SP Angel Morning View - Apple downgrades Q1 revenue estimates on virus concerns

SP Angel . Morning View . Tuesday 18 02 20

Apple downgrades Q1 revenue estimates on virus concerns

 

MiFID II exempt information – see disclaimer below   

Glencore (GLEN LN) – Glencore report 2019 loss as marketing department serves to rescue customers as Wuhan virus disrupts commodity supply chains.

Medusa Mining (MML AU) – Co-O L8 Shaft operations restarted

Pan African Resources (PAF LN) – Positive interim result on strong production and gold prices

Sirius Minerals (SXX LN) – Private investor opposition

Tertiary Minerals* (TYM LN) – Pyramid Gold project Nevada

 

Battery factories supplied some 95.6GWh of battery capacity into new passenger EVs (Adamas Intelligence)

• Battery production rose 30% year-on-year
• Battery supply:
  • 50.9 GWh  - Asia Pacific up 27% yoy
  • 23.9 GWh - Europe up 89% yoy
  • 20.5 GWh – The Americas up 1% yoy
  • 0.17 GWh- Middle East and Africa up 57%yoy

by EV type:

• • 90% - BEVs ‘Battery Electric Vehicles’
  • 7% - PHEVs ‘Plug-in Hybrid Electric Vehicles’
  • 3% - HEVs ’Hybrid Electric Vehicles’

 

Inflation coming as Supply Chain Disruption worsens as ‘blank sailings’ jump and 600,000 20ft containers remain trapped by virus controls

• China’s Coronavirus is causing substantial disruption to the world’s supply chains.
• Some 600,000 20ft containers are reported to be out of action due to the virus, containers which are needed to ship goods back into China causing a knock-on effect around the world.
• Many lorry drivers are still not back at work meaning that containers are stranded inland. Transport agents are not back at work – may be based in Wuhan
• Ships are also skipping China in ‘blank sailings’.
• Cargo cancellations into China have hit oil and gas shipments with Chinese buyers seen declaring force majeure
• Day rates for bulk carriers have collapsed to well below the cost of operation highlighting the risk to shippers.
• Qingdao factories are at 70% normal production following their return to work from the Lunar new year
• Ganfeng Lithium plans on raising prices by 10% to cover additional transport and other virus-related costs and other producers are also likely to follow with higher prices.

 

Petra Diamonds share price falls 16% due to weaker diamond market

• The miner announced yesterday that it was on track to exceed its full-year production guidance but was hampered by a slower start at its Cullian mine in South Africa.
• The company saw losses of $10m in the six months leading up to December 2019, compared to profits of nearly $58m in that time period the year before.
• Revenue declined 6% to $193.9m, down from $207.1m in 2018 – largely due to falling prices as production rose 3% to 2.1 million carats in 2019.
• Petra recorded net debt of $596.4m last year, a 6.6% rise from the year before.
• The company has targeted a delivering cumulative cash flow of $150m to $200m by June 2020, but following issues with the coronavirus this has been reduced to a range of $100m to $150m (UK Investor Magazine).

 

Dow Jones Industrials		CLOSED	at	29,398
Nikkei 225		-1.40%	at	23,194
HK Hang Seng		-1.54%	at	27,530
Shanghai Composite		+0.05%	at	2,985
FTSE 350 Mining		+1.04%	at	18,155
AIM Basic Resources		+1.30%	at	2,292

 

Economics

US – Index futures slide as a revenue warning from Apple weighed on tech sector names and challenged the market risk sentiment.

• The Company warned it would miss its March quarter sales outlook affected by the virus outbreak along with the news of a slower-than-expected restart in the firm’s Chinese factories, Reuters reports.

 

China – More than two dozen trade fairs and industry conferences are being postponed due to the virus.

