Today's Oil and Gas Update - Base metals need to rise to support next generation exploration

Proactive Published 22/10/2018

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SP Angel – Morning View – Monday 22 10 18

Base metals need to rise to support next generation exploration

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Altus Strategies* (LON:ALS) – Board directors buy 1.5m shares in the market

Beowulf Mining* (LON:BEM) – Copenhagen Economics Study published in Swedish

Cradle Arc* (LON:CRA) – US$2m loan facility

Element 25 (ASX:E25) – Infill drilling commenced at Butcherbird manganese project

Lonmin PLC (LON:LMI) – Platinum sales guidance exceeded for year to 30th September

Petra Diamonds (LON:PDL) – Q1 Trading update

121 Mining Investment conference with SP Angel in London

20-21 November - See: https://www.weare121.com/121mininginvestment-london/

Base metals prices still fundamentally too low for the exploration and financing of next generation projects

Research at SP Angel indicates growing deficits in many of the world’s principal base and industrial metals if current price levels persist.
While there are many less-than marginal metals projects there are few outstanding development-ready proposals for banks to finance given current prices and forward price curves.
While traders are now financing royalty, offtake and metal streaming proposals there remains a degree of caution among major lenders for project finance.
Some funds have stepped into the breach with their ‘last brick in the wall financing approach’ but the recent withdrawal of support by a major Investor at Wolf’s Drakelands tungsten mine in the UK indicates a new caution among fund investors.
Our ongoing analysis indicates prices for most base metals and many industrial minerals will need to rise significantly to attract sufficient capital to fund the next generation of copper mines.
BHP’s recent investment into SolGold* is a good example of a major lining up to fund a next generation copper mine.

*SP Angel acts as broker to SolGold

NMC batteries to dominate future EV markets

The most popular battery chemistry used by EV manufacturers is expected to expand dramatically in new EV sales, according to the latest outlook reported by Fitch Solution. The growing EV market is expected to spur demand for the battery metals through their use in a wide range of chemistry combinations, with NMC-cathodes (Nickel-Manganese-Cobalt) buoyed by high energy density and reliability. NMC cathodes currently account for 28% of global EV sales, which is forecast to rise to 63% by 2027.
While Fitch expects NMC cathodes to dominate among future EV sales, a drawback is the high cobalt content, which can expose manufacturers to price risks and challenges relating to sustainable and ethical sourcing.
Cobalt prices rose over 120% in 2017 due to a global supply shortage. Prices peaked in March 2018, and then fell back to near 2017 pricing in October. Its prevalence in the DRC, where the use of child labour is rampant, poses ethical concerns for battery suppliers.
Battery makers such as SK Innovation and Panasonic are already anticipating this risk and working to increase the ratio of nickel in the cathodes, and decreasing cobalt. Key EV manufacturers currently using NMC cathodes in their batteries include Kia, Hyundai, BMW and Mercedes-Benz.

Breakthrough allows for 3D-printed Li-ion batteries

Scientists from Duke University utilise an electrolyte solution to increase the ionic conductivity of the polymers used for 3D printing which allows them to print complete lithium-ion batteries with an inexpensive machine. The poly(lactic acid) or PLA material builds on the previous limitations whereby only the non-conductive parts of the battery could be printed.
Besides printing the whole device, Christopher Reyes, Benjamin Wiley and colleagues were able to give it many different forms. This means that manufacturers of things such as electric vehicles, cell phones and laptops won't have to adapt their designs to the size and shape of commercially available batteries.
"Most lithium-ion batteries on the market come in cylindrical or rectangular shapes. Therefore, when a manufacturer is designing a product — such as a cell phone — they must dedicate a certain size and shape to the battery, which could waste space and limit design options," the researchers say.
In addition to printing the battery, Reyes and Wiley's team boosted the battery's electrical conductivity by incorporating graphene or multi-walled carbon nanotubes into the anode or cathode, respectively.
Capacity is currently too low for practical use, and the group are working on several ideas for increasing the capacity of the device, such as replacing the PLA-based materials with 3D-printable pastes.

Use of plastic in electric cars

Researchers from the University of Tokyo are pioneering a new way to make electric vehicles – by using plastic rather than metal and glass for both the body and windshield.
Professor Kozo Ito is the driving force behind the research that could reduce the weight of cars by 50%.
“The car we’ve built weighs about 850kg. It’s normally 1,300kg or 1,400kg. So we can bring down the weight by as much as half. Half the weight means twice the fuel efficiency,” he says.
They have developed a new polymer which they claim is 10x tougher and 1.6x more flexible and gas passed automotive safety tests for a vehicle windshield.

Faster electric vehicle charging

Sydney-based start-up Chargefox Pty is planning 21 sites across major interstate freeways that will cut hours from the time it currently takes to charge a standard electric vehicle to just 15 minutes. The renewable-powered stations will deliver up to 400km of range.
Australia made up just 0.2% of all new car sales in 2017, behind peers such as the U.K. at 1.9% and Germany at 1.5%.
Chargefox has secured A$15m from private investors and government to build the charging stations, which will have a capacity of up to 350KW, according to the statement.

Flying taxis to be cleared for take-off

Flying taxis could soon take to the skies over British cities with the introduction of the first rules governing drone-style passenger operations.
The European aviation safety regulator has launched a consultation into plans to certify small electric rotor-propelled aircraft to enable passenger or cargo flights.
The reforms will clear the way for the operation of vertical take-off and landing aircraft that carry five passengers and weigh no more than two tonnes when fully loaded. Regulations will apply to aircraft with a pilot on board or those that are “remotely piloted” from the ground, it was announced.

Addison Lee plans self-driving taxis by 2021

Addison Lee has joined forces with self-driving software specialist Oxbotica, and says the tie-up means it will offer self-driving taxis in the capital by 2021.
Addison Lee says it will now work with Oxbotica on digitally mapping public roads in and around the capital which will record the position of kerbs, road signs and traffic lights in preparation for autonomous cars.
Addison boss Andy Boland said the technology would help the firm "address congestion, free space used for parking and improve urban air quality".

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Economics

China – Preside Xi Jinping pledged “unwavering” support for non-state firms over the weekend while the government draft plan guided for better than expected personal tax cuts.

New tax proposal released on Saturday and planned to be implemented from January 1 2019 will boost personal disposable income and potentially support domestic demand.
Top officials’ comments aimed at shoring up business confidence, latest fiscal stimulus along with monetary easing announced earlier including a 1pp cut in reserve requirement ratio taking the cumulative reduction to 250bp this year serves to slowdown deceleration in economic growth rates.
Markets welcomed the news with the Shanghai Composite Index up 4.1% today, recovering from a four-year low hit last week.

Italy – Italian bond and equity markets are re-assured by the Moody’s better than expected rating change as well as one of cabinet members comments that the government could modify its spending should weaker than forecast growth comes around.

Moody’s cut the sovereign credit rating one notch to Baa3 while upgrading outlook to “stable” from “negative”.
Cabinet Undersecretary, Giancarlo Giorgetti, in his weekend interview noted the latest month’s bond-market sell-off and urged investors to consider the 2.4% deficit projection as a “ceiling” rather than an objective.
Concerns over a potential rejection of the Italian budget proposal have escalated as EU Commission criticised coalition spending plans amid high levels of debt.
Spread between 10y German and Italian bonds narrowed by 20bp to 282bp today after touching a five-year high of 341bp on Friday.
The FTSE MIB Index is up 0.6% this morning.

US/Russia – President Trump announced a withdrawal from the 1987 Intermediate Nuclear Forces Treaty arguing Russia had been violating the agreement for years.

The treaty was signed by Ronald Reagan and Mikhail Gorbachev in 1987 marking a major de-escalation in the nuclear arms race and banning all conventional and nuclear missiles with ranges between 500km and 5,500km.
The US claimed that a number of new Russian missiles are in breach of the treaty.
Trump said the US would consider capping its nuclear weapons development if it could make a new arrangement with both Russia and China.
“But if Russia is doing it and if China is doing it, and we-re adhering to the agreement, that’s unacceptable,” Trump highlighted.
Moscow denied all allegations.

