SP Angel . Morning View . Increased capital markets volatility supports gold

SP Angel – Morning View – Tuesday 11 12 18

Increased capital markets volatility supports gold

MiFID II exempt information – see disclaimer below

Crusader (CAS LN) – Suspended on AIM, Crusader appoints new Nomad as it signs death spiral convertible

MC Mining (MCM LN) (Formerly Coal of Africa) – Chapudi Mining Right

Solgold* (SOLG LN) – Other exploration around Alpala driving SolGold

 

China car sales drop at steepest pace in almost seven years

• China’s automobile sales fell about 14% in November from a year earlier, the country’s top auto industry association said, marking the steepest such drop in nearly seven years.
• The drop in sales to 2.55m vehicles, a fifth straight decline in monthly numbers, was the steepest decline since January 2012.
• The industry body forecast annual sales would drop 3%.

 

Hyundai Motor Group commits $7bn to fuel-cell technology

• Hyundai Motor Group will pour almost $7bn into developing hydrogen-powered systems for cars, drones and ships.
• The investment will be made over the next ten years and cover 700,000 units.
• In addition to supplying fuel-cell systems for cars, drones and vessels, the group said it expected demand for its technology to “emerge quickly” for power generation and storage systems.

 

Dow Jones Industrials		+0.14%	at	24,423
Nikkei 225		-0.34%	at	21,148
HK Hang Seng		+0.07%	at	25,772
Shanghai Composite		+0.37%	at	2,594
FTSE 350 Mining		+1.44%	at	16,307
AIM Basic Resources		-1.71%	at	2,058

 

Economics

Markets are mixed this morning with European stocks trading higher (Stoxx Europe 600 +0.7%) led by gains in mining and technology names whereas US futures are weaker today.

• News that Chinese Vice Premier Liu He discussed the timetable for trade talks with Treasury Secretary Mnuchin helped the sentiment slightly.
• Additionally, Canadian provincial court is reported to be weighing whether to grant bail to Huawei CFO who is currently facing possible extradition to the US; the hearing is expected to take place today at 1800 GMT.
• Most of the base metals complex is up this morning while oil prices are steady at just below the $60/bbl mark.
• MSCI Emerging Markets Index futures are up 0.3%
• US$ index is down 0.3%.

 

Chinese auto sales drop 14%yoy in November marking the steepest drop in seven years in the world’s largest auto market.

• This marks the a fifth straight decline in monthly numbers and puts China on track for an annual sales decline not seen since at least 1990.
• China car sales totalled 25.4%yoy in the first eleven months of the year, down 1.7%yoy, according to the China Association of Automobile Manufacturers (CAAM) data.
• The agency blamed economic shifts, weakness in smaller cities and “international reasons” behind low sales numbers.

 

China – Credit growth continued to slowdown in November which in turn fuels speculation that authorities might need to step in to slowdown deceleration in economic activity.

• Broad M2 money supply measure climbed 8.0%yoy, matching one of the lowest readings on record.
• Seasonal Aggregate Financing measure more than doubled from previous month in November, but when YTD data is compared the measure reported a 15% decline reflecting regulatory tightening on shadow financing and bond issuance by local governments.
• Aggregate Financing (CNYbn): 1,519 v 743 in October and 1,350 forecast.

 

UK – PM decided to delay the Commons vote on the Brexit deal at 11:30 yesterday, just minutes after her official spokeswoman told journalists that it was definitely going ahead and that she was “confident” of victory, FT reports.

• It appeared the deal would have been down by a significant margin of MPs potentially leading to an expression of no confidence in the current government.
• May is planning to meet EU leaders to better the deal before presenting a revised version.
• PM refused to say whether she would bring a new deal back to Westminster before Christmas.
• EU counterparts have not been that welcome over potential improvements in deal terms calling the latest deal “the best option” that “could not be renegotiated.
• The pound is trading higher this morning recovering for a 1.5% drop on Monday helped by good employment numbers.
• The economy added more jobs than forecast  in 3m to October (+79k v +25k forecast) while average labour earnings accelerated to 3.3%yoy, up from 3.1%yoy in the previous month and ahead of 3.0%yoy expected.

 

France – The government announced a series of tax cuts and new spending measures in an effort to arrest the monthlong Yellow Vests crisis.