• Property sales are down by more than 90% than one would expect for this time of the year, according to the Economist.
• Coal demand is more than a third lower.
• Liu Zhiming, the director of one of the leading hospitals in Wuhan, died of the disease today taking the total number of diseased health workers to seven.
• The number of new cases dropped to 1,886, the first below 2,000 reading since January, for a total of 72,436.
• The total death toll in China climbed to 1,868, according to the National Health Commission.

 

South Korea – President Moon Jae-in called for “all possible measures” to help the economy and soften disruptive consequences of the coronavirus outbreak.

• “The current situation is more serious than we thought… we need to take emergency steps in this time of emergency,” Mr Moon told his cabinet of ministers.
• Calls follow already announced a Won420bn ($356m) emergency plan to provide loans to hard-hit airlines, shipping firms, travel agencies and retailers.

 

Singapore – The government is expected to announce a fiscal stimulus to support economic growth, according to FT.

• The economy is heavily reliant on Chinese visitors with the traffic expected to be down by up to 30% this year due to the virus.

 

Zimbabwe to print more Zim dollars to wean the nation off the US dollar within the next five years

• Zimbabwe is to feed higher-denomination Zimbabwe dollar notes into the economy to ease cash shortages.
• The Central Bank also announced the interest rate will remain 35% and that it will resume publishing annual inflation data from March.

 

Locusts spread fear as they swarm into Asia (Xinhua Net)

• Desert locusts which have devastated farmland in African countries such as Ethiopia, Somalia and Kenya since the middle of last year have now reached China’s Southwestern border.
• The infestation has been called the worst in decades, and the United Nations World Food Programme has called on the international community to provide $76m to help affected areas.
• Agricultural futures listed on China’s main commodity exchanges moved decisively higher on Monday as the UN issued a threat warning over the swarm (Agri Census).
• Demand for fertilizer is set to increase as farmers rush to resume crop production once locusts have left an area, along with demand for insecticides to apply before the pests arrive.

 

Currencies

US$1.0830/eur vs 1.0844/eur last week.  Yen 109.70/$ vs 109.85/$.  SAr 15.076/$ vs 14.919/$.  $1.300/gbp vs $1.304/gbp.  0.668/aud vs 0.672/aud.  CNY 7.007/$ vs  6.980/$.

 

Commodity News

Gold US$1,588/oz vs US$1,581/oz last week

   Gold ETFs 83.6moz vs US$83.5moz last week

Platinum US$979/oz vs US$970/oz last week

Palladium US$2,519/oz vs US$2,447/oz last week - China’s car sale slump could threaten Palladium’s rally

• The 22% slump in China’s January car sales is threatening to derail the rally in palladium metal, which is almost exclusively used in catalytic converters (mining.com).
• The metal rose in value by 59% last year, fuelled by expectation that stricter Chinese environmental standards will lead to higher loadings of palladium in cars.
• On Thursday last week, the China Passenger Car Association predicted a worsening outlook for the industry, reporting sales may drop by more than 30% in February.
• Palladium for immediate delivery has fallen 5.6% to $2,434/oz on Thursday compared to the record highs of late January.
• Analysts at Citigroup see prices falling to $2,100/oz in the near term under base case scenario where the market remains tight, and could even see the metal falling as low as $1,600/oz.
• The auto industry accounts for more than 80% of demand for the precious metal, making it difficult for the market to ignore shutdowns in China (Johnson Matthey).

Silver US$17.90/oz vs US$17.80/oz last week

            

Base metals:    

Copper US$ 5,766/t vs US$5,812/t last week - Copper falls this morning as concerns over Chinese demand linger (Reuters)

• Apple warned it was unlikely to meet its March quarter sales guidance due to slower-than-expected ramp up in its Chinese manufacturing facilities due to the virus.
• The announcement hurt sentiment and echoed the knock-on affects that the virus is having on the manufacturing industry.
• Three-month copper on the LME was down 0.4% at $5,790/t earlier this morning.
• Losses were also seen on the Shanghai Futures Exchange, with April copper falling 0.4% to 46,300 yuan per tonne.

