SP Angel . Morning View . Thursday 03 11 22
Hawkish Fed statement lifts the US dollar weighing on commodities
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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.
- 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.
- IPO documentation has been prepared for listing when market conditions improve.
*SP Angel’s role is limited to making introductions and interested parties should be aware that investment in a private company can present certain risks not present in listed companies (e.g. limited or no liquidity and no rules compelling disclosure of information to investors). This offer is open to professional investors only and is not offered to retail investors
Empire Metals Ltd (AIM:EEE)* – Geochemical evaluation of historical data at Pitfield
Power Metal Resources PLC (AIM:POW)* – Encouraging initial drill results adjacent to historic mine
Hochschild Mining PLC (LSE:HOC, OTCQX:HCHDF) – Immaculada update
Lucara Diamonds (TSE: LUC) – Quarterly results maintain full year guidance expectations as sinking of the main shaft at Karowe gets underway
Newcrest Mining Limited (ASX:NCM) - Newcrest to boost copper output to cater for long-term demand outlook
EV and hybrids account for 43% of new EU car sales in Q3 22
- BEVs made up 11.9% of sales.
- Petrol car sales were down 3.3% but remained the most popular in the EU with 37.8% of total sales.
CATL to take 25% stake in DRC copper-cobalt miner
- CATL, the world’s largest battery maker, is set to buy a 25% stake in CMOC Group, previously known as China Molybdenum.
- CATL’s second largest shareholder, Sichuan CATL, will indirectly own a 24.7% stake in CMOC via a capital boost and stake transfer valued at $3.7bn.
- CMOC owns and operates the Tenke Fungurume Mine, which produces ~200kt of copper cathode and ~20kt of cobalt per annum.
- CMOC bought a controlling stake in the mine from US miner Freeport-McMoRan for $2.6bn.
Global growth to increasingly come from new US infrastructure and GDP growth
- The Biden Administration has been working on a number of initiatives with the $1.7tn ‘Build Back Better’ Bill, passed by the House of Representatives but not by the Senate a year ago, blocked by Steve Manchin
- The bill was trimmed to $430bn with $369bn allocated to fight climate change with the Inflation Reduction Act targeting renewable energy, green policies and support for prescription drugs.
- The US definitely needs new bridges, roads and allot more rail if it is to keep pace with China’s shiny new rail and road infrastructure.
- Fortunately, GDP growth in the US should raise the tax take though we are not sure how long the US Treasury can support paying higher interest rates on its government debt mountain.
- Europe is slowing as the Russian gas / energy crisis starts to bite with manufacturers looking to safeguard critical production by moving to the US and elsewhere.
- China remains committed to building more infrastructure but also has millions of unfinished flats to complete, particularly with strong emphasis on ‘Common Prosperity’.
- This is changing demand away from rebar steel and cement towards commodities for ‘fitting out’ such as stainless steel and copper.
- China’s policy of ‘Dual Circulation’ is effectively ‘internal consumption’ is likely to come increasingly to the fore to help support demand for manufactured products.
- While the world will slow this year, we suspect the transition away from China GDP growth to new US GDP growth will kick in relatively quickly to support global commodity consumption.
China steel mills slash production again as demand situation continues to worsen on property crackdown
- Over 20 steel mills have reportedly mothballed blast furnaces, ramped up maintenance shut downs and cut scrap feedstock demand. (Mysteel)
- Capacity cuts reportedly range from 30-60% and daily tonne output is expected to be slashed by over 100,000t.
- Iron ore prices have continued to slump on dire steelmaking demand, with Singapore futures seeing their worst run since the contract’s inception in 2013.
- China’s annual steel production hit over 1bn tonnes pa in the past 2 years, with the autumn, traditionally a peak season, coming in far lower than expected for output levels.
- No signs of a policy shift in either zero-covid or the crackdown on property sector leverage from the National Congress added a further nail in the coffin for China’s current iron ore demand.
- China’s property market provides c.40% of the country’s steel demand.
- Data compiled from over 100 major Chinese property developers last month recorded home sales falling 28% last month. (Bloomberg)
- Q3 saw steel mills turn in their first losses for over 4 years. Dry bulk freight rates continue to crater on the limp demand.
