SP Angel – Morning View – Thursday 17 01 19 - Palladium prices hit fresh high on structural deficit and rising gasoline sales

SP Angel – Morning View – Thursday 17 01 19

Palladium prices hit fresh high on structural deficit and rising gasoline sales

MiFID II exempt information – see disclaimer below

 

Avesoro Resources (ASO LN) 169p, Mkt Cap £137.9m – Initial drilling results from the Ndablama deposit

Management Resource Solutions plc (MRS LN) 5.1p, mkt cap £8m – Interim trading update and guidance

Serabi Gold (SRB LN) 37.5p Mkt value £22.0m – Record Q4 gold production and 2019 guidance

Shanta Gold (SHG LN) 5.5p, Mkt Cap £42.9m – Strong Q4 helps to hit 80koz guidance

Talga Resources (TLG AU) A$0.36, Mkt Cap A$77.5m – LOI signed with Schunk over graphene product co-operation

 

Self-congratulations again to the mining team at SP Angel for coming No1 in Precious metals forecasting in Q4

• SP Angel came 1^st in Precious Metals forecasting in Q4 in the Fastmarkets APEX Q4 poll ahead of a whole bunch of much larger banks and commodity traders.
• We also came 5^th in the Raw Materials leaderboard in Q4 which represents iron ore and coking coal forecasts.
• Sadly we did less well in our base metals forecasting.

 

Dow Jones Industrials		+0.59%	at	24,207
Nikkei 225		-0.20%	at	20,402
HK Hang Seng		-0.65%	at	26,727
Shanghai Composite		-0.42%	at	2,560
FTSE 350 Mining		-0.89%	at	17,397
AIM Basic Resources		+0.35%	at	2,189

 

Economics

US – On Tuesday, the White House doubled the estimate of the cost of the government shutdown on the economy adjusting for the affects on government contractors.

• The original estimate that the partial shutdown would subtract 0.1pp from growth every two weeks has now been doubled to a 0.1pp subtraction every week, according to an official who asked not to be named.
• Bloomberg compiled Data suggests that federal contractors could be seeing as much as $200m in lost revenues a day.
• The shutdown launched on the 22nd of December is now approaching the end of the fourth week.
• Yesterday, Trump signed the legislation authorising back pay for federal government workers once the shutdown is over.

 

China – A number of US lawmakers are reported to have introduced bills that would ban the sale of US chips to Huawei and other Chinese firms yesterday.

• At the same time, US federal prosecutors are currently investing allegations that Huawei stole trade secrets, the Wall Street Journal reports.
• These developments may not prove to be helpful as Chinese top economic aide is expected to visit the US at the end of the month for a round of trade talks.
• Separately, the PBOC is reported to have added CNY 560bn ($83bn) into its banking system, a daily amount, easing concerns of a funding squeeze in the Chinese economy ahead of a major festive season.

 

UK – Property market sentiment is at worst in two decades

• On a separate note, the RICS survey shows UK property market sentiment is at worst in two decades with real estate agents reporting falling prices.
• Brexit uncertainty and lack of supply were blamed for the latest set of weak data, RICS reported.
• Additionally, demand for home loans dropped “significantly” in the three months through November with a further decline expected, the BoE said in its latest Credit Conditions Survey.

 

UK – Teresa May wins vote of no confidence as MPs vote to keep Jeremy Corbyn out of power

• Teresa May survived an ill-timed vote of no confidence in parliament yesterday supported by 325 vs 306.

• Following the results, May invited opposition leaders to join talks on how to break the Brexit deadlock
• Plan B is expected to be announced on Monday with market expectations for the Artcile 50 to be extended past the March 29 deadline.
• The pound is little changed at 1.2875 today while FTSE 100 is slightly weaker (-0.4%) after posting a small drop on Wednesday (-0.5%).

• The Democratic Unionist Party ‘DUP’ were never going to vote for Corbyn due to his past support for their arch enemy ‘Sinn Fein.
• Curiously, the BBC which has been leaning towards the Remain camp from an EU perