Morning Market Pulse - Iron ore prices rise following Vale dam disaster

SP Angel – Morning View – Monday 28 01 19

Iron ore prices rise following Vale dam disaster

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Jangada Mines (LON:JAN) – Resource increase at Pedra Blanca

Petra Diamonds (LON:PDL) – H1 Trading update

Ferro-vanadium prices edge slightly higher to US$77-79.1/kgV (Fastmarkets MB)

• Tightening supply in China is helping vanadium prices higher in China as traders and consumers look to buy stock ahead of the Chinese new year.
• Government statements and intent on better enforcement of vanadium content and strength testing for steel rebar should drive demand significantly higher.
• The effective banning of Quench & Temper steel for construction rebar in China is a major move from a vanadium demand perspective and is likely to cause traders to keep vanadium in China on the expectation for higher prices in the Chinese new year.
• Thin supply in China is reported to be raising prices for exports. The bid offer spread in Europe has narrowed with small cargoes traded while prices pull back in the US.
• A slowing of the European economy may be causing caution among buyers.
• In China, much vanadium slag production as a by-product of iron production from magnetite with vanadium has been displaced due to the pollution from open furnaces. Some, but not all of this production is said to have moved to Austria and Russia.
• Over 70% of vanadium comes from co-product steel slag with under 20% coming from primary vanadium ores and just 10% from secondary recycling. The removal of even a small proportion of the co-product steel slag should have a significant impact on the supply demand balance which saw a 9% market deficit of 8,000t in 2017 according to Largo Resources.
• The market for vanadium feels likely to see further and potentially dramatic tightening over the next few months.

Iron ore surges following deadly Vale dam disaster

• Iron ore futures at Dalian, China rose 6% in response to Vale’s decision to halt operations at its Corrego do Feijao mine in Brazil following the failing of a tailings dam on Friday.
• The failed dam released millions of tonnes of low-grade laterite soil and rock which passed through Vale’s mining facilities and nearby communities, killing 58, with hundreds still missing.
• The disaster follows the Samarco (BHP & Vale) tailings collapse which killed 19 in 2015.
• While BHP will have double checked all its tailings facilities since the Samarco collapse we wonder if Vale were so diligent in their review of their own facilities.
• Closure of the Corrego do Feijao mine will result in a 1.5% production loss at Vale, which will have a negligible impact on supply. “The accident involves Brazilian high-grade ore. However, I think physical prices may not change significantly because the market has already been very, very quiet (ahead of the Lunar New Year holiday in early February”, adds CRU consultant.
• “The short-term impact is limited considering the mine itself only has 7.8mt capacity and China’s current iron ore inventory is still high”, according to Qingdao-based iron ore trader.
• High-quality, less-polluting iron ore continues to draw preferential interest across China, with ongoing second-level or ‘orange’ pollution alert issued by China’s biggest steelmaking city, Tangshan, for a wave of smog expected to blanket the region. The alert means steel mills will have to curtail sintering operation by 30% to 60%, or even shut, based on their emission levels.
• The impact for Vale is expected to be severe, with the company facing fines and the potential loss of its licences to operate in the affected region.
• In response to the disaster, Brazilian authorities levelled Vale SA a combined $1.7bn in blocked funds and fines from a Minas Gerais state judge and the Ibama environmental agency, as the second deadly accident struck just over three years after.
• Friday’s tragedy has also been a tough blow for Chief Executive Officer Fabio Schvartsman, who took office in 2017 and had been riding high as customers gobbled up Vale’s iron ore and prices for the raw material used in steelmaking stabilized amid steady economic growth in China.
• Huge production volumes has benefitted the Rio de Janeiro-based company, allowing for significant dividends and successful slashing of billions of dollars of debt.
• Brazil’s largest iron ore miner is reported to be deliberating on “the suspension of the shareholder remuneration policy, and therefore the non-payment of dividends and interest on capital, as well as any other deliberation on shares buyback.”
• In addition, the miner’s board set up two committees to probe the disaster that struck on Friday at one of its operations at the Feijao mine in Minas Gerais.
• Schvartsman said Vale is investigating the causes of the accident and that the company had doubled down on security after the similar accident in 2015, adding that the dam had been audited by an outside firm.

Chinese new year runs from 5 Feb 2018 to 19 Feb 2019 with a fair number of Chinese tourists already in London

• This is the year of the Brown Pig, or Female Earth Pig.
• A pig represents luck, overall good fortune, wealth, honesty, general prosperity, symbolizing a hard working, a peace-loving person, a truthful, generous, indulgent, patient, reliable, trusting, sincere, giving, sociable person with a large sense of humour and understanding.
• All personality traits which we would like to see in our Chinese friends during their negotiations with Donald Trump.

