SP Angel – Morning View – Thursday 25 10 18
Miner show resilience to sell-off in US equities
MiFID II exempt information – see disclaimer below
AfriTin Mining (LON:ATM) – Uis tin project update
Oriole Resources (LON:ORR) – Drilling results from Dalafin
Freeport McMoran (NYSE:FCX) – to earn into Solaris Copper’s Ricardo project in Chile
Mkango Resources* (LON:MKA) – BUY - Target Price 27.9p – China could easily starve Rare Earth buyers
Miners and commodities show resilience to sell-off in US equities
- Base Metals held firm overnight following the sell-off in US equities while gold continued to improve in an increasingly volatile environment
- Major mining equities are quick to rally as investors move to increase weightings in US-dollar earning stocks.
- Metals in general stood firm as nervous investors adjust equity weightings to a more risk off strategy.
- Investors and traders often sell metals defensively as they unwind any leveraged or extended positions and consumers hold back on purchases hoping for lower prices.
- But the potential for shortages to develop across a range of metals appears to be holding the market firm with premiums reported to be rising in the tighter metals.
- US equities are reacting to evidence of some slowing of the US new-build housing market which is reacting to higher US interest rates. The slowdown here is also seen as symptomatic and a cause of slower growth in other areas of the economy.
Markets are also worried about:
- Pipe bombs sent to US politicians on both sides. Seems someone just does not like politicians of any colour.
- The ECB's refusal to approve the Italian budget which could lead to an Ita-exit.
- The Saudi situation
- Stronger US dollar
- ECB potential to end QE in meeting on Thursday
- US GDP may have slowed in Q3.
- It looks as if markets feel they have had all the positive news flow and it’s all downhill from here
Scandium – Extra-terrestrial metal boosted by demands for modern planes and cars
- An obscure silver-while metal, found in higher concentrations in moon rocks than on earth, holds promise to transform manufacturing of planes and cars and is receiving a strong boost from the boom in battery metals mining.
- Addition of the metal to aluminium improves the weight, strength and malleability, dramatically reducing the weight for parts for aircraft, cars or ships and help deliver savings on fuel costs. Vice president for business development and scandium marketing at Clean TeQ Holdings Ltd adds “it’s the single most potent strengthening element you can add to aluminium. Why scandium is so interesting is that if you add very, very small amounts of it – its has amazing impacts”.
- The big problem has been a lack of supply. This is being improved by the arrival of new mines that’ll yield scandium as part of the process of producing the cobalt and nickel needed for lithium-ion batteries. Extracting all three materials from a single deposit, rather than focusing only on producing scandium, drastically improves the economics. “It more or less gets a free ride along with the cobalt and nickel,” said Clean TeQ, “The cost of production is significantly less” according to Australian polymetallic developer.
- A raft of industries have long been aware of the potential benefits -- on a small scale. Alloys using scandium were developed in the 1960s and have been deployed in Russian MiG fighter jets to baseball bats. The material currently is mainly used in solid oxide fuel cells, used to provide uninterrupted power for hospitals or data centers, and has also been deployed for 3-D printing, including for an electric motorcycle.
- Wider adoption has proved more difficult, with the sector stuck in a conundrum: global output of scandium had been too small to give potential users such as aerospace companies confidence there’d be a reliable, long-term supply -- a factor that’s also kept prices high. Yet without certainty about demand, producers have been unable to commit to developing operations.
- Changing demands are creating new requirements, with Japan’s Sumitomo Metal Mining Co. entering production in the Philippines, while United Co. Rusal is studying plans to add scandium output following tests at its Urals smelter.
- In Australia, Clean TeQ’s Sunrise mine is intended to be up and running in 2021, while Australian Mines Ltd. and Scandium International Mining Corp.are among others developing assets. Centennial, Colorado-based NioCorp Developments Ltd. is developing a mine in Nebraska.
- “As new supply comes online some of the latent demand will be unlocked,” said Will Ayre, a London-based consultant at CRU Group. “The aerospace industry is one of the obvious sectors where scandium consumption might increase dramatically. Tiny reductions in aircraft weight can lead to significant fuel cost reductions.” The current market for scandium oxide is about 15-20t/year, and a switch by the airline industry to replace 30% of aluminum consumption with aluminum-scandium alloys could lift demand to about 80t/year, according to Ayre.
