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Today's Market View - Fed reservations on further rate cuts hold back metals

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SP Angel – Morning View – Thursday 01 08 19

Fed reservations on further rate cuts hold back metals

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MiFID II exempt information – see disclaimer below

 

Arc Minerals* (LON:ARCM) – Mineralogy at Cheyeza East indicated high-grade weathered copper zone

Bacanora Lithium (LON:BCN) – Genfeng receives first approval from China’s Ministry of Commerce, two more approvals to go

Chaarat Gold* (LON:CGH) – Operational update conference call

Phoenix Copper* - formerly Phoenix Global Mining (LON:PXC) – Updated project economics for Empire oxide project

 

Dow Jones Industrials

 

-1.23%

at

  26,864

Nikkei 225

 

+0.09%

at

  21,541

HK Hang Seng

 

-0.83%

at

  27,547

Shanghai Composite

 

-0.81%

at

   2,909

FTSE 350 Mining

 

-1.94%

at

  19,562

AIM Basic Resources

 

-0.74%

at

   2,132

 

Economics

US – The FOMC cut the rate by the expected 25bp as well as said it will stop the reduction in the Fed’s balance sheet in August, two months earlier than planned.

  • Unexpectedly, Jerome Powell called the latest cut a “mid-cycle adjustment to policy” playing down market expectations that more easing to follow.
  • “I’m contrasting it there with the beginning, for example,of a lengthy cutting cycle… that’s not what we’re seeing now… that not our perspective now, or outlook,” Powell commented on the decision.
  • Before the press conference, markets expected the Fed to announce three cuts before year end.
  • S&P 500 closed more than 1% down while US Treasury yields climbed nearly 10bp to 1.90% for 2y notes and 4bp to 2.05% for 10y notes.
  • The US$ index was up 0.4% weighing on the US$ denominated base and precious metals.

 

China – Manufacturing sector posted negative growth in July, surveys of both private and state-owned companies show.

  • On a positive note, the industry seem to be stabilising as declines slowed during the month with firms pointing relatively firmer demand conditions and new orders posting a modest increase following a decline at the end Q2 driven by stronger domestic demand with export orders being little changed.
  • Companies referred to the ongoing trade dispute with the US as the factor weighing on export sales.
  • “China’s manufacturing economy showed signs of recovery in July… business confidence rebounded, reflecting the strong resilience in the economy… policies such as tax and fee reductions designed to underpin the economy had an effect,” Caixin report read.
  • Official Manufacturing PMI: 49.7 v 49.4 in June and 49.6 forecast.
  • Caixin Manufacturing PMI: 49.9 v 49.4 in June and 49.5 forecast.

 

Eurozone – The manufacturing sector remains a drag on growth with the industrial output falling at the quickest pace in years, according to the Markit PMI data for July.

  • All major single currency economies report a contraction in the sector in July including Germany (43.2), France (49.7), Italy (48.5) and Spain (48.2).
  • The drop comes amid a sharp decline in new orders on the back of trade tensions, difficulties int eh auto industry and political uncertainties weighing on demand both in internal and external markets.
  • Employment dropped the most in over six years with firms’ sentiment seen deteriorating to the lowest point since the end of 2012.

 

Italy – Economic growth was flat in Q2 which is broadly in line with anaemic growth recorded in the Eurozone in general (+0.2%qoq in Q2, down from 0.4%qoq in Q1).

  • The 0.0%qoq growth is a reflection of a contraction in manufacturing compensated by an expansion in the service sector.
  • Stagnation or negative growth puts pressure on Rome to meet its fiscal deficit to GDP targets as part of EU membership commitments.
  • GDP (%qoq/yoy): 0.0/0.0 v 0.1/-0.1 in Q1 and -0.1/-0.1 forecast.

 

South Korea – IN a reflection of weak global growth momentum, exports from South Korea dropped 11%yoy in July marking an 8th straight decline.

  • Global trade tensions, a slowdown in Chinese economy and contracting demand for memory chips have been weighing on growth in the Asia’s fourth-largest economy.
  • In particular, semiconductor exports were down 28% with volumes shipped down 15%.
  • Local demand is also fragile with imports reporting a 2.7%yoy drop which is a 6th drop in the last seven months.