• Authorities argued that containing the crisis will be taking priority over EU budget rules.
• The administration agreed to raise the minimum wage by €100 per month without any cost to employers with overtime work not to be taxed from 2019.
• Additionally, Macron urged employers to pay their workers a year-end bonus that won’t be taxed and dropped a controversial tax on pensions below €2,000 euros a month.
• At the same time, President defended his decision to cut the wealth tax arguing it was necessary to bring investment and jobs to France.
• Latest changes suggest the government may struggle to meet the 3% limit on budget deficit next year with government officials estimating the measures may push it to as much as 3.5%.
• The nation managed to reduce the deficit below 3% last year for the first time in a decade.

 

Turkey – Current account posted a record monthly current account surplus helped by weaker imports as the central bank hiked rates to 24% and lower oil prices.

• The finance minister expects the 12-month current account deficit to come down to $36bn by the end of the year, compared with $47bn in 2017 when it was 5.6% of GDP.
• The nation imports almost all of the oil and gas it consumes.

 

Currencies

US$1.1385/eur vs 1.1416/eur last week.  Yen 113.08/$ vs 112.69/$.  SAr 14.396/$ vs 14.172/$.  $1.262/gbp vs            $1.272/gbp.  0.721/aud vs 0.722/aud.  CNY 6.903/$ vs  6.914/$.

 

Commodity News

Precious metals:         

Gold US$1,249/oz vs US$1,246/oz yesterday

   Gold ETFs 69.0moz vs US$68.8moz yesterday

Platinum US$782/oz vs US$789/oz yesterday

Palladium US$1,244/oz vs US$1,218/oz yesterday

Silver US$14.61/oz vs US$14.53/oz yesterday

           

Base metals:   

Copper US$ 6,135/t vs US$6,112/t yesterday

Aluminium US$ 1,949/t vs US$1,952/t yesterday

Nickel US$ 10,850/t vs US$10,835/t yesterday

Zinc US$ 2,598/t vs US$2,587/t yesterday

Lead US$ 1,979/t vs US$1,991/t yesterday

Tin US$ 18,935/t vs US$18,945/t yesterday

           

Energy:           

Oil US$60.1/bbl vs US$62.0/bbl yesterday

Natural Gas US$4.510/mmbtu vs US$4.504/mmbtu yesterday

Uranium US$28.85/lb vs US$28.95/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$64.8/t vs US$65.1/t

Chinese steel rebar 25mm US$590.6/t vs US$595.6/t

Thermal coal (1st year forward cif ARA) US$87.3/t vs US$86.8/t

Coking coal futures Dalian Exchange US$199.9/t vs US$199.6/t

           

Other:  

Cobalt LME 3m US$55,000/t vs US$55,000/t

China NdPr Rare Earth Oxide US$46,358/t vs US$46,285/t

China Lithium carbonate 99% US$10,141/t vs US$10,125/t - AVZ Minerals published world’s largest lithium hard-rock mineral resource in the Congo

• AVZ Minerals has published a resource of 400mt grading 1.66% LiO2 containing 6.6m tonnes of lithium oxide.
• Problem is that this gargantuan resource is located in the DRC, far from the coast and even further from any battery-related lithium processing facility
• Worse still the state-owned company Cominiere holds 30% of the Manono deposit though lithium royalties are at a relatively low 3.5% for the DRC
• Manono was previously mined for tin for around 60 years and fortunately the deposit still contains some 300,000t of tin and 13,200t of tantalum.
• Our advice; stick to the tin and tantalum unless Elon Musk or some other genius decides to build a giga-factory somewhere close by.

 

Battery News

Tianqi $4.1bn SQM acquisition

• Tianqi acquired a 23.77% stake in SQM last week for a trifling US$4.1bn following approval by Chile’s antitrust court which placed conditions limiting Tianqi’s access to SQM business secrets (Reuters).