- Adoption by the auto sector would be a potential game-changer, according to CRU. Using scandium alloys to replace even a small proportion of aluminum used in vehicles would require enormous volumes, potentially lifting demand to more than 1,800t by 2035 -- vastly more than the capacity of current planned projects. It’s more likely that use of scandium in autos will be limited to some high-end vehicles, Ayre said.
- Swelling demand and clarity over growing consumption is expected to deliver more stability on prices that have fluctuated between a current level of ~$1,500/kg to as high as $5,000/kg.
- There are market parallels in the rise of niobium, with demand surging more than 10x over the past forty years and market value rising from less than $100m to $2bn. “We’re going to end up in the case of scandium with something similar to that we had for niobium,” said Carneiro, who served as CEO of CBMM, known formally as Cia. Brasileira de Metalurgia & Mineracao,
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Dow Jones Industrials
HK Hang Seng
FTSE 350 Mining
AIM Basic Resources
US – Equities sold off heavily just before the closing bell with S&P 500 down more than 3% and Nasdaq off 4.4%.
- European and Asian markets followed suit with the pan-European Stoxx 600 down 0.6% this morning and MSCI Asia Pacific down 0.4%.
- October month has seen erasing YTD gains in the US with stocks on course for their worst month in more than six years as the effects of trade tensions, geopolitics and rising Fed rates damp growth outlook.
- While earnings results have been coming in strong many companies have voiced warnings about the future impact of tariffs and rising costs.
- As the companies release earnings they would be able to re-start buybacks in the market that should lend some support to prices.
- Companies have been among the biggest buyers of stocks in this bull market, spending $4.4tn on buybacks since the end of the financial crisis, or about $800bn more than the Fed spent on quantitative easing.
- Latest business activity reports show growth accelerated in October following three months of slowing headline rate of expansion, according to PMI data.
- Flash Composite PMI climbed to a 3-month high this month driven by gains in the service sector compensating for a bit of a loss of momentum in manufacturing.
- Strong new orders are reported to have been driven by improving domestic economic conditions “with exports stagnating amid growth in signs of trade being subdued by tariffs”; stronger US$ does not help either.
- Prices charged by businesses held up at survey-record high reported in September.
- “The flash PMI surveys indicate that the pace of economic growth gained momentum again in October after having been subdued mainly by adverse weather in September… the headline PMI is running at a level broadly consistent with the economy growing at an annualised rate of 2.5% boding well for another robust quarter of growth,” PMI wrote.
- First Q3 GDP reading is due this Friday with estimates for 3.3%yoy versus 4.2%yoy recorded in Q2/18.
ECB – The central bank will be holding its monetary policy press conference today which could see policymakers confirming the end to asset purchases in December this year while keeping rates at record low through summer 2019.
- Mario Draghi has previously guided to continue with €15bn monthly purchases until the end of December and subject to incoming data confirming the medium-term inflation outlook to end net purchases then.
- The meeting comes amid slowing growth momentum in the single currency region as well as growing debt sustainability concerns in Italy.
Germany – Business confidence weakened with deadlocked negotiations between the EU and UK over Brexit terms and the continued trade row between the US and China adding to uncertainty.
- IFO Business Climate: 102.8 v 103.7 in September and 103.2 forecast.
UK – The pound is slightly stronger this morning on the back of reports that PM Theresa May managed to secure support from fellow MPs to continue to with Brexit negotiations.
- Rumours have been circulating that the prime minister could face an imminent vote of no-confidence from rank-and-file MPs.
- However, May has promised to deliver Brexit whatever happens on March 29 and that the UK will not be in a customs union forever.
- She also pledged not to end up with Northern Ireland being split from the rest of the country leaving it behind in the customs union.
Italy – PM Giuseppe Conte denied suggestions that he had asked Russia to buy Italian bonds in an effort to calm markets, Reuters reports.
- “I did not come here to ask Putin to buy Italian securities through the sovereign fund… if a sovereign fund or the central bank were to make such a decision, they would do so because it is convenient, and a good deal,” Conte said.
- The spread of Italian 10y debt over the German equivalent is down 5bp at 3.19% this morning.
- Italian head of the cabinet has also declined to say if Rome was ready to veto any sanctions renewal with regards to Russian banking, financial and energy sectors.
- Punitive sanctions have been renewed in June but expire at the end of January and are up for discussion in Brussels.
US$1.1401/eur vs 1.1430/eur yesterday Yen 112.31/$ vs 112.53/$ SAr 14.601/$ vs 14.239/$ $1.291/gbp vs $1.295/gbp 0.706/aud vs 0.709/aud CNY 6.945/$ vs 6.939/$
Gold US$1,230/oz vs US$1,231/oz yesterday
Gold ETFs 68.1moz vs US$67.9moz yesterday
Platinum US$830/oz vs US$830/oz yesterday
Palladium US$1,139/oz vs US$1,143/oz yesterday
Silver US$14.75/oz vs US$14.75/oz yesterday
Copper US$ 6,209/t vs US$6,222/t yesterday
Aluminium US$ 2,003/t vs US$2,010/t yesterday
Nickel US$ 12,395/t vs US$12,420/t yesterday
Zinc US$ 2,703/t vs US$2,712/t yesterday
- The refined zinc market is getting extremely tight with London Metal Exchange zinc spreads swelling to one-year high of $63/t earlier this week for cash-to-three-months premium. LME stocks are also falling, touching 99,900t excluding metal earmarked for physical load-out.
- Shanghai Futures Exchange market reflects global tightness, with zinc spreads also in backwardation, while the premium for metal in bonded warehouses shot to multi-year highs in September. ShFE stocks have rebuilt slightly since the start of the month to 53,500t. But that's still well short of the 160,000t that were there as recently as April.
- While analysts at Citi had previously reported the market as “screamingly bullish”, the International Lead and Zinc Study Group (ILZSG) increased its expected global supply deficit this year to 322,000t from the previous 263,000t forecast at its last meeting in April. However, trying to predict a market balance for an industrial metal such as zinc is a hapless exercise, particularly given the statistical opacity of China, the largest single influence on the calculations.
- This year's expected mine production growth has been slashed to 2.0% from April's forecast of 5.1%. China's own mine output is now forecast to contract by 2.5% this year. In April the ILZSG expected it to rise by 2.3%. China's usual "swing capacity", the smaller operations that burst into life during periods of elevated pricing, has failed to swing this time around, even though the zinc price hit 11-year highs in the second quarter – possibly related to environmental inspections and growing legislation.
- The study group are forecasting the surging supply to hit later next year, with global mine production forecast to surge by 6.4% with refined output growth accelerating from 1.4% to 3.0%. Physical tightness in the refined segment of the market is expected to remain through to the new year.
Lead US$ 2,023/t vs US$2,020/t yesterday
Tin US$ 19,375/t vs US$19,335/t yesterday
- European tin premiums continues to surge this week as concerns build about continued supply from Indonesia. Rotterdam 99.9% standard-grade tin ingot with 300ppm lead content in-warehouse climbed to a five-month high on Tuesday at $350-425/t amid continuing developments in Indonesia’s crackdown on illegal mining.
- Following the government’s suspension of key smelter inspector PT Surveyors, market participants have reported increased difficulty in sourcing tin from Indonesia, the world’s second-largest tin producer. A European tin trader said “until this is resolved, there’s a high chance that there could be no tin coming out of Indonesia”.
- Tin exports from Indonesia need an independent certificate of content and quality before being traded on the Indonesian Commodity & Derivatives Exchange (ICDX). ICDX data has shown minimal trading since the announcement that PT Surveyors was suspended, with 4,645t traded so far in October, compared with 8,270t traded in September.
- Similarly, pressure is beginning to mount in China’s south-west Yunnan province, home to Yunnan Tin, the world’s largest tin producer. Central government environmental inspections have assessed only 15 of 173 smelting and rolling mills in the non-ferrous sector as being qualified producers. A second European trader added “we’ve also seen a lot of people borrowing the spreads this week, indicating that the market has genuine supply issues. There is no quick fix for [the supply issues in] Indonesia and China. It needs a real, long-term solution”.
