SP Angel . Morning View . Tuesday 18 10 22
Metals prices continue to slide as China doubles down on Zero-Covid strategy
MiFID II exempt information – see disclaimer below
Private Zambian copper exploration opportunity
- We are looking for investment into a private copper explorer with four highly prospective licences in Zambia, near major mines or significant exploration targets.
- One license is contiguous with First Quantum’s Sentinel copper and Enterprise nickel mines which whom they have a Technical Cooperation Agreement.
- Historic drilling on the licence includes 0.7% copper over 1m and 0.2% nickel over 3m. Geophysics in 2021 & 2022 advanced project toward identifying drill targets.
- A large licence with multiple copper targets. Samples from small artisanal mines assayed 15.8% copper, 0.57g/t gold and 4.87% copper, 18.3 g/t gold.
- A highly prospective licence acquired in 2022 on the Western Foreland trend which hosts the giant Kamoa-Kakula mine.
- IPO documentation has been prepared for listing when market conditions improve.
- All licences are 100% owned with Zambian partners significant shareholders in the company.
BioLargo Inc (OTCQB:BLGO) – Q3 production falls, though in line with revised guidance
Pilbara Minerals Ltd (ASX:PLS) – Pre-auction bid of US$7,100/dmt for SC5.5 accepted
Rio Tinto PLC (LSE:RIO) – Q3 performance leaves full year production guidance largely intact
Vale SA (ADR) (NYSE:VALE) – Q3 iron ore production beats estimates
Gold holds lower levels despite softening of Dollar and US Treasury rallies
- Gold is hovering near March 2020 lows, having now fallen 4% from its recent spike back to $1,726/oz.
- Dollar-denominated gold prices have failed to rally on recent weakness from both the dollar and US Treasury yields, which have fallen as their bonds have recovered slightly.
- The lack of positive sentiment reflects traders’ expectations that the dollar’s minor weakness is a short-term correction, with a rally higher expected for the currency.
- ETFs continue to slash gold holdings, with over $100m cut from holdings yesterday.
- Gold ETF holdings have fallen 1.6% this year.
- In an additional hit to gold prices, analysts expect muted sales during India’s major festival period this year, following a big jump in 2021.
- The World Gold Council has warned that sales are unlikely to match last year’s, post-covid 344t record for the festival period.
Copper slides on major spike in Shanghai inventories in sign of easing supply tightness
- Copper weakened slightly on news that inventories in Shanghai jumped by 47,024t yesterday.
- The increase was the largest since 2010, cooling concerns triggered by record low physical copper stocks.
- Backwardation on Chinese copper futures also eased, suggesting the market tightness is beginning to cool.
- Bullish copper traders had hoped that China’s National Congress would offer the chance for a policy reversal away from Zero-Covid and deleveraging the housing market – as of yet this has not materialised.
- Rio Tinto warned yesterday that global recession risks are expected to weigh on commodity demand alongside China’s evident slowdown in growth.
- Despite seemingly bearish fundamentals, Shanghai brokers are net-long copper.
Dow Jones Industrials +1.86% at 30,186
Nikkei 225 +1.42% at 27,156
HK Hang Seng +1.23% at 16,818
Shanghai Composite -0.13% at 3,081
Economics
China –.President Xi focusses China on hi-tech as leading economic policy in redefinition of 2035 development targets
- Xi is refocussing the nation on technological self-reliance, national security and rural development said.
- Xi also highlighted ongoing anti-corruption campaign in the Peoples Liberation Army
- The campaign which has targeted military officials may also be designed to keep senior military officers in line with government and perhaps avoid problems seen in the Russian military.
China’s Premier Li tries to ease concerns over China’s economic slowdown, despite GDP data delay
- Apple drops China’s YMTC as memory chip supplier (Nikkei)
- China’s Li Keqiang noted the country is committed to opening up the economy and allowing the market to play a ‘decisive’ role going forward.
- He pointed to the ‘strength’ of the Chinese economy, noting its recent improvement.
- The speech followed Beijing’s decision to delay its Q3 GDP data, previously scheduled for today.
- We feel President Xi is happy for China to settle into a slower growth trajectory as he continues to push his Zero Covid strategy.
Covid vaccination: China has developed mRNA vaccine targeting BA.4 and BA.5 Omicron variants but is strangely reluctant to start rolling out the new vaccines (SCMP).
- Suzhou Abogen Biosciences redesigned mRNA sequence is said to be effective against most Omicron variants and has just been approved for clinical trials in the UAE.
- China has yet to authorise any mRNA vaccine for emergency use although candidates by various developers have been approved for clinical trials in the past three years.
