Today's Market View - Trade deal optimism overshadows weak PMI data

Proactive Published 01/07/2019

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SP Angel – Morning View – Monday 01 07 19

Trade deal optimism overshadows weak PMI data

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Bacanora Lithium (LON:BCN) – Genfeng signs agreement to buy 29.99% of Bacanora for £14.4m

Cora Gold* (LON:CORA) – Directorate change

IronRidge Resources* (LON:IRR) – Progress report on exploration in Cote d’Ivoire

Premier African Minerals* (LON:PREM) – 2018 Results focus on need to restore profitability

Copper prices rally to six-week high as US agrees to restart negotiations with China

The rally in global equities through the first half indicates lower interest rates to come.
Copper is seen as a store of value, particularly in China and is sometimes bought by traders ahead of economic stimulus.

Equity rally in first half indicates economic stimulus and lower interest rates are on way

Dow Jones rose 14.0%
S&P rise by 17.7%
China’s CSI 300 rose by 31.4%
Hang Seng rose by 10.4%
Nikkei rose by 8.6%
Euro Stoxx rose 16.8%
FTSE 100 rose 11.3%
IBOVESPA (Sao Paulo, Brazil) rose by 14.9%
Oil prices up 25%

Dow Jones Industrials

+0.28%

26,600

Nikkei 225

+2.13%

21,730

HK Hang Seng

-0.28%

28,543

Shanghai Composite

+2.22%

3,045

FTSE 350 Mining

+0.68%

20,829

AIM Basic Resources

-1.15%

2,050

Economics

US – Trump and Xi agree to resume trade talks while warning that there was a “long road” before the deal can be reached.

Trump offered concessions to the Chinese side including no new tariffs and an easing of restrictions on Huawei.
China agreed to make unspecified new purchases of US farm products, according to Reuters.
Risk on sentiment helps equity and copper prices while expectations of extensions of oil output cuts during the OPEC meeting see Brent up nearly 3% today.

China – Private manufacturing PMI dipped more than expected slipping back into a contractionary territory in June, according to Caixin data.

The index hit the second lowest level since Jun/16 with both domestic and export new orders below the 50.0 mark highlighting weak demand environment amid the continuing trade war with the US.
Companies continued to shed jobs amid renewed drops in output while business confidence fell sharply.
Manufacturing PMI: 49.4 v 50.2 in May and 50.1 forecast.

Eurozone factory activity slows for fifth month

The PMI number fell back to 47.6 as manufacturers battle against worsening sentiment, Trade war issues, inventory build earlier this year, and low cost Chinese and other Asian imports.
The figures increase the potential for the ECB to cut interest rates and look at further measures for monetary easing.
Inflation remained stable in the Eurozone at 1.2% in June, down from the 2% where the ECB would like to see the rate.
While the election of the next president for the ECB is likely to be delayed, the job is likely to come with its challenges as the Union risks splitting apart.#

Germany remained the weakest-performing country despite the respective PMI improving to a four-month high (45.0).
France registered the highest PMI in nine months, although growth was only marginal (51.9).
Austria, Spain, Ireland and Italy all recorded PMI readings below the 50.0 no-change mark.
Germany: 45.0 v 45.4 flash and 45.4 forecast.
France: 51.9 v 52.0 flash and 52.0 forecast.
Italy: 48.4 v 49.7 flash and 48.7 forecast.
Spain: 47.9 v 50.1 flash and 49.5 forecast.
New orders continued to slide with a ninth monthly consecutive drop, although the latest decline was the weakest since January.
Weakness in production and new orders weighed on employment with job cuts recorded in Germany, Italy and Spain.
Outlook wise, business confidence remained subdued with Austria and Germany being the least confident in output over the next 12 months.
“The disappointing survey rounds off a second quarter in which the average PMI reading was the lowest since the opening months of 2013, consistent with the official measure of output falling at a quarterly rate of approximately 0.7% and acting as a major drag on GDP,” Markit wrote.
Italy’s Monte Paschi receives third bailout in under ten years. Bloomberg comment that a document questions state aid funding for the bank under EU rules.
Problem is that if Monte Paschi goes down it risks further economic contagion in Italy.

Russia/Saudi Arabia – President Putin said on Sunday he had agreed with Saudi Arabia to extend existing cuts of 1.2mmbbl by 6-9 months.

