China's ‘Blue Skies’ Environmental Program Drives Premiums for High-Grade Feedstock
10:47, 10th August 2018

SP Angel's Morning View Wednesday 09/08/18

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 Industrial commodities expected to show significant growth

  • The retooling of factories for the next generation of electric vehicles and the move away from combustion engines will be a major driver for many specialist commodities.
  • The trend is likely to coincide with a ‘late cycle’ upturn in capital investment which has traditionally been good for tungsten, zinc, niobium and vanadium and should also be good for steel and titanium through the construction of factories and relating infrastructure.
  • Tin and Copper should continue to see significant demand growth as power and controls for new machinery and infrastructure are installed.
  • The replacement of the world’s auto-manufacturing combined with the construction of battery manufacturing alongside new power generation and many other manufacturing facilities is likely to lead to very significant demand for many industrial commodities.

Rio Tinto considers float of Canadian iron ore business

  • Rio Tinto, is exploring a public listing of its Iron Ore Company of Canada business, banking and industry sources said, as it focuses on boosting revenue from its flagship Australian assets
  • IOC, 59% owned by Rio, 26% by Japan’s Mitsubishi Corporation and 15% by Labrador Iron Ore Royalty Company, is one of Canada’s largest producers of iron ore with revenues of $1.9bn in 2017
  • Rio’s tried to sell its stake in IOC in 2012 but did not meet target of between $3.5-4bn
  • Management are now considering IPO of its stake on TSX as part of its ongoing work to hold only its best assets, but the process was at an early stage and it had not yet hired a financial adviser

Glencore credits China's 'Blue Skies' program for strong H1

  • Glencore credited China's clamp down on mills and smelters with boosting its bottom line in its 2018 H1
  • The diversified commodity giant adjusted H1 EBITDA for its metal and minerals division was $6bn, 28% higher than the same period a year ago, energy division was up 19% to $2.5bn while agriculture declined 34% to $109m
  • "Industrial metals prices increased over 2017 levels, driven by a healthy global demand picture and lacklustre mine supply growth, a surprise on the supply side has been the seriousness and depth of China’s 'blue skies' environmental programme” the company said

We asked Capital Economics who are world class in their economic analysis a few questions

Please see answers below from Caroline Bain, Chief Commodities Economist, Capital Economics

  • Lots of people asking if the Trade war is going to affect commodities?

‘In the event of a full-blown trade war we could see some dramatic falls in commodities prices and supply disruptions. And perhaps somewhat lower absolute demand in the medium term than would otherwise be the case.

But prices should subsequently recover as supply chains are re-routed’

  • Could the fall in Chinese manufacturer margins spark another Asian Crisis? Or will the Chinese authorities be able to avoid this?

‘The Asian crisis of 1997/98 was caused by a build-up of short-term dollar debt, fixed exchange rates and ill-advised lending. We think the current situation in China is quite different. China has $3trn in foreign exchange reserves and the renminbi is much more flexible than the South-east Asian currencies in late 1990s.

It is possible that lower margins for Chinese exporters would dampen Chinese export growth, which could in turn lead to a build-up of non-performing loans, putting pressure on the banking sector. But for now, China’s banks are largely state owned and can be bailed out if necessary by the state.‘

  • Also are Tariffs becoming more of a tax to refill US coffers and could they make a meaningful dent in the US Debt mountain?

‘We don’t think the tariffs will make a significant difference. The tariffs imposed so far (or about to be imposed) on steel, aluminium and Chinese goods will generate revenue of less than $30bn, even assuming no decline in import volumes. For context, the US budget deficit last year alone was about $650bn, and total Federal debt is about $15tn.

Even if Trump follows through on his threats to impose a 25% tariff on an additional $200bn of goods, that still gives total revenue of no more than $80bn per year, which won’t be enough to prevent the debt burden rising steadily over the coming years – especially if Congress decided to spend that tariff revenue.’

  • Are Tariffs going to become the next VAT, eg a stealthy way to apply more tax to more people?

‘This doesn’t seem too likely. It is possible that advanced economies move to higher average tariffs overall, but imports are a much smaller share of GDP in the US, for example, than VAT/sales taxes. Admittedly, in more open economies, tariffs could raise more revenue, but very open economies are less likely to embrace protectionism if they can help it. ‘

  • Will the impact of all this be to generally slow down the whole global economy?

‘This is quite possible. The disruption from relocating/localising production could reduce global growth in the short term. And permanently higher tariffs would probably have a small dampening impact on trend/potential GDP growth.‘

Our conclusion: Yes, Trump’s trade war could dampen global growth but, in our view, strong growth in the US combined with ongoing but maybe slower growth in China and other regions should continue to enable reasonable global growth overall.

China is not about to see the derailment of its new economic miracle though the tendency for gambling indicates to us

Dow Jones Industrials

 

-0.29%

at

25,509

Nikkei 225

 

-1.33%

at

22,298

HK Hang Seng

 

-0.92%

at

28,343

Shanghai Composite

 

0.03%

at

2,795

FTSE 350 Mining

 

-1.60%

at

17,661

AIM Basic Resources

 

-0.04%

at

2,302

Economics

US – Wholesale prices growth slowed in July on the back of weaker inflation in the services sector, although the PPI inflation remained close to multi-year highs boding well for stronger final goods inflation outlook.

  • PPI excluding food, energy and trade services rose 2.8%yoy v 2.7%yoy.
  • CPI numbers are due later today with estimates for the headline number to remain at 2.9%yoy, the highest level since 2012.
  • PPI (%yoy): 3.3 v 3.4 in June and 3.4 forecast.

Japan – Growth bounced back from a decline recorded in Q1CY18 although YoY GDP showed only marginal growth (+0.1%yoy) with private consumption remaining weak.

  • The economy grew 0.1% last quarter v 0.5%yoy recorded in Q1/18.
  • Clouded outlook as well as a potential sales tax introduction in the fall of next year further exacerbate concerns over future economic growth in Japan.
  • Business investment climbed 1.5%yoy accelerating from 1.0%yoy recorded in Q1CY18, although that may slowdown amid global trade tensions.

Eurozone – The euro is trading at the lowest level since Jul/17 on the back of worries over extent of European bank exposure to rapidly deteriorating Turkish FX crisis.

UK – Economic growth bounced from poor weather hit weak Q1 levels led gains in the services sector and construction while manufacturing performance disappointed.

  • The statistics office said good weather lifted retail sales and construction, suggesting the reasons behind the Q2 relatvie strength may be just a transient as the snow and storms in Q1/18.
  • GDP climbed 0.4%qoq in Q2/18 in line with the median Bloomberg estimate.
  • Nationwide forecasts “subdued” housing market in 2018 with “house prices broadly flat” during the period.
  • While gross mortgage lending climbed in three months to June 30, Nationwide said it was seeing consumers adapt their behaviour “in response to the pressure on disposable income”.
  • The pound is off at the lowest in more than a year hovering around the 1.2740 level as the US$ gains on a risk off sentiment.
  • GDP (%qoq/yoy): 0.4/1.3 v 0.2/1.2 in Q1 and 0.4/1.3 forecast.

Russia – The top economic aide to President Putin proposed increasing taxes on mining companies that could potentially gross $7.5bn a year, according to an internal letter cited by Bloomberg.

  • Mining and other non-energy companies have benefited from a rally in commodity prices and drop in the value of the rouble the letter argued, but are not paying taxes on this “excess income”.
  • The letter was sent from Andrey Belousov and featured such companies as Norilsk Nickel, Alrosa, petrochemical group Sibur and Novolipetsk Steel; interestingly, it did not include Rusal, Polymetal nor fertilizer group Eurochem Group.
  • No reaction from the administration to the proposal is currently known.
  • The rouble crossed the 67 level against the US$ this morning extending losses to more than 5% over the last couple of days over the news of US sanctions.

Currencies

US$1.1462/eur vs 1.1584/eur yesterday  Yen 110.80/$ vs 111.05/$  SAr 13.918/$ vs 13.529/$  $1.278/gbp vs $1.285/gbp  0.732/aud vs 0.742/aud  CNY 6.853/$ vs 6.829/$.

Commodity News

Precious metals:         

Gold US$1,208/oz vs US$1,212/oz yesterday

   Gold ETFs 68.8moz vs US$68.8moz yesterday

Platinum US$830/oz vs US$829/oz yesterday

Palladium US$901/oz vs US$896/oz yesterday

Silver US$15.34/oz vs US$15.38/oz yesterday

Base metals

Copper US$ 6,141/t vs US$6,207/t yesterday

  • Copper and zinc lead base metals lower as the dollar climbs amid concern’s Turkey’s currency problems are expanding into broader global markets. LME copper was down -1.1%, while zinc tumbled -1.9%.
  • Dollar extends gains for 2nd day as euro sinks after Financial Times reports European Central Bank concerned about Turkish exposure of some European banks.
  • Fundamental demand remains bullish across metals as China pledges to boost infrastructure spending to shore up their economy and provide defense against trade frictions, highlighted by +1% LMEX Metal Index growth this week. Further Bloomberg poll suggest bulls outnumber bears for a third straight week. Survey results: Bullish: 9; Bearish: 2; Neutral: 5