Rio Tinto warns of slowdown in iron ore shipment as construction in China slows
- The ongoing debt crisis at Country Garden and other Chinese property developers has stalled the development of new housing projects as developers focus resources on finishing existing projects.
- The vast majority of steel and concrete used by developers is used in the early stages of development
- We wait to see if President Xi announces a series of major new construction projects to help restore economic growth following significant slowdown from his Zero Covid policy.
Germany – Three remaining nuclear power plants will continue operating through mid-April 2023 past their planned closure at the end of the year.
France – More workers are striking on demands for an upwards revision in pay amid high inflationary pressures, Bloomberg writes.
- Regional trains and bus routes have been cancelled while some Eurostar services having also been delayed as bus and train drivers strike.
- Unions are calling for port workers to hold stoppages for several hours as well.
- The news follow reports of refinery workers going on strike that saw nearly a third of petrol stations in France reporting a deficit of at least one fuel as of Sunday last week.
- Nearly two thirds of workers in France drive to work.
UK – New Chancellor scrapped most of mini budget initiatives including the majority of tax cuts and reducing the period for energy price ceiling from two years to six months.
- Hunt reversed £32bn worth of tax cuts from Truss’s mini budget in an attempt to reassure the markets including the 1p cut in the basic rate of income tax.
- Chancellor also warned of potential more tax rises and spending cuts to come saying the government would beet to make “eye-wateringly difficult” decision to balance the books, The Times writes.
- The pound climbed on the news regaining some of the ground lost earlier and currently trading around 1.1357.
- Separately, the BOE said it is likely to delay its planned sale of government bonds after September mini budget led to a sell off in the UK debt.
- The central bank holds nearly £840bn of gilts with the regulator planned to reduce its holdings by ~£80bn over 2023.
UK National Grid warns of blackouts this winter
- The UK needs to voluntarily cut gas demand by 13% if Russia cuts gas supplies completely (IEA).
- Europe must also use 10% less gas to avoid the risk power rationing and widespread blackouts (IEA)
- We believe gas is still flowing through the Ukrainian pipeline and also through the TAP ‘Trans Adriatic Pipeline’ from Azerbaijan into Europe.
- This is part of the SGC ‘Southern Gas Corridor’ which was built to diversify and increase gas supplies into Europe.
- But the biggest question in the UK is, will Liz Truss last longer than the Daily Star’s lettuce?
Brexit - British public supports reset in relations with Brussels, poll finds (FT)
- But few want to re-join the single market according to a survey commissioned by the Tony Blair Institute.
- The majority of people accept making trade-offs with Brussels over judicial sovereignty and regulatory autonomy in order to secure cheaper imports, reduced border frictions and improved security.
- The survey by JL Partners showed a clear desire for a middle way forward. EU politicians may not see it the same way.
South African strikers reach deal with Transnet, one union to continue industrial action
- Port staff at Transnet, South Africa’s state-backed rail and port operator, have accepted a wage hike offer following weeks of striking.
- However, a smaller union, representing over 30% of the Company’s workers, are planning to carry on striking.
- The industrial action is costing South African mining companies over $45m/day and hitting SA’s exports of fruit.
Currencies
US$0.9838/eur vs 0.9738/eur last week. Yen 149.01/$ vs 148.63/$. SAr 18.025/$ vs 18.213/$. $1.132/gbp vs $1.125/gbp. 0.629/aud vs 0.624/aud. CNY 7.196/$ vs 7.202/$.
Dollar Index 112.03 / -1% on week
Commodity News
Major Japanese smelter warns of significant nickel supply deficit by 2026
- Nickel smelter Sumitomo Metal Mining Co. has warned that nickel supplies will be deleted by 2026-27.
- The Company sees the rising demand for EV batteries, hitting 500kt in 2023 vs 410kt this year and 320kt in 2021.
- Nickel has been in a supply deficit since 2021. (Bloomberg)
Precious metals:
Gold US$1,652/oz vs US$1,654/oz yesterday
Gold ETFs 96.2moz vs US$96.3moz yesterday
Platinum US$920/oz vs US$915/oz yesterday
Palladium US$2,016/oz vs US$2,024/oz yesterday
Silver US$18.74/oz vs US$18.54/oz yesterday
Rhodium US$13,800/oz vs US$13,700/oz yesterday
Base metals:
Copper US$ 7,485/t vs US$7,557/t yesterday
Aluminium US$ 2,230/t vs US$2,283/t yesterday
Nickel US$ 21,470/t vs US$21,777/t yesterday
Zinc US$ 2,847/t vs US$2,915/t yesterday
Lead US$ 2,039/t vs US$2,033/t yesterday
Tin US$ 19,650/t vs US$19,880/t yesterday
Energy:
Oil US$92.1/bbl vs US$92.6/bbl yesterday
- Crude oil prices were broadly flat with fundamentals continuing to pull in opposite directions.