The OPEX+ alliance is reported to be willing to extend production cuts into 2020.
Iran was the latest OPEC member to support an extension as long as nine months.
Members of the alliance are holding meetings in Vienna over Monday and Tuesday.

Ethiopia – Coca Cola plans to invest $300m in Ethiopia over the next five years as the East African nation opens up to foreign investors, Bloomberg reports.

The Company is planning to open a fourth plant is Sebeta (25km outside the Addis Ababa) with a $70m investment.
Additionally, Coca Cola plans to build a fifth plant in Hawassa, capital of the southern SNNPR region of the country.
New administration has been proactive in attracting foreign capital in Ethiopia, one of the fastest growing countries in the Sub Saharan region, as the government is looking to reduce the nation’s reliance on state funded development programmes.

EU-based traders risk imprisonment in Switzerland from today if they trade Swiss stocks on EU exchanges (FT)

The EU has been renegotiating its trading agreement with Switzerland and has decided to get heavy handed with the Swiss.
From today Swiss shares may only be trades on the Zurich Stock Exchange via a recognised broker. Around 30% of trading in Swiss stocks is done through London.
Swiss traders will also lose their access to EU-based stock exchanges.
Swiss regulators have imposed a ban on trading Swiss equities on exchanges in the EU after the European Commission let the ‘equiValence’ granted to Switzerland and its Stock Exchanges expire.
The Equivalence permit had allowed Swiss shares to be freely traded across the Swiss / EU boarders.
EU investors are more likely to be fined than be jailed if they trade Swiss stocks on non-Zurich exchanges.
We wonder how many algo-trading platforms are going to fall foul of the new change and who the authorities are going to jail for automated computerised trading.
This may prove to be a test of the power of the authorities to control traders and banks operating ‘Dark Pool’ trading platforms.
Equivalence status is likely to be granted by the EU to the UK after Brexit.
The issue highlights the difficulty of negotiating between the EU and outside states even when they are closely aligned with the EU.

Currencies

US$1.1324/eur vs 1.1387/eur yesterday. Yen 108.36/$ vs 107.71/$. SAr 14.110/$ vs 14.123/$. $1.267/gbp vs $1.268/gbp. 0.700/aud vs 0.702/aud. CNY 6.844/$ vs 6.865/$.

Commodity News

Precious metals:

Gold US$1,388/oz vs US$1,413/oz yesterday

Gold ETFs 74.2moz vs US$74.0moz yesterday

Platinum US$835/oz vs US$814/oz yesterday

Palladium US$1,541/oz vs US$1,544/oz yesterday

Silver US$15.23/oz vs US$15.25/oz yesterday

Base metals:

Copper US$ 6,045/t vs US$5,990/t yesterday – Copper hit the highest in six weeks this morning on the back of the news that China and the US will restart trade talks as both sides offered concessions.

Chuquicamata was reported as fully operational as of last Friday following a two-week strike.

Aluminium US$ 1,808/t vs US$1,796/t yesterday

Nickel US$ 12,470/t vs US$12,630/t yesterday

Zinc US$ 2,511/t vs US$2,483/t yesterday

Lead US$ 1,938/t vs US$1,941/t yesterday

Tin US$ 18,845/t vs US$18,850/t yesterday

Energy:

Oil US$66.7/bbl vs US$66.3/bbl yesterday

Natural Gas US$2.310/mmbtu vs US$2.324/mmbtu yesterday

Uranium US$24.60/lb vs US$24.65/lb yesterday

Bulk:

Iron ore 62% Fe spot (cfr Tianjin) US$107.9/t vs US$111.5/t – Steel making raw material exports from Australia are on course to register the first annual decline in nearly two decades affected by bad weather and output setbacks, according to the Department of Industry, Innovation and Science report.

The world’s largest shipper cut its 2019 forecast 814mt from 867mt estimated in March and down from 835mt recorded in 2018.
“The iron ore price is expected to be higher than previously forecast – and for a longer period – due to the limited capacity of other operations in Australia and elsewhere to ramp up and replace Vale’s production loss of high-grade supply, at least in the short term,” the report read.
At the same time, steel production in China is heading for a record year.
“The seaborne iron ore market is thus likely to stay tight, and prices elevated, out to at least 2021,” the report said.
62% Fe FOB contract is estimated to average $80/t in 2019, $61/t in 2020 and$58/t in 2021.