- Tin’s three-month price climbed to a three-month high of $19,415/t in the morning of October 24, while the metal’s LME inventory volume has fallen by almost 6% week on week.
Oil US$75.6/bbl vs US$76.3/bbl yesterday - North Sea oil and gas spend
- Up to £330bn could be spent on extracting oil and gas from UK waters over the next three decades, according to leading industry experts.
- Prof Alex Kemp and Dr Linda Stephen at Aberdeen University have used new data to model the potential for the offshore industry until 2050.
- The study concludes that there could be 17bn barrels of oil or the equivalent gas still to be extracted from offshore fields.
Oil prices fall 1% amid global stock market slump
- Oil prices fell by around 1% on Thursday, coming under pressure from sharp selloffs in global stock markets, with U.S. stocks posting the biggest daily decline since 2011 to wipe out the year's gains.
- Front-month Brent Crude Oil futures were at $75.42 a barrel at 0043 GMT, 75 cents, or 1%, below their last close.
- U.S. West Texas Intermediate crude futures were at $66.23 a barrel, 59 cents, or 0.9%, below their last settlement.
Natural Gas US$3.184/mmbtu vs US$3.219/mmbtu yesterday
Uranium US$27.80/lb vs US$27.80/lb yesterday
Iron ore 62% Fe spot (cfr Tianjin) US$74.2/t vs US$72.3/t
Chinese steel rebar 25mm US$695.2/t vs US$695.1/t
- Significant investment by steel mills in environmental operations may allow for “some relaxation” in China’s winter restrictions this year, according to Fortescue Metals Group Ltd. Chief Operating Officer Greg Lilleyman.
- “We’re not expecting there’s going to be a relaxation of policy in terms of the blue-sky policy. It’s a matter of achieving the environmental results that the government is trying to achieve that has started to have an impact in terms of mills investing in pollution controls,” Lilleyman says
- Winter restrictions this year will still be “detrimental” to overall steel production, with mills also seeking higher-grade efficient iron ores to generate cleaner steel.
Thermal coal (1st year forward cif ARA) US$97.3/t vs US$98.0/t
Coking coal futures Dalian Exchange US$206.8/t vs US$206.9/t
Cobalt LME 3m US$60,000/t vs US$60,000/t
China NdPr Rare Earth Oxide US$45,665/t vs US$45,901/t
- Supply of materials fundamental to support growing green technologies, including permanent magnets in EVs and wind turbines, may be struck as the major ex-China producer Lynas Corp. may need to reduce output of its rare earth operation over the remainder of 2018 if approval from regulatory authorities isn’t received.
- The company sees a potential reduction in NdPr output in Dec. of ~400t, although any temporary shutdown will be timed to coincide with necessary plant upgrades.
- The Malaysian government is carrying out a review of Lynas Corp.’s operations, including its public health and environmental impact. Govt. review committee will visit Lynas plant early next month, co. says; co. to continue to engage with govt to seek further details of review committee and related regulatory issues.
- With supply dominated by China, these issues serve to highlight the importance of developing production capacity outside the Asian nation. Mkango Resources continue to develop their advanced stage Songwe Hill rare earth resource, targeting an updated resource statement and technical studies to unlock the next phase of Talaxis investment. The project represents one of only a few options for sourcing reliable non-Chinese supply for growing green technology demand.
China Lithium carbonate 99% US$9,796/t vs US$9,800/t
Tungsten APT European US$275-295/mtu vs US$275-290/mtu
Tesla Model 3 announcement
- Elon Musk announced on Wednesday that Tesla’s Model 3 will start selling in Europe early next year and in Australia around the middle of next year.
- When describing the level of global demand for the sedan, Musk estimated somewhere in the range of 500,000 to 1m a year.
- The company reported a net profit, positive cash flow and wider-than-expected margins for the last quarter on Wednesday, delivering on Musk’s promise to turn the business profitable as higher production volumes of the new Model 3 begin to pay off.
- Tesla reiterated that it expected to repeat its net profit in the current quarter, helping drive the company’s shares up 14% in afterhours trading.
