Today's Market View - Metals retreat after China trade drops unexpectedly

Proactive Published 14/01/2019

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SP Angel – Morning View – Monday 14 01 19

Metals retreat after China trade drops unexpectedly

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Acacia Mining (LON:ACA) – Fourth quarter 2018 production results

Beowulf Mining* (LON:BEM) – Swedish Depository Receipts

Caledonia Mining (LON:CMCL) – Blanket Mine meets 2018 production guidance target

Highland Gold (LON:HGM) – MNV JORC reserves/resources update

Horizonte Minerals (LON:HZM – Construction licence awarded for Araguaia

Phoenix Global Mining* (LON:PGM) – Funding update

Strategic Minerals* (LON:SML) – Cobre stockpile access

Tri-Star Resources* (LON:TSTR) – SPMP project update

Vanadium prices rise following December pullback

Ferro-vanadium prices rose 2.8% last week to US$76.4-79.5/kgV in Western Europe according to Fastmarkets MB.
Prices also rose in China by 1.8% to US$69-72/kgV.
Ferro-vanadium prices also rose in the US by 0.6% to US$41.5-46/lbV2O5.
The move indicates a general pick up in vanadium prices following the price pullback in December.
‘European vanadium prices began to bounce back in the week ended Friday January 4 amid renewed supply tightness and increased buying interest, while Chinese export prices stalled on a lack of trading activity. Meanwhile, despite thin numbers of inquiries from the overseas market, Chinese exporters held their offer prices relatively stable because they noticed that the domestic market was showing the potential for a round of price rises in the near future.’ (FastmarketsMB).
News reports indicate that some Chinese steel producers have avoided adding required vanadium into their steel for rebar production and are still using Quench and Temper ‘Q&T’ processes for hardening steel.
We do not expect the Chinese inspectors / authorities to tolerate the production of substandard ‘Q&T’ steel as it is brittle and prone to structural failure.

Dow Jones Industrials

-0.02%

23,996

Nikkei 225

+0.97%

20,360

HK Hang Seng

-1.38%

26,298

Shanghai Composite

-0.71%

2,536

FTSE 350 Mining

-0.87%

17,445

AIM Basic Resources

+0.85%

2,176

Economics

US – Headline inflation slowed, in line with expectations, in December, although core measure (excluding food and energy) came in unchanged above the Fed 2% target.

The plunge in the headline number has been largely driven by lower fuel prices which are likely to remain a drag over the next few months.
ON core inflation, “there seems to be some pass-through from higher wage growth, evident in the latest payrolls report, particularly in recreation and lodging service prices,” Bloomberg reported.
CPI (mom/yoy): -0.1/+1.9 v 0.0/2.2 in November and -0.1/+1.9 forecast.
Core CPI (mom/yoy): 0.2/2.2 v 0.2/2.2 in November and 0.2/2.2 forecast.

China – Exports and imports unexpectedly dropped in December weighing on risk sentiment and metal prices.

It was the worst result since 2016 when measured in US$ terms marking a possible slowing in the front-loading of shipments that companies used to beat tariff increases.
November numbers have also been revised downwards.
US trade deficit with China expanded to a record $323.3bn in FY18 with exports to the US up 11.3%yoy while US imports up on 0.7%yoy.
“The record US trade deficit with China will sit uncomfortably with the Trump administration… that may cast a shadow over the next round of trade talks,” the Economic Intelligence Unit commented on the news.
On a separate note, auto sales recorded the first decline since the early 1990s last year driven by a cut to government tax breaks and a wider economic slowdown.
Sales in December recorded a 15.8%yoy drop marking the steepest decline in more than six years and the sixth consecutive month of falling sales.
Sale of passenger cars totalled 23.8m in 2018, down 4.1%yoy (CAAM).
Exports (US$ terms): -4.4 v 3.9 (down from 5.4) in November and 2.0 forecast.
Imports (US$ terms): -7.6 v 2.9 (down from 3.0) in November and 4.5 forecast.

UK – Parliament is set to vote on Mrs May’s Brexit deal on Tuesday.

While the government delayed the vote in December, PM has struggled to win additional assurances from the EU that might improve her proposal to her MPs.
Theresa May will be speaking on a visit to Stoke-on-Trent today, a heavily Leave-voting city, warning over “catastrophic ham” to people’s faith in the democratic process if parliament fails to implement the result of the 2016 Brexit referendum, FT reports.
Despite an uncertainty over the potential course of action should the proposal fail, the pound has been relatively little changed this morning at 1.2834, following a 1.0% appreciation last week.

Greece – Prime minister faces a confidence vote in parliament next week as the ruling Syriza coalition partner announced it was pulling out of the government.

Zimbabwe – Government more than doubled fuel prices to the highest level in the world leading to protests and major labour unions calling for a strike.

The ZCTU representing most labour unions in the southern African nation started the strike two days after the state more than doubled the cost of gasoline.
Prices have gone up to $3.11 and $3.21 per litre of gasoline and diesel, respectively.
This compares with a global average of $1.08 and $2.04 being the highest (Hong Kong).

Currencies

US$1.1467/eur vs 1.1527/eur last week Yen 108.16/$ vs 108.25/$ SAr 13.932/$ vs 13.812/$ $1.283/gbp vs $1.274/gbp 0.719/aud vs 0.721/aud CNY 6.760/$ vs 6.747/$

Commodity News

Precious metals:

Gold US$1,293/oz vs US$1,294/oz last week

Gold remains steady after data suggests U.S. inflation is contained around the Federal Reserve’s target, giving the central bank little urgency to raise interest rates soon as it signals a more cautious approach in 2019.
Adding to the bullish outlook is the steady increase of holdings in bullion-backed exchange-traded funds, with investors boosting safe-haven assets as economists put the risk of a US recession at the highest in more than six years amid mounting dangers from financial markets, a trade war with China and the federal-government shutdown.
The metal’s also on the verge of a golden cross -- where the 50-day moving average climbs above the 200-day moving average -- a pattern considered bullish by some traders.

Gold ETFs 71.8moz vs US$71.8moz last week

Platinum US$804/oz vs US$824/oz last week

Palladium US$1,315/oz s US$1,323/oz last week

Silver US$15.59/oz vs US$15.71/oz last week

Base metals:

Copper US$ 5,893/t vs US$5,977/t last week

Base metals broadly retreated after China trade unexpectedly slumped, dampening the demand outlook across commodities. Exports and imports both fell in December, according to Chinese customs data Monday, showing the effects of the trade war with the U.S. and an economic slowdown. General Administration of Customs official Li Kuiwen added the biggest concern for China’s trade in 2019 is external uncertainty.
China’s copper imports softened at the close of 2018, taking the sheen off a record year for volumes and highlighting risks ahead for the world’s top consumer of the metal. Full-year shipments of unwrought copper and copper products rose 13% to 5.3mt in 2018, according to customs data
However, China’s unwrought copper and copper products imports fell to 429,000t in December, down from 460,000t in November and 450,000t a year earlier, indicating near-term uncertainty. The pace of imports in 2019 “won’t be as heated as last year”, according to an analyst with Jinrui Futures Ltd., a unit of Jiangxi Copper Co., the nation’s top copper producer.
China’s refined copper demand will decline 1.1% to 12.5mt in 2019, following an 6.7% increase to 12.7mt in 2018, according to Goldman Sachs Group forecast.

Aluminium US$ 1,830/t vs US$1,855/t last week

Nickel US$ 11,350/t vs US$11,445/t last week

Zinc US$ 2,460/t vs US$2,477/t last week

Lead US$ 1,980/t vs US$1,993/t last week

Tin US$ 20,320/t vs US$20,235/t last week

Energy:

Oil US$59.9/bbl vs US$62.1/bbl last week

Natural Gas US$3.310/mmbtu vs US$3.036/mmbtu last week

Uranium US$28.90/lb vs US$28.90/lb last week

Bulk:

Iron ore 62% Fe spot (cfr Tianjin) US$72.5/t vs US$72.3/t

Iron ore deliveries to China falter for the first time since 2010 as economic headwinds build, mills boosted their use of higher-grade material and scrap use ticked higher. Imports dropped 1% to 1.06bt in 2018 according to mainland customs data.
The global iron ore market revolves around China, which accounts for about 70% of seaborne shipments from miners including BHP Group, Rio Tinto Group and Vale SA. After the sustained period of year-on-year expansions, the country’s first import drop in eight years flashes a warning that growth in volume terms may now be topping out. A pollution crackdown to clean up the air has also made higher-quality ore more attractive for mainland users.
The annual decline is mainly driven by mills using higher-grade cargoes as steel capacity was being curtailed, according to Daniel Hynes, senior commodity strategist at Australia & New Zealand Banking Group Ltd. “The market is diversified with pockets of strength,” he said by phone. “Demand for high-grade ore remains strong, while there’s a weakening for low-grade.”
Top iron shipper Australia has also said in October steel output in China was likely to peak in 2018, and shrink this year in a shift that would add to headwinds for iron ore.
Despite record volumes of steel output, the industry’s latest purchasing managers’ index showed steep contractions in the final two months of 2018.

Chinese steel rebar 25mm US$587.2/t vs US$593.0/t

A steep fall in steel prices seen in Q4 2018 has been partially caused by weaker than expected winter output cuts, as none of the nine key cities tracked met government targets of 3% reduction in PM 2.5 concentration.
Environmental inspections are to be a ‘repeating theme’ according to Citigroup, with China likely to continue pressing non-ferrous metals smelters to upgrade anti-pollution equipment.

Thermal coal (1st year forward cif ARA) US$82.6/t vs US$82.5/t

Coking coal futures Dalian Exchange US$218.8/t vs US$217.8/t

Other:

Cobalt LME 3m US$42,000/t vs US$45,000/t

China NdPr Rare Earth Oxide US$46,675/t vs US$46,787/t

China Lithium carbonate 99% US$10,134/t vs US$10,158/t

China Ferro Vanadium 80% FOB US$69./kg vs US$70./kg

China Antimony Trioxide 99.5% EU US$7./kg vs US$7.1/kg

Tungsten APT European US$260-270/mtu

Battery News

Company News

Acacia Mining (LON:ACA) 194.9p, Mkt Cap £799.5m – Fourth quarter 2018 production results

Gold production for the final quarter 2018 achieved better than expected 130,581oz. Despite being 12% lower than the prior year mainly due to the transitioning of Buzwagi to a stockpile processing operation, the fall was offset by higher gold production at North Mara and Bulyanhulu.
Gold ounces sold for the quarter of 133,460oz were slightly higher than production due to the favourable timing of shipments and draw down of finished gold on hand.
Full year production of 521,980oz was ahead of expectations for the year, although 32% lower than 2017 due to the transition to reduced operations at Bulyanhulu and to stockpile processing at Buzwagi. The operation benefited from higher grade ore received from the Nyabirama open pit at North Mara, enhanced Buzwagi processing plant throughput and recoveries combined with extended mining of the final cut of the higher grade ore, and favourable performance from tailings processing at Bulyanhulu.
Full year gold sales of 520,380oz were broadly in line with production.
The cash balance as at 31 December 2018 amounted to approximately US$130m, representing an increase of approximately US$13m during the quarter and US$50m for the year, with net cash increasing to approximately US$88m at period end.
Acacia have been dealing with an export ban on gold and copper concentrates, which has been in place since April 2017, and suffering from a long-running dispute with the Tanzanian government over undeclared royalties it allegedly owes.
Acacia’s majority shareholder Barrick Gold Corp has been negotiating with the Tanzania government on Acacia’s behalf but they are yet to agree on a final deal.
In October last year, a senior manager of Acacia’s Tanzanian businesses was arrested and charged by the Tanzanian Prevention and Combating of Corruption Bureau (PCCB). The manager pleaded not guilty to all charges, which were understood to have included counts of tax evasion, forgery and money laundering.
Interim chief executive Peter Geleta adds “I am proud of the resilience, hard work and dedication shown by our people in realising this achievement despite a challenging operating environment”

Beowulf Mining* (LON:BEM) 5.75p, Mkt Cap £32.6m – Swedish Depository Receipts

Beowulf report there are now 343,457,507 Swedish Depository Receipts representing some 60.65% of the company.
Swedish Depository Receipts ‘SDRs’ represent the conversion of AIM shares into the SDRs.
The report indicates ongoing buying by Swedish investors from the last report showing SDR ownership of 59.8% of the company on 15 November.
Beowulf published a report last year highlighting the key economic benefits of the Kallak project on which it has spent some SEK77m (£6.6m) so far. Key points are:
250 new jobs at Kallak and 300 indirect jobs in Jokkmokk, the local town.
Two new mines at Kallak South and Parkijaure likely come after Kallak North is mined creating long-term employment
Task Force with the local Jokkmokks municipality to help local people prepare for employment in relation to the Kallak project.
tax receipts > SEK1bn (£85m) over a projected 25 year mine life from ~SEK40mpa (£3.41mpa).
Kaunis Iron restarted the Kaunisacaara mine in Sweden last year with ship loading at Narvik providing employment in the Pajala community.
Iron ore prices are at US$72.5/t in China with premiums paid for >62% iron ore continue to record high price levels with Kallak’s proposed 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.
Kosovo: Given uncertainty over the Swedish government’s intransigence over the Kallak project Beowulf moved last year to acquire an initial 14% stake in the Vardar project in Kosovo.
Vardar has four wholly owned exploration licences in Kosovo and two more under purchase agreement whereby Vardar will own 85% of the licences. The combined coverage is a total of 333.2km². Licences are split into three projects – Mitrovica, Viti and Drazna with net proceeds of the investment funding exploration and general working capital requirements.
Mitrovica, situated in northern Kosovo adjacent to the significant Stan-Terg lead-zinc-silver mine, exhibits alteration typical of porphyry-epithermal systems. Highlights from this licence include gold and silver anomalies associated with advanced argillic alteration, several iron stockworks, breccias and gossans with associated copper and lead-zinc anomalies. The project is prospective for high-sulphidation gold, porphyry copper-gold and vein/replacement related base metal targets.
Viti is situated in south-eastern Kosovo and is made up of three adjacent licences covering 213 km². The main exploration target is an interpreted circular intrusive body identified in magnetic data. There is evidence of intense alteration typically associated with porphyry systems, with several copper occurrences and stream sample anomalies in proximity to, and within, the licence areas. In addition, Viti is prospective for lithium-boron mineralisation, with a geological setting similar to Rio Tinto's Jadar deposit in Serbia.
Drazna is situated on Kosovo's western border, in proximity to the Kiseljak copper-gold porphyry and Draznja lead-zinc mine. The licence has several alteration centres typical of porphyry/epithermal systems.
Aitolampi graphite: JORC Indicated and Inferred Resource of 19.3mt at 4.5% Total Graphitic Carbon ("TGC") for 878,000t of contained graphite, comprising eastern and western lenses above a 3.0% TGC cut-off grade.
A higher grade Western Zone with an Indicated and Inferred Resource of 9.8mt at 5.0% TGC for 490,000t of contained graphite.

Conclusion: It is interesting to see ongoing buying of Beowulf shares in Sweden. Makes us wonder if LKAB’s recent admission that its resource at Kiruna is more ‘complex’ than previously assumed might cause it to look to acquire other high-grade iron ore resources in Sweden.

*SP Angel acts as nomad and broker

Caledonia Mining (LON:CMCL) 450p mkt cap £47.7m – Blanket Mine meets 2018 production guidance target

Caledonia Resources reports that, following a 7% increase in gold production during Q4 to 14952oz, its Blanket mine in Zimbabwe produced approximately 54,512oz of gold during 2018 and achieved its previously reported guidance of 54-56,000oz.
The company is guiding 2019 production in the range 53-56,000oz and confirms that it remains on track “to achieve production of approximately 80,000 ounces of gold per annum from 2021 following completion of the Central Shaft”.
The Central Shaft provides access to deeper level ore at Blanket below the 750m level and is currently reported to have reached a depth of 1150m and targeted for a final depth of 1204m. The company reports that “It is anticipated that shaft sinking will be completed towards the middle of 2019 after which the shaft will be equipped and commissioned”.
Commenting on the significance of the shaft sinking programme, Chief Executive, Steve Curtis, said “Completion of the Central Shaft is the key to Blanket achieving its planned production of approximately 80,000 ounces of gold per annum from 2021 onwards. I expect that sinking work at Central Shaft will be completed by mid-year after which we will start to equip the shaft.”
Mr. Curtis went on to explain that “This part of the Central Shaft project is relatively capital intensive. In light of our significant capital expenditure commitments, we believe it is prudent to take advantage of the recent strengthening of the gold price and we have therefore secured a minimum received gold price of $1,250 per ounce for the 5 months to June 2019 whilst maintaining full upside exposure to the gold price through a cost-effective option structure”.
He also pointed out that with the shaft-sinking programme now “in the final 18 months of construction; we expect capital investment on this project to be lower in the second half of 2019 and to reduce further in 2020 as it nears completion”.