Gold slides 2.3% to $1,627/oz on rising dollar and US Treasury yields as Powell announced the Fed will hike rates higher for longer
- The meeting saw a 75bp rate hike and the key terminal rate climb from c.4.7% to over 5.1%.
- The dollar reacted positively to the news, climbing 2.71% from last week’s lows. 10 Year US Treasuries, gold’s other primary headwind, climbed 5.45% over the same period.
- Whilst Powell raised the potential of step down to 50bp in December, a longer terminal rate outweighs any dovish sentiment provided by a 25bp step down next month.
- Importantly, Powell reiterated his commitment to the 2% inflation target, further supporting hawkish market bets in the aftermath of the meeting.
- Fed rates are currently at their highest since 2008, correlating to gold’s 20% fall from March highs.
- The gold market has been supported by a central banking whale in recent months, with undisclosed central bank buying taking purchases to over double previous records at 399t.
- China has not reported changes to its gold reserves since 2019, with analysts suspecting Beijing might be behind recent purchases as geopolitical tensions with China mount.
- The weaponization of the dollar against Russia has pushed America’s antagonists to look for alternative currency reserve solutions.
- Bloomberg reports China has imported 902t of gold this year from Q1-3, higher than last year’s 12-month total.
- Russia has been selling gold holdings from its foreign reserves this year, according to the WGC, potentially in a bid to fund its war efforts following 6 years’ worth of accumulation.
- Saudi Arabia has not reported changes to its holdings since 2010 despite major wealth inflows from buoyant oil and gas prices.
- It is unlikely India is the mystery whale considering the effect of the soaring dollar against the Rupee.
Copper prices edge lower on dollar strength despite major drawdown in global inventories
- Copper prices fell 2.8% to $7,486/t alongside a sharp upwards reversal in the dollar index following Jerome Powell’s market-bashing hawkishness.
- Copper prices have been rangebound in recent months, tracking the dollar despite sliding physical stocks.
- Global copper inventories have fallen 25% from October highs and are now 51% lower than the 5-year seasonal average.
- Backwardation on the main copper futures spread has fallen 39% over the past few days, suggesting buyers are less desperate for physical supply as the demand picture remains gloomy.
- Shanghai brokers remain net long on copper contracts, SHFE.
Dow Jones Industrials -1.55% at 32,148
Nikkei 225 -0.06% at 27,663
HK Hang Seng -3.02% at 15,349
Shanghai Composite -0.19% at 2,998
Economics
JP Morgan global composite manufacturing 49.4 in October vs 49.8 in September –
US – The Fed delivers a hawkish monetary statement dismissing hopes for a “pivot” in the policy sending equities lower and the US$ index up yesterday.
- The central bank will raise rates by 0.75% to the 3.75-4.00% range, in line with estimates, and warned that further increases are necessary to contain inflation expectations.
- The target rate is expected to be higher than initially though, albeit, future rate hikes are likely to be smaller than 75bp to provide time for affects of higher policy rate to filter through into the economy.
- The FOMC statement highlighted low unemployment rate and persistently high inflation in support of further policy tightening.
- ADP private employment rose to 239k vs 192k in September
China – Health authorities reiterated support for the nation’s zero Covid policy quelling rumours that Beijing was forming a committee to consider an exit from the policy, FT writes.
- The announcement follows two days of frantic trading who bought into Chinese equities following the circulation of unsubstantiated claims that Beijing will create a task force to consider plans to reconsider highly disruptive zero covid strategy.
- Hang Seng closed 3.1% down today.
ASEAN - Manufacturing PMI 51.6 in October vs 53.5 in September – shows a fall but still in positive territory
South Korea - CPI rose 0.3% in October vs 0.3% in September 5.7% yoy in October 5.6% yoy in September
EU - Manufacturing PMI 46.4 in October vs 48.4 in September – data shows rapid fall in manufacturing activity across Europe
Germany to provide liquidity to commodity traders in bid to boost resource security
- The Bundestag has agreed to offer loan guarantees to commodity trading houses to secure metals.
- The move follows the precarity of commodity security highlighted by Putin’s war in Ukraine.
- Trafigura signed a 5-year guarantee to supply non-Russian metals to German buyers for the next year on the back of a $800m credit facility.
- Trafigura is also looking to sign a similar deal for LNG, Bloomberg reports.