Aluminium US$ 2,065/t vs US$2,104/t yesterday

Nickel US$ 13,730/t vs US$14,000/t yesterday

Zinc US$ 2,556/t vs US$2,613/t yesterday

Lead US$ 2,103/t vs US$2,142/t yesterday

Tin US$ 19,460/t vs US$19,555/t yesterday

Energy           

Oil US$71.5/bbl vs US$72.2/bbl yesterday

Natural Gas US$2.934/mmbtu vs US$2.945/mmbtu yesterday

Uranium US$26.10/lb vs US$26.05/lb yesterday

Bulk

Iron ore 62% Fe spot (cfr Tianjin) US$69.7/t vs US$69.5/t

Chinese steel rebar 25mm US$664.8/t vs US$666.8/t

  • Chinese steel futures rise to close at the highest level since Feb. 2013 on production curbs and low inventories, with rebar climbing +0.6% to 4,251 yuan/tonne. Sinosteel Futures note “despite the seasonally weak demand, environmental curbs are driving declines in inventory levels. We expect prices of rebar and hot-rolled coil to be at 4,250 yuan levels today”.
  • Rebar inventory has fallen near its lowest since January as demand remains resilient across the Asian nation. In advance of the winter production curbs, prices are surging as current inventories are expected to continue on their downward trend as capacity is shut to combat environmental impacts.
  • Steelmakers are increasingly focused on quality, prompting the largest clearer of derivatives for iron ore to expand its portfolio, with plans for a new contract for higher-grade material. Singapore Exchange Ltd., which has contracts for ore with 62% iron content as well as the lower-grade 58%, is aiming to introduce a high-grade product, according to Head of Commodities William Chin. The exchange is also exploring steel derivatives.
  • The iron ore market has become more fragmented over the past two years, with greater demand for higher-quality material and wider spreads between grades by content and purity. The shift has been driven as top user China charges ahead with an anti-pollution drive, sparking a flight to better-grade material that’s cleaner and more efficient. A contract for 65% ore would allow investors and users to hedge their exposure, as well as trade the spread.
  • A high-grade 65% iron ore contract addresses the environmental part of the equation in the ongoing decommoditsation of iron ore,” Chin said. “Clients are asking for a hedging tool to better manage the increasingly volatile spread in grade differentials.”
  • The SGX AsiaClear contract for benchmark 62% ore was at $69.72 a ton on Friday, and it’s lost ground this year even after a five-week advance. By contrast, spot ore with 65% content was at $95.85 on Thursday, more than 7% higher in 2018, according to Mysteel.com. The gap between the two stands at more than $26, up from about $6 at the start of 2016.
  • Top miners have noted the shift in the market, and say they expect the trend to endure. Brazil’s Vale SA, which is bringing on high-quality supply from its S11D mine, said in May the the gaps between grades are “here to stay,” according to Rogerio Tavares Nogueira, marketing director for iron ore and coal. BHP Billiton Ltd. dubbed the trend a “new reality.”
  • Mills in China are seeking out higher-grade ore as local mine output slumps and policy makers clamp down on industrial pollution by ordering curbs on activity, especially during colder months. Officials have signaled that this winter’s curbs will more stringent and cover a wider area than last year’s.

Thermal coal (1st year forward cif ARA) US$87.0/t vs US$87.1/t

Premium hard coking coal Aus fob US$180.0/t vs US$180.0/t

Other:  

Cobalt LME 3m US$62,000/t vs US$62,000/t

Tungsten APT European US$320-325/mtu vs US$323-330/mtu

Lithium – Bring supply continues to advance in major producer, Chile

  • Vancouver-based MGX Minerals announces the option payments of $1.5m to acquire 50% of the issued shares of Chilean Lithium Salars. CLS is a wholly-owned subsidiary of Australia’s Chilean Lithium Salars Holdings, which holds 100% interest in three prospective lithium exploration projects in the South American country.
  • Dedicating $2m, all the project will be explored by MGX in a region dominated by large, fault-bound, alluvium-filled basins. One of the projects, the Francisco Basin lithium project is a lease area of 12,900 hectares located 30 kilometres south of the Maricunga salar in northern Chile, which records some of the world’s highest lithium brine concentrations.
  • According to MGX, two completed reconnaissance brine sampling have been carried out at Francisco Basin and both confirmed the presence of lithium enrichment in the surface brines. In a media statement, the miner said historical sampling of surface brines indicated significant lithium enrichment. “Work by Risacher et al., (2003) has shown that subsurface brines contained within the volcanic geology are of a much higher concentration, typically 250,000–350,000 mg/L TDS,” the brief reads.
  • Exploration into lithium brines are expected to support the accelerating Li-ion battery market, with low-cost evaporation processing more defensible to rebalancing lithium prices. Exploration commitments in the country only serves to highlight the importance of expanding brine production to support swelling long-term demand.
  • The company are well positioned to exploit Chilean brines, having developed a technology that allows it to operate with a complex range of brines previously considered un-processable because they are located outside of solar evaporation appropriate zones.
  • Chile’s exports of lithium carbonate reached US$85m in July, more than double that of the same month the previous year, as demand and prices continues to rise, the central bank said.
  • The value of exports of the metal from Chile, one of the world’s top producers of lithium, jumped 51% in the first 7 months of the year.
  • Top lithium producers Albemarle and SQM have both signed deals in recent years with the Chilean government to increase production in the lithium-rich Salar de Atacama.