Conclusion: Caledonia Mining’s production from the Blanket mine met guidance during 2018 and the company confirms that, with the key development of the new Central Shaft now at around 95% of its targeted depth, the Blanket mine remains on course to deliver around 80,000oz of gold pa from 2021.

Highland Gold (LON:HGM) 156p, Mkt Cap £568m – MNV JORC reserves/resources update

Micon International conducted an audit of MNV JORC mineral reserves/resources taking into account near mine exploration completed in 2017 and updated mining parameters.
Updated JORC mineral reserves total 9.0mt at 2.7g/t for 772koz including both open pit (0.1mt at 11.3g/t for 48.9koz) and underground (8.9mt at 2.7g/t for 723koz) mineral inventory.
Open pit reserves exclude a share of GKZ reserves that are a part of the mine plan totalling 643kt at 7.55g/t for 156koz which are planned to be recategorized following additional drilling within the next two years.
JORC mineral resources came in at 14.1mt at 3.2g/t for 1,470koz with a nearly 60/40 split between Indicated and Inferred categories (8.1mt at 3.3g/t for 852koz in Indicated).
The resource excludes MNV historic rock waste dumps which has been the source of low grade ore in the past (675kt at 1.09gt/t processed in 2016-18) and that the Company is evaluating separately on an ongoing basis.
Mineral reserves have been calculated at lower cut off grades (0.7g/t for open pit and 1.0g/t for underground v 1.0g/t and 2.0g/t, previously) and slightly higher gold price ($1,250/oz v $1,200/oz previously); mineral resources grades have also been brought down (0.7g/t and 1.0g/t for both open pit and underground).
Reserves/resources are reported as of January 2018.

Conclusion: A positive mineral resources/reserves update extends the life of mine at MNV to 2029. New mineral inventory report includes significantly lower average grades (2.7mt at 5.3g/t for 453koz in previous reserves and 2.4mt at 7.6g/t for 578koz in previous resources) reflecting lower cut off grades applied but brings reserves/resources grades more in line with mined grades.

Horizonte Minerals (LON:HZM) 2.4p, mkt cap £34.4m – Construction licence awarded for Araguaia

Horizonte Minerals reports that the Environmental Agency in Para State has awarded the company the Construction Licence for its Araguaia ferro nickel project in Brazil.
The permit provides Horizonte Minerals with the authorisation to proceed with constructing the Rotary Kiln Electric Furnace process plant and the associated infrastructure.
Chief Executive, Jeremy Martin, welcomed the award of the licence and said that “Subject to funding, the company is now in a position to commence construction with the necessary environmental permits approved, including water abstraction permits issued in 2018 together with the newly issued LI. The LI allows development to commence on the RKEF process plant and associated infrastructure.”
The published feasibility work describes a 28 year project comprising an initial production phase where approximately 900,000tpa of ore is treated in a Rotary Kiln Electric Furnace (RKEF) to produce approximately 14,500tpa of nickel contained in 52,000tpa of ferronickel.
Capital investment of US$443m for the initial phase of the project is expected to generate an after tax NPV8% of US$401m and an IRR of 20.1% with cash costs equivalent to US$3.08/lb of contained nickel.

Conclusion: The award of the construction licence is a project milestone for Araguaia and we await further information on the proposed funding structure for the project development.