 

North Sea Nova rig powered by lithium-ion batteries

• Siemens is supplying what it describes as the world’s first energy storage solution to an offshore drilling rig.
• The BlueVault lithium-ion battery-based solution will be installed on Northern Drilling ultra-deep water semisubmersible West Mira, which will operate on Wintershall’s Nova field development in the Norwegian North Sea.
• This will be the world’s first modern drilling rig to operate a low-emission hybrid (diesel-electric) power plant using lithium-ion energy storage, Siemens claimed, the set-up in this case featuring four converter-battery systems providing combined maximum power of 6 MW.
• BlueVault should lead to a 42% reduction in the runtime of the rig’s on-platform diesel engines, the company added, cutting its carbon dioxide emissions by 15% and its nitrous oxide emissions by 12%.
• If the lithium-ion batteries catch fire, and we are sure they will be very well managed, then this could be lithium’s Hindenburg event.

 

Australia government launches strategy to develop itself as battery hub

• Australia is seeking investment to develop a battery industry to wring more value from its minerals wealth, the government said in a report on Tuesday.
• Australia will aim to attract investment to build a battery supply chain, including chemical technology and cell manufacturing, and it is prepared to offer funding incentives, it said.
• Under the strategy, the government will offer yearly tax offsets of up to A$200,000 per year for investors and a 10-year exemption on capital gains taxes for investments held for at least a year.
• “Australia has a once-in-a-generation opportunity to transform into a major processing, manufacturing and trading hub for lithium-ion batteries,” according to the Minister for Trade.

 

Company News

Crusader (CAS LN) FOLLOW– Suspended on AIM, Crusader appoints new Nomad as it signs death spiral convertible

• Crusader Resources reports it has found a new NOMAD on the AIM market to support the return from suspension of its shares.
• Management explain in the announcement that the company’s shares had been suspended pending clarification of the company’s financial position.
• The statement refers to ‘proposed capital raising initiatives to provide working capital and continue with the development of its two gold projects in Brazil’.
• It goes on ‘The Company's working capital position had been adversely affected by, inter alia, additional costs and fees incurred in relation to the Admission to AIM earlier in the year, the non-payment by the purchaser of the Posse iron ore mine ("Posse") of the deferred consideration payments, a lower than anticipated reduction in corporate and operational overheads and additional third-party consultants' fees.
• In short the company does not seem able to properly manage its finances and has a propensity to spend money it does not have. A bad habit to start off with by any standards.
• To blame ‘additional costs and fees incurred in relation to the Admission to AIM’ looks ludicrous as its listing Nomad Smith & Williamson was perfectly respectable and its IPO broker, Hannam & Partners would have set out its charges in advance.
• The delay in payments from Posse, a Brazilian company was unfortunate but highlights the risks and cost of doing business in Brazil which is better known for its corruption than its integrity.
• Crusader management have since signed a convertible note to raise A$1m before costs (we do hope they understand the costs this time).
• The company is also going to offer shareholders a pro-rata entitlement issue using a Perth-based corporate finance boutique involving the issuance of a prospectus involving yet more fees.
• The convertible notes carry an 8%pa interest rate ‘payable in new fully paid ordinary shares ("Shares") at the 30-day volume weighted average price of Crusader Shares (subject to a floor price equal to the lower of $0.01 or the Entitlement Issue price) and mature one year from the date of issue, unless converted.’ Eg it’s what is commonly termed, a death spiral.
• ‘At the base conversion price of AUD$0.01 per share, the conversion of these Convertible Notes would result in the issue of 30 million new shares (representing approximately 6 per cent. of the current issued share capital of the Company.’

Conclusion:  Never, in the history of mining on AIM, have we seen a company so poorly managed. Need we say more?

 

MC Mining (MCM LN) FOLLOW56.5p, Mkt cap £79.6m - Chapudi Mining Right

(Formerly Coal of Africa)

• MC Mining reports that the South African Department of Mineral Resources has granted it the mining right for the 74% owned Chapudi coking and thermal coal project located "within close proximity to the Musina-Makhado Special Economic Zone ("SEZ"), an area designated by government to focus on amongst others, energy and metallurgical processing".
• The project area is reported to contain "over 6.3 billion gross tonnes in situ of inferred coal resources".
• Commenting on the new licence approval, CEO, David Brown, said "The granting of the mining right for the Chapudi Project is a key step in unlocking value from MC Mining's significant coking and thermal coal assets … [and] … "the Company will commence with the various studies required for the outstanding water and environmental regulatory approvals".
• Mr. Brown went on to confirm that "We continue to advance our flagship Makhado hard coking and thermal coal project" and he also highlighted the recent "conclusion of a hard coking coal off-take agreement while negotiations for the remaining hard coking coal as well as the thermal coal and funding initiatives are progressing and updates will be provided when appropriate."