 

Brazil – The central bank joined other nations’ monetary authorities in an easing drive cutting the benchmark rate for the first time in over a year.

  • The monetary policy committee cut the rate by 50bp to 6.0% while also signalling more potential stimulus to follow.
  • “The Committee deems that the consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus,” the central bank said.
  • Consumer prices inflation has been slowing down with the last reading coming almost a full percentage point below this year’s target of 4.25%.
  • Additionally, the pension reform that is expected to cut budget commitments considerably passed the first vote in the lower house with a second one due in August before moving to the Senate.
  • The IMF recently cut its forecast for GDP growth this year for Brazil to 0.8% from 2.1% which is roughly in line with the government and central bank estimates.

 

Saudi Arabia – quarterly budget deficit grows to $8.9bn

  • Government officials are increasing spending in Saudi Arabia in an attempt to restore growth into its slowing economy.

 

Hong Kong – typhoon 8 warning causes delays negotiations with Metals Exploration bankers

  • There is much that gets blamed on the weather but this is a new one on us.
  • We might have expected the HK pro-democracy demonstrations might have had an impact but it seems the protestors are largely back at work after their protests.
  • The weather gets blamed for much in the mining industry, now it is time for the bankers to blame the weather as well.

 

Currencies

US$1.1046/eur vs 1.1155/eur yesterday. Yen 109.17/$ vs 108.53/$. SAr 14.420/$ vs 14.150/$. $1.212/gbp vs $1.216/gbp. 0.685/aud vs 0.689/aud. CNY 6.900/$ vs 6.886/$.

 

Commodity News

Precious metals:         

Gold US$1,407/oz vs US$1,432/oz yesterday

   Gold ETFs 75.6moz vs US$75.6moz yesterday

Platinum US$855/oz vs US$879/oz yesterday

Palladium US$1,515/oz vs US$1,534/oz yesterday

Silver US$16.06/oz vs US$16.49/oz yesterday

           

Base metals:   

Copper US$ 5,906/t vs US$5,951/t yesterday

Aluminium US$ 1,793/t vs US$1,808/t yesterday

Nickel US$ 14,305/t vs US$14,355/t yesterday

Zinc US$ 2,409/t vs US$2,444/t yesterday

Lead US$ 1,988/t vs US$1,992/t yesterday

Tin US$ 17,300/t vs US$17,500/t yesterday

           

Energy:           

Oil US$64.4/bbl vs US$65.2/bbl yesterday

Natural Gas US$2.241/mmbtu vs US$2.139/mmbtu yesterday

Uranium US$25.30/lb vs US$25.45/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$110.7/t vs US$117.1/t

Chinese steel rebar 25mm US$603.1/t vs US$606.3/t

Thermal coal (1st year forward cif ARA) US$67.4/t vs US$67.2/t

Coking coal futures Dalian Exchange US$212.5/t vs US$213.0/t

           

Other:  

Cobalt LME 3m US$26,000/t vs US$26,000/t

NdPr Rare Earth Oxide (China) US$42,393/t vs US$42,042/t

Lithium carbonate 99% (China) US$8,768/t vs US$8,786/t

Ferro Vanadium 80% FOB (China) US$39.3/kg vs US$39.0/kg

Antimony Trioxide 99.5% EU (China) US$5.3/kg vs US$5.4/kg

Tungsten APT European US$210-225/mtu vs US$210-225/mtu

 

Battery News

California gas-powered generator moving to more solar and battery storage

 

  • Glendale Water & Power plans to partially replace gas-fired power generation with up to 50 MW of solar and a 75MW, 300MWh battery energy storage system

 

Company News

Arc Minerals* (LON:ARCM) 4.3p, Mkt Cap £31m – Mineralogy at Cheyeza East indicated high-grade weathered copper zone

(The Cheyeza project is 66% owned by Arc Minerals through its holding in Zamsort)

STRONG BUY - CLICK FOR PDF

  • Arc Minerals held a conference call for investors and analysts yesterday to discuss progress in drilling on its new and existing projects and mine in Zambia.
  • The company continues to drill the Cheyeza East project and is also moving a third rig on to the Lumbeta project nearby.
  • Further drill results are expected within the next 10 days.
  • Cheyeza East: the recent high-grade copper intercept of 7.60m grading 4.15% copper is particularly interesting, not just because of its high grade but because it indicates a mineralogy which may be similar to some very high ‘world class’ discoveries seen in the DRC in recent years.
  • Arc’s chief geologist describes the higher-grade material as in the black saprolite weathered profile. The tabular shape weathered zone appears to host secondary oxide material influenced by meteoric waters, though most holes do not reflect the black saprolite material so far.
  • The geologists do not believe the weathered saprolite zone is connected with sulphide mineralisation below which is seen in visible chalcocite and chalcopyrite.
  • On questioning, the geologist confirmed the higher-grade weathered material looks like the ‘Terre Noire’ (Black Earth) material which often hosts very high grade copper in the DRC. We have seen Terre Noire ores running at very high grades copper in mines where the ore was thought to have been enhanced through the concentration of copper by the action of the water table, as at FQM’s Lonshi mine.
  • We note, it is early days in the geological interpretation of the drill results at Cheyeza East and much is likely to change in the team’s understanding of the geology of the deposit as new information fills extends our knowledge of the prospect.
  • The team have drilled around a third of the project so far so there is much to discover at Cheyeza East.
  • Major interest: The company reports it has signed a number of NDAs with other mining companies and at least one very large new player who has commented that the drill results are the ‘best results to come out of Africa for many years’.
  • Ivanhoe Mine’ s, Kamoa-Kakula mine, near Kolwezi in the DRC is around 200km to the north of Kalaba which is relatively close in geological terms.
  • While Ivanhoe has a  number of projects much if its C$4.2bn valuation is based on its Kamoa-Kakula discovery despite its location in the DRC.
  • Kalaba: the Kalaba mine pilot process plant continues to batch process material resource needs to be refined to better enable the feed of ~1% copper ore for processing.
  • Zambia: tax issues in Zambia have concerned investors in recent years with the government looking to liquidate Vedanta’s Konkola copper mining assets due to significant  tax issues. The government has also settled its tax dispute with First Quantum’s Kalumbila Minerals business relating to unpaid tax on imported mining equipment.
  • The two cases highlight to us that the Zambia is a good jurisdiction to work in and that the rule of law is respected and adhered to in Zambia by the government.
  • Drill results so far:
  • CHDDE001:
    • 3.94m, 0.72% copper from 35.8m down hole
  • CHDDE002:
    • 25m of 1.05% copper mineralisation from just 2m depth including:
      • 1.7% copper over 9.3m from 18.5m depth and
  • 13.34% copper over a short 0.56m intersection from 27m depth.
  • CHDDE003: hole lost due to problem in drilling.
  • CHDDE004:
    • 18.00m at 2.35% Copper from 30.60m down hole including:
      • 7.60m at 4.15% Copper from 39.00m
      • 26.4m at 0.32% copper from 53.6m
  • CHDDE005: ~200m from hole 4:
    • 28.5m @ 1.32% copper inc.
      • 13m @ 2.31% copper from 26.2m down the hole.
      • 7.5m @ 0.3% from 59.6m

Conclusion:  The discussion on mineralogy suggests a zone of high-grade Terre Noir material may exist in the Cheyeza East prospect. We look forward to further drill results in the next ten days. We maintain our STRONG BUY recommendation as we view the shares as having significant upside on further discovery potential.

*SP Angel acts as nomad and broker to Arc Minerals.