Dow Jones Industrials

+0.75%

at

24,737

Nikkei 225

-0.60%

at

20,649

HK Hang Seng

+0.03%

at

27,577

Shanghai Composite

-0.18%

at

2,597

FTSE 350 Mining

+1.76%

at

17,996

AIM Basic Resources

+1.29%

at

2,177

Economics

US – Trump agreed to temporarily reopen the government on Friday following 35 days of shutdown, the longest in the nation’s history.

• The government is set to be funded for three weeks as lawmakers try to strike an immigration deal.
• Congress is planning to set up a bipartisan, bicameral conference committee to try to strike a deal on border security.
• Trump threatened to let funding lapse or even declare a national emergency if Congress does not craft an immigration deal he likes.
• Q4 GDP numbers are due Wednesday (+2.6%qoq v 3.4%qoq in Q3) as well as Fed press conference following the FOMC rate decision (no change in rates forecast).
• Labour data is due on Friday (165k v 312k in December; Earnings +0.3/+3.2 v +0.4/+3.2 in December).

China – Industrial profits dropped for the second consecutive month on the back of slowing factory inflation and economic growth.

• On a separate note, news on trade negotiations front are due this week with Chinese President Xi’s top economic aide, Vice Premier Liu He, set to meet with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Wednesday and Thursday.
• The PBOC announced an extra CNY 250bn ($37bn) in available funding for lenders on Friday after a review showed more banks were eligible for a cut in reserve requirement ratios.
• Additional banks are eligible for the cuts as their lending to small companies had risen to a required level which in turn suggests monetary authorities are monitoring and managing support to the small businesses and the private sector.
• Combined with a previously announced cut in RRR and a targeted lending tool used last week for the first time, the PBOC said in a statement it had made available around CNY 800bn in funds to banks.
• Industrial Profits (%yoy): -1.9 v -1.8 in November.

• China National Bureau of statistics data released today shows that Industrial profits grew by 10.3% in 2018
• 2018 growth was lower than the 21% growth reported for 2017 and profitability fell by 1.8% in December 2018.
• State-owned companies saw profits rise by 2.6% year on year in 2018 – this compared with 45.1% growth in 2017
• Private firms' profit growth accelerated from 11.7% In 2017 to 11.9% in 2018.
• Mining profitability grew by 40.1%, manufacturing 8.7% however, 9 sectors saw profits decrease including

non-ferrous metals smelting and rolling by 9% and automobile manufacturing by 4.7% year on year.

Eurozone – German exporters’ business confidence more than halved in the past two months to hit 5.9 points in January highlighting risks to growth outlook in the Eurozone largest economy.

• Auto manufacturers and the chemical sector outlook has worsened while some upside is seen in the food industry and among paper manufacturers; pharmaceuticals expect an increase in foreign sales.
• “The new year is marked by worries among German manufacturers… December’s ray of hope in the automotive industry has vanished at the beginning of the year,” the report said.
• Additionally, details of a leaked report from German government last Friday showed authorities have downgraded its forecast for economic growth in 2019 to 1% from an earlier one of 1.8%.

UK – The pound is trading close to the highest level since October last year as markets discounted chances of a no-deal Brexit.

• Andrea Leadsom, Conservative Party’s leader of the House of Commons, suggested the date UK leaves the EU may be pushed by a couple of weeks to give time for legislation to be approved by lawmakers, the most senior figure to make such an announcement.
• A spokesman for the government office said the No. 10 position had not changed i.e. no extension to Article 50 set date is currently considered.
• Parliament will be debating May’s proposed next steps as well alternative plans put forward by lawmakers, including a potential extension to the Article 50 negotiation period, tomorrow.
• The currency rallied 2% last week, the strongest increases since late January 2018, and is up more than 5% since hitting lows of 1.2475 in mid-December.

Russia – The US Treasury Department lifted sanctions on three companies linked to Oleg Deripaska, including United Co. Rusal, with aluminium prices posting declines this morning.

• Aluminium LME 3m forward contract prices are down 1.3% while Rusal is up 9.4% in Hong Kong today.

Venezuela - China and Russia are said to be supporting the self-determination and inevitable self-destruction of Venezuela and are planning a major support operation.

• China is allowing its oil payments in kind for loans and interest to be suspended so Venezuela can sell it for cash on the open market.
• We suspect there are some highly dubious oil for trade deals going on here of the type which would not pass inspection / legislation in the US, UK or EU.

Canada – ambassador to China has been forced out after Huawei comments

• John McCallum’s comments relate to the potential release Huawei executive Ms Meng in effective return for two Canadian national detailed in China
• Canada’s president was less than amused and told McCallum to hand in his resignation
• Our advice, if you are Canadian, don’t travel to Canada anytime soon.

