SP Angel . Morning View . Trade tensions eroding global aluminium demand

SP Angel – Morning View – Thursday 18 07 19

Trade tensions eroding global aluminium demand

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MiFID II exempt information – see disclaimer below

 

Centamin (CEY LN) – Q2 Production and exploration update

Edenville Energy* (EDL LN) – Start of mining operations at the Northern Area to drive coal run rates up

Peak Resources (PEK AU) – Rare earth market update

Rio Tinto (RIO LN) – Oyu Tolgoi schedule delayed for additional technical studies

Shanta Gold (SHG LN) – Q2 Production keeps Shanta on track to achieve 2019 production guidance

Tertiary Minerals* (TYM LN) – Sale of shares in Sunrise Resources

 

Dow Jones Industrials		-0.42%	at	27,220
Nikkei 225		-1.97%	at	21,046
HK Hang Seng		-0.64%	at	28,411
Shanghai Composite		-1.04%	at	2,901
FTSE 350 Mining		-0.63%	at	20,501
AIM Basic Resources		+0.22%	at	2,119

 

Economics

China current account surplus fell to 0.4% last year as China increases imports of goods and services and raises domestic demand

• China’s once problematic current account surpluses are now reduced to near -zero according to the IMF.
• The stats undermine Donald Trump’s position against China’s disruptive position within the global economy though Trump is addressing the imbalance of US trade flows with China.
• China’s Green Shield and other environmental policies has forced importers to buy higher-value commodities and to reject certain scrap materials. China is also effectively exporting pollution through investment in mineral processing in other Asian nations, though this is also down to ore export restrictions in Indonesia and the Philippines.

 

US – US and China appear to be in a standstill as Washington weighs on which businesses should be allowed to supply Huawei with so needed telecom-equipment, the Wall Street Journal reports.

• In June, Trump agreed to resume the supply of US equipment to Huawei as part of a ‘truce’ in trade negotiations between the US and China.
• However, administration official have not yet reached consensus on which semiconductor chips and other products can be provided to Huawei without triggering security concerns or offering the Company a strategic edge.
• Equities closed lower on Wednesday on the WSJ story while on weak earnings expectations set the tone for the quarterly reporting period.
• Corporate profits are expected to have fallen 3% during the quarter, according to FactSet data.
• So far, numbers were coming in stronger than expected with more than 7% of S&P 500 companies having reported their numbers and around 85% of those releasing better than estimated numbers. Reported earnings growth was 3.1% so far.

 

Japan – Exports drop for a seventh straight month in June highlighting weak global growth with semiconductor and auto parts sales posting sharpest declines.

• The value of overseas shipments dropped 6.7%yoy in June.

 

Russia – Weak GDP numbers highlight struggling domestic demand with industrial production remaining the main driver behind modest expansion.

• Industrial output contributed 0.8pp to growth with expansion in trade, construction and transport was around zero.
• Q2 GDP cane in at 0.8%yoy, up on 0.5%yoy recorded in Q1, according to the Russia’s Economy Ministry.
• Real disposable incomes dropped 0.2%yoy in Q2 following a 2.5%yoy in Q1.
• The central bank cut the benchmark rate in June by 25bp to 7.5% and hinted at two more before the end of the year given slowing inflation levels.
• The rouble is little changed this morning trading at 62.8 to the US$.

 

South Korea – The Bank of Korea surprised markets and cut its benchmark rate (7d repo rate) by 25bp to 1.5% amid slowing growth and inflation outlook.

• Economic growth rate forecast has been cut to 2.2% for this year versus 2.5% projected in April.
• Inflation is estimated to average 0.7% versus 1.1% previously.
• The decision represents the first rate cut since 2016 and reflects the urgency to support the ailing growth as the export-dependent nation seems to be struggling amid US/China trade tensions and the latest row with Japan.
• South Korean exports have been falling for the seven straight months.

 

Indonesia – The central bank cut the benchmark rate for the first time in almost two years and promised more easing to come.

• The 7d repo rate was reduced by 25bp to 5.75%, in line with market estimates.
• “Bank Indonesia sees that the room is still open for accommodative monetary policy that is in line with the low inflation estimate and the need to push economic growth momentum further,” Governor of the central bank said in Jakarta.
• Indonesia also plans on banning all ore exports by 2022.

