Today's Market View - China stimulus holds GDP growth at 6.4pc in Q4

Proactive Published 21/01/2019

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SP Angel – Morning View – Monday 21 01 19

China stimulus holds GDP growth at 6.4 in Q4

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MiFID II exempt information – see disclaimer below

Ariana Resources (LON:AAU) – Kizilcukur bulk sampling

Connemara Mining* (LON:CON) – Drill results expected sometime soon. Appointment of SP Angel

Highland Gold (LON:HGM) – Annual production in line with guidance

MOD Resources (LON:MOD) – Fundraising and indicative offer from Sandfire

Vast Resources (LON:VAST) – Off take pre-payment finance update

LME to launch seven new contracts

The London Metal Exchange are expected to launch seven new cash-settled futures contracts on March 11, including hot-rolled coil (HRC) steel and alumina. The exchange, the world’s oldest and largest market for industrial metals, are also expected to launch a lithium contract in the fourth quarter.
“We believe that these new cash-settled contracts…will help lower barriers to market entry”, said head of market development for the LME. “This will attract new players to the market who can benefit from using LME hedging to better manage their price risk in the physical metals market.”
For the lithium contract, the LME said it had short-listed three index providers for pricing: Argus, Benchmark Minerals and Fastmarkets.

Toyota and Panasonic form battery manufacturing partnership

Panasonic is looking beyond Tesla, expanding its partnerships with a Joint Venture with Toyota to avoid being left behind as the electric vehicle revolution gathers momentum. In the new venture Toyota will own 51% and Panasonic the remaining 49%.
Panasonic will transfer ownership of five battery manufacturing facilities in China and Japan to the new entity, but the deal will not affect its partnership with Tesla in Nevada.
According to Nikkei Asian Review, the total amount of battery capacity from the new venture will be 50x greater than Toyota’s current usage for its standard hybrid vehicles, dramatically reducing the unit cost of batteries.
The JV will supply batteries to Mazda as well, which is partnering with Toyota on EV technology, along with Toyota subsidiaries Daihatsu and Subaru.
The two companies will also cooperate in developing next-generation solid-state batteries which are expected to boost the range of electric cars at lower cost than today’s lithium-ion batteries. They have been working together on solid-state technologies since 2017.
Toyota plans to triple its annual sales of electrified vehicles — a term that includes conventional hybrids — to 5.5m by 2030.
The Toyota Prius has been using Lithium-ion batteries since 2009. Each Prius has 95 battery cells for 8.8Kwh of power capacity

Conclusion: The new partnership is going to require allot more lithium, cobalt, graphite, nickel and manganese than is currently being sourced in a world where China has moved to buy-up or buy-into allot of the world’s more advanced lithium projects going.

China – Official GDP growth slipped just a touch to 6.4% in Q4 from 6.5% in Q3 matching the median average forecast on Bloomberg

Reuters reports China’s economy is cooling slightly faster than policymakers expected.
Growth is down from 6.8% in 2017 but the economy is so much larger than it was then.
China retail sales grew 8.2% in December yoy up from 8.1% in November and 10.2% in 2017 to US$5.7trillion. Remember China retail sales were at 4.3% in May 2003
Industrial Production grew 5.7% in December.
China growth target range is between 6-6.5% for 2019 according to the South China Morning Post.
Capital Economics ‘CE’ own China Activity Proxy ‘CAP’ measure shows a mild slowdown to 5.3% in December from 5.4%. They reckon the services sector strengthened slightly in Q4.
Industrial value-added also rise to 5.7% from 5.4% in December in the official figures beating Bloomberg’s and CE’s 5.3% forecasts.
CE’s Industrial Output Index also rise to 3.7% from 3.1% in December despite weaker foreign demand indicating an important rise in domestic consumption growth (Will help with Trump).
The figures are still way ahead of every other developed economy and could see China overtaking the US in terms of GDP in 13 years in 2032, according to the CEBR Centre for Economic and Business Research (Dec 2018).
Policymakers are pulling levers without recourse to the massive injection of stimulus as seen in the Global Financial Crisis.
Beijing has pledged to support jobs and can easily turn up infrastructure expenditure and increase capital availability through cutting bank reserve requirement ratios.
The FT indicates that financing for private manufacturers has been hit by a squeeze in bank lending as Beijing has moved to reduce debt levels.
Non-state companies including foreign-invested enterprises account for more than half China’s total economic output and anywhere between 50-90% of tax receipts which makes their activity highly important to the nation and the economy.
Shadow banking financing has also dried up as the authorities clamped down on debt levels at non-financial companies which are estimated at some 300% of GDP.
Total credit grew at its slowest pace for more than 10 years at just 9.8% in December according to Capital Economics with Fixed Asset Investment growing at 5.9% its lowest level since 1996.
It is good to see Chinese retail sales on the rise as China has previously pledged to raise domestic demand to help drive imports and redress balance of payments deficits
Better China retail sales should reduce the risk of a trade war with the US.
Asian equities posted gains this morning on the figures.