Aluminium US$ 1,715/t vs US$1,721/t last week

Nickel US$ 12,965/t vs US$13,165/t last week

Zinc US$ 2,158/t vs US$2,182/t last week

Lead US$ 1,860/t vs US$1,895/t last week

Tin US$ 16,665/t vs US$16,630/t last week

            

Energy:            

Oil US$56.7/bbl vs US$57.3/bbl last week

Natural Gas US$1.952/mmbtu vs US$1.896/mmbtu last week

Uranium US$24.50/lb vs US$24.50/lb last week

            

Bulk:    

Iron ore 62% Fe spot (cfr Tianjin) US$86.1/t vs US$86.1/t

Chinese steel rebar 25mm US$539.9/t vs US$545.4/t

Thermal coal (1st year forward cif ARA) US$61.6/t vs US$61.0/t - Coal India’s daily output set to rise to 3mt next month (Economic Times India)

• According to company executives, daily output has already been ramped up to 2.3mt after dipping to 1.1mt from 1.8mt following heavy monsoon rain.
• The state-run miner is now focusing on project expansion, an in recent weeks has focused on removing top soil to expose coal – which is expected to rapidly raise output.
• Coal India plans to increase stocks at thermal power plants form 20 days to 30, and reduce pending supplies to non-power consumers to zero by March.
• Last year the miner produced 607mt of coal, and is targeting production of 660mt this year.

Coking coal swap Australia FOB US$160.5/t vs US$159.5/t

            

Other:   

Cobalt LME 3m US$33,750/t vs US$33,750/t

NdPr Rare Earth Oxide (China) US$40,533/t vs US$40,685/t

Lithium carbonate 99% (China) US$5,566/t vs US$5,587/t - Lithium reserves found in Bengaluru

• The reserves have been discovered in Mandya, 100km from Bengaluru in Karnataka. The Atomic Minerals Directorate estimates the reserves to be 14,100t of lithium metal from 30,300t of Li₂O over a 0.5km by 5km area. (Business Today)
• The results of the study will be published in a forthcoming issue of the journal ‘Current Science’. The find is small compared to the reserves found in other nations, for comparison: 8.6mt in Chile, 2.8m tonnes in Australia and 1.7mt in Argentina. (The Economic Times)
• India currently imports all of its lithium, $1.2bn of lithium batteries in 2019, primarily from China, Hong Kong and Vietnam. Prime Minister Modi has made the transition to EVs a priority and has set out to make India one of the foremost exporters of EVs but today the country lacks the natural resources to build the batteries.(Bloomberg)
• State run Khanij Bidesh India Ltd has been tasked with sourcing and acquiring mines Argentina, Bolivia and Chile. The JV comprising the National Aluminium Company Ltd, Hindustan Copper Ltd and Mineral Exploration Company is also on the lookout for adding to India’s overseas reserves.(Lithium News)

Californian Energy Commission (CEC) considers alternative methods of Lithium extraction

• The West Coast state’s Energy Commission is investigating alternative sources for the materials that go into making batteries and mediums for storing energy. (Energy Storage News)
• The Commission hosted a symposium last week, with presentations and panel discussion on the extraction of lithium from geothermal brine. The increase in demand for lithium worldwide the CEC has noted the opportunity to “foster a more environmentally sound lithium product coupled with geothermal electricity production’.
• Researchers at the Oak Ridge National Laboratory (ORNL), US have been working on a method for extracting lithium salts from geothermal plants. They estimate 15,000 metric tons of lithium carbonate could be recovered from the Salton Sea geothermal plant in California. (Tecchnology.org)
• Both the symposium and research at ORNL are part of a wider moves by the US to move lithium production onshore as today the metal is almost exclusively sourced abroad. (Engineering 360)

