SP Angel . Morning View . Iron ore accelerates to five year high on tight fundamentals

SP Angel – Morning View – Tuesday 16 07 19

Iron ore accelerates to five year high on tight fundamentals

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MiFID II exempt information – see disclaimer below

Ferro-Alloy Resources Limited (FAR LN) – First half vanadium pentoxide production rises to 71.5t

Bushveld Minerals* (BMN LN) – Brits vanadium mineral resource restatement on percentage ownership

 

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HK Hang Seng		+0.11%	at	28,586
Shanghai Composite		-0.16%	at	2,938
FTSE 350 Mining		-0.58%	at	20,360
AIM Basic Resources		+0.61%	at	2,115

 

Economics

US – Trump urged China to reach the deal arguing tariffs are having “a major impact” on the Chinese economy.

• Mnuchin and Lighthizer may travel to Beijing for further talks If talks by phone this week are productive.
• “We expect to have another principal-level call this week, and to the extent we make significant progress, I think there’s a good chance we’ll go there later,” Mnuchin said on Monday.
• That would be a second phone call between two sides since Trump and Xi called a truce in the year long trade war during the G-20 meeting at the end of June.
• On a separate note, New York manufacturing index bounced off an almost-three year low in July. Business expectations improved, although, new orders remained weak while a measure of employment dropped to the weakest level since Jan/16. The index came in at 44.3 v -8.6 in June and 2.0 forecast.
• Retail sales are due later today with estimates for growth to slowdown in June (+0.2%mom v +0.5%mom in May).

 

EU – The WTO decision allowing US to place tariffs on $5-7bn worth of EU products is expected this summer.

• Previously, the WTO found the EU subsidies to Airbus to have violated international trade rules and is currently considering the amount of countermeasures the US can impose.

 

UK – Hedge funds and other asset managers pile up bets on a no-deal Brexit with sterling short positions at the highest level since Sep/18.

• Both PM candidates said they would be looking to remove the Irish border backstop plan and accept a no-deal Brexit if negotiations with EU fail.
• European officials referred to the meeting between EU and UK representatives last week as one of the most difficult encounters in the last three years.
• The pound if off 0.3% against the US$ and 0.2% against the € this morning.

 

Australia – The central bank may be cutting rates further after reducing the benchmark rate by 25bp for the second consecutive month in July.

• “There was scope to ease monetary policy further if needed,” minutes of the July meeting read.
• Authorities have been trying to support the economy amid the slowdown in China, a domestic property slump and weak domestic consumption.
• “The board would continue to monitor development in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time,” the RBA said.
• Markets are currently expecting the rate to come down by another 25bp by the end of the year.

 

Turkey – New central bank governor told local news agency the central bank has lots of room to cut interest rates given the continuing slowdown in inflation rates in 2019.

• “The level of tightens here can be best described through real rates rather than nominal rates,” Mural Uysal, a new governor appointed by President Erdogan, said.
• Economists forecast the bank to cut its benchmark rate by 200bp from 24% at its next rate setting meeting on July 25.
• The lira is off only marginally this morning (-0.07%).

 

Greece – The government is considering issuing a new 7y bond taking advantage of record low borrowing costs, FT reports.

• Demand is helped by the ECB expansionary monetary policy seeing investors taking on riskier “peripheral” eurozone bonds in search for yield.
• Greek bonds were further boosted following the centre-right new Democracy party win in general elections this month.
• The country’s benchmark seven-year bond was trading on Monday with premium over the equivalent German debt of 1.54%, down from above 4% in November last year.
• The government issued 10y bond at 3.73% spread in March and 5y bonds at 3.89% spread in January, FT reports.

 

Uganda – plans $263m vehicle plant

• Uganda is looking to build a new vehicle plant starting with an initial $40m investment as the first phase of a $263m vehicle-assembly plant.
• Initial production is planned at 5,000 vehicles a year rising to 150,000 units including the assembly of SUVs, busses and trucks.
• While many parts of Uganda could use a few extra new vehicles, congestion in Kampala indicates there is not much spare capacity on the capital’s roads during the rush-hour and drivers do not feel safe taking the back streets in Kampala to our recollection.

 

Currencies

US$1.1255/eur vs 1.1281/eur yesterday  Yen 108.05/$ vs 107.98/$  SAr 13.880/$ vs 13.883/$  $1.249/gbp vs $1.257/gbp  0.703/aud vs 0.703/aud  CNY 6.875/$ vs 6.872/$

 

Commodity News

Precious metals:         

Gold US$1,414/oz vs US$1,413/oz yesterday – Judy Shelton, advisor to President Trump is reported to be a long supporter of the return to the gold standard

   Gold ETFs 74.3moz vs US$74.3moz yesterday

Platinum US$845/oz vs US$838/oz yesterday

Palladium US$1,559/oz vs US$1,563/oz yesterday

Silver US$15.44/oz vs US$15.27/oz yesterday

           

Base metals:   

Copper US$ 5,988/t vs US$5,977/t yesterday

• Rio Tinto Group warns expansion efforts at the flagship Oyu Tolgoi mine has run into difficulties, potentially costing as much as $1.9bn more than forecast while extending delays to full production as much as 2.5 years.
• Potential stability risks were identified within the planned underground operation, with development costs rising from $5.3bn to between $6.5bn and $7.2bn, while first sustainable production is now expected between May 2022 and June 2023 -- a delay of between 16 and 30 months.
• Final estimate on the cost and schedule for the underground transition is now expected to be confirmed in the second half of the year, requiring more technical work.
• Oyu Tolgoi is Rio’s key project to add new output in copper, the commodity that’s the growth focus for every leading mining company amid forecasts rising demand will coincide with faltering supply from aging mines. Demand is seen growing about 2% to 3% a year, driven by urbanization, greater adoption of renewable energy generation and rising demand for electric vehicles, Arnaud Soirat, Rio’s copper and diamonds chief executive officer, said.
• The transition to underground operations targets an eventual rate of more than 500,000tpa copper, but progress on the expansion had been stalled since mid-2013 amid disagreements over taxes and cost overruns, while the project has been the subject of previous budget revisions and write-downs.
• Delays will not support the growing global deficit, with output at the existing surface operation declining 15% in the three months to June 30, from the same period a year earlier, as mining moves to lower-grade areas of the pit.

Aluminium US$ 1,845/t vs US$1,828/t yesterday

Nickel US$ 13,920/t vs US$13,470/t yesterday

Zinc US$ 2,436/t vs US$2,430/t yesterday

Lead US$ 1,984/t vs US$1,976/t yesterday

Tin US$ 18,100/t vs US$18,070/t yesterday

           

Energy:           

Oil US$66.5/bbl vs US$66.8/bbl yesterday

Natural Gas US$2.395/mmbtu vs US$2.436/mmbtu yesterday

Uranium US$26.30/lb vs US$25.05/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$117.9/t vs US$113.0/t

• Iron ore surges, with bulls supporting climbing prices to a fresh five-year high on tight global supply and record steel output in China. Futures in China rose as much as 3.3% to the highest since December 2013.
• The prices of the fundamental steel raw material took off following the deadly dam disaster at a Vale SA operation in Brazil in January, exacerbated by bad weather in Australia curtailing shipments.
• The Brazilian major continues to be stung in the aftermath of the event, reporting it would pay 400m reais (US$106.52m) to compensate workers impacted by the deadly rupture. In May, the company also reported it was taking $2.42bn in write-downs payments to victims’ families and estimated out-of-court settlements for various damages related to the dam collapse, including $247m for a “framework agreement” with labor prosecutors.
• Rio Tinto Group report that second-quarter iron ore shipments jumped almost a quarter on the previous three months, although they were still down 3% from a year earlier, and held its forecast for full-year cargoes after downgrading expectations last month.
• In China, data released Monday showed crude steel production rose 10% from a year earlier and average daily production reached a record, with run rates equivalent to more than a billion tons a year. The country’s imports fell to the lowest in more than three years in June.

Chinese steel rebar 25mm US$616.9/t vs US$613.7/t

Thermal coal (1st year forward cif ARA) US$68.4/t vs US$68.9/t

Coking coal futures Dalian Exchange US$207.1/t vs US$207.2/t

           

Other:  

Cobalt LME 3m US$28,000/t vs US$27,050/t

NdPr Rare Earth Oxide (China) US$45,454/t vs US$46,932/t

Lithium carbonate 99% (China) US$9,164/t vs US$9,168/t

Ferro Vanadium 80% FOB (China) US$36.8/kg vs US$36.7/kg

Antimony Trioxide 99.5% EU (China) US$5.5/kg vs US$5.5/kg

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

*Pricing sourced from Bloomberg

 

Battery News

US CO2 emissions tumble as coal consumption to fall

• Energy-related CO2 emissions in the US are expected to decrease through 2019, with the US Energy Information Administration forecasting falling coal consumption as the most significant impact.
• “Nearly all of the forecast decrease is due to fewer emissions from coal consumption. Forecast natural gas CO2 emissions increase and petroleum CO2 emissions remain virtually unchanged”, as the EIA forecast a 2.2% decrease in the US energy-related emissions for 2019.
• The first three months of 2019 and 2018 were roughly equal in CO2 emissions — the first quarter of each year typically has the highest emissions. However, the EIA expects that mild temperatures will keep energy demand lower for the rest of the year.
• Coal-fired power plant retirements are on the upswing, the largest decrease in CO2 emissions since 2015.