Currencies

US$1.1395/eur vs 1.1325/eur last week Yen 109.42/$ vs 109.77/$ SAr 13.643/$ vs 13.685/$ $1.317/gbp vs $1.308/gbp 0.718/aud vs 0.711/aud CNY 6.739/$ vs 6.764/$

Commodity News

Precious metals:

Gold US$1,301/oz vs US$1,284/oz last week

Gold ETFs 72.5moz vs US$72.5moz last week

Platinum US$814/oz vs US$805/oz last week

Palladium US$1,351/oz vs US$1,323/oz last week

Silver US$15.74/oz vs US$15.40/oz last week

Base metals:

Copper US$ 6,048/t vs US$5,951/t last week

Aluminium US$ 1,903/t vs US$1,892/t last week – US lifts sanctions on Deripaska and his EN+ business

Nickel US$ 11,915/t vs US$11,810/t last week

Zinc US$ 2,700/t vs US$2,644/t last week

Lead US$ 2,118/t vs US$2,077/t last week

Tin US$ 20,660/t vs US$20,915/t last week

Energy:

Oil US$60.7/bbl vs US$61.5/bbl last week

Natural Gas US$2.911/mmbtu vs US$3.146/mmbtu last week

Uranium US$29.00/lb vs US$29.00/lb last week

Bulk:

Iron ore 62% Fe spot (cfr Tianjin) US$74.6/t vs US$74.5/t

Chinese steel rebar 25mm US$597.8/t vs US$594.8/t

Thermal coal (1st year forward cif ARA) US$84.8/t vs US$84.3/t

Coking coal futures Dalian Exchange US$204.3/t vs US$211.7/t

Other:

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

China NdPr Rare Earth Oxide US$46,227/t vs US$46,058/t

China Lithium carbonate 99% US$10,017/t vs US$9,980/t

China Ferro Vanadium 80% FOB US$70.7/kg vs US$70.6/kg

China Antimony Trioxide 99.5% EU US$7./kg vs US$6.9/kg

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

Battery News

‘Better’ alternative lithium-ion batteries by Honda, CalTech and NASA

• Collaboration between Honda Research Institute, California Institute of Technology and NASA’s Jet Propulsion Laboratory yields a new alternative to the standard lithium-ion battery – fluoride-ion batteries.
• The research group appear to have overcome major issues with overheating fluoride batteries which require temperatures of ~300°F (~150°C) to work effectively. According to their abstract published at Science.com, the reason for this is that “current batteries need to operate at high temperatures that are required for the molten salt electrolytes.”
• “Fluoride-ion batteries offer a promising new battery chemistry with up to ten times more energy density than currently available Lithium batteries,” said Christopher Brooks, a Honda Research Institute researcher and a co-author of the paper.
• Fluoride-ion also has another advantage over lithium-ion: they can be sourced from more common materials, which can be good for the environment.
• “Unlike Li-ion batteries, FIBs do not pose a safety risk due to overheating, and obtaining the source materials for FIBs creates considerably less environmental impact than the extraction process for lithium and cobalt,” Brooks shared.

Volkswagen flagship plant undergoing EV transformation

• German automaker giant raises its bet on electric vehicles by overhauling its Salzitter plant to focus on production processes for battery cell for the next generation of cars. The Wolfsburg-based company is expected to invest €870m ($985m) by 2020 to develop e-vehicle components, adding that its components division will now be in charge of producing, packing and overseeing recycling of battery cells and packs.
• VW has been actively promoting the electric push by creating global production capacities for the construction of 1m electric cars. Late last year, it announced it would spend nearly $50bn to refocus on the making of electric cars, autonomous vehicles and new mobility services.
• The company also promote its mobile electric car charging stations, which rely on bundled cells from EV batteries into storage power banks that can be used to recharge up to 15 e-cars at a time.
• Volkswagen’s shift to e-mobility is also adding jobs in the U.S. Last week, the company said it would build an $800m plant in Chattanooga, Tennessee, creating 1,000 positions, plus additional ones at suppliers. EV production there will begin in 2022.
• The company also recently announced it was investing in Forge Nano, a California-based start-up that seeks to improve the efficiency of battery cells.
• However, the transition to electrification will need to also focus on employment as the growing adoption of EVs in expected to cost the country’s key auto industry around 75,000 jobs by 2030, according to a report carried out by the Fraunhofer Institute of Industrial Engineering.