Chinese steel rebar 25mm US$628.7/t vs US$613.6/t

Thermal coal (1st year forward cif ARA) US$65.0/t vs US$64.0/t

Coking coal futures Dalian Exchange US$207.7/t vs US$211.2/t

Other:

Cobalt LME 3m US$29,000/t vs US$29,000/t

NdPr Rare Earth Oxide (China) US$50,385/t vs US$50,258/t

Lithium carbonate 99% (China) US$9,347/t vs US$9,469/t

Ferro Vanadium 80% FOB (China) US$38.0/kg vs US$38.5/kg

Antimony Trioxide 99.5% EU (China) US$5.7/kg vs US$5.7/kg

Tungsten APT European US$250-255/mtu vs US$250-255/mtu

*Pricing sourced from Bloomberg

Battery News

Company News

Bacanora Lithium (LON:BCN) 53p, Mkt Cap £71m – Genfeng signs agreement to buy 29.99% of Bacanora for £14.4m

Genfeng Lithium has signed its previously announced strategic investment agreement to buy 29.99% of Bacanora for £14.4m.
Genfeng is also making a project level investment in Sonora Lithium, for 22.5% of the project holding company of £7.6m.
Genfeng has an option to increase its interest in Sonora Lithium to 50% within 24 months at a share price based valuation at the time of investment.
Offtake agreement:
Genfeng is also entitled to take 50% of Bacanora’s Stage 1 lithium production plus 75% of Stage 2 lithium production.
Sonora project review
Genfeng will complete a review within six months of the EPC engineering design and capital costs of Sonora Lithium Project with a view to reducing costs and accelerating the timetable. It will also provide a plant and process commissioning team to assist Bacanora in delivering first production in 2021
Production
Bacanora plans to produce 17,500 tpa of lithium carbonate during phase 1 of the project before doubling output to 35,000 tpa during phase 2.
Capex
Overall capital cost estimates for Phase 1 amount to US$420m of which, according to the January 2018 feasibility study, approximately US$232m is attributable to the beneficiation plant, lithium extraction plant and the shared plant services.
Hanwa Corporation
In April 2017, Bacanora Lithium secured a five year lithium product offtake agreement with the major Asian battery chemicals trader, Hanwa Corporation of Japan and in June this year announced that they had agreed to extend the offtake partnership by a further 5 years, effectively underpinning the Phase 2 expansion of the project.
Last year Bacanora announced that plans by the Chinese investor NextView, to invest an initial £31m in Bacanora had failed to materialise.

Conclusion: Bacanora’s Sonora project plans to produce lithium carbonate from clay in Mexico. The project has run a fairly large scale C$20m pilot plant over more than two years to confirm the extraction process and train local staff. Hanwa Corp. pulled out despite the pilot plant testwork and an investment from NextView also failed to materialise.

Lets hope it is third time lucky for Bacanora otherwise it may be sayonara for Sonora. If Genfeng can’t get this project up and running then probably no one can.

Cora Gold* (LON:CORA) 4.4p, Mkt Cap £4.4m – Directorate change

Ed Bowie joined the Board of Cora Gold as Non-Executive Director.
Mr Bowie brings over 23 years of experience within the natural resources sector having started his career as an exploration geologist with SAMAX in Tanzania and more recently having worke as Head of business Development at Amara Mining.
Additionally, Bert Monro will be stepping down from the Board to fill in the newly created position of Business Development for Cora Gold.
Mr Monro will perform his role alongside his responsibilities at Hummingbird Resources, a substantial shareholder in the Company.