 

Turkey – The US suspends the Turkey’s participation in the F-35 programme with its order for more than 100 US-made jets to be cancelled, the New York Times reports.

• “The F-35 cannot coexist with a Russian intelligence collection platform that will be used to learn about its advanced capabilities,” the White House said in a statement.
• “Accepting the S-400 undermines the commitments all NATO allies made to each other to move away from Russian systems.”
• Turkish pilots trained in the US to fly the F-35 are int eh process of being sent home.
• Ten Turkish companies will be suspended from manufacturing more than 900 parts for the F-35 that over the programme’s lifetime could have generated more than $9bn in orders, according to Pentagon.
• The lira is off 0.18% this morning.

 

High-yield bond ETFs see record fund inflows on expectations for lower interest rates

• Bloomberg report that investors are flocking to high-yield bond ETFs as other instruments head into negative yields.
• European-listed funds have attracted over €5bn since January while BlackRock’s €8.5bn IHYG attracted €640m in the week to 5 July breaking all previous records.
• A US junk-bond fund brought in record cash in June despite rising defaults
• Investors are hoping corporate yields will continue to outpace government debt with some $13tr of global debt now yielding less than zero,
• The high-yield ETFs effectively dilute the impact of corporate defaults providing some respite from the capital erosion of negative yields.
• ETFs also offer investors low-spread liquidity in equity trading as opposed to the more opaque pricing of OTC cash bonds.
• Question is, what is really in these massive high-yield ETFs?
• If investors wish to withdraw funds en-masse then ETF pricing will reflect the impact of outflows as much as any other instrument.
• Could we see a rerun of the Subprime crisis with high-yield effective ‘junk bond’ ETFs that are not able to support investor expectations and subsequently crash?

 

London property prices fall at 4.4% in year to May (FT)

• Prices had fallen just 1.7% in the year to April with the fall accelerating in May to 4.4% (ONS stats).
• London house prices fell 7% in August 2009 due to the impact of the collapse of Lehman Bros and the Sub Prime Crisis.
• Prices rose in the UK as a whole by 1.2% for the year to May.
• Kensington and Chelsea in London are leading the slowdown following sharp falls from peak prices with these falls also dragging many neighbouring boroughs lower.
• While the closure of Deutsche Bank’s equity business, stagnant earnings and lack of cash bonusses in many parts of the City are impacting London prices, many potential local buyers are still unable to afford the substantial deposits, stamp duty and other costs required to buy central London property.
• HMRC action against members of film schemes and other tax reduction vehicles may also be depressing prices in some parts of the capital.
• Cheap sterling may attract US investors back into London but Brexit uncertainty and high rates of stamp duty is still putting off overseas buyers.
• While London prices rose to peak levels on a perfect storm of sovereign wealth buying combined with high oil prices some prices are now >25% lower than their peak levels in central areas. For overseas property investors its even worse with the impact of a substantially weaker pound which has fallen by 26% over the past 10 years.

 

Rothschild & Co. buy into Redburn for its independent analyst research offering as MiFID II regulations impact (FT)

• The move is a rare vote of confidence in a market that has been hit hard by the impact of the new MiFID II research regulations.
• Lower fund management fees and fund outflows have also caused further cutbacks in funding made available for research.
• A dramatic fall in IPO and placement fees are also hitting investment banks and brokers hard.
• The monetary, time-consuming cost and personal risk of increased regulation is causing an exodus of talent and dissuading companies from coming to market.
• The unintended consequence of greater regulation is for companies to avoid the market and stay away from the influence and oversight of public markets and their regulators.