Phoenix Global Mining* (LON:PGM) 19.5p, Mkt Cap £6.5m – Funding update

Phoenix Global Mining has confirmed that following the subscription, completed on 24th December, for £358,099 it remains in discussion with a number of potential US institutional investors which were unable to close prior to the year end.
The company has also confirmed that “it remains in positive discussions with such investors with a view to completing a further subscription during January 2019, as foreseen at the time of the December 2018 close.”
A bankable feasibility study is currently underway on the future development of the oxide resource, currently 19.4mt at an average grade of 0.47% copper, 0.13% zinc, 10g/t silver and 0.3g/t gold, however, in December Phoenix Global Mining also reported a number of positive drill intersections from its 2018 drilling campaign which have extended the area of known mineralisation in and around the historic Empire mine in Idaho to a strike length of some 3.5km and which should have a positive impact on the resources.
Last year’s drilling has also begun to shed light on the longer term potential of the underlying sulphide mineralisation which was the mainstay of the historic mining activity at Empire from the early 1900s to the late 1930s.

Conclusion: Discussions which could lead to US institutional investment may lead to a broadening of the company’s register as it works on the BFS for the Empire mine oxides and starts to assess the potential of underlying sulphide mineralisation.

*SP Angel acts as Nomad and broker to Phoenix Global Mining

Strategic Minerals* (LON:SML) 1.475p, Mkt Cap £20.4m – Cobre stockpile access

Strategic Minerals has confirmed that its wholly owned subsidiary, Southern Minerals Group has “successfully obtained an early rollover of access to the Cobre magnetite stockpile” with access granted until 31st March 2020 and agreement that “Annual access will automatically rollover on 31 March each year thereafter…”.
Characterising the early renewal as an indication of confidence in the operational and safety competence of SMG and its management, Managing Director, John Peters said that “While the Company considers that access to the Cobre magnetite stockpile will continue to be provided until exhausted (6+ years), this early rollover is strategically significant for the Company as it ensures access to positive cash flows while it prepares to commence its second income stream from Leigh Creek Copper Mine”.
The company aslo expects to announce the quarterly sales update for Cobre “later this week”.

Conclusion: The renewal of the access to Cobre is not unexpected but securing it early and with the agreement for the contract to roll-over automatically secures Strategic Minerals’ operating cashflow while it brings its second operating asset, at Leigh Creek Copper, on stream.

Tri-Star Resources* (LON:TSTR) 26.5p, Mkt Cap £25.4m – SPMP project update

(Tri-Star holds 40% of jv company SPMP alongside The Oman Investment Fund and Dutco Natural Resources)

(Odey Asset Management, holds a 72.06% interest in TriStar Resources)

TriStar Resources has provided a further progress report on the commissioning of its 40% owned antimony-gold process plant of SPMP in Oman.
The company reports that it has now produced crude antimony trioxide which is being stockpiled “in readiness for the commissioning of the furnace section of the plant”.
Although “the process is fundamentally working well, certain engineering issues have been encountered for which remediation requirements are understood and in process”.
TriStar Resources goes on to say that “As a result of the delay in first metal and full commissioning of the plant, SPMP will need further funding for additional capex and working capital.” Potential sources of the additional funds include Omani and international banks as well as the company’s existing shareholders (TriStar Resource holds 40% of SPMP) and the company reports that “As an interim measure SPMP has requested an additional US$10.5m from its shareholders”.
Commenting on the commissioning of the SPMP facility, TriStar Resources Acting Chief Executive, Karen O’Mahony, said “Some engineering glitches have arisen during commissioning. However, this is not unusual. SPMP feels that the capability of the plant to produce antimony and other metals is now confirmed and an update on first metal is expected once the remediation work and furnace commissioning is complete.”
As well as the developments at SPMP, TriStar Resources has also disclosed that it has signed a Letter of Intent with a local Turkish entity for the exploration and mining rights over the historical artisanal antimony workings at Goynuk in the Murat Dagi mountains of western Turkey. Currently TriStar owns 99.93% of the project and the Turkish party “plans to bring the mine back into production before the end of 2019 and has indicated a desire to enter into an offtake agreement with SPMP which Tri-Star will facilitate.”

Conclusion: The SPMP plant is a technically advanced facility, which when fully operational should be among the world’s most advanced antimony production plants. Although commissioning delays would not necessarily be entirely unexpected the additional funding requirement may cast a shadow over the technical achievement.

*SP Angel acts as Nomad to Tri-Star Resources