Chinese Traders Rush To Buy Aluminium As Top Producer Strikes
10:32, 9th August 2018

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

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SP Angel are the No. 1 broker for AIM mining stocks in London

  • Condor Gold (CNR) – Nicaragua in crisis following killing of 300-450 and kidnapping of >600
  • Caledonia Mining (CMCL) – Q2 Results
  • Mkango Resources (MKA) – Major drill programme update at Songwe Hill Rare Earths project
  • Randgold Resources (RRS) – Record quarterly production at Kibali offsets issues at Tongo

New material opportunities expand interest in miners

  • We have noticed a significant rise in our morning note readership over the past few months.
  • While this may reflect a number of issues we suspect it is, in part, due to new investor interest in battery metals and the electrification of transport.
  • The mining sector is reaching into the supply of specialist materials and commodities for high-tech manufacturing as well as providing cleaner materials in bulk commodity markets
  • There are significant opportunities to profit from value-added products and premiums on clean commodities with extraordinary margins for those companies that get it right.
  • Nickel and lithium battery products, rare earths, vanadium and its electrolytes, high-quality iron ore are just a few examples of materials that are offering significant premiums and margins in the new market environment.

Stocks slaughtered by Saudi sales in retaliation for Canadan condemnation of activist arrest

  • The Saudi Arabian government has ordered the indiscriminate selling of Canadian equities on Tuesday in relation for criticism over the recent arrest of a female activist.
  • The general Canadian market was already suffering from the recent fad for investment into Marijuana and Blockchain related stocks with Canadian miners feeling particularly overlooked from an investor perspective.
  • The FT reports that third-party managers run some $100bn of money in global markets though a relatively small proportion of this would be invested in Canada.
  • We suspect that many managers may not be so quick to sell their favourite stocks and damage the performance of their Canadian portfolios on the whim of the rulers of Riyadh
Dow Jones Industrials   -0.18% at 25,584 
Nikkei 225   -0.20% at 22,598 
HK Hang Seng   +0.82% at 28,591 
Shanghai Composite   +1.83% at 2,794 
FTSE 350 Mining   -0.20% at 17,944 
AIM Basic Resources   +0.10% at 2,303 

Economics

China – Price pressures remain muted one month after US and China imposed first round of tariffs on each other’s’ imports.

  • Consumer prices growth accelerated 0.2pp to 2.1%yoy in July.
  • Nevertheless, there is a risk of higher prices should duties be potentially applied to a majority of China’s imports from the US.
  • CPI (%yoy): 2.1 v 1.9 in June and 2.0 forecast.

Russia – The rouble is down more than 4% in two days trading at a two year low while Russian equity index RTS is off more than 6% during the same period on the back of a round of sanctions announced by the US and a more than 3.5% drop in oil prices.

  • US administration to impose fresh sanctions on Russia on allegations that it used a chemical weapon in Salisbury in violation of international law.
  • Following a 15-day Congressional notification period, the new sanctions will be taking effect on or around 22 August.
  • The first batch of sanctions covers trade of sensitive national security goods; although there would be exemptions for space flight programmes and commercial passenger aviation safety.
  • The second tranche is conditional on Russia providing evidence over the next 90 days that it is not using chemical or biological weapons as well as provide on-site access to inspectors to ensure compliance.
  • The second batch would target Russian exports to the US and could potentially include restricting flights by the state-owned air carrier Aeroflot to the US.
  • Sanctions under the 1991 law have been previously applied to Syria for its 2013 use of chemical weapons and against North Korea for its use of VX nerve agent in a Malaysian airport during the assassination of Kim Jong Un’s half brother.

Turkey – No resolution on the diplomatic spat between US and Turkish diplomats send the lira to new lows this morning.

  • “We held additional talks with Turkish officials… the conversations continue,” the US state department announcement said.
  • The lira is off 2.7% this morning extending YTD losses to 30.2%.

Currencies

US$1.1584/eur vs 1.1621/eur yesterday  Yen 111.05/$ vs 110.90/$  SAr 13.529/$ vs 13.300/$  $1.285/gbp vs $1.294/gbp  0.742/aud vs 0.743/aud  CNY 6.829/$ vs 6.817/$

Commodity News

Precious metals          

Gold US$1,212/oz vs US$1,215/oz yesterday

Gold ETFs 68.8moz vs US$68.8moz yesterday

Platinum US$829/oz vs US$831/oz yesterday

Palladium US$896/oz vs US$907/oz yesterday

Silver US$15.38/oz vs US$15.45/oz yesterday

Base metals

Copper US$ 6,207/t vs US$6,189/t yesterday

  • LME copper slipped on the announcement that the United States are geared up to begin collecting tariffs on a further $16bn of Chinese goods later this month, before continuing an upward trend building on previous growth of +0.6% on short-covering and optimism that China will prop up its economy with stimulus measures.
  • The news overshadowed data highlighting higher than expected July exports despite US duties, while China’s imports of copper concentrate rose to an all-time high last month as Chinese smelters ramped up purchases to feed their growing capacity and take advantage of high processing charges.
  • While the market has been roiled by escalating trade tariffs, Chile’s state copper firm Codelco announced a $4.88bn investment to convert its open cast Chuquicamata miner into an underground mine. The world’s top copper miner said the investment would add to the $331m it has already invested in converting the aging mine, its second-largest.
  • Once approved by the board the investment would extend the mine life of the project and continue supplying crucial metal to support the growing electric economy.

Chile’s Codelco revises plans to convert Chuquicamata copper mine

  • Chile’s state copper firm Codelco announced a $4.881bn investment to convert its open cast Chuquicamata mine into an underground facility
  • Said its plans represented a scaled-back version of an earlier blueprint to reflect the fluctuating copper price and ongoing high operating costs
  • Combined with previous spending, the new figure would take to $5.550bn the amount it planned to spend in total to convert the Chuquicamata mine
  • The plans for Chuquicamata form part of a 10-year, $39bn overhaul of Codelco’s key operations as it seeks to maintain production despite rapidly falling ore grades at its deposits

Union at Caserones mine in Chile says no deal in labour talks, strike imminent

  • The main union at Chile’s Caserones copper mine said that a last round of labour negotiations with mine operator Lumina Copper had broken down and that a strike was imminent
  • The 300-member worker’s union said Lumina, which is controlled by a partnership of JX Holding and Mitsui Mining, had taken an “intransigent” position to their demands during a final period of government-mediated talks
  • “Negotiations with the company under mediation have failed. Management wanted … to put an end to the negotiations by offering us a bonus, but they weren’t listening to our demands,” union president Nelson Iribarren said
  • If Lumina doesn’t improve its contract offer by Friday, a strike would begin next Tuesday, Aug. 14

Aluminium US$ 2,104/t vs US$2,036/t yesterday

  • ‘Aggressive’ buying of aluminium on Asian markets helped trigger buy orders on the London Metal Exchange that sent the metal to its biggest gain in three months. Chinese traders were throwing their weight around, piling into the Shanghai Futures Exchange during a half hour ended 9:30pm in Shanghai, with 68,430 contracts for delivery in October changing hands.
  • Aluminium for delivery in three months climbed 3.3% to settle at $2,106/t, after touching $2,115.50/t. The rally gained steam around the same time Chinese traders flooded the Shanghai market, with 3,130 lots trading in the half hour ended 2:30 p.m. in London (9:30 p.m. Shanghai).
  • The market is also receiving support as the cost side is strengthening, as Huatai Futures Co refer to a strike at Alcoa Corp.’s alumina plant in Australia and China’s continuous crackdown on aluminium smelter’s captive power facilities. Alumina and electricity account for 70% of producers’ total costs.
  • Aluminum Corp. of China Ltd., the top state-owned producer, soared 5%, and was one of the leading gainers on the Shanghai Shenzhen CSI 300 Index, while Yunnan Aluminium Co. was up 3.7%.
  • U.S. sanctions on United Co. Rusal have also roiled the global market. China’s aluminum exports have been rising and surged to the highest in more than three years in July after the U.S. action in early April cut supplies. Russian aluminum giant United Co. Rusal is concerned of “catastrophic” shutdowns if U.S. sanctions aren’t lifted, Reuters reported Monday. Earlier this week, Rusal said it plans to start idling the Nadvoitsy smelter this month, which produced 12,000 tonnes last year.