 

Currencies

US$1.1236/eur vs 1.1209/eur yesterday  Yen 107.75/$ vs 108.21/$  SAr 13.974/$ vs 13.972/$  $1.246/gbp vs $1.240/gbp  0.704/aud vs 0.701/aud  CNY 6.879/$ vs 6.879/$

 

Commodity News

Precious metals:         

Gold US$1,420/oz vs US$1,406/oz yesterday

   Gold ETFs 74.6moz vs US$74.3moz yesterday

Platinum US$849/oz vs US$841/oz yesterday

Palladium US$1,541/oz vs US$1,526/oz yesterday

Silver US$15.98/oz vs US$15.64/oz yesterday

           

Base metals:   

Copper US$ 5,962/t vs US$5,963/t yesterday

Aluminium US$ 1,846/t vs US$1,842/t yesterday

• Major Alcoa Corp. cut its global aluminium demand forecast for the second time in three months, fueled by concerns trade frictions are eroding the outlook for the industrial metal.
• Aluminium supply will trail consumption by 1-1.4mt as trade tensions and macroeconomic headwinds slow demand in China, according to Alcoa during second-quarter earnings reporting.
• The company sees aluminum use this year growing 1.25% to 2.25%, compared with its previous estimate of 2% to 3%.
• But China’s stimulus may help strengthen demand for the metal, Alcoa Chief Executive Officer Roy Harvey said. "If you continue to see some of that slowdown inside of their economy, you’re going to see more stimulus that moves from financial to physical and to infrastructure," he said. "That will then give you a number of impacts positive impacts, particularly in aluminum.”
• The company estimates the global inventory of the refined metal at 10.7mt, about half of which are considered "unreported stocks," Harvey said. About 2.5mt of the supply that’s not tracked by exchanges are in China, he said.

Nickel US$ 14,885/t vs US$14,110/t yesterday

• Nickel prices are surging as the metal consumed in stainless steel climbs 20% in 10 trading days, the best performance since early 2010. The spike has extended an already yawning lead over its peers, with nickel nearing a 40% gain for the year-to-date against mostly flat prices for other base metals.
• Fundamentally, nickel is facing reduce LME inventory, spurring the latest bout of tightness and encouraging the spike in price.

Zinc US$ 2,494/t vs US$2,456/t yesterday

Lead US$ 2,018/t vs US$1,988/t yesterday

Tin US$ 17,925/t vs US$17,950/t yesterday

           

Energy:           

Oil US$63.6/bbl vs US$64.7/bbl yesterday

Natural Gas US$2.313/mmbtu vs US$2.324/mmbtu yesterday

Uranium US$25.95/lb vs US$26.30/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$115.3/t vs US$115.7/t

Chinese steel rebar 25mm US$618.1/t vs US$618.0/t

Thermal coal (1st year forward cif ARA) US$68.1/t vs US$67.3/t

Coking coal futures Dalian Exchange US$207.0/t vs US$207.0/t

           

Other:  

Cobalt LME 3m US$28,000/t vs US$28,000/t

NdPr Rare Earth Oxide (China) US$45,431/t vs US$45,429/t

Lithium carbonate 99% (China) US$9,159/t vs US$9,159/t

Ferro Vanadium 80% FOB (China) US$37.0/kg vs US$37.0/kg

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

Tungsten APT European US$210-225/mtu vs US$230-242/mtu

 

Battery News

UK railway to directly power trains with solar energy in upcoming project

• The UK’s South Western Railway is about to launch a new type of solar energy project that will power trains using solar panels, without first distributing that power to the electrical grid.
• The project, which is set to go live in August, uses 135 solar panels on land near the station to generate electricity that never reaches the grid. Instead, it will connect directly into the railway system, where it’s used as traction current to power trains.
• While there are already solar-powered trains, the specific use of solar panels in this case sets the project apart. If the project works in the real world, larger solar projects in the same vein could be installed in the future.
• The “First Light” demonstrator project from Riding Sunbeams is a collaboration between a number of groups, including climate change charity 10:10. It’s being funded by Innovate UK and the Department of Transport.
• Ollie Pendered, Riding Sunbeams’ executive director, said in a statement “We are very excited to be installing the world’s first project to directly power railway lines with solar energy at Aldershot station. We hope this pilot scheme paves the way for the railway industry, and the UK, becoming zero-carbon.”
• Amelia Woodley, South Western Railway’s head of sustainability, said “The rail industry plays an important role in reducing carbon emissions. SWR has reduced its emissions by 33% over the last 12 months and are continuing to install renewables, and other technologies, to cut our carbon emissions by 60% overall within the next five years.”
• Riding Sunbeams plans on connecting “the world’s first-ever, full-scale, community- and commuter-owned solar traction farm to the railways by 2020,” so the results from this project could guide the organisation’s future plans.