Lyft buys UK start-up Blue Vision
- Lyft has bought UK technology start-up Blue Vision Labs to boost its efforts in developing self-driving vehicles.
- The acquisition is the first for Lyft’s autonomous division, which was launched in July 2017. Lyft said on Tuesday that it will use Blue Vision’s expertise in computer vision to help build maps of the environment surrounding a car.
- “This technology will significantly accelerate our efforts toward developing safe and reliable autonomous transportation,” said Luc Vincent, head of Lyft’s autonomous division.
AfriTin Mining (LON:ATM) – 3.3p, Mkt cap £18m – Uis tin project update
- AfriTin has provided a progress report on its Uis tin project in Namibia where it has now completed the civil earthworks and is moving on to the construction of the steelworks and equipment installation for its phase 1 processing plant which is expected to “process approximately 500,000 tonnes per annum producing around 60 tonnes of tin concentrate per month”.
- The plant incorporates a four-stage crushing circuit to feed the concentrator comprising a combination of dense media separation and gravity concentration capacity.
- The phase 1 plant “in conjunction with further testing, will provide the Company a seamless transition to a bankable feasibility study for Phase 2. This will comprise a planned operation of a 3 million tonne per annum processing facility, producing approximately 5,500 tonnes per annum of tin concentrate”.
- Previous announcements from AfriTin disclose that the incorporation of dense-media processing enables the Uis phase 1 plant to produce a tin concentrate grading 60% and recovery rates of around 85%.
- AfriTin has also indicated in the past that it identifies significant exploration potential in the vicinity with more than 180 tin-bearing pegmatite occurrences known within a 5km radius of the Uis plant.
Conclusion: Construction of the phase 1 plant at Uis is proceeding and we look forward to further news as it moves towards commissioning.
Oriole Resources (LON:ORR) 0.48p, Mkt cap £3.4m – Drilling results from Dalafin
- Oriole Resources, formerly Stratex International, reports that, as part of its earn-in commitments, IAMGOLD has recently completed a 2,428m (552 holes) programme of aircore drilling over the Madina Bafe area in the south of the Dalafin licence area in eastern Senegal.
- The results confirm a broadly WNW trending gold anomaly, with coincident bismuth and molybdenum anomalies, previously identified by Oriole over a 15km strike length as well as also confirming a “Second N-S trending gold anomaly (>20 ppb AU) located 2km to the NW extends over 400m and has confirmed earlier termite anomalism tested by Oriole.”
- Follow up work including a 3000m reverse-circulation drilling programme is expected to start during November “to test newly generated targets as well as along strike from mineralised holes previously reported by Oriole”. A “500m follow-up diamond drilling [campaign] will be conducted to confirm higher grade results from Oriole’s earlier RC and diamond drilling.”
- Oriole’s earlier drilling included intersection of 9.6m at an average grade of 16.08g/t gold in hole MBSS-002 and 15m averaging 6.1g/t gold in hole MBRC-117.
- Commenting on the success of the aircore programme in identifying mineralisation beneath lateritic cover, CEO, Tim Livesey, said that the programme had identified “broad zones of anomalous gold mineralisation as well as higher grade samples that could indicate a feeder zone at depth. These encouraging results have not only supported previous work by Oriole but have importantly also identified new targets.”
- Madina Bafe is located approximately 12km WNW of IAMGOLD’s 2.5moz Boto gold project where, following a recently completed feasibility study, IAMGOLD is shortly applying for a mining licence. Under the terms of its agreement, IAMGOLD is earning an initial 51% in the Dalafin project by spending US$4m on exploration over 4 years with an option to increase its ownership to 70% by spending a further US$4m over the following 2 years.
- Earlier this week, IAMGOLD announced that its feasibility study for Boto described a 12.8 year mine producing an average of 140,000oz pa of gold at an all-in sustaining cost of US$753/oz. Based on initial capital expenditure of US$254m and a life of mine gold price of US$1,250/oz, Boto is expected to generate an after tax NPV6% of US$ 261m and an IRR of 23%.
Conclusion: Given its adjacent Boto deposit, IAMGOLD’s interest in Dalafin, and particularly in Madina Bafe, which appears to lie directly along strike, is understandable. We look forward to the results of the follow up reverse-circulation and diamond drilling.