Nickel US$ 14,000/t vs US$14,020/t yesterday

Zinc US$ 2,613/t vs US$2,612/t yesterday

Lead US$ 2,142/t vs US$2,149/t yesterday

Tin US$ 19,555/t vs US$19,705/t yesterday     

Energy  

Oil US$72.2/bbl vs US$74.6/bbl yesterday

Natural Gas US$2.945/mmbtu vs US$2.891/mmbtu yesterday

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

Bulk

Iron ore 62% Fe spot (cfr Tianjin) US$69.5/t vs US$69.9/t

Chinese steel rebar 25mm US$666.8/t vs US$668.6/t

Thermal coal (1st year forward cif ARA) US$87.1/t vs US$87.8/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$55,750/t

  • Cobalt bulls reverse recent trends as the battery metal surged from a record two-day slide which drew it to the lowest since May 2017. Prices have fallen about 18% this year as tighter credit conditions in China fuel sales from inventories and cost-cutting carmakers try to reduce the amount they use in batteries. “Prices are close to bottoming out,” said Andrew Cosgrove, a senior analyst at Bloomberg Intelligence, who cited imminent restocking and easing Chinese credit for a more bullish outlook.

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

Lithium – Lithium supply deals under negotiation for Australian producer

  • Developers of battery technology are still actively hunting for reliable long-term high purity supply as Australia’s Kidman Resources expects to strike one or two additional agreements before the end of the year. The company will supply Tesla from a planned refinery in Western Australia under a deal agreed in May.
  • CEO Martin Donohue notes the project is fielding interest from other carmakers, battery producers and battery cathode suppliers, and the level of demand for supply means the process of finalising agreements is taking longer than anticipated. “The issue we’ve got is that we’ve got so many groups wanting off-take, its becoming quite a competitive process”.
  • Interestingly, the company is finding demand is almost exclusively for lithium hydroxide, rather than carbonate. The joint venture with Chile’s lithium giant Sociedad Quimica y Minera de Chile SA has taken the decision to focus solely on production of lithium hydroxide, beginning 2021. Lithium hydroxide is increasingly in demand for EV batteries as producers seek to manufacture cells with higher-energy density.

Chile’s SQM says to overtake Albemarle as world’s top lithium producer by 2022

  • Chilean miner SQM said it would overtake competitor Albemarle as the world’s top producer of lithium by 2022, boosting its production capacity that year to 28% of the world’s total versus the U.S.-based Albemarle’s 16%
  • SQM Vice President Daniel Jimenez said that capacity increases at its Chile operations, together with new projects in Australia and Argentina, would help put the company in the top slot
  • Albemarle is currently the globe’s top producer, with capacity to produce 29% of the world total versus SQM’s 23%, according to SQM’s data
  • Both SQM and Albemarle are making preparations to ramp up production in Chile’s Salar de Atacama 

Company News

Altus Strategies (ALS)  6p, Mkt Cap £10.7m – JV partner secures additional bauxite licenses in Cameroon

Canyon Resources (CAY AU) A$0.17, A$53.6m

  • The government of Cameroon granted Minim Martap bauxite licenses to Canyon Resources.
  • Tenements are estimated to host 550mt of ore at an average grade of 45.5% Al2O3 and total silica 2.06%SiO2 with 85% of that in the Inferred Resource category (JORC, 2004).
  • The Minim Martap Project is located adjacent to the Birsok Project which is owned under the JV with Altus Strategies under which Canyon has an option to earn up to 75% interest in the Project.
  • The Minim Martap Project includes two deposits, namely Ngoundal and Minim Martap which are located 25km of each other.
  • This is a major bulk scale bauxite deposit previously owned and advanced by Cameroon Alumina Ltd Sarl, a JV operated by a consortium of major aluminium production and power generation companies including Hindalco, Dubai Aluminium Company and Hydromine; licenses have been returned to the state of Cameroon in 2016.
  • “The Minim Martap Project is a very large, high grade, low impurity bauxite deposit that is located alongside an operating rail line that has the potential to transport the bauxite to the Douala Port and eventually to the new Kribi deep water port… we believe that the large scale and quality of the bauxite within the Project pus the access to suitable rail and port infrastructure makes the Minim Martap Project a very exciting and transformational opportunity for Canyon,” the Company commented.
  • Canyon plans to upgrade the available JORC resource to new 2012 Code level including completing additional drilling targeting high grade zones, launch feasibility studies on mining, rail and port as well as identifying potential off takers and commence local community and stakeholder consultations regarding a potential development of the project.
  • Canyon agreed to issue up to 100m shares (c.32% of currently outstanding number of shares) in several tranches and conditional on a number of clauses to a party that assisted in securing Minim Martap Project licenses.
  • The Company is currently in discussions with Altus Strategies regarding combining Minim Martap and Birsok operations and consolidating the land package.
  • Altus Strategies also owns 8m shares in Canyon Resources where share price climbed 36% on the news this morning valuing Altus interest at $1m.