Ferro Vanadium 80% FOB (China) US$30.5/kg vs US$30.5/kg

Antimony Trioxide 99.5% EU (China) US$5.0/kg vs US$5.0/kg

Tungsten APT European US$240-245/mtu vs US$240-245/mtu

Graphite flake 94% C, -100 mesh, fob China US$540/t vs US$540/t

Graphite spherical 99.95% C, 15 microns, fob China US$2,550/t vs US$2,550/t

 

Battery News

Electric Vehicle revolution will need drastic expansion of current recycling facilities (FT)

• Lithium-ion batteries for EVs are expected to have a useful life of up to a decade, meaning that by 2026 global recycling needs could outstrip existing capacity by almost ten times.
• After that, either an alternative use needs to be found for the battery or they need to be recycled.
• A conservative eight-year estimate of battery life could mean 1.1m batteries could be in need of recycling/re-use by 2025, a figure which could rise to more than 3m by 2026.
• Researchers at the universities of Newcastle and Leicester estimated in a study that based on the one million electric cars sold in 2017, 250,000t of unprocessed pack waste will result when these vehicles reach the end of their lives (E&T).
• Apple and Tesla are separately developing novel recycling technologies, including extracting metals from batteries.
• Apple has opened its Material Recovery Lab, and Tesla is currently developing a unique electric-car-battery recycling system at its Gigafactory 1 battery production plant (c&en).
• Dedicated recycling companies are stepping up efforts to increase recycling as a surge of spent batteries is made available. Belgian recycling group Umicore saw EBIT from recycling activities jump by 40% to €188m last year (euwid-recyling).

 

Indian government continues its EV evolution 

• Over the weekend the Indian government issued a tender, its first in 2yrs for the purchase of 1,000 EV with a range of at least 180km. The Energy Efficiency Services Limited is scheduled to receive 2000 EVs from Indian manufacturers. Tata Motors and Mahindra & Mahindra have delivered 1500 vehicles to dater.(Cleantechnica)
• EESL had been expected to procure 10,000 vehicles for deployment across the country by fleet operator and cab aggregators.
• India’s car market is at a crucial juncture with take up last year slow. This has not been helped by the ESSL expressing dissatisfaction with the poor performance of compact sedan models delivered by Tata Motors and M&M and Amara Raja batteries suggesting they were hesitant to set up facilities in India due to the lack of demand in 2019. (Bloomberg Quint)
• Demand has showed sign of improvement in January with MG’s ZS EV receiving 2800 bookings, more than the total Indian EV demand in 2019. (Inside EVs)

 

Company News

Glencore FOLLOW (GLEN LN) 229p, Mkt cap £30.5bn – Glencore report 2019 loss as marketing department serves to rescue customers as Wuhan virus disrupts commodity supply chains.