Company News

Jangada Mines (LON:JAN) 2.225 pence, Mkt Cap £5.2m – Resource increase at Pedra Blanca

• Jangada Mines reports that it has increased the JORC compliant minerals resource estimate of its Pedra Blanca platinum group metals and nickel project, located approximately 280km from the port of Fortaleza in north-eastern Brazil, by 117% to 74.84mt at an average grade of 1.31 g/t palladium equivalent (PdEq).
• The estimate, which was prepared by the independent, South African based, consulting company, Minxcon, was prepared at a cut-off grade of 0.6g/t PdEq used the following individual metal prices and grades:
• Platinum US$1,224/oz 0.32g/t
• Palladium US$1,250/oz 0.36g/t
• Gold US$1,500/oz 0.03g/t
• Nickel US$19,270/t 0.18%
• Copper US$7,216/t 0.03%
• Chromium US$258/t 0.40% and
• Cobalt US$46,171/t 0.009%.
• The indicated portion of the resource estimate has increased by 64% to 29.34mt at an average grade of 1.36g/t PdEq while the inferred part of the resource is reported to have grown by 174% to 37.09mt, although the accompanying table shows an inferred estimate of 45.5mt at an average grade of 1.28g/t PdEq.
• The company has confirmed that the “Verification phase of the fully funded Bankable Feasibility Study ('BFS') on track for completion by end Q1 2019”.
• Commenting on the upgraded resource, Executive Chairman, Brian McMaster, highlighted the new resource estimate as a “significant step forward” for the company and said that “labelling this a 'PGM project' doesn't do it justice; it is clearly much more than that. The key economic drivers of the Project are palladium and nickel, two of the most in favour minerals of today and for the foreseeable future.”
• Mr. McMaster confirmed that “The work being done to finalise the BFS and prepare the Project for development is exceptional and the results are coming through better than expected."

Petra Diamonds (LON:PDL) 40.48p, Mkt Cap £350.3m – H1 Trading update

• Petra Diamonds reports a 10% increase in H1 diamond production for the six months ending 31st December 2018 to 2.0m carats (1.8m carats in six months to 31st December 2017).
• The overall increase includes a 13% increase in the run-of-mine (ROM) production, to 1.95m carats, which more than offsets a decline of 37% from the reprocessing of tailings. The company is maintaining its current production guidance for the year of 3.8-4.0m carats.
• Production was dominated by the Finsch and Cullinan mines which produced 947,424 carats (47% of the total) 832,026 carats (41%) respectively, with Cullinan’s ROM output increasing by 30% to 785,444 carats as production continues to build up from the C-Cut Phase 1 mining area.
• The company comments that “The third and final underground crusher was commissioned during December, delivering increased operational flexibility as mining progresses across the footprint of the cave. The new Cullinan plant is fully operational and is meeting design parameters while normal optimisation is ongoing.” As well as confirming that “This increase in volume and grade is due to the continued ramp up of production from the C-Cut phase 1 and a reduction in ore mined from old areas with higher waste dilution. During the Period, production from the C-Cut phase 1 was largely concentrated in the south-western part of the footprint and therefore not representative of expected production associated with the full extent of the C-Cut phase 1 block cave.”
• While production at the Finsch and Koffiefontein mines remained stable at 927,934 carats and 25,275 carats respectively, Koffiefontein’s production was “negatively impacted during the Period due to community unrest relating to municipal service delivery, operational challenges experienced relating to plant availability and a lower than planned grade recovered.”
• Describing the diamond market, the company explains that seasonal weakness led to a 4% decline in rough diamond prices (to average approximately $119/carat) driven by “weakening in global markets and by seasonal destocking at a number of Indian midstream companies”. Demand for smaller stones is reported to have recovered somewhat during November and December but overall Petra Diamonds “continues to expect the diamond market to remain stable for the remainder of FY 2019”.
• The disruption at Koffiefontein started in September and “worsened and severely disrupted operations at Koffiefontein throughout Q2 FY 2019 due to high absenteeism as a result of the protest actions. In spite of these challenges, ROM tonnes mined increased 40% to 434Kt (H1 FY 2018: 311Kt) and ROM tonnes treated increased 30% to 377Kt (H1 FY 2018: 289Kt)”.
• In Tanzania, the Williamson mine diamond production rose by 23% to 214,421 carats and the company reports that, post December 2018, it recovered “two good quality pink stones (21ct and 10ct respectively) which are expected to be sold during the February 2019 tender … [and that it] … remains in discussions with the Government of Tanzania and local advisers in relation to the overdue VAT receivables and the blocked parcel”.
• The build up in production at Cullinan sees Petra diamonds past the peak of its capital expenditure cycle which is now expected to decline. Capex during the half year amounted to US$40.6m, excluding capitalised borrowing costs, (H1 FY 2018 – US$69.4m – down 41%).

Conclusion: Petra Diamonds is building up its primary ore production at Cullinan and has put its peak capital expenditure requirement behind it with mining now expected to move into the planned C-Cut area should see a progressive decline in mining from the old mining areas and a consequent reduction in dilution.