 

Company News

Centamin (CEY LN) FOLLOW 115.7p, Mkt Cap £1,337.1m – Q2 Production and exploration update

• Centamin reports gold production of 117,913oz for the quarter ending 30^th June bringing H1 gold output to 234,096oz at the Sukari mine. Given its expected skew in production with only 45% of production expected during H1, the company is maintaining its annual forecast production range of 490-520,000oz.
• Mill throughput of 3.36mt exceeded the preceding record quarter throughput of 3.25mt although fee grades were some 10% lower at 1.16g/t gold (Q1 2019 1.28g/t) although the company points out that this still represents a 17% year-on-year grade improvement.
• The company also says that it “expects costs to trend downwards in line with the scheduled increased production profile in H2”.
• Centamin’s exploration at Sukari has focussed “on growing the existing underground resource. The majority of the exploration drilling was close to existing development and infrastructure thereby expanding the structural understanding of the orebody and in turn, supporting increased mine life potential … [and … The Company has successfully replaced underground reserves year-on-year and this remains Centamin's underground performance target”.
• The company also points to “the drilling into the Horus Deeps that is currently 400 metres below the existing reported resources. These results continue to expand on the resource potential at depth” where a further 2000m of deep drilling is scheduled during Q3.
• At the Doropo project in Cote d’Ivoire, Centamin completed a further 19,000m of drilling during the quarter “testing structural extensions and priority targets previously identified with aircore drilling”.
• Work is continuing on the Preliminary Economic Assessment of the Doropo project “targeting a project update later in H2.”
• Commenting on the results, CEO, Andre Pardey  said ” The outlook for the business continues to improve. We remain focused on delivery against our promises and our corporate strategy. Stronger production in the second half will be driven by mining open pit grades above 1g/t, as the Stage 4 pit progresses down into the Hapi Zone”

Conclusion: Centamin has maintained the strong performance in Q1 2019 into Q2 and is currently maintaining its production forecast range of 490-520,000oz for the year with the expectation that the stronger performance will be achieved during the 2nd half.

 

Edenville Energy* (EDL LN) FOLLOW 0.06p, Mkt cap £2.8m – Start of mining operations at the Northern Area to drive coal run rates up

• Coal mining in the Northern Area started following the removal of the overburden and exposing of coal seams.
• Coal seams are thicker (20m v 3.5m in the previously mined area) and richer (6,200kcal/kg v 5,000kczl/kg) in the Northern Area.
• Additionally, the Company is reporting new coal being exposed to the west of the Northern Area allowing to potentially extend the mining area.
• The coal appears consistent with only moderate amounts of material such as mudstone within the seam structure with the management considering the potential for simple screening of the material and selling the produce unwashed given high calorific values.
• Production rates at the wash plant are increasing having produced 730t from 1 July to 15 July including 102t produced from a single shift on 15 July 2019 (equivalent to c.3,000t per month run rate).
• The team is expecting to switch to two shifts operation of the processing plant as the coal starts to be delivered from the Northern Area reducing the mining bottleneck Rukwa Coal Project has been experiencing so far.
• The Company reiterated its guidance on reaching breakeven levels and hitting 6,000t per month over the next nine months and ramping up to >10,000t per month thereafter.

Conclusion: A positive announcement from the team marks the start of mining operations at the Northern Area that is expected to drive the ROM supply of coal to the wash plant and allow to ramp up production rates towards targeted 6,000t first and >10,000 thereafter.