Dow Jones Industrials

+1.38%

24,706

Nikkei 225

+0.26%

20,719

HK Hang Seng

+0.39%

27,197

Shanghai Composite

+0.56%

2,611

FTSE 350 Mining

-0.61%

17,636

AIM Basic Resources

+0.26%

2,209

Economics

US – The government shutdown in the US continues after the Trump offer for a limited concession on immigrant “Dreamers” on Saturday in exchange for funding saw congressional Democrats rejecting it out of hand.

The ongoing impasse has also delayed the release of a number of economic statistics including housing starts and new home sales.
US equity and bond markets are closed on Monday as the nation celebrates Martin Luther King Jr. Day.

UK – PM Theresa May is about to address Parliament at around 1530 GMT and put forward a motion on her proposed next steps on Brexit.

PM told her ministers that she would focus on securing changes from Brussels designed to win over rebel Conservatives and the Northern Irish DUP, according to the The Times.
The latest deal was voted down by 402 lawmakers in the 650-seat parliament with just over two months left to March 29 for the UK to try and reach a different agreement.

Zimbabwe – crackdown and rumored coup attempt cause President to return from Davos

President Emmerson Mnangagwa’s government spokesman comments the crackdown is a ‘foretaste of things to come’
Recent unrest appears to have been sparked by the recent tripling of fuel prices which is causing widespread economic pain
South Africa has turned down a request for an emergency loan of US$1.2bn from the Zimbabwe Government saying it does not have that sort of money

China - Fraud at world’s largest drone manufacturer in China

A Yuan1bn (US$148) fraud has been uncovered at the DJI drone manufacturer in China.
Some employees had inflated the cost of parts enabling some $150m of personal profit.
The company has fired 29 and referred another 16 to the authorities.
We have to wonder how many other frauds are being perpetrated by Chinese nationals in China and overseas?
ASA Resources was also subject to ‘fake invoicing’ by Chinese management though this was quickly dealt with by the UK-based non-executive directors.

Currencies

US$1.1382/eur vs 1.1400/eur last week Yen 109.61/$ vs 108.77/$ SAr 13.878/$ vs 13.709/$ $1.286/gbp vs $1.288/gbp 0.717/aud vs 0.717/aud CNY 6.790/$ vs 6.769/$

Commodity News

Precious metals:

Gold US$1,282/oz vs US$1,289/oz last week

Gold continues to track lower amid signals of strength in the US economy and optimism towards a US-China trade resolution. Data on Friday indicated US factory production expanded in December by the most in 10 months.
China notched its slowest expansion since the 2009 financial crisis last quarter, while signs of stabilization in December suggest government efforts to cushion the deceleration are beginning to take hold.
The market will this year grapple with the extent to which government policies, including tax cuts and infrastructure spending, can boost metals demand and whether producers can adjust supply to weaker demand conditions.
China has offered to ramp up imports from the U.S. to reduce its trade balance, while a separate report showed that the two countries have made little progress on the issue of intellectual property.
The Federal Reserve should be patient in tightening monetary policy further as U.S. economic growth moderates, New York Fed President John Williams said, supporting the attractiveness of gold.
Investors added 14.4t to gold-backed exchange-traded funds on Friday, according to data compiled by Bloomberg. That’s the biggest increase since Dec. 26 and pushed holdings to 2,253.2t, the highest since April 2013.
BlackRock Inc. says prices may be helped by slowing economic growth, equity market volatility and expectations the Fed will ease back on its pace of interest rate increases this year. ETF holdings are already up almost 43t this year after increasing about 80t in 2018, a third annual gain.
Also on investors’ minds is the longest partial U.S. government shutdown in the modern era that shows little signs of abating and uncertainty around Brexit. Theresa May briefed her Cabinet on Sunday evening that there was little prospect of cross-party Brexit talks yielding a workable alternative plan to the one that Parliament overwhelmingly rejected last week.