 

Solgold* (SOLG LN) FOLLOW 34.8p, Mkt Cap £643m – Other exploration around Alpala driving SolGold

• A recent interview by Jason Ward, SolGold’s Country Manager describes the other exploration within the license area at Cascabel and elsewhere in Ecuador.
• Ward refers to making discoveries with the regional projects – 11 high-priority projects, where they are applying for drill permits and will be drilling in 2019
• The Blanca epithermal target is 8km NW of Cascabel while another epithermal target in the South shows high-grade gold veins all over the mountain.
• A number of porphyry targets also host allot of potential according to Ward who has spent the last few years in Ecuador.
• Ward also describes the Alpala resource estimate as a ‘bit of a dream come true’ and refers to the employment of ‘upwards of 7,000 people’ at Cascabel as the company goes into construction.
• See:  https://twitter.com/SolGold_plc?lang=en, http://www.solgold.com.au/videos/
• A second video on the SolGold website shows Benn Whistler, the Technical Services Manager talking about the 2019 drilling program.
• The drilling contractors had a busy year drilling 120,000m at Alpala. The campaign has drilled out most of the resource though the resource remains open at shallower levels to Alpala SouthEast and Alpala NorthWest / Trivinio with some higher grade zones within a hydrothermal breccia indicating the probability of some highly mineralised rock below.
• This will use some 7-9 rigs in 2019 to determine what lies in this area.
• The drillers are also gearing up for a load of geotechnical drilling to check ground conditions for a planned decline, implying that the team are gearing up in preparation for a positive decision on the financing and development of the Alpala project.
• The team is looking to prepare the ground through geotechnical drilling for stockpile, plant, tailings areas etc..
• Benn sees focus also extending to the regional projects outside the Alpala where the Alpala model is grey.
• Any remaining rigs will move onto the more regional targets.
• A further video shows, Eduardo Valenzuela, the Preliminary Economic Assessment study manager, extoling the virtues of underground and block cave mining and the relatively small footprint which will be used at the Alpala project if it is mined.
• Valenzuela, refers to the early extraction of a cohesive high-grade core at Alpala and the relative benefits of the location in terms of its proximity to water and power supplies and relatively low altitude.
• Metallurgical work is ongoing and it will be interesting to see the recovery rates of the copper with the gold and how this impacts plant design and tailings issues.
• The high grade zone shown in company presentations runs at >1.5% copper equivalent surrounded by >0.7% cu eq and >0.3% cu eq mineralisation.
• SolGold recently upgraded its maiden mineral resource estimate for the Alpala project to an indicated resources of 2.05bnt grading 0.6% copper equivalent, at a 0.2% cut-off. An additional 900mt is also classed as inferred at an average grade of 0.35% copper.
• The updated study also significantly expanded the high grade core of the deposit, defined by the 0.9% copper equivalent cut-off grade, to 420mt at an average grade 0.86% copper and 0.9g/t gold for an equivalent copper grade of 1.47%.

Conclusion: SolGold has assembled an enthusiastic technical team at Cascabel who are methodically drilling through and around the resource. Drilling continues to intersect long and highly mineralised sections and should now enable the evaluating the potential economics of a large-scale underground block-cave mine at Alpala in Ecuador.

The latest two drill holes reported show mineralisation starting from 1,004m down the drill hole followed by a second hole where mineralisation starts at 740m down the hole which are fairly typical of the Alpala resource, both holes will be near vertical. It will be interesting to see the results of the PEA, the estimated multi-billion dollar capital cost and the value this gives to this large-scale underground project.

Potential shallower resources to NorthWest at Trivinio offers the potential to dramatically change the economics of the Alpala project if shown to have significant higher-grade copper/gold mineralisation.

Both BHP (US$45M) and Newcrest (US$62.8m) have put substantial sums into the company and while this may be small change for some, the funding should enable the evaluation of a large-scale development plan.

*SP Angel acts as broker and advisor to Solgold. SP Angel have raised funds for SolGold on eight previous occasions.

 

 

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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