 

Bacanora Lithium (LON:BCN) 44.8p, Mkt Cap £60m – Genfeng receives first approval from China’s Ministry of Commerce, two more approvals to go

(Genfeng has agreed to buy 29.99% of Bacanora for £14.4m)

  • Genfeng Lithium, one of the world’s leading lithium processors, reports it has received approval from China’s Ministry of Commerce for its proposed investment into Bacanora. Two further approvals are required from the Peoples Republic of China ahead of Genfeng’s strategic investment.
  • The £14.4m investment is intended to form part of the Sonora US$420m Phase 1 funding for 17,500tpa of lithium carbonate. .
  • Genfeng is also making a project level investment in Sonora Lithium, for 22.5% of the project holding company of £7.6m with 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: Genfeng is also entitled to take 50% of Bacanora’s Stage 1 lithium production plus 75% of Stage 2 lithium production.
  • Genfeng plans to review the EPC engineering design and capital costs of Sonora Lithium Project within six months with a view to cutting capital costs, operating costs and time to first production.
  • Genfeng will also provide a team to help Bacanora in delivering first production in 2021
  • Hanwa (Japan): Bacanora has a five-year lithium product offtake agreement Hanwa Corporation of Japan which has been extended to effectively underpin Phase 2 of the project.

Conclusion:  It is good news that Genfeng has received its first approval from the PRC government for its investment into Bacanora. It will be better news for the company when all approvals are received and the money actually arrives.

We are wary of the risk that China may hold back on overseas investment as the US-China trade war / negotiations progress. Economic growth appears to be slowing in China with reports of strain in China’s highly leveraged banking industry.

 

Chaarat Gold* (LON:CGH) 30p, Mkt Cap £120m – Operational update conference call

  • The Company held a webcast highlighting the progress to date and development plans for the CIS focused portfolio of assets.
  • At Kapan (Armenia), the team reiterated its annual 65koz AuEq production guidance for the year with better grades expected to come through in H2/19 as mining operations focus on richer ore zones.
  • Updated mineral resources released earlier this week improve geological understanding of the deposit with the Company expected to release an updated mine plan as well as mineral reserves statement by the end of Q3.
  • Kapan is guided to hit $20m annualised EBITDA run rate by end of Q4/19.
  • At Tulkubash (Kyrgyzstan), the team is working on putting development funding together that is targeted for completion by end of 2019 while continuing with the drilling programme for 20,000m this year most of which (16.000m) to be directed towards step out drilling with a view to expand the mineral inventory and the life of mine.
  • One can listen to the conference call replay here: https://secure.emincote.com/client/chaarat/chaarat002

*SP Angel acts as Broker to Chaarat Gold

 

Phoenix Copper* - formerly Phoenix Global Mining (LON:PXC) 15.5p, Mkt Cap £6.6m – Updated project economics for Empire oxide project