Gold ETFs 72.4moz vs US$72.0moz last week

Platinum US$802/oz vs US$813/oz last week

Palladium US$1,401/oz vs US$1,419/oz last week

Silver US$15.31/oz vs US$15.51/oz last week

Base metals:

Copper US$ 6,024/t vs US$6,041/t last week

Aluminium US$ 1,884/t vs US$1,872/t last week

China’s aluminium booming production keeps piling on pressure for a metal hovering just above two-year lows, as the world’s largest aluminium producer lifted output by +7.4% during 2018 to an all-time high of 35.8mt, according to the statistics bureau.
Production for December alone was a monthly record, rising 11% to 3.05mt. The elevated supply will refocus attention on China as the saga over U.S. sanctions on United Co. Rusal looks to be drawing to a close.
However, prices continue tracking down into 2019 amid a cocktail of bearish factors, as China’s manufacturing sector hits a lull while the US plan to remove sanctions on Russia’s Rusal, the biggest producers outside of China, has removed the threat of major supply disruption.
China’s production expanded in 2018 as smelters ramped up output to feed demand, with a tighter global market helping to boost overseas sales, which rose 21% for the year. But the domestic environment has deteriorated and the market is in its worst shape in terms of supply-demand balance since the first half of 2016, Citigroup Inc. said last week.
Major smelters met last month and pledged to halt capacity in an effort to halt a slump in margins.
Aluminum prices have significance beyond the cost for automakers, packaging companies and other consumers of the metal. The breadth of its use, and its importance to China’s manufacturing sector, mean it’s a “market to watch closely in 2019” for the global economy, Jason Schenker, president and founder of Prestige Economics.

Nickel US$ 11,775/t vs US$11,705/t last week

Zinc US$ 2,587/t vs US$2,580/t last week

Lead US$ 2,012/t vs US$1,982/t last week

Tin US$ 20,615/t vs US$20,725/t last week

Energy:

Oil US$62.6/bbl vs US$61.6/bbl last week

Natural Gas US$3.319/mmbtu vs US$3.327/mmbtu last week

Uranium US$28.85/lb vs US$28.85/lb last week

Bulk:

Iron ore 62% Fe spot (cfr Tianjin) US$75.3/t vs US$73.4/t

Chinese steel rebar 25mm US$589.9/t vs US$589.0/t

Thermal coal (1st year forward cif ARA) US$85.9/t vs US$86.5/t

Coking coal futures Dalian Exchange US$210.8/t vs US$207.5/t

Other:

Cobalt LME 3m US$38,000/t vs US$40,000/t

China NdPr Rare Earth Oxide US$45,878/t vs US$46,007/t

China Lithium carbonate 99% US$9,941/t vs US$9,969/t

China Ferro Vanadium 80% FOB US$70.3/kg vs US$69.7/kg (AsiaMetals.com via Bloomberg) –

Ferro Vanadium rose 0.7% in China to US$70-72/kgV on a week earlier and US$76.5-78/kgV for 78% ferro-vanadium in Western Europe (Fastmarkets MB).

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

Tungsten APT European US$260-270/mtu unchanged from previous week

Battery News

Warren Buffet geothermal wells to supply N. American lithium

Warren Buffet’s Berkshire Hathaway Inc has signed an agreement to allow extraction of lithium from its geothermal wells in California – a project that could offer US carmakers and battery producers a secure supply of the metal.
The venture has begun discussions with Tesla Inc for lithium supply, with geothermal wells offering production up to 90,000t lithium/year, worth $1.5bn at current prices, cited in a fundraising document.
"We see a lot of interest in getting North American supply as automakers start to get further into electric vehicles," according to Eric Besseling, a vice president at BHE Renewables.
We wonder how this matches up with Cornish Lithium and its Lithium brine wells which we believe are relatively close to the old Cornish ‘Hot Rocks’ project.

Magnesium batteries – Major breakthrough announced in use of magnesium as an anode in rechargeable batteries

CVMR Energy Metals Inc. reports that it has made a major breakthrough in the use of magnesium as an anode in rechargeable batteries.

South Korean government announces roadmap for hydrogen economy - plan for hydrogen to drive a new growth engine and turn South Korea into a society fuelled by eco-friendly energy.

The government’s plan is focused on increasing production of hydrogen-powered fuel cell electric vehicles, expanding the supply of fuel cells and building a system of producing and supplying hydrogen.
By 2040, the plan seeks to increase the cumulative total of fuel cell vehicles to 6.2 million, raise the number of hydrogen refuelling stations to 1,200 (from just 14 today) and also boost the supply of power-generating fuel cells.

UK Government Slammed For Approach To Electric Cars

MPs have criticized the government’s policy surrounding electric vehicles.
The Plug-In Car Grant, which saw part of the purchase price of electric and plug-in hybrid vehicles paid by the government, were cut in the autumn of last year.
However, a government response to the report refused to make any commitments or clarifications, instead suggesting that while change should be industry- and consumer-led and the government would constantly “review” its policies.