Conclusion: Altus in discussions with Canyon regarding vending-in of the Birsok JV allowing the Company to monetise its stake in early stage bauxite exploration project which can be consolidated with a more advanced Minim Martap Project. We are looking forward to the progress on those discussions.

*SP Angel acts as Nomad and Broker to Altus Strategies plc

Condor Gold (CNR)  43.5p, Mkt Cap £29.2m – Nicaragua in crisis following killing of 300-450 and kidnapping of >600

  • Human rights groups reckon that some 300-450 people have been killed since protests began in April with a further 600 kidnapped.
  • The fatalities and kidnappings are mainly among opposition leaders and their supporters with many shot by police and paramilitary forces.
  • The authorities are now reported to be targeting business leaders who have criticised the president’s approach.
  • Daily street protests are exacerbating the problem with the government hunting down and jailing opponents and new antiterrorism laws criminalising members of the opposition.
  • The political unrest will likely make the financing and development of mining projects next to impossible
  • In a recent statement management paid tribute to the team of 100% Nicaraguan nationals, though we have to wonder if management are less than keen to visit Nicaragua in its state of current unrest as hotels empty and airlines scale back flights to the country.

Conclusion: We note FCO advise against all but essential travel to Nicaragua and would avoid any investment in the region till the political situation resolves. We suspect with reports of so many killings and kidnappings that Nicaragua will need to see wholescale regime change before the country becomes investible again. 

Caledonia Mining (CMCL)  645p, Mkt Cap £68.4m – Q2 Results

  • Caledonia Mining reports an 86% rise in adjusted Q2 earnings, to 35.2cents/share compared to Q2 2017, reflecting increased export credit incentives and deferred tax adjustments.
  • The result comes at the end of a challenging quarter at the Blanket mine where grades were lower than expected at 3.19g/t gold as a result of “in accessing broken ground at AR South and higher than expected dilution at the Blanket ore body due to the introduction of long-hole stopping on the grounds of safety”. The company reports that it has taken remedial action and expects that “the grade and production tonnages will increase over future quarters, particularly in the fourth quarter of 2018.”
  • Against this background, however, gold production of 12,657oz during the quarter is broadly in line with the 12,521 oz produced during the equivalent quarter in 2017 and with the 12,925oz of the preceding quarter. The company also confirms that production is “in line with our expectations for our 2018 guidance range of 55,000 – 59,000 ounces …[and that it] … remains on track to achieve the production target of 80,000 ounces per year by 2021 at its Zimbabwean subsidiary, Blanket Mine.”
  • Cost performance was described as “satisfactory, with on-mine and all-in sustaining costs being well-contained; on-mine costs of $717 per ounce for the quarter were 3 per cent higher than the corresponding quarter of 2017 and the all-in sustaining costs of $856 per ounce was flat year on year. In the light of lower grade and tonnage for the quarter we are pleased to see this level of cost control in the business and remain confident in our longer-term cost guidance target of $700 – $800 per ounce as the business grows towards 80,000 ounces per year by 2021.”
  • The company continues to focus on delivering the long-term redevelopment plan at the Blanket mine which accesses deeper ore and secures the longer term future of the mine at the increased production rate.
  • The company reports that, following capital expenditure of $5.6m during the quarter and additional working capital requirements, net cash at 30th June amounted to $5.3m.