  • Phoenix Copper has released the highlights of its updated internal economic model for the open-pit/heap-leach/SXEW oxide copper project at the historic Empire mine in Idaho.
  • The updated PEA envisages the treatment of 1.6mtpa of ore over a 9 years mine life in order to produce an average of 7,000tpa of copper and 1,600tpa of zinc.
  • Using a long-term copper price of US$3.25/lb, pre-production capital investment of US$50.578m is expected to generate an after tax NPV7% of US$55.5m and IRR of 33%.
  • Sensitivity analysis presented in the announcement indicates that a variation of 25cents/lb in the assumed copper price represents approximately US$15m or around 27% in the NPV7%
  • Based on the company’s reported life-of-mine copper production of 68,500t, zinc production of 16,500t and their commodity price assumptions of US$3.25/lb of copper and US$1.35/lb of zinc, Phoenic Copper reports life of mine operating costs of US$259.25m representing an average cost of approximately US$1.72/lb of equivalent copper production.
  • The study announced today updates the previous PEA, released in April 2018, and incorporates a number of changes, including:
    • Average ore treatment has been reduced from over 2mtpa to 1.6mtpa and mine life increased from 9 years to 11 years.
    • Annual copper production of 7,000tpa is approximately 14% lower than the previous study which envisaged 8,124tpa.
    • Phoenix Copper is using a lower copper price forecast of US$3.25/lb compared to its previous $8,265/tonne – equivalent to US$3.75/lb.
    • Pre-production capital costs have been reduced to US$50.578m from the previous estimate of US$61.2m. This implies a capital intensity of approximately $7,225/annual tonne of copper production, excluding the contribution from zinc (approximately $6,600/annual tonne of production on a copper equivalent basis), and is, we believe, around the lowest quartile of North American copper development projects
    • As discussed above, we estimate net life-of mine costs of copper production of around US$1.72/lb which are significantly lower than the US$4,068/t (US$1.85/lb) estimated in April 2018, reflecting, in part we believe, the inclusion of credits for zinc production. We note, however, that at this stage, any potential precious metals credits have still been excluded.
  • Our analysis of 15 other undeveloped copper projects in North America shows that although Phoenix Copper’s project is amongst the smallest in terms of overall production it is also amongst the lowest cost in both capital and operating cost terms.
  • Commenting on the updated PEA, CEO, Dennis Thomas, said that the updated internal economic model, which incorporates a higher initial grade on the heap leach pads “has allowed the mine production rate to be reduced from 2.25 million tons a year in the April 2018 economic model to 1.6 million tons, resulting in a reduction in the pre-production capital cost from $68 million to $51 million”.
  • Mr. Thomas went on to confirm that the feasibility study was “scheduled for completion in Q2 2020, and [we] look forward to commencement of mine production of copper and zinc in late 2021. In due course, we will also look to expand and extend the project.”.
  • Referring to the longer term potential in and around the Empire mine in which the initial open pit project is described as “very much … a starter mine” ”, Mr. Thomas discussed the “23 square kilometres of mineralised claims staked along a 5.4 kilometre strike length from the Empire oxides, as well as the Navarre Creek precious metals zone” and in particular to the “high grade Red Star discovery, the deeper underground sulphide orebody at Empire and three other historic producing mines.”
  • The company has previously drawn attention to a report on the exploration potential of the area by its consulting geologist, Nigel Maund which estimates that “only 1-2% of the potential ore system has been explored”. The report by Mr. Maund is available on the company’s website at https://static1.squarespace.com/static/5914577386e6c0cd77e15c74/t/5caf2a718165f523e54fdd4b/1554983554275/Maund+Report+April+2019.pdf
  • We are optimistic that the possible identification of further operating refinements during the feasibility studies as well as the potential to recover precious metals credits offers the opportunity for further improvements to the economic returns from the oxide project as the feasibility study progresses while much of the exploration potential of the wider land holdings remains to be evaluated.

Conclusion: Phoenix Copper’s updated economic model for the oxide operation at the Empire mine-site uses more conservative metal price assumptions and production rates than the earlier study, however, lower capital and operating costs and a capital intensity amongst the lowest of undeveloped copper projects in North America all of which contribute to robust economics..

*SP Angel acts as Nomad and broker to Phoenix Copper

 

 

Analysts

John Meyer – 0203 470 0490

Simon Beardsmore – 0203 470 0484

Sergey Raevskiy – 0203 470 0474

James Mills -0203 470 0486

 

Sales

Richard Parlons – 0203 470 0472

Jonathan Williams – 0203 470 0471

Abigail Wayne – 0203 470 0534

Rob Rees – 0203 470 0535

 

SP Angel                                                            

Prince Frederick House

35-39 Maddox Street London

W1S 2PP

 

*SP Angel are the No1 integrated nomad and broker by number of mining brokerage clients on AIM according to the AIM Advisers Ranking Guide (joint brokerships excluded)

+SP Angel employees may have previously held, or currently hold, shares in the companies mentioned in this note.

 

 

Sources of commodity prices

 

Gold, Platinum, Palladium, Silver

BGNL (Bloomberg Generic Composite rate, London)

Gold ETFs, Steel

Bloomberg

Copper, Aluminium, Nickel, Zinc, Lead, Tin, Cobalt

LME

Oil Brent

ICE

Natural Gas, Uranium, Iron Ore

NYMEX

Thermal Coal

Bloomberg OTC Composite

Coking Coal

DCE

RRE

Steelhome

Lithium Carbonate, Ferro Vanadium, Antimony

Asian Metal

Tungsten

Metal Bulletin

 

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