*SP Angel acts as Nomad and Broker to Cora Gold

IronRidge Resources* (LON:IRR) 15.25p, Mkt Cap £47.4m – Progress report on exploration in Cote d’Ivoire

IronRidge Resources has announced details of its gold exploration activities in Cote d’Ivoire where it has strengthened its team of geologists with Ivorian nationals and established a new office in Abidjan “to support our level of in-country activity”.
At the Zaranou licence north-east of Abidjan, detailed mapping and sampling of 145 artisanal mining pits extending over 16km of strike within the northern part of the licence has “provided valuable insights into potential mineralised structures, vein types and true mineralised widths pending receipt of assays”.
The company plans to build on this work with a programme of infill aircore drilling “to test for mineralisation width and continuity within high priority zones highlighted in the channel and rock chip sampling and assay results”.
Work on the Bianouan and Bodite licences, also located north-east of Abidjan, included the completion of 28 aircore drill holes at Bianouan to test “coincident soils, auger and trenching gold geochemical anomalies at depth” while a further 37 aircore holes were completed at Bodite in order to “test the highest priority geochemical anomaly”. The follow up programme of work is to be determined upon receipt of the assay results from the aircore drilling programmes.
Trenching work at the Kineta project north of Bodite, showed “multiple narrow gold intersections … including 2m @ 4.04g/t gold and 6m @ 0.24g/t gold”. The company also reports that soil sampling at the Marahui prospect, located south of Kineta, has identified anomalous levels of gold in NNE trending structures over an area covering 2km of strike length and width of between 1-200m. Further trenching or aircore drilling is planned to follow up these anomalies.
Commenting on these developments, Chief Executive, Vincent Mascolo, said that “The addition of national geologists has bolstered our in-house exploration team and we have secured new office facilities in Abidjan to support our level of in-country activity.”
He went on to explain that the work at Zaranou “will provide valuable insights into gold mineralised structures where intensely, steep dipping sheared and brecciated quartz vein zones have been mapped”.

Conclusion – Relatively early stage exploration is providing insights into what appears to be complex geology at Zaranou while results from other projects are providing further targets to test in Cote d’Ivoire which is increasingly emerging as a favoured destination for west African gold exploration.

*SP Angel act as nomad and broker to IronRidge Resources

Premier African Minerals* (LON:PREM) 0.055p, Mkt Cap £4.4m – 2018 Results focus on need to restore profitability

Reporting on what the Chief Executive described as a “disappointing” year in 2018 during which “a number of achievements anticipated being stalled and generally due to circumstances not immediately under our control” Premier African Minerals reports a loss of US$7.8m for 2018 (2017 – loss of US$19.8m)
Following additional financing of US$1.4m during 2018, the company’s net debt at 31st December 2018 is reported at US$0.49m (2017 US$82,000).
At the RHA tungsten mine, “The prospect of restructuring the ownership at RHA Tungsten (Pty) Ltd ("RHA"), born out of the promise of a new Zimbabwe, failed to materialise and in its place the Zimbabwean National Indigenisation and Economic Empowerment Fund ("NIEEF") proposed in late 2018 that they would fund RHA back into production whilst retaining their ownership. In this event, Premier's loan account to RHA, now in excess of $20 million, remains in place and Premier is reappointed as the manager of the project.”
The NIEEF funding was announced in May 2019 and the company remains “focused on getting RHA fully operational and has agreed that together with NIEEF, this is our prime objective”. Chief Executive, George Roach expressed confidence in the longer term future of the RHA project saying “There is no doubt in my mind that once RHA attains steady state, it will be a long term and important tungsten producer”.
At the Zulu lithium project “the failure to reach agreement on the proposed joint venture to develop Zulu Lithium (Pty) Ltd ("Zulu") has been exacerbated by the ongoing frustrations associated with the delay in granting our Exclusive Prospecting Order ("EPO") application over the on-strike extensions to Zulu. Most disappointing is that these extension areas, in our opinion, are worth little to any other party without the main body of the Zulu deposit but would be highly complementary to Zulu in the long term.”
“Re-evaluation of investment and country risk associated with Zimbabwe has resulted in an increased discount rate of 33%. Production of concentrates only cannot support this risk profile and primarily for this reason, the decision has been taken to fully impair Zulu at this time [US$4.6m]. It should be noted that any decision to construct a lithium carbonate plant would be expected to lead to a reversal of this impairment at present price levels and even at this discount rate.”
Although there is a focus on bringing the RHA mine to production, Mr. Roach also says that “There is little doubt in my mind that Premier must diversify and identify revenue generating assets that are actually in production and profitable now.”

Conclusion: Reporting on what has clearly been a difficult year in 2018 Premier African Minerals underlines its commitment to bringing the RHA tungsten mine back to production but also stresses the need to diversify into profitable, revenue generating assets.

*SP Angel have an agreement with Premier African Minerals as a result of the acquisition of Northland Capital Partners