- Trading houses have been hit by major margin calls over the past 2 years on the back of covid and war-induced volatility.
- Berlin’s decision is the latest in a series of Western policy decisions to increase resource security, with Biden’s August Inflation Reduction Act reiterating the need for a domestic supply of critical minerals.
Chancellor Scholz is due in China today, the first western leader to visit since the start of the Covid pandemic
- Scholz is accompanied by 12 company CEOs including Merc, Siemens and VW.
- We suspect the US is quietly seething at Germany’s willingness to undermine their strategy to re-shore manufacturing from China.
- Particularly after China’s refusal to condemn Russia’s invasion of Ukraine.
- Germany should have learned from its dependence on Russian oil and gas that dealing with command communist states carries huge risk.
- It makes you wonder if Scholz is another closet communist sympathizer like Chancellor Schröder who became a director of Gazprom.
- Schröder claimed he had nothing to apologise for over his friendship with Putin, whom he met in July while on holiday in Moscow. (Guardian).
- Manufacturing PMI 45.1 in October vs 47.8 in September – Germany is leading European PMIs lower as confidence falls ahead of looming power crisis
- German unemployment is holding steady at 5.5%,
France –Manufacturing PMI 47.2 in October vs 47.7 in September – French nukes should be back up to power following summer drought but high energy prices take their toll
Poland - Manufacturing PMI 42.0 in October vs 43.0 in September – Poland has been hit hard by the war in Ukraine
UK – The central bank is expected to hike rates by 75bp to 3% later today
Soros calls for Sunak and Bailey to issue war bonds to reassure financial markets following Truss chaos
- In a piece written for the FT, legendary trader George Soros has called for Sunak to avoid heightened level of austerity by issuing perpetual bonds.
- The bonds, first utilised in the Napoleonic Wars, do not require the principal to be repaid, just the coupon.
- Soros believes the bond issuance would provide a solution to current pressures on UK mortgages and pensions.
- The Hungarian investor believes perpetual bonds would create ‘a single liquid benchmark to anchor the long end of the gilt market,’ providing liquidity to longer duration UK bonds and supporting pension funds.
Turkey – Inflation continued to increase for the 17th consecutive month in October hitting 85.5%.
- Food and transport costs doubled year on year driven by higher global energy costs among other things.
- The central bank has been unable to anchor inflation expectations voting to cut rates under pressure from the administration that is facing elections in June next year.
- Policymakers cut the benchmark rate 250bp to 10.5% since August and are expected to do so again at their meeting this month, FT reports.
- President Erdogan is eyeing his third five year term as President arguing that it is his second term under the new presidential system voted through in 2017.
Ethiopia – The government and TPLF signed a surprise peace agreement with both sides looking to stop their two year conflict.
- The current agreement is reported to have gone further than previous ones that were later breached as two sides signed up to a disarmament plan and the restoration of crucial services, including aid supplies, according to BBC.
- TPLF agreed to “disarm, demobilise and reintegrate fighters into the federal army”.
- The conflict has been running for almost two years in the Tigray region now after the TPLF, a guerrilla movement turned political party, held its own regional elections not agreeing to a delay in nationwide vote.
- The resolution to the conflict will hopefully hold allowing private capital to flow into the most populated African nation.
Currencies
US$0.9777/eur vs 0.9886/eur yesterday. Yen 148.01/$ vs 147.22/$. SAr 18.350/$ vs 18.144/$. $1.133/gbp vs $1.150/gbp. 0.632/aud vs 0.642/aud. CNY 7.319/$ vs 7.281/$.
Dollar Index 112.52 / -1.68% on week
Commodity News:
Nickel prices sustain rally as LME weighs up sanction approach to Russian metal
- Nickel prices rallied 11% from Friday on rumours that China would lift their zero-covid policy.
- Prices contrast extreme pessimism stemming from China’s steel sector, with mills shutting down across the country.
- Nickel prices have fallen 3% from Monday’s highs but remain well supported by slumping physical inventories.
- LME nickel warehouse inventories have fallen 63% over the past year.
- Traders are unwilling to offload nickel positions in case the LME introduces a drastic crackdown on Russian metal, as discussions continue over the exchanges approach.
- BHP stated that the Company expects nickel demand to increase fourfold to 2050 on the back of EV demand.
Precious metals:
Gold US$1,629/oz vs US$1,653/oz yesterday
Gold ETFs 95.0moz vs US$95.1moz yesterday
Platinum US$926/oz vs US$956/oz yesterday
Palladium US$1,859/oz vs US$1,915/oz yesterday
Silver US$19.16/oz vs US$19.69/oz yesterday
Rhodium US$14,000/oz vs US$14,000/oz yesterday
Base metals:
Copper US$ 7,545/t vs US$7,685/t yesterday
Aluminium US$ 2,244/t vs US$2,269/t yesterday
Nickel US$ 23,580/t vs US$23,800/t yesterday
Zinc US$ 2,726/t vs US$2,760/t yesterday
Lead US$ 1,975/t vs US$1,995/t yesterday
Tin US$ 17,650/t vs US$18,100/t yesterday
Energy:
Oil US$95.2/bbl vs US$95.5/bbl yesterday
- Crude oil prices moved higher as the EIA reported a US crude inventory draw of 3.1mb last week (+0.4mb draw expected), following a smaller w/w 1.9mb SPR release and with refinery utilisation up 1.7% to 90.6%.
- European energy prices moved higher this morning as temperatures continue to cool across Northern Europe following the mildest October in the last ten years.
Natural Gas US$6.067/mmbtu vs US$5.892/mmbtu yesterday
Uranium UXC US$52.40/lb vs US$52.65/lb yesterday
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$80.7/t vs US$78.3/t
Chinese steel rebar 25mm US$520.2/t vs US$521.0/t
Thermal coal (1st year forward cif ARA) US$225.0/t vs US$225.0/t
Thermal coal swap Australia FOB US$365.5/t vs US$361.0/t
Coking coal swap Australia FOB US$315.0/t vs US$315.0/t
Other:
Cobalt LME 3m US$51,955/t vs US$51,955/t
NdPr Rare Earth Oxide (China) US$88,335/t vs US$88,937/t
Lithium carbonate 99% (China) US$76,858/t vs US$76,575/t
China Spodumene Li2O 5%min CIF US$6,100/t vs US$6,100/t
Ferro-Manganese European Mn78% min US$1,208/t vs US$1,221/t
China Tungsten APT 88.5% FOB US$31.7/kg vs US$31.7/kg
China Graphite Flake -194 FOB US$875/t vs US$875/t
Europe Vanadium Pentoxide 98% 7.5/lb vs US$7.5/lb
Europe Ferro-Vanadium 80% 31.95/kg vs US$31.95/kg
China Ilmenite Concentrate TiO2 US$307/t vs US$308/t
Spot CO2 Emissions EUA Price US$78.0/t vs US$78.8/t
Brazil Potash CFR Granular Spot US$595.0/t vs US$595.0/t
Company News
Empire Metals Ltd (AIM:EEE)* 1.7p, Mkt Cap £7.2m –Geochemical evaluation of historical data at Pitfield
- Empire reports that it has analysed compiled historical geochemical sampling that has been completed on the Pitfield Copper Project located in Western Australia.
- Airborne survey data has indicated a regional magnetic anomaly over 40km long, which the company intends to focus on in the first instance.
- Historic sampling in the vicinity of the magnetic anomaly yielded results up to 2.3% Cu and 20.8g/t Ag from surface rock chip sampling.
- Empire intends to carry out surface exploration work in Q1 next year ahead of a drill programme.
*SP Angel acts as nomad and broker to Empire Metals
Power Metal Resources PLC (AIM:POW)* 1.35p, Mkt Cap £22m – Encouraging initial drill results adjacent to historic mine
- Power Metals reports that it has received assay results for the first three holes of a nine-hole programme at its Tati Project near Francistown, Botswana.
- Highlights from today’s assay results:
- Hole CHRC0001 - 1m @ 10.2g/t Au from 33m
- Hole CHRC0002 - 1m @ 5.6 g/t Au from 15m
- Hole CHRC0003 - 3m @ 16.8 g/t Au from 5m, including 1m @ 47.2 g/t Au from 6m
- Results from the six remaining holes are expected in the coming weeks, which we expect to provide more insight into the dolerite and quartz reef hosted gold mineralisation was intersected in this round of results.
*SP Angel acts as nomad and broker to Power Metal
Hochschild Mining PLC (LSE:HOC, OTCQX:HCHDF) 51p, Mkt Cap £264m – Immaculada update
- 30 people from a local community are reported to have broken into the Immaculada mining unit on October 31.
- The group severely damaged certain non-critical installations.
- The Company notified relevant authorities of the incidence to ensure safety of the 1,700 employees at the operation.
- The team held discussions with community representatives on 1 and 2 November, although, no agreement between parties was reached.
- Further talks are scheduled for next week with representatives from the Peruvian government also planned to attend.
- The Company says production was not affected.
Lucara Diamonds (TSE: LUC) C$0.55, Mkt Cap C$249m – Quarterly results maintain full year guidance expectations as sinking of the main shaft at Karowe gets underway
- Lucara Diamonds reports that it produced 78,879 carats of diamonds from its Karowe mine in Botswana during the 3 months to 30th September (Q3 2021 – 95,907 carats) bringing YTD output to 249,113 carats and keeping the company on track to meet its full year guidance range of 300-340,000carats.
- The quarterly production included the recovery of six individual diamonds larger than 100 carats “including one stone greater than 200 carats” from the processing of 0.7mt of ore at a recovered grade of 11.4 cpht (carats per hundred tonnes).
- Sales of 99,301 carats during the quarter generated revenues of US$46.5m and brought YTD revenues from the sale of 245,764 carats at an average price of US$528/ct to “$129.9 million before top-up payments … [from the sales agreement with HB] … of $33.8 million”.
- “Under the amended sales agreement, +10.8 carat gem and near gem diamonds from the Karowe Mine of qualities that can directly enter the manufacturing stream are being sold to HB at prices based on the estimated polished outcome of each diamond”.
- Lucara confirms that it expects to achieve full-year revenue guidance in the range US$195-225m and that “Operating cost per tonne on an annualized basis is expected to be at the low-end of 2022 Guidance ($29.50 to $33.50)”.
- The company says that the US$547m underground mine development project, which extends the life of the Karowe mine “to at least 2040” is expected to reach full production in H2 2026.
- Shaft sinking of the main production shaft started in late September and the ventilation shaft continued although “As main sinking activity ramped up in the ventilation shaft during the third quarter, several operational issues arose resulting in sinking rates achieving less than plan due to longer cycle times. In response to the operational challenges and longer duration cycle times, changes and mitigations were actioned during the quarter. Observed cycle times and sinking rates are improving. The start of main sink activity in the production shaft was delayed due to longer than planned commissioning of the winders and hoisting plant. Cycle times are now improving”.
- Commenting on the state of the diamond market, Lucara Diamonds explains that “After a strong start to the third quarter of 2022, diamond price softening was observed in late August and into September, however, solid market fundamentals continue to support diamond prices despite growing concerns of a global economic slowdown” with “.uncertainty caused by geopolitical events, including the ongoing conflict in Ukraine and continuing implications of the COVID-19 pandemic (specifically in China where the demand for diamonds has not yet recovered) remain a risk to diamond pricing trends in the short term with demand from the US a critical driver on prices of both rough and polished diamonds”.
- In the longer term, Lucara reiterates its view that “market fundamentals remain unchanged and positive, however, pointing to strong price growth over the next few years as demand is expected to outstrip future supply”.
- In other news from the diamond industry, the mining industry website, www.mining.com reports that the ‘Kimberley Process’ meeting currently underway in Gabarone, Botswana in expected to consider the role of Russian diamonds, which are currently sanctioned by both the UK and the US Governments, in funding the Ukraine conflict. Diamonds trade watchdog mulls fate of Russian gems - MINING.COM
Newcrest Mining Limited (ASX:NCM) A$17.33, Mkt cap A$15.5bn - Newcrest to boost copper output to cater for long-term demand outlook
- Newcrest’s CFO stated that copper could provide over 50% of the Company’s revenues by 2030 on the ramp up of its major Canadian and Papua New Guinea projects.
- The CFO stated there is ‘no limit’ to Newcrest’s copper ambitions.
- The Company reiterates their commitment to gold but is looking to ‘invest more courageously’ in the key electrification metal.
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
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 - SSY
RRE - Steelhome
Lithium Carbonate, Ferro Vanadium, Tungsten, Spodumene, Ferro-Manganese, Graphite- Asian Metal
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