Conclusion: We observe that effectively building a new underground mine below an existing one while at the same time maintaining and increasing production is one of the most challenging tasks to present to a mining team which then has to balance the effective use of resources between production and development. Despite a challenging quarter, the team at Blanket is achieving this balance and remains on course to meet both its current year production guidance and the longer term target of sustainable production growth and mine-life extension.

Mkango Resources (MKA)  8.6p, Mkt Cap £9.5m – Major drill programme update at Songwe Hill Rare Earths project

  • The most comprehensive drilling programme to date at the advanced stage rare earth project in Malawi has advanced on track, achieving a total of 6,558m as of August 8. Comprising 53 drill holes to a maximum depth of approximately 220m, multiple zones of carbonatite, the primary host rock for rare earth mineralisation at Songwe Hill, have been intersected.
  • Assay results from the first batch of samples from 8 drill holes totaling 944m are expected to be announced by the end of August 2018.
  • The second batch of samples from 6 drill holes totaling 721m were recently dispatched for assay, and further batches of samples will be dispatched in coming weeks.
  • The drilling programme is a key component of the Feasibility Study for Songwe, which is being fully funded by Talaxis Limited, a subsidiary of Noble Group Ltd. On Mkango publishing a NI 43-101 technical report in relation to the updated Mineral Resource Estimate, Talaxis will invest a further £7m to fund completion of the Feasibility Study for Songwe.
  • Mkango have advanced the scale of the drilling and is now expected to total approximately 10,000m (updated from 4 August announced 5,000m minimum), focused on infill drilling the existing Indicated and Inferred Mineral Resource Estimates, testing extensions to the mineralisation and geotechnical drilling.
  • CEO William Dawes notes “Mkango is developing one of the few advanced stage rare earths projects globally. It is fully funded and well positioned to benefit from growing demand for neodymium and praseodymium used in permanent magnet motors for electric vehicles.
  • Mkango completed two successful drilling programmes at Songwe in 2011 and 2012, totaling approximately 6,850m and culminating in a maiden Mineral Resource Estimate. Mkango is targeting announcement of an updated Mineral Resource Estimate, incorporating the results of the latest drill programme, by the end of 2018.

Randgold Resources (RRS)  5400 pence, Mkt Cap £5.1bn – Record quarterly production at Kibali offsets issues at Tongon

  • Randgold Resources reports that a17% increase in output  during the quarter to a record quarterly production of 201,742oz at its 45% owned Kibali mine in the DRC helped a 9% quarter-on-quarter increase in its attributable gold output to 313,302oz and a 3% reduction in cash costs to US$697/oz.
  • Gold sales of 316,804oz of generated US$284m of revenue and a profit of US$58.4m for the quarter bringing the total for the six months to 30th June to US$124.9m.
  • Net operating cash flow of US$95.5m during the quarter brought the total for the half year to US$159.5m and free cash flow after investments of US$82.6m to US$76.9m leaving a cash balance of US$603.4m at 30th June.
  • Underground operations at Kibali, which moved from contractor to owner operation at the end of the quarter, produced some 910,000 tonnes of ore during the quarter with open pit operations delivering around 2mt.
  • Tongon’s output rose by 12% during the quarter to 65,259 oz as workers returned in early April following stoppages during Q1. However, “Early in Q3 2018, the government-led process to resolve industrial relations issues at Tongon was interrupted when employees went on strike again before the negotiations were concluded.  Consequently, operations at the mine were suspended from 13 July 2018 for three weeks.  The mine is working on a recovery plan to get back to full production with expected annual production revised from 280koz to approximately 250koz.”
  • The Loulo/Gounkoto complex in Mali produced 150,117oz of gold at a cash cost of US$691/oz. At Loulo, “Higher grades from Yalea underground were offset by the lower grade ore from the Baboto satellite pit resulting in higher plant throughput and head grade in line, compared to the previous quarter.”
  • On a standalone basis, Gounkoto produced 49,042oz of gold at a cash cost of US$746/oz. This is a 26% decline in output during the quarter which the company attributes “to the planned decrease in tonnes processed and lower head grade milled as the pushback for the super pit progressed”.

Conclusion: The record breaking quarterly performance at Kibali offsets problems at Tongon where sporadic labour unrest has hit production and caused a reduction of 30,000oz in the company’s 2018 guidance target to 250,000oz for the mine. 

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 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.

 

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