Saudi Arabia – Energy Minister Khalid al Falih rejected suggestions Saudi Arabia may be using its oil supply as a weapon in retaliation to the international political pressure after authorities admitted that Jamal Khashoggi was murdered in its consulate in Istanbul.

The nation is reported to have already raised output by 700,000b/d to 10.7m since spring and is eyeing the 11.0m rate “in the near future”.
The Ministry said the kingdom should be “appreciated and supported” in its willingness to increase production and try to limit oil rally to a four-year high, ahead of the re-imposition of US sanctions on Iran in early November.
“I can say that we can go up, if necessary, to 12m. This I can assure. But if 3m disappears, we cannot cover this volume. So we have to use oil reserves. But it is very important for the world to support Saudi Arabia, because it is the only country that invests heavily in spare capacities,” Mr Khalid said.

Currencies

US$1.1550/eur vs 1.1439/eur last week Yen 112.72/$ vs 112.43/$ SAr 14.268/$ vs 14.405/$ $1.308/gbp vs $1.301/gbp 0.712/aud vs 0.711/aud CNY 6.932/$ vs 6.934/$

Commodity News

Precious metals:

Gold US$1,228/oz vs US$1,227/oz last week

Gold advanced for a third day as White House economic adviser Larry Kudlow accused China of doing “nothing” to defuse a trade spat and as tensions between the US and Saudi Arabia continue to simmer.
The metal received safe haven support as Saudi Arabia over the weekend admitted that the writer Jamal Khashoggi had dies, calling his death an accident after a fistfight in the Saudi Consulate in Istanbul. However, the body of Mr. Khashoggi is still missing, and it remains unclear whether the Crown Prince Mohammed bin Salman directly ordered his killing.
Western politicians have dismissed the Saudis’ shifting explanations over the episode as lies, with President Recep Tayyip Erdogan of Turkey promising to reveal intelligence and evidence on the case “in full nakedness”.
Trump said the Saudi narrative had been marked by “deception and lies,” but also defended the crown prince.
White House economic adviser Kudlow accused China of doing “nothing” to defuse trade tensions ahead of a likely meeting between President Donald Trump and President Xi Jinping at the G20 in Argentina next month, the Financial Times reported.
Bullion for immediate delivery rose +0.1%, with the metal capping its third weekly gain on Friday.
U.S. stock-index futures declined, while equities in China climbed after President Xi Jinping vowed “unwavering” support for the country’s private sector.
Gold has acted as a safe haven during October’s market sell-off. The precious metal has gained three percent this month, while the MSCI World Index plummeted more than five percent as investors focus on the protracted trade war between the US and China, the Italian debt crisis and rising interest rates. Gold’s rally is the strongest since January according to one technical gauge - Divergence Analysis Inc.’s (DVAN) Buying and Selling Pressure indicator.

Gold ETFs 67.9moz vs US$68.0moz last week

Platinum US$838/oz vs US$832/oz last week

Palladium US$1,091/oz vs US$1,084/oz last week

Silver US$14.69/oz vs US$14.61/oz last week

Base metals:

Copper US$ 6,320/t vs US$6,169/t last week

London copper prices surges for the second day, extending a really fueled by a pledge from China’s central bank that it would support firms with liquidity problems. The pledge was followed by comments from Chinese President Xi Jinping on Sunday that the ruling Communist Party would always support private-sector firms.
China is "multiplying its efforts to support the economy, and in particular, the infrastructure sector amid domestic and international headwinds," such as the trade war with the United States and high debt levels, Fitch Solutions said in a note. The research house added the country’s demand for copper “will improve over the coming months as property completions and grid investment picks up and demand from the autos and consumer sectors remain buoyant”.
Three-month copper on the London Metal Exchange rose +0.8%, extending the 1% previous jump in an earlier session. Further, China’s copper import premiums rose to $117.5/t, just below the recent three-year high of $120/t, indicating strong demand for physical metal.