Freeport McMoran (NYSE:FCX) US$10.7, mkt cap £15.5bn to earn into Solaris Copper’s Ricardo project in Chile
- Freeport has agreed a three-stage process to earn into Solaris’ large 16,000Ha Ricardo property.
- The deal enables Freeport to earn up to 80% in the project for $130m or by spending $30m and completing a feasibility study, we suspect the latter would be cheaper.
- A $100m feasibility study would be interesting and would imply a very large project if the study and related drilling were to cost that much.
- Freeport get an initial 60% for spending US$4.2m in the first two years of exploration after which they can spend a further $4.8m in the third year and another $8m in the fourth year and $13m in the fifth year.
- In Stage 3, Freeport can then earn an extra 20% of the project by funding a feasibility study or spending a further $100m
- Solaris is a large copper porphyry prospect in the north of Chile on the West Fissure Fault which hosts a number of the world’s major copper porphyry mines.
- The West Fissure Fault extends for around 5,000km through Chile and Peru
- Solaris also have a significant copper-molybdenum project in Ecuador called Warintza, though the Ecuadorian government appear to have stalled permits for drilling to explorers.
- Drilling at Ricardo of a a near vertical 1,600m hole shows ‘strong quartz sericite alteration and a series of rock types similar to wall rocks found on the west end of the Chuquicamata orebody’ according to Solaris. The hole intersected, at a depth of approximately 600m, a zone of weakly anomalous zinc in the range of 100 ppm Zn. At a depth of approximately 900m to 1,100 metres this was replaced by weakly anomalous copper values ranging from 100-200 ppm Cu.
- This is about as much as we and the rest of the market appears to know about the Ricardo prospect indicating that Freeport geologists are more than excited about the sequence of rocks potentially indicating another giant copper mine like Chuquicamata.
- Chuquicamata is only 25km away from the Ricardo prospect indicating an element of close-ology, but the presence of a similar sequence of rock types should give more reason geological interest.
- BHP’s recent US$45m investment into SolGold* (SOLG) LN taking its stake to 11.18% looks like better founded investment into a next generation copper mine though more is to be discovered.
*SP Angel act as broker to SolGold in the UK
Mkango Resources* (LON:MKA) 8p, mkt £8.7m – China could easily starve Rare Earth buyers
BUY - Target Price 27.9p
- A rush to develop new supply of rare earth minerals outside of China will come too late to soften the impact of Beijing limiting its output of rare earths. According to Adamas Intelligence, China could easily starve foreign buyers of key ingredients such as cerium, neodymium and praseodymium, used in catalysts, electronics and weapons – a drastic trade war escalation that would punish profit margins.
- The dominance of the rare earths’ market by the People’s Republic encapsulates a lot of what trading partners worry about. The elements perceived as strategic two decades ago by leader Deng Xiaoping, who compared it to the Middle East’s oil bounty. He instructed Chinese state-owned companies to dig deep, and they did - assisted by a horde of smaller private miners that drilled in haste, polluted liberally, and drove prices so low it became uneconomical for many foreign rivals to stay in business.
- U.S. Geological Survey data shows China holds around a third of global reserves, and accounted for 80% of output last year. The United States imported $150m worth from the People’s Republic in 2017. This is a worry for security hawks: in 2010 Beijing used its near-monopoly in a trade fight with Japan, halting exports.
- Now China could be turning back to its old playbook, with plans to slash production to 45,000t in the second half of 2018, according to Adamas.
- Beijing could reward some countries with exports in exchange for concessions. Japanese Prime Minister Shinzo Abe is in China today, and firms like Panasonic and Toyota are both exposed to rising costs.
- For U.S. companies it could be more painful. Even with the required economic incentives, it would take years to open new mines elsewhere, highlighting the importance of advanced stage rare earth projects like Mkango Resources’ Songwe Hill resource.
Conclusion: Mkango is one of very few companies with an advanced rare earth project. The company is being supported by Talaxis which is part of Noble Group.
*SP Angel act as Nomad and broker to Mkango Resources. The analyst has visited the Songwe Hill exploration site.