UK’s first battery-powered hotel

Premier Inn, in collaboration with project partner E.ON, has installed the UK’s first battery-powered hotel in Edinburgh.
The 3m3 5t battery works by storing power from the National Grid during off-peak times when electricity prices are lower, saving the energy for periods of high consumption.
The battery takes two hours to charge and will be employed for around two to three hours per day.

Company News

Ariana Resources (LON:AAU) 1.8p, mkt cap £19.0m – Kizilcukur bulk sampling

Ariana Resources has announced that a 20t bulk sample taken at its wholly owned Kizilcukur project in Turkey has assayed at 4.22g/t gold and 284g/t silver.
The result is a composite of results from trench-sampling over 5m long trenches 1.3m wide and 1.2m deep along the strike of the Kizilcukur vein system which extended over a strike length of 25m. In detail, the results of the individual trench samples stockpiled as separate samples are:
Stockpile 1: 3.7 g/t gold and 345 g/t silver;
Stockpile 2: 5.85g/t gold and 357 g/t silver;
Stockpile 3: 5.57g/t gold and 286 g/t silver;
Stockpile 4: 1.36g/t gold and 114 g/t silver; and
Stockpile 5: 4.61g/t gold and 319 g/t silver
The company comments that it has currently approximately 2800t of stockpile material from the vein on site and that during the summer of 2019 it plans “to truck approximately 300 tonnes of high grade (4.30g/t gold and 239g/tAg) material currently held in stockpile to Kiziltepe for test processing through the CIL processing plant.”
Ariana Resources also plans further trial mining at Kizilcukur during 2019 and that “If test processing of the first batch of 300 tonnes concludes successfully, the Company will give consideration to expanding its operations at Kizilcukur with a view to trucking 2,500 tonnes of ore to Kiziltepe.”
The existing mineral resource at Kizilcukur is reported as around 308,000t of indicated and inferred material at an average grade of 2.1g/t gold and 73.4 g/t silver.

Conclusion: The bulk samples confirm the high-grade nature of the Kizilcukur vein. At this stage, the resource is small, however, continuing trenching, drilling and bulk sampling may lead to resource expansion in due course. We await further news as the programme proceeds.

Connemara Mining* (LON:CON) 1.425p mkt cap £1.6m – Drill results expected sometime soon. Appointment of SP Angel

SP Angel is delighted to have been appointed as Nominated Advisor and Joint Broker to the Irish exploration company, Connemara Mining.
Connemara Mining holds a suite of exploration projects in Ireland, including a 23.4% interest in the Stonepark zinc/lead project in Limerick, a group of nine wholly owned exploration licences in Wicklow and Wexford known as the Mine-River project covering a 15km long strike length of prospective gold bearing geology which was the site of a historic gold-rush during the 1790s, as well as other projects including the Oldcastle lead/zinc project in Cavan/Meath and the Inishowen gold project in Donegal.
The Stonepark project contains an inferred resource of 5.1mt at an average grade of 8.7% zinc and 2.6% lead and is located some 5km from Glencore’s 44mt resource at Tobermalug/Pallas Green which averages 7.2% zinc and 1.2% lead, also classed as inferred.

Conclusion: SP Angel looks forward to working with Connemara Mining as it progresses its exploration efforts in Ireland.

*SP Angel is Nomad and Joint-Broker to Connemara Mining

Highland Gold (LON:HGM) 155.9p, Mkt Cap ₤567.2m – Annual production in line with guidance

Annual production totalled 269.5koz (2017: 272.3koz), in line with the guidance range for 265-275koz, as stronger output at MNV compensated for a dip in production at Novo.
Q4 production amounted to 65.8koz (Q4/17: 68.7koz) with an average gold price for the quarter of $1,230/oz.
Annual average realised gold price was $1,255/oz.
2019 production target guided at 290-300koz
Stronger gold production guidance reflects incremental output from the recently acquired Valunisty mine and related assets that are expected to contribute over 30koz to annual output in 2019.
At MNV, production amounted to 112.6koz, up 10%yoy, on the back of stronger processed grades (2.9g/t v 2.5g/t); operations are reported to have suffered from the avalanche in December that occurred above Adit #1 of the underground mine blocking mine access with mining operations having been shifted to areas accessed via other adits as well as to the open pit in order to meet production targets.
The team continues with near mine and regional exploration works with a views to locate future ore sources and extend MNV LoM past current 2029.
At Belaya Gora, production came in at 44.1koz, little changed from 43.2koz in 2017, with mining operations recording a 94%yoy increase in mined ore tonnages reflecting the focus in 2017 on processing ore from Belaya Gora stockpiles.
An exploration programme was completed on Belaya Gora flanks for 8,268m in 2018 (Kolchansky and Zayachy prospects) with mineral reserves update targeted for Q2/19.
At Novo, output was 112.8koz, down 11%yoy, reflecting lower mined grades(5.13g/t v 5.52g/t for 2018 and 2017, respectively) and weaker plant recoveries.
Lower grades have been recorded at lower horizons with expected reserve grades having not been confirmed in certain blocks while weaker lead content and an increase in the share of gold associated with pyrite negatively affected recoveries.
In response to that, the Company has narrowed in-fill underground production drilling as well as intensified a reserve confirmation drilling programme; additionally, the Company is studying adjustments to the processing circuit to improve recoveries.
At the Chukotka cluster, the Company applied to register Kekura and Klen in the recently expanded Advanced Special Economic Zone that could provide tax breaks improving economics of the projects.
Preparations for the start of construction works at Kekura are ongoing.

MOD Resources (LON:MOD) 20.5p, Mkt Cap £51.0m –Fundraising and indicative offer from Sandfire

MOD Resources reports that it has raised $10m via an institutional placement at $0.30/share and secured an additional $5m in an underwritten rights issue to its existing shareholders at $0.24/share.
The company comments that “The Company's Board of Directors … and Metal Tiger Plc have committed to take up their entitlements in the Rights Issue”.
The funds are to be used to advance the company’s 2019 programme of work in Botswana where current feasibility work, land purchases, infill drilling and associated activities on the T3 project are expected to lead to a “decision to mine, targeted by the end of the first half of 2019”. The company also plans to study the underground mining opportunities at T3 as well as progressing earlier stage drilling at the t4-T23 Dome projects.
In addition, MOD Resources reports that it has “received an unsolicited, non-binding, indicative and conditional proposal … from Sandfire to acquire 100% of shares in MOD”. The indicative proposal “was made after a period of technical due diligence, including access to a data room and a site visit, with respect to a potential joint venture arrangement, the potential sale of a partial interest in T3 Copper Project and a potential market placement to support development of the T3 Copper Project” and “comprises a full scrip consideration equivalent to $0.38 per MOD share, valuing the Company's equity, on a fully diluted basis, at $113 million”.
The MOD Resources’ Board says that the indicative offer, which equates to 1 Sandfire share for every 17 of its shares and values the company at $113m, undervalues the company and points out that both MOD’s share price and the proposed exchange ratio are at a 2.5 year low.
MOD Resources also points out that the pre-feasibility study for the T3 project envisaged a pre-tax NPV of “$370m under the Base Case and $529m under the Expansion Case”. We observe that these values exclude the additional potential of the “Domes” project where, for example, recent drilling at the T23 Dome intersected a number of higher grade sections within the mineralised zone including 3m averaging 0.7% copper and 10g/t silver from 65m depth, 1m averaging 1% copper and 13g/t silver from 80m and 2m averaging 0.6% copper and 7g/t silver from 88m depth.
However, MOD Resources has stated that it “is willing to engage with Sandfire and grant confirmatory due diligence if a compelling price is presented and capable of being supported by the Board and MOD shareholders”.
Confirming the Board’s view that the Sandfire proposal undervalues the company, Managing Director, Julian Hanna, said that “Funding from this capital raise will enable the Company to progress the T3 Copper Project towards a development decision and conduct further drilling for additional resources.” Mr. Hanna also commented that “With strong ongoing support of our shareholders through a placement and a fully underwritten rights issue, we believe that the Company will have sufficient working capital to achieve our objectives."

Conclusion: The additional funding underpins the work required to bring the T3 project to a decision point. The approach from Sandfire places a significant discount on the pre-feasibility study value of the T3 project and fails to recognise any value in the highly promising projects emerging from the rest of the licence area in Botswana. The constructive engagement of the company may, however, elicit a better offer in due course, meanwhile the continuing advance of the project is likely to be followed more closely by both financial and mining industry investors.

Vast Resources (LON:VAST) 0.2p, Mkt Cap ₤12.6m – Off take pre-payment finance update

The Company is currently in discussions with a number of off take partners after Mercuria said it will not be proceeding with the advance of the Tranche B of $5.5m.
The management believes the process can be accelerated with some initial due diligence having already been in process by other potential off-takers.
A non-binding indicative term sheet has been received and others are promised very shortly.
In the meantime, the Company is holding discussions with Mercuria on the future relationship between Mercuria and Vast regarding to off take from Manaila and the obligations of the Company over the $4m Tranche A already advanced to Vast.