• Glencore’s results highlight the challenge of managing a diverse portfolio of mining businesses in some of the world’s more challenging emerging markets.
• Glencore, the world’s largest metals trader, is also likely to come into its own this year as Coronavirus disruption hits commodity supply chains in and out of China.
• Net income for 2019 fell to $2.4bn pre-impairment charges of $2.8bn leading to a net loss of 0.4bn. The impairment charges relate to Glencore’s Colombian coal, oil in Chad and copper in the DRC.
• Group EBITDA fell 26% to $11.6bn reflecting the cost of ramping up production at the giant Katanga copper, cobalt mine in the DRC.
• Mining (Industrial) EBITDA fell 32% yoy to $9.0bn due to lower commodity prices. Prices fell dramatically in January on news of the Coronavirus and will further impact this division through 2020.
• We expect any LME metals price recovery to be dependent on the level of disruption caused by the Coronavirus lock-down in China and potentially in the rest of the world.
• Management refer to good demand for their key commodities and tightly balanced supply/demand balances which was certainly true before the Coronavirus disrupted supply chains. Relatively low LME warehouse inventories may further exacerbate these balances if supply chain disruption stops new metal from entering the LME while Coronavirus disruption may also impact demand from manufacturers depending on how fast China returns to work.
• Energy Products (Oil & Gas) saw a 34% fall in EBIT to $2.6bn and will see further falls through Q1 2020 due to the dramatic decline in oil prices and disruption to deliveries into China.
• Glencore ran up a bill of $159m expenses relating to legal matters with $117m in respect of various investigations amongst other costs.
• Impairments of $2.8m were made up of:
  • $514m at Prodeco Coal due to global LNG oversupply, low spot gas prices and higher carbon prices.
  • Chad oil cost another $538m due to historic costs relating to the acquisition of Caracal in 2014.
  • Mutanda copper in the DRC which was placed on Care & Maintenance in November due to low cobalt prices.
  • Oxidos and Cerro de Pasco operations (Volcan group) $378m writedown which are reclassified for sale.
  • Zambia $162m of VAT impariments due to long overdue claims.
• Cash generation from operating activities fell by 22% to $10.3bn highlighting strong ongoing cash generation of the group.
• Net debt: $17.6bn – target to reduce net debt to $14-15bn which looks manageable particularly with bond repayments limited to under $3bn a year to prevent any further debt repayment crisis.
• Glencore’s results reflect difficulties in ramping up new mines in the DRC and the impact of US / China trade negotiations which served to weaken prices in key commodities
• Marketing: Unsurprisingly Glencore’s marketing business finished the year well driving the Marketing division EBIT to $2.4bn.
• The marketing business may also gain from the extreme volatility in the LME base metals seen this year.
• Dividend of 20c/s is to be paid in two equal instalments which will cost the group $2.6bn and is covered 1.5x current annualised free cashflow generation.
• Emissions (GHG): Glencore reiterated its commitment on reducing emissions, not least because lower emissions should mean lower fuel costs. The group has cut emissions intensity by ~10% since 2016 and is looking for a ~30% reduction by 2035.
• The improvement indicates to us that Glencore and its shareholders will benefit from the focus on better energy efficiency and emissions control, though investment in more off-gas co-generation and renewable generation schemes.
• Coronavirus: Glencore’s marketing division will become all the more critical to its customers as supply chains are disrupted in China and producers and consumers struggle to move raw materials and processed commodities.
• Glencore’s marketing department provides strong links between China and the rest of the world and the skill of its marketing department will better enable manufacturers to work through the disruption.

Conclusion: Glencore’s marketing division will come into its own this year resolving supply chain issues for customers affected by the Coronavirus. This should serve to offset some of the impact of lower oil and LME metals prices the Energy and Industrial divisions. If the Coronavirus is contained within China then Glencore looks well placed for recovery, if not then Glencore may still outperform other miners on the strength of its trading division.

 

Medusa Mining (MML AU) A$0.7, Mkt Cap A$146m – Co-O L8 Shaft operations restarted

• The team completed the replacement of the faulty electronic controller for L8 Shaft winder that went out of service last week.
• Shaft operations restarted today.
• The Company reiterated FY20 (Jun YE) production guidance at 95-105koz at $1,025-1,125/oz AISC (FY19: 103koz at $1,045/oz).

 

Pan African Resources FOLLOW (PAF LN) 12.5p, Mkt Cap £278m – Positive interim result on strong production and gold prices

• Revenues climbed to $132.8m (+36.2%yoy) reflecting stronger gold sales (90.6koz (+13.6%) and realised prices ($1,464/oz +19.8% in US$ and +24.1% in ZAR terms).
• Production was up at 92.9koz (+14.7%) reflecting a full six-month contribution from Elikhulu Tailings Retreatment Plant as well as the increase in production from remnant mining and surface sources.
• AISC averaged 1,113/oz (+14.2% in US$ terms and +18.3% in ZAR terms) reflecting more than half of the total production contribution from high cost underground operations.
• The 8 Shaft pillar project produced first gold in August with 2.3koz produced in 2019 with commercial production expected to be reached over the next few weeks.
• The project will replace the deep-level remnant mining contributing high grade lower cost production in H2/FY20 with AISC projected at $1,000/oz once steady-state run rates are achieved.
• At Barberton underground operations, Prince Consort Shaft pillar project is expected to reduce AISC significantly in Q4/FY20 reflecting higher grades of the pillar resources.
• AISCs for tailings retreatment facilities averaged $708/oz at Elikhulu and $643/oz at Barberton.
• EBITDA amounted to $44.2m (+83.4%) with PAT more than doubling to $21.9m (+125.8%)
• FCF (excluding $5.5m in interest payments and $2.9m in dividends) amounted to $4.0m (H1/FY19: -$13.2m).
• Net debt reduced to $123.7m (Jun/19: $129.9m) or 1.6x LTM EBITDA (Jun/19: 3.2x).
• FY20 reiterated at 185koz at below $1,000/oz in AISC.

Conclusion: Good financial results reflect higher gold production on full six-months’ contribution from Elikhulu coming at a time of favourable gold price environment. The team is working on bringing unit costs down at its underground operations complementing low cost ounces delivered by its tailings reprocessing facilities focusing on cash flow generation and deleveraging of the business.

 

Sirius Minerals FOLLOW (SXX LN) 4.9p, Mkt cap £346m – Private investor opposition

• Private investor opposition to the agreed acquisition of Sirius Minerals by Anglo American risks spoiling the deal.
• We have no axe to grind on the deal but common sense based on the public information we have indicates Anglo is the best deal Sirius is going to get.
• We sympathise with Sirius’ loss making shareholders and we wonder who is responsible for encouraging the shares to unrealistic levels?
• But we feel certain that the offer by Anglo is the best outcome for Sirius shareholders.
• Sirius was always highly unlikely to be fully funded through the bond markets.
• Major institutional shareholders were unlikely to ever support the billions of pounds of capital required to build and fully commission the Woodsmith mine to positive cash flow.
• Anglo American is bravely stepping in but Anglo has the, technical knowledge, marketing skills, depth of balance sheet and access to funding to see the project though the precarious commissioning.
• There will be opposition within Anglo and investors should be immensely grateful that, ceo, Mark Cutifani is prepared to stick his neck out and take this project on.

Conclusion: Investor should know not to look a gift horse in the mouth and the offer by Anglo for Sirius is no exception.

 

Tertiary Minerals* FOLLOW (TYM LN) 0.24p, Mkt Cap £1.1m – Pyramid Gold project Nevada

• Tertiary Minerals report they are making progress with the Pyramid Gold Project in Nevada, USA.
• Management have identified a preferred drilling contractor
• A drone survey has been done to plan the drilling and target epithermal veins
• Drilling in 1989 intersected visible gold
  • 1.52m grading 17.8 g/t gold from 94.5m down hole
  • the last 21.4m of the hole graded an average of 1.5 g/t gold including 1.52m grading 2.6 g/t Au at 115.8m depth where the hole ended
• Management hope this may be similar to the low-grade halo gold mineralisation seen at Fire Creek which has/had a non-JORC open pit mineral resource of 74.6mt grading 1.0 g/t.
• The Pyramid Gold Project hosts a significant gold-arsenic-mercury soil geochemical anomaly which appears to outline a strike length of 650m and is open ended.
• The Company’s mining claims cover more than 500 acres of ground giving plenty of room for further exploration and potential to scale up a resource within the existing license.

Conclusion:  Its good to see Tertiary following up on what looks like a promising gold target and pressing ahead with the Pyramid Gold project

*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 

 

Sales

Richard Parlons – 0203 470 0472 

Abigail Wayne – 0203 470 0534 

Rob Rees – 0203 470 0535 

 

SP Angel                                                             

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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	SSY
RRE	Steelhome
Lithium Carbonate, Ferro Vanadium, Antimony	Asian Metal
Tungsten	Metal Bulletin

 

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