Aluminium US$ 2,028/t vs US$2,014/t last week

Nickel US$ 12,665/t vs US$12,475/t last week

Zinc US$ 2,673/t vs US$2,672/t last week

Lead US$ 2,025/t vs US$1,992/t last week

Tin US$ 19,190/t vs US$19,155/t last week

Energy:

Oil US$80.4/bbl vs US$79.5/bbl last week

Brent Crude Oil prices rose back above $80 a barrel on Monday as markets were expected to tighten once U.S. sanctions against Iran’s crude exports are implemented next month.
Brent crude oil futures were at $80.26 a barrel at 0646 GMT, up 48 cents, or 0.6%, above their last close.
U.S. West Texas Intermediate crude futures were at $69.60 a barrel, up 48 cents, or 0.7%.
Iraq is producing a record 4.78m barrels of oil a day, the country’s Oil Minister Jabbar Al-Luaibi said on Saturday.
Output will rise to 5m barrels a day in 2019 and 7.5m in 2024, he said.
Forecasts suggest Iraq could pump 6m barrels a day by 2025 and that its output is set to grow faster than for all countries but the U.S. over the next six years.

Natural Gas US$3.200/mmbtu vs US$3.205/mmbtu last week

Uranium US$27.60/lb vs US$27.70/lb last week

Bulk:

Iron ore 62% Fe spot (cfr Tianjin) US$71.7/t vs US$72.1/t

Iron ore spot markets weakened across the board on Friday following news the Chinese economy grew at the slowest pace since the GFC in the September quarter.
According to Metal Bulletin, the price for benchmark 62% fines dipped 0.4% to $73.28/t, pulling back from the multi-month high of $73.58/t struck a session earlier.
Low and higher grades also softened during the session.
The price of 58% fines shed 0.9% to settle at $42.59/t. Ore with 65% Brazilian fines fell by a smaller 0.5% to $96.70/t.

Chinese steel rebar 25mm US$690.2/t vs US$690.0/t

Thermal coal (1st year forward cif ARA) US$99.0/t vs US$97.5/t

Premium hard coking coal Aus fob US$205.1/t vs US$191.3/t

Other:

Cobalt LME 3m US$60,000/t vs US$60,750/t

China NdPr Rare Earth Oxide US$45,944/t vs US$45,930/t

China Lithium carbonate 99% US$9,809/t vs US$9,806/t

Tungsten APT European US$275-295/mtu vs US$275-290/mtu

Company News

Altus Strategies* (LON:ALS) 4.0p, Mkt Cap £7.1m – Board directors buy 1.5m shares in the market

Steven Poulton (CEO), Matthew Grainger (Executive Director) and Robert Milroy (NED) have purchased 795k, 400k and 325k shares each at an average price of 3.5p last week.
Over £50k worth of shares acquired in the market bring total number of outhandling shares held by Board members to 35.9%.
The management and BOD members picking up shares in the market is a welcome news and reflects their confidence in the Company and its portfolio of prospective exploration assets.
The Company has recently announced an LOI with Canyon Resources where Altus will transfer 100% interest in the Birsok and Mandoum bauxite licenses in return for 30m shares in Canyon and a $1.5/t royalty on the project.
Before that, Altus team signed an LOI with Raptor Resources, a private entity planning to list on the ASX this year, with regards to copper and other base metals exploration assets in Morocco; Raptor will be able to earn up to 100% interest in the Altus’ Morocco subsidiary in return for upfront cash payment, equity in Raptor and a NSR on licenses.
The team is progressing an extensive portfolio of early stage exploration projects covering 18 targets across six African countries (Morocco, Ethiopia, Cameroon, Liberia, Cote d’Ivoire and Mali), identifying priority targets and de-risking assets sufficiently to attract partners for more capital intensive drilling programmes.
Among latest priority targets highlighted by Altus team is the drilling ready Lakanfla Gold Project in Western Mali where the Company is planning to test a potential for a karst-style mineralisation at depth which might be analogous to FE3 and FE4 deposits (1.5moz) and Yatela (4.5moz), parts of a multi-million ounce Sadiola gold operation located 6.5km NW of the license area.