 

Company News

Ferro-Alloy Resources Limited (FAR LN)  FOLLOW38p, Mkt cap £119m – First half vanadium pentoxide production rises to 71.5t

• Ferro-Alloy Resources report rising production of vanadium pentoxide to 71.5t in the first half.
• Production in June rose to 17.6t indicating potential production of over the 150t target for the full year from the improved process plant.
• The team plan further debottlenecking and process improvements to raise production to 1,500tpa from the current target of 150tpa.
• The team are installing further new equipment for the Phase 1 expansion of the process plant and are connecting to a 110kV power line to deliver additional grid power.
• Phase 1 - $100m capex
  • Mine production 1mtpa of ore to give around 5,600tpa of vanadium pentoxide
• Phase 2 - $225m capex
  • Mine production to 4mtpa giving some 16,800tpa of vanadium pentoxide
• The team have ambitions to then further scale up the process to 22,500tpa through this will require the construction of a complete new plant and massive expansion of the mine infrastructure at Balasausqandiq.
• The Balasausqandiq mine has a JORC 2012 reserve of 24mt of grading 0.68% vanadium, 13.6% carbon, 0.03% molybdenum, 0.009% uranium along with some rare earth metals, potassium, and aluminium. The mine also has an exploration target of 110mt of ore of similar grade.
• Vanadium pentoxide prices fell a further 10.7% last week to $6.2-6.7/lb in Rotterdam from a peak of ~$29/lb last November (Fastmarkets MB).
• Pentoxide prices rose 1.3% last week to $8-81./lb in China.

 

Bushveld Minerals* (BMN LN)  FOLLOW24p, Mkt Cap £269m – Brits vanadium mineral resource restatement on percentage ownership

(Bushveld Minerals owns 74% of Vametco, 84% of Bushveld Energy in South Africa, 100% of Lemur Holdings, 9.5% of Afritin)

(Vanchem: Our figures assume Bushveld completes the acquisition of Vanchem later this year)

BUY – Valuation 90p

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• Bushveld Minerals report indicated attributable resources at the Brits vanadium project as 28mt of ore containing 129,000t of vanadium pentoxide.
• The total indicated and inferred resource is also restated at 41.8mt containing some 195,800t of vanadium pentoxide.
• The resource is calculated on 62.5% ownership vs the 74% ownership interested which was incorrectly stated in Bushveld’s previous announcement.
• Valuation: we value Bushveld Energy at US$149m representing 8.8 pence per share to our valuation on Bushveld Minerals. We have added 7.93p/s for Bushveld’s other assets, cash and subsidiaries including Lemur and the P-Q Iron and Titanium project. Our revised ferro-vanadium price forecast adjusts our valuation for the Vametco-Vanchem vanadium business to £801m representing 72 pence per share.
• Vanadium price assumption:
• We are assuming a Ferro-vanadium price forecasts for 2019 of $50/kgV from $60.4/kgV in response to the fall in ferro-vanadium prices to around US$36/kgV FOB China. For 2020 we assume $45/kgV and we maintain out longer term price forecast at $45/kgV.
• We still see vanadium demand and prices rising in China in response to better compliance with the legislation introduced in November last year.
• Demand for vanadium electrolyte for Vanadium Redox Flow Batteries VRFBs should also come into the market to support our estimate price assumptions.
• While demand for vanadium for electrolyte may be price sensitive we see the invention of new lease finance structures for the vanadium in VRFB’s as enabling the financing of VRFBs at higher vanadium price levels going forward.

Conclusion:  The Brit’s resource combined with the Vametco mine and Mokopane mine resources give Bushveld more than enough high-grade vanadium ore to mine and should keep the operations going for the next 20-50 years. The restatement makes no difference to our valuation.

 

Vametco 74% & Vanchem 100%			2018A	2019e	2020e	2021e	2022e	2023e
Ferro Vanadium	US$/kg		81.2	50.0	45.0	45.0	45.0	45.0
Vanadium sales	mtV		2573	3096	4370	5432	6422	7911
Sales	US$m		192.1	148.5	188.7	234.6	277.3	341.6
Operating costs	US$m		65.0	78.9	98.3	120.0	139.7	167.7
Operating costs	US$/kg		25.3	25.5	22.5	22.1	21.7	21.2
Operating profit	US$m		95.2	69.6	90.4	114.6	137.7	173.9
Pre-tax profit	US$m	74.00%	86.6	60.9	85.3	110.5	132.9	169.8
tax	US$m		37.6	17.4	24.3	31.5	37.9	48.4
Post-tax profit	US$m		49.0	43.6	61.0	79.0	95.1	121.4
EPS	US$c/s		2.9	3.9	5.5	7.1	8.6	10.9
PE	x		6.9	7.8	5.6	4.3	3.6	2.8
EV/EBITDA	x		4.3	5.2	4.0	3.1	2.6	2.1
EBITDA	US$m	-	95.2	69.6	90.4	114.6	137.7	173.9
Free Cash Flow	US$m	-		35.0	57.0	77.9	98.0	133.0
Vametco Cash Flow	US$m	74.00%		41.1	48.7	57.3	65.5	68.4
Vanchem Cash Flow	US$m	100.00%		-6.1	8.2	20.6	32.4	64.5

*Source SP Angel. SP Angel acts as Nomad & Broker to Bushveld 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

 

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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.

 

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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