- Near-term European energy prices fell on warmer-than-usual weather and high levels of storage (92% full), though we note that month-ahead forward pricing remains at elevated levels.
- US natural gas prices also extended their declines below $6/mmBtu as warmer weather curbed demand on the East Coast.
Natural Gas US$5.917/mmbtu vs US$6.244/mmbtu yesterday
Uranium UXC US$51.00/lb vs US$50.60/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$92.0/t vs US$93.7/t
Chinese steel rebar 25mm US$561.1/t vs US$565.1/t - Fosun to sell stake in Nanjing Iron & Steel for US$2.1 billion, source says
- Fosun International, which holds a 58.92 per cent stake in Shanghai-listed Nanjing Iron & Steel, is close to finalising a deal with Jiangsu Shagang Group, a source said.
Thermal coal (1st year forward cif ARA) US$270.0/t vs US$270.0/t
Thermal coal swap Australia FOB US$393.0/t vs US$394.0/t
Coking coal swap Australia FOB US$291.0/t vs US$291.0/t
Other:
Cobalt LME 3m US$51,955/t vs US$51,955/t
NdPr Rare Earth Oxide (China) US$94,844/t vs US$95,114/t
Lithium carbonate 99% (China) US$73,027/t vs US$72,967/t
China Spodumene Li2O 5%min CIF US$5,640/t vs US$5,640/t
Ferro-Manganese European Mn78% min US$1,215/t vs US$1,203/t
China Tungsten APT 88.5% FOB US$32.0/kg vs US$32.0/kg
China Graphite Flake -194 FOB US$860/t vs US$855/t
Europe Vanadium Pentoxide 98% 7.3/lb vs US$7.3/lb
Europe Ferro-Vanadium 80% 30.75/kg vs US$30.75/kg
China Ilmenite Concentrate TiO2 US$313/t vs US$313/t
Spot CO2 Emissions EUA Price US$66.9/t vs US$66.3/t
Brazil Potash CFR Granular Spot US$650.0/t vs US$650.0/t
Battery News
Top China EV maker BYD estimates Q3 profit up over 300% YoY
- China’s biggest electric car maker said third-quarter net profit for July-Sept is expected to come in between 5.5bn yuan and 5.9bn yuan ($765m to $820m) - an increase of 333% to 365% from the same period a year earlier.
- BYD's combined sales of pure electric and hybrid plug-in vehicles increased 250% in the first nine months to 1.2m units.
- The company commented that the huge jump in vehicle sales had relieved pressure brought on by increases in raw materials costs, though it did raise its prices by as much as 6,000 yuan.
CATL and Primergy Solar sign US battery supply agreement
- Solar developer and operator, Primergy Solar, have entered into a sole battery supply agreement with battery-maker CATL.
- Primergy operates the Gemini Solar Storage Project near Las Vegas, which is set to become the largest US solar and storage project operating.
- CATL is set to supply a modular outdoor liquid cooling battery energy storage system, as per Bloomberg.
- CATL’s LFP-based batteries offer up to 10,000 cycles.
Company News
BioLargo Inc (OTCQB:BLGO) C7.79, Mkt Cap C$499m – Q3 production falls, though in line with revised guidance
- Vanadium producer Largo has released its quarterly production update for the three months to 30th September 2022.
- Total vanadium oxide (V2O5) production came in at 2,906t in Q3, vs 3,084t the month prior and 3,260t over the same period last year.
- The average benchmark price of V2O5 in Europe of $8.23/lb, a 12% decrease from the average of $9.40/lb in Q3 2021.
- President and CEO of Largo, Paulo Misk, commented: “Production of V2O5 in Q3 2022 was impacted by a refractory refurbishment and a mining contractor transition, while V2O5 equivalent sales were affected by shipping delays and lower spot demand.
- The company also notes “demand in the steel market softened in Q3 2022 due to geopolitical uncertainties and concerns over energy prices and availability—most notably in Europe”
- Despite demand softening, the Company produced 962t of high purity material in the quarter to meet increased demand from this sector.
- The company maintained its 2022 production and sales guidance range of 11,000 to 12,000t.
Pilbara Minerals Ltd (ASX:PLS) A$2.8, Mkt Cap A$14.3bn – Pre-auction bid of US$7,100/dmt for SC5.5 accepted
- Pilbara Minerals reports it has accepted a pre-auction bid for a spodumene concentrate cargo ahead of its tenth scheduled digital auction.