*SP Angel acts as Nomad and Broker to Altus Strategies plc

Beowulf Mining* (LON:BEM) 5.3p, Mkt Cap £29.7m – Copenhagen Economics Study published in Swedish

Beowulf has translated the key points from its newly published study by Copenhagen Economics in relation to the proposed Kallak iron ore mine in Sweden.
Key points:
250 new jobs at Kallak and 300 indirect jobs in Jokkmokk, the local town.
New mines at Kallak South and Parkijaure may come after Kallak North is mined.
Beowulf to create a Task Force with the Jokkmokks municipality to help local people prepare for employment in relation to the Kallak project.
>SEK40mpa (£3.41m) in tax revenues forecast totalling some SEK 1bn (£85m) over a projected 25 year mine life.
Beowulf has spent some SEK77m (£6.6m) at Kallak.
Kallak is proposing to produce high quality iron ore concentrates.
Kaunis Iron recently restarted the Kaunisacaara mine in Sweden with ship loading at Narvik. The mine provides employment in the Pajala community.
Iron ore prices and the premiums paid for >62% iron ore continue to record high price levels 71% iron ore likely to now attract >$7/t for each percentage point above the 62% benchmark price
This should see Kallak iron ore fetch prices well over $100/t when sold into DRI furnaces in Europe and the Middle East.
The company is also advancing a number of graphite prospects in Finland where the permitting regime may be better defined and supported.

*SP Angel acts as nomad and broker

Cradle Arc* (LON:CRA) 1.1p, mkt cap £3.1m – US$2m loan facility

Cradle Arc reports that it has reached agreement with its largest shareholder, PenMin Botswana, for a US$2m loan facility which “provides Cradle Arc's operating company, Leboam, with sufficient funding to establish an enhanced inventory of key spare parts and improve and rehabilitate the current processing facilities at Mowana and thereby address the intermittent breakdowns and interruptions that were the key reason for the Company's inability to meet its production targets during Q3 2018”.
The company has previously disclosed that its “CEO, Kevin van Wouw, is indirectly interested in approximately 41.8 per cent. of the Company's existing issued share capital via PenMin, which is a substantial shareholder”.

Conclusion: It is encouraging to see the commitment of the CEO in assisting the provision of a loan facility which should help Cradle Arc address the underlying causes of its mixed operational performance at the Mowana mine.

*SP Angel acts as Joint Broker to Cradle Arc PLC

Element 25 (ASX:E25) A$0.2, Mkt Cap A$16.7m – Infill drilling commenced at Butcherbird manganese project

Element 25 have commenced the latest infill drilling campaign at the company’s 100% owned Butcherbird High Purity Manganese Project following receipt of comprehensive heritage clearance from the Nyiyaparli Native Title Claim Group.
The programme comprises 200 holes for a total of ~7,000m, the results of which will form the basis of a revised mineral resource estimate to upgrade the planned starter pit area from Inferred and Indicated to Indicated and Measured categories as a basis for a maiden reserve, expected to be published with the PFS.
Drilling is expected to take approximately four weeks, with assays due in December and revisions to the resource estimate expected in early 2019.
The company are looking to develop the current JORC resource in excess of 180Mt of manganese ore, to target high-purity manganese sulphate for lithium-ion battery cathodes as well as Electrolytic Manganese Metal for use in specialty steels.

Conclusion: High-purity manganese is essential for supporting the rapidly growing Li-ion battery market, with the favoured composition of NMC (Nickel-Manganese-Cobalt). The most popular chemical make-up is expected to swell to 63% global EV market by 2027 boosting the requirement for consistent, battery-purity manganese. We look forward to seeing how the JORC resource grows with the infill drill campaign and work scaling up the proprietary ambient temperature and atmospheric pressure leaching processing.

Lonmin PLC (LON:LMI) 52.8 pence, Mkt Cap £149m – Platinum sales guidance exceeded for year to 30th September

