC drill holes covering 5,619m since October with assays returned for some 26 of the holes by ALS Laboratories.
- Results have been calculated with a rigorous 1% Li2O lower cut-off and maximum 2m internal dilution and only reporting intersections of >5m width.
- Notable results are:
- 18m at 1.75% Li2O;
- 20m at 1.71% Li2O;
- 17m at 1.63% Li2O;
- 18m at 1.54% Li2O;
- Bulk sample: Kodal is looking to ship a 5,000t bulk sample to China for further testing. The cost of the sample will be around £350,000 though a portion of this will be recouped through the sale of the contained lithium after processing.
- Concentrate: Battery grade lithium carbonate concentrate of >6% Li2O should be producible at Bougouni. Recent prices are reported by Kodal to be running at around US$600/t
- Cash: Kodal is relatively well funded for an exploration company with £3.6m cash in the bank and relatively low overhead costs running at around £360,000pa.
- Drilling costs extra but this is also at a relatively modest $60/m.
- Feasibility Study: Kodal is working on the key elements for a Feasibility Study, eg drilling, bulk sampling and metallurgical testing. The data should enable the development of a suitable study for more accurate economic assessment of the project for further financing and potential future development.
- Location: Bougoumi is unusually well located for a project in Mali with the town of Bougouni just 7km to the north which is just 180km from Bamako.
- Power: there is a power line running through the license area though the project is likely to require its own power plant. Advances in solar power mean that much of this could be generated simply and locally with grant funding available to help projects get going.
Conclusion: The relative purity of Kodal’s Bougouni project ores combined with low associated mica levels should make concentrates from the Bougouni project relatively simple to produce and easy to sell. So far Suay Chin PTE based in in Singapore has contributed £4.8m to Kodal. The group is affiliated with the Shandong Ruifu Lithium Company, a lithium processing and chemical business based in China. We see this as a beneficial, strong and meaningful partnership for Kodal and its shareholders.
*SP Angel act as Financial Advisor and broker to Kodal Minerals. A partner at SP Angel acts as Chairman to the company.
Mkango Resources* (LON:MKA) 8.9p, mkt 9.3m - EV Automakers look to optimise use of rare earths on forecast demand growth
- Toyota Motor Corp., Asia’s number 1 automaker, is developing a new wave of electric vehicles which are more affordable and less vulnerable to price fluctuations for key elements in short supply. The next generation electric motor permanent neodymium batteries look to reduce the dependency on expensive rare earths including neodymium, terbium and dysprosium.
- Magnet development in the future aims to reduced neodymium consumption by up to 50% and eliminated terbium and dysprosium from 4th generation Prius motor permanent magnets, in favour of more abundant lanthanum and cerium, which cost about 20x less.
- With rising neodymium prices and exports from China dropping 30%, next-generation magnets prices are expected to be more sustainable.
- Toyota expects that the magnets will be put to first use in electrified vehicle drive motors and generators and electric power steering in the first half of the 2020s. The International Energy Agency estimates the number of electric vehicles to reach around 40 million, while the mining Giant BHP Billiton forecast 8% global fleet (140 million vehicles) by 2035.
Conclusion: The adjustments to the mix of rare elements to be used appears to favour the mix of rare earth metals within Mkango’s Songwe Hill project in Malawi
*SP Angel act as nomad and broker
Rainbow Rare Earths Ltd (LON:RBW) – 13.9p, mkt cap £24.2m – Results
We apologise for issuing an old headline in yesterday’s comment
- Rainbow Rare Earths has reported a loss of US$1.1m for the six months to 31st December 2017 2016 Loss - US$0.4m) as it ramps up mine production at its Gakara mine in Burundi and moved the Kabezi plant through commissioning.
- The 31st December cash balance is reported at US$2.7m and at US$2.4m net cash.
- The company expects to achieve formal hanDover of the plant this month and be able to declare full commercial production during Q2 2018 so that during the second half of the calendar year it can build up to a production rate of 5000tpa of concentrate.
- Two 25t consignments of concentrate were shipped during December with a further 75t consignment in January and "February's export Figure is due to be higher still."
- Exploration work including mapping and geochemical stream sediment sampling has identified 69 potential rare earth target while ground based gravity and airborne magnetic geophysical surveys have " indicated the presence of four sizeable and highly prospective magnetic anomalies, the largest of which covered an area which includes the Gashirwe and Kiyenzi prospects."
- Drilling is currently underway on these targets.
Commenting on the state of the rare earths market, the company points out that rare earths prices "increased considerably in the second half of 2017" after "two years of inactivity". The basket price of the company's suite of rare earths "ranged between US$10-11 per kg TREO in the first six months of 2017, reached a peak in excess of US$18per kg in September, before ending the year at US$12.27per kg and strengthening further to US$13.24per kg as at 20th February 2018."
Xpediator PLC* (LON:XPD) 38.5p, mkt cap £45.2m – Full Year trading update shows strong growth in line with market expectations
Buy - Target price 44p
- Adjusted net profits double and cash is ahead- UK based freight management company, Xpediator, has issued a trading update for the Full Year ending December 2017. We estimate that 2017 adjusted net profits more than doubled from £1.4m to £3.1m. Year-end cash closed at £1.5m (vs. our forecast net debt of £1.5m) on strong working capital performance. Our 2018 adjusted EPS estimates (unchanged) rate the shares on a p/e 9.9x with a yield of 4.4%.
- Group margins are rising - the Group continues to invest in operations to expand margins and add value. Xpediator has today announced the appointment of a new Chief Information Officer to drive IT strategy. We forecast rising adjusted EBIT margins - from 3.8% in 2017 to 4.6% in 2018 and 4.8% in 2019.
- Expanding European presence and e-commerce capability - three acquisitions were undertaken during 2017, management resource is in place to support integration and IT infrastructure is being expanded.
- Brexit and shipping via UK ports - Dover handled more than 2.6 million trucks in 2017 and Calais 2 million – both ports are now campaigning for a free flow trade system post Brexit. Without this, HMRC estimate customs declarations rising from 55 million to 255 million per annum. The existing customs declaration system CHIEF is 25 years old and HMRC is in the process of developing and testing a replacement, the Customs Declaration System (CDS). This is to be phased in from August 2018. The Group recently acquired UK port offices at Dover and Felixstowe for potential post Brexit customs work.
- Growth opportunities - the Freight Forwarding division is seeing strong CEE freight demand, supported by strong regional GDP growth and is investing in new routes. Newly acquired Regional Express is an Amazon Global preferred supplier providing VAT registration and shipping for e-commerce operators in the U.S. and Asia selling into UK and Europe. This brings upside opportunity. The Warehousing & Logistics division’s new Romania warehouse has reached full capacity helped by growth of the Pall-Ex franchise. Further capacity is being sought. The Transport Services division, with a network of 1,500 CEE haulage firms, provides fuel cards, breakdown recovery and ferry bookings. It has high margins and steady growth.
Valuation - the UK sector trades on a p/e multiple range of 10.0x – 13.0x and the wider international sector on a p/e of 16.0x. Xpediator trades on a 2017 p/e of 12.5x falling to 9.9x in 2018 and 8.6x in 2019. Coupled with an attractive 2018 yield of 4.4%, market opportunity and upside from the effective integration and development of the recent acquisitions, we believe that the current share price is undervalued.
*SP Angel act as Nomad and joint broker