*SP Angel acts as Nomad and Broker to Edenville Energy

 

Peak Resources (PEK AU) A$0.039, Mkt Cap A$31.2m – Rare earth market update

• Advanced-stage rare earths developer continue following its commercial strategy engaging with automakers and magnet manufacturers, automotive Tier 1 suppliers and distributors.
• Peak Resources are actively looking to engage the market, highlighting that it is imperative for the industry and electric vehicle manufacture supply chain to act in the near term to diversify supply source before the S-curve and high volumes in electric vehicle market begin.
• Chinese dominance in the rare earth market offers potential countermeasures in the ongoing trade dispute with the US, and despite parties agreeing on the resumption of trade talks at the G20 summit, solutions will take time. Political tensions helped the market price of NdPr reach new yearly highs, rising 22% from 23^rd April to 17^th July to $46.13/kg.
• From the demand perspective, analysts from Bloomberg, Exxon, IEA, OPEC and BP have revised their electric mobility vehicle sales forecast multiple times to accommodate dominance in global auto markets. China leads the way with their quota system, with a 20% electrification target by 2025 (sales 2017 = 25.8m), followed by EU, establishing an indirect EV quota with its introduction of its new legislation and emission target for 2021/ 2025 & 2030 (sales 2017 = 21m).
• Revisions are heavily policy driven, with new European legislation (commencing Jan 1. 2020) requires all but 5% of EU’s auto fleet to emit no more than 95g CO2/km driven.
• Penalties would require manufacturers to pay €95/g CO2, per vehicle that exceeds agreed targets, potentially impacting VW Group with €9.19Bn fines.
• Incentivises to avoid fines, the global automotive industry will invest more than $400bn across the electric vehicle space.
• E-mobility represent a new incremental demand source for NdPr, operating in a multi-million unit sales mass market. Each internal combustion vehicle replaced by an electric vehicle (BEV, PHEV, HEV and mild hybrid) represents incremental demand of approx. 0.5-1kg NdPr oxide.
• Peak Resources aims to be one of the lowest cost players in the rare earth space, as presented in the April 2017 Bankable Feasibility Study. The superior physical attributes of the Ngualla orebody, combined with the unique advantages of the Tees Valley refinery location makes Peak the lowest operating and capital cost project of any comparable rare earth developer.

 

Rio Tinto (RIO LN) FOLLOW 4815.5, Mkt cap £82.1bn – Oyu Tolgoi schedule delayed for additional technical studies

• Rio Tinto has reported that its plans for the underground development of the Oyu Tolgoi copper project in Mongolia have been delayed by between 16 to 30 months while it investigates its options in response to “stability risks identified with the approved mine design”.
• A number of options are under consideration some of which “may result in some of the critical infrastructure, such as the mid-access drive and ore handling system, being relocated or removed.”
• The company says that “All options under consideration present a pathway to sustainable first production, and have different cost and schedule implications … [and that] … Preliminary estimates for development capital spend for the Project, depending on the outcome of the work described above, is now $6.5 billion to $7.2 billion, an increase of $1.2 billion to $1.9 billion from the $5.3 billion previously disclosed”.
• In a company presentation in October 2016, Rio Tinto described how the addition of the large scale underground block caving operation to the existing open-pit operation at Oyu Tolgoi was expected to produce an average of 560,000tpa of copper between 2025-2030 at costs within the lowest quartile. The incorporation of the 495mt (Measured & Indicated) Hugo North  orebody at an average grade of 1.26% copper and 0.35g/t gold and inferred orebodies at the Hugo South and Heruga deposits was expected to offer “a potential multi-decade future”.

Conclusion: Although there may be some disappointment at the delay and possibility of increased cost of the Oyu Tolgoi underground operation, in the context of a large-scale, multi-decade operation, a delay of up to 30 months in the initial production in order to minimise operational risks and help ensure the smooth operation of the underground mine appears to be a prudent use of resources which we hope will avoid disruption over the long term life of the operation.

 

Shanta Gold (SHG LN) FOLLOW 7.65p, Mkt Cap £60.2m – Q2 Production keeps Shanta on track to achieve 2019 production guidance

• Shanta Gold reports production of 19,856oz of gold during the quarter ended 30^th June bringing H1 production to 42,230oz and keeping the company on track to meet its guidance of 80-84,000oz for the full year.
• All-in-sustaining costs for the quarter of US$773/oz bring the year to date average to US$735/oz keeps the production cost on course to beat the current AISC guidance of US$740-780/oz for the full year.
• Production benefitted from high grade underground ore from the Bauhinia Creek operation as well as record quarterly mill throughput of 177,647 tonnes which exceeded the 172,644tonnes in Q1 2019 which was, itself, also a record.
• Referring to the recently announced mineral resource upgrade which “converted 126,787 oz of Inferred Resources grading 3.15 g/t into 83,543 of Indicated Resources grading 7.85 g/t and added new Inferred Resources of 58,553 oz grading 4.79 g/t” the company points out that it “has replaced all depletion expected from 2019 gold production” at a cost of US$2/oz.
• The company reiterates its previously announced drilling results from its Phase 2 campaign at Bauhinia Creek which included a 16.02m long intersection at an average grade of 9.36g/t gold in hole CSD122 and 7.07m at an average grade of 16.1g/t in hole CSD123. Encouragingly, “Initial drilling results identified the orebody is becoming wider at depth”.
• Reflecting the operational performance, “Gross debt [is] down US$8.6 m (22%) at US$30.1 m (Q1: US$38.7 m) following US$4.9 million partial buyback of Convertible Loan Notes” leaving the company with a cash balance of US$3.1m.
• Commenting on the company’s “transition to one of the least geared U.K. listed gold producers. The company moves into H2 with a strong balance sheet, strong operations, an increasingly attractive orebody and exciting upcoming catalysts”, CEO, Eric Zurrin, said that “In the second half of this year we expect more on-mine and regional exploration results, the launch of the Singida IPO and hopefully some movement on the $25 m VAT receivable which is roughly the same size as our net debt."

Conclusion: The high grade underground ore from Bauhinia Creek and record quarterly mill throughput have contributed to production and costs which keep Shanta Gold on course to meet or exceed its annual production and cost guidance while continuing exploration has already succeeded in replacing the ore-resource depletion from the expected production

 

Tertiary Minerals* (TYM LN)FOLLOW  0.24p, Mkt Cap £1.1m – Sale of shares in Sunrise Resources

• Tertiary Minerals reports that it has sold 31.5m shares in Sunrise Resources at a price of 0.08p/share realising a total of £25,200.
• The company still holds approximately 79.45m shares in Sunrise Resources or 2.89% of the company. Sunrise Resources is currently priced at 0.0825p/share.
• The shares were bought by Patrick Cheetham, who chairs both companies, in a transaction which, after consultation with the Nomad, is considered by the non-executive directors to be “fair and reasonable insofar as shareholders of the Company are concerned”.
• Sunrise Resources’ website disclosure under AIM Rule 26 shows Mr Cheetham holding  approximately 94m shares or 3.42% of the company. We note that this disclosure pre-dates the disclosure under rule 26 and that consequently we infer Mr. Cheetham may now hold approximately 4.6% of Sunrise Resources. The Rule 26 disclosure for Tertiary Minerals shows a holding of approximately 2.85% attributed to Mr. Cheetham.

Conclusion: The sale of some of its holding in Sunrise Resources still leaves Tertiary Minerals with a holding of almost 2.9%

*SP Angel act as Nomad and broker to Tertiary Minerals

 

Analysts

John Meyer – 0203 470 0490

Simon Beardsmore – 0203 470 0484

Sergey Raevskiy – 0203 470 0474

James Mills -0203 470 0486

 

Sales

Richard Parlons – 0203 470 0472

Jonathan Williams – 0203 470 0471

Abigail Wayne – 0203 470 0534

Rob Rees – 0203 470 0535

 

SP Angel                                                            

Prince Frederick House

35-39 Maddox Street London

W1S 2PP

 

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

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

 

Sources of commodity prices
Gold, Platinum, Palladium, Silver	BGNL (Bloomberg Generic Composite rate, London)
Gold ETFs, Steel	Bloomberg
Copper, Aluminium, Nickel, Zinc, Lead, Tin, Cobalt	LME
Oil Brent	ICE
Natural Gas, Uranium, Iron Ore	NYMEX
Thermal Coal	Bloomberg OTC Composite
Coking Coal	DCE
RRE	Steelhome
Lithium Carbonate, Ferro Vanadium, Antimony	Asian Metal
Tungsten	Metal Bulletin

 

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