Lonmin reports that sales of 681,580oz of platinum during the year to 30th September exceeded its guidance range of 650-680,000oz and that overall sales of platinum group metals (PGMs) amounted to 1,323,708oz.
On an unaudited basis, the company achieved a 25.5% increase in the basket price PGMs of R13,447/oz while unaudited costs of R12,271/oz fell within previously published the guidance range of R12,000-12,500/oz.
The company reports that production from its key “Generation 2” shafts, K3, Daffy, Rowland and the E3/Pandora unit contributed around 77% of total mined production remained “broadly flat” at 2.1m tonnes for the quarter and 7.6mt for the full year.
As part of the company’s strategy to reduce high cost production from the “Generation 1 shafts (4B, Hossy, W1 and E1) at 625,000 tonnes continues to decline as planned, as we optimise our remaining ore reserves in these shafts, and was 3.9% lower than Q4 2017. The decrease is also due to E2, which produced until Q3 2017, being on care and maintenance since November 2017.”
The company has also announced today a US$200m re-financing via a “metal purchase agreement with Pangaea Investments Management Limited (PIM) an associate company of Jiangxi Copper Limited “.
“Lonmin will settle its pre-existing term loan of US$150 million (the Term Loan) and cancel all its other pre-existing undrawn facilities (together, the Existing Debt Facilities) with both its South African Rand and US Dollar lender groups (the Existing Lenders). The Facility will provide Lonmin with improved liquidity and removes certain restrictive current lender conditions notably the tangible net worth covenants contained in the Existing Debt Facilities which were waived by the Existing Lenders subject to the anticipated successful completion (Completion) of Sibanye-Stillwater's all share offer for Lonmin (the Offer).”
Commenting on the implications of the new financing facility, CEO, Ben Magara, pointed out that “Regrettably, the new facilities do not address the fundamental business challenges facing Lonmin and do not offer an opportunity to avoid the announced retrenchments and shaft closures. Accordingly, the Board of Lonmin remains focused on completing the Sibanye-Stillwater all share transaction, which we firmly believe provides a sustainable solution and is in the best interest of all our stakeholders.”
The company reports that the South African Competition Tribunal is expected to convene to consider the Sibanye-Stillwater acquisition of Lonmin during the period 12th to 14th November.

Conclusion: Lonmin’s operations have exceeded guidance during the year to 30th September. The next key date in the proposed acquisition of Lonmin by Sibanye Stillwater is 12th November when South Africa’s Competition Tribunal meets to consider the transaction.

Petra Diamonds (LON:PDL) 37.2p, Mkt Cap £322m – Q1 Trading update

Petra Diamonds reports a 21% increase in year-on-year diamond production during the quarter ending 30th September to 1,068,140 carats (Q1 2018 – 883,803 carats).
The increased production reflects a substantial increase in output from the Cullinan mine “mainly due to the contribution from the C-Cut in line with the ramp up plan” (404,667 carats compared to last year’s 250,001 carats) combined with smaller increases at the other group operations, partially offset by planned reductions in output from reprocessing of tailings at the Finsch mine.
Petra Diamonds comments that it “remains in discussions with the Government of Tanzania and local advisers in relation to the overdue VAT receivables and the blocked parcel.”
Sales of 626,541 carats of diamonds during the quarter generated revenues of $80.2m implying an average price of US$128/carat sold compared to US$112/carat for the equivalent quarter last year. The company notes that “Diamond prices for Q1 on a like-for-like basis were down ca. 5% in comparison to FY 2018 due to the usual seasonal weakness, but partially offset by the improvement in product mix”.
Average prices achieved by the Finsch mine were $106/carat for the 318,872 carats sold while Cullinan realised an average of US$101/carat on sales of 217,727 carats. At the smaller Koffiefontein mine sales of 11,942 carats realised US$505/carat while the Williamson mine in Tanzania sold 78,028 carats for an average price of US$237/carat.
Commenting on the general state of the diamond market, Petra Diamonds view is that “The market is showing the usual signs of seasonal weakness associated with this time of year, with a number of religious and other holidays observed by clients in the midstream, but is generally assessed by industry participants to remain stable. Supply discipline by the major diamond producers is expected to assist with maintaining an equilibrium between supply and demand of inventories in the midstream.”
The company reports that “due to the timing of our first tender” net debt increased during the quarter to US$538.9m from the US$520.7m reported at 30th June but that “Petra remains on track to generate free cashflow in FY 2019 but notes the weighting of tenders towards H2, with two further tenders scheduled during H1 and four during H2 FY 2019”.

Conclusion: The rising production profile and expected supply discipline is expected to move Petra Diamonds into positive cashflow during the current financial year.