Company News

Ncondezi Energy (NCCL)  7.7p, mkt cap £21.7m – Shareholder Loan – proposed restructuring

  • Ncondezi Energy reports that it has received proposals for a restructuring of it US$5.1m loan which would include a 12 month extension beyond the current maturity date on 2 September 2018, a reduction in the interest rate to 12% payable at maturity and the ability for lenders to swap debt for equity, in full or in part, at a conversion price of 10p/share.
  • The company has, to date received “indications from Lenders representing over 60% of the Loan that they will accept the Restructuring proposal, with no rejections. This includes Company Chairman, Michael Haworth and Non-Executive Directors, Estevao Pale and Chris Schutte. The balance of Lenders, including one party that represents 37% of the Loan, are to be engaged within the near future”.
  • The restructuring would be subject to the approval of all the Lenders, “as well as shareholder approval for the necessary share authorities to allow conversion of the Loan into equity”.

Strategic Minerals (SML)  1.25p, Mkt Cap £17.2m – Exercise of Directors’ Options

  • Strategic Minerals reports that three of its directors have exercised a total of 6.5m options and that “certain Directors and key personnel” have been allocated the majority of the remaining options authorised by shareholders at the October 2017 General Meeting.
  • The options have been exercised at a price of £0.01/share.
  • Following this exercise of options, Peter Wale will hold 3.64% of the company’s shares with his board colleagues John Peters and Alan Broome holding 2.42% and 0.34% respectively.
  • The 50.75m new options are to be allocated in three tranches – Tranche 1, comprising 35.25m options maturing on 30th June 2020 at an exercise price of £0.055; Tranche 2, maturing on 30th June 2021 at an exercise price of £0.075; and Tranche 3 maturing on 30th June 2022 at £0.010.
  • Director Jeffrey Harrison has been granted 12m options in Tranche 1, 5.5m options in Tranche 2 and 2.5m options in Tranche 3. His Board colleague, Peter Wale has been granted 12m options in Tranche 1.
  • Nine, named, employees or strategic consultants have been allocated a further 11.25m options in Tranche 1, 5.25m options in Tranche 2 and 2.25m options in Tranche 3.
  • Commenting on the exercising of options, Managing Director, John Peters, highlighted “the confidence of the Board and how invested it is in the Company’s future success” and its commitment to aligning itself with the interests of shareholders. This alignment of interests is reinforced by the approval of the new, three tranche, options programmes to staff, key employees and consultants.
  • In addition to the exercising and granting of options, the company has also announced that Non-Executive Director, Peter Wale, the Company’s second largest shareholder, is to move into a role as an Executive Director with immediate effect. The appointment reflects Mr. Wale’s “increased involvement with the Company” in a variety of areas including strategic planning, operating management and market communications and signifies that as the Company grows it needs increasing senior management time and expertise..
  • Commenting on his evolving role in the Company, Peter Wale stressed the potential for long-term value creation and said that “We are now at a point where I believe the Company’s valuation versus its prospects are perhaps at their most divergent and I look forward to assisting in closing that gap in the near term as we continue to progress our strong portfolio of assets.”

Conclusion: The exercise of options by Directors and the move into an executive role by one of the largest shareholders underlines the confidence of the Board  in the Company’s future prospects. The new option arrangements provide incentives, not only for the key directors, but also for the key managers and consultants who will be delivering those prospects on the ground.

*SP Angel act as Nomad and broker to Strategic Minerals

Analysts

John Meyer – 0203 470 0490

Simon Beardsmore – 0203 470 0484

Sergey Raevskiy – 0203 470 0474

Phil Smith (Technology) – 0203 470 0475

Zac Phillips (Oil & Gas) – 0203 470 0481

 

Sales

Richard Parlons – 0203 470 0472

Jonathan Williams – 0203 470 0471

 

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

 

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