- An offer of US$7,100/dmt was accepted for a shipment of 5,000dmt on a 5.5% lithia basis.
- This offer of US$7,100/dmt equates to an approximate price of US$7,830/dmt on a SC6.0 CIF China equivalent basis.
Conclusion: Pilbara continues to command higher and higher prices for its product, and a very strong offer pre-auction reflects the current tightness in the lithium market. We note the company’s cash position of A$874m at the end of FY2022, meaning Pilbara could be looking to secure strategic assets of scale in order to shore up future production.
Rio Tinto PLC (LSE:RIO) – 4,776.5p, Mkt cap £60bn – Q3 performance leaves full year production guidance largely intact
- Rio Tinto’s quarterly production results for the 3 months ending 30th September leaves production guidance unchanged with the exception of a trimming of expectations for refined copper output to 190-220,000t from the previously announced range of 230-290,000t and indications that iron ore shipments from the Pilbara are now likely to come in towards the lower end of the 320-335mt guidance range.
- The company confirms its cost guidance for the Pilbara operations in the range US$19.50-21.00/t.
- The company explains that the Pilbara shipments “remain subject to weather and market conditions” and are “dependent on ramp-up of Gudai-Darri and Robe Valley, availability of skilled labour and management of cultural heritage”.
- Iron ore shipments of 82.9mt during the quarter are 1% lower than in Q3 2021 but 4% above those of the preceding quarter “despite two unplanned rail outages on the Yandicoogina and Gudai-Darri lines” and bring the total so far this year to 234.3mt.
- At Gudai Darri, “the ramp up is progressing as planned and the full capacity run rate is expected to be achieved during 2023”. We understand that, at full capacity, Gudai Darri is expected to produce 43mtpa.
- Rio Tinto says that it detects “some encouraging performance trends in the third quarter in relation to mine material movements, build-up of run of mine ore stocks and continued ramp up of new projects. Deployment of the Rio Tinto Safe Production System continues to see positive results at West Angelas, Yandicoogina, Tom Price, and Brockman 4”.
- The previously announced joint-venture with China Baowu Steel for the $2bn development of the 25mtpa Western Range Iron Ore project (Rio Tinto share $1.3bn) “will help sustain production of the Pilbara Blend from Rio Tinto's existing Paraburdoo mining hub. Early works commenced in September following receipt of Western Australian Government State Agreement approval, with construction of the mine expected to begin in early 2023 and first production anticipated in 2025.”
- Also in the Pilbara, a 1972 agreement with Wright Prospecting has been updated to help develop the Rhodes Ridge iron ore deposits with work underway to “consider the development of an operation before the end of the decade with initial plant capacity of up to 40 million tonnes annually”.
- Mined copper output of 138kt (10% higher than in Q3 2021) brings YTD output to 390kt as a result of “higher grades and recoveries at Kennecott, partly offset by lower grades and recoveries at Oyu Tolgoi as a result of planned mine sequencing”.
- The company explains its reduction in refined copper production guidance in terms of “further downside risk associated with Kennecott's smelter and refinery performance, until we undertake the largest rebuild in nine years which is planned for the second quarter of 2023”.
- Initial copper ore production from the underground production of the Lower Commercial Skarn at Kennecott is expected early in 2023 delivering “a total of around 30 thousand tonnes of additional copper through the period to 2027 alongside open cut operations”.
- Agreement has been reached on the $3.3bn acquisition of the minority interest is Turquoise Hill leaving Rio Tinto with a 66% interest in Oyu Tolgoi in association with the Government of Mongolia (34%).
- Rio Tinto reports that the environmental permitting review by the US Forestry Service continues for the Resolution copper project in Arizona while at the Winu copper/gold project in WA Rio Tinto confirms its commitment to “the highest standards on environmental and cultural heritage, and strengthening Traditional Owner relationships … [and says that as a result the permitting] … pathway is expected to take longer than originally anticipated and remains subject to regulatory and other required approvals”.
- Exploration is exploring for seven commodities in 18 countries with the “bulk of the exploration expenditure in the third quarter of 2022 focused on copper in Australia, Peru, Zambia and the United States, diamonds in Canada and Angola, and nickel in Canada and Finland”.
- Bauxite output of 13.68mt was 2% lower than the equivalent quarter in 2021 as a result of “equipment reliability issues at Gove” and brings YTD output to 41.44mt while alumina output of 1.84mt brings the YTD total to 5.60mt.
- “Aluminium production of 0.8 million tonnes was 2% lower than the third quarter of 2021, and 4% higher than the prior quarter as the Kitimat smelter continues to ramp up and Boyne smelter cell recovery efforts progress as expected”.
- Commenting on the state of commodity markets, Rio Tinto says that “prices continued their downward trend during the quarter and there are further downside risks to demand as the global economy slows. Labour markets are holding up relatively well although consumer confidence has waned. Fears of recession are emerging on the implementation of aggressive interest rate hikes in the US and Europe, while a weak property sector continues to weigh on China's economy.”
- China is also reported to be experiencing economic challenges arising from continuing Covid19 related lockdowns “power shortages in summer” as well as “continued weakness in the property market”.
- “The US economy is showing more signs of a slowdown even though employment trends are still holding up positively. Consumers are spending more cautiously, industrial production growth is more subdued and corporate profits have edged lower. Inflation remains elevated despite easing gasoline prices” while in Europe the “Eurozone's economic growth outlook has deteriorated, as inflation climbed further, and the latest data points suggest the region's economy could be already in contraction”.
- Rio Tinto comments that the “major iron ore producers shipped the same aggregate volume during the first three quarters of 2022 as they did over the same period of 2021. With supply from other producers down 17% year to date - due to, among other factors, the war in Ukraine and export taxes in India - total seaborne supply contracted 4.5% during August year to date versus the same period of 2021”.
- Although copper prices declined by 7% during the quarter to US$3.47/lb, Rio Tinto says that “A strong US dollar, tightening monetary policy and challenging economic outlook weighed on market sentiment. Nevertheless, prices have been partly supported by supply concerns and low exchange inventories, which currently remain at multi-year lows”.
- Commenting on the impact of continuing strong growth in the electric vehicles market, Rio Tinto says that “Lithium carbonate prices remain elevated on strong demand. Power rationing in China's Sichuan province (a key lithium supply hub) also led to production cuts and market tightness during the quarter”.
Conclusion: Rio Tinto is warning of a downward trend in commodity prices as the global economy slows, fears of recession grow and interest rates rise. The company’s 2022 production guidance is being maintained across its major product groups although expectations for refined copper output are being pared back in response to the planned major rebuild of the Kennecott smelter during Q2 2023.
Vale SA (ADR) (NYSE:VALE) US$13.28, Mkt cap US$63bn – Q3 iron ore production beats estimates
- Vale produced more iron ore than expected in Q3 22, amounting to 89.7mt vs 87.2mt average analyst estimate.
- Production was 21% higher than the three months prior and 1.1% up on the same period last year.
- Sales of iron ore fines and pellets increased 6% QoQ to 77.6Mt, well below output, which Vale attributes to “transitioning inventories along the supply chain”
- Vale comments that its Brazilian iron operations benefitted from the dry weather in third quarter.
- Nickel production increased 51% QoQ and 72% YoY to 51.8kt as refineries came back from a maintenance period, while sales increased 13% on the three months prior.
- Copper production increased 33% QoQ and 7% YoY to 74.3kt following better plant performance and improving recoveries, with sales up 37% on the three months prior.
Conclusion: Vale had a solid Q3 in terms of production, and we look forward to the company’s earnings report on the 27th of October which we expect to give more insight into the current fundamentals in the iron ore market.
No.1 in Copper: “The winner of the 2020 Fastmarkets Apex contest for copper was the team at SP Angel comprising John Meyer, Sergey Raevskiy and Simon Beardsmore, with an accuracy score of 93.8%”
No1. In Gold: “SP Angel’s trio took the top spot for the gold price prediction throughout the year, with an accuracy score of 97.59%”
The SP Angel team also ranked 1st in Palladium, 3rd in Tin and 5th in Silver in the fourth quarter of 2020
Analysts
John Meyer – John.Meyer@spangel.co.uk – 0203 470 0490
Simon Beardsmore – Simon.Beardsmore@spangel.co.uk – 0203 470 0484
Sergey Raevskiy –Sergey.Raevskiy@spangel.co.uk - 0203 470 0474
Joe Rowbottom – Joe.Rowbottom@spangel.co.uk - 0203 470 0486
Sales
Richard Parlons –Richard.Parlons@spangel.co.uk - 0203 470 0472
Abigail Wayne – Abigail.Wayne@spangel.co.uk - 0203 470 0534
Rob Rees – Rob.Rees@spangel.co.uk - 0203 470 0535
Grant Barker – Grant.Barker@spangel.co.uk – 0203 470 0471
SP Angel
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*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 - SSY
RRE - Steelhome
Lithium Carbonate, Ferro Vanadium, Tungsten, Spodumene, Ferro-Manganese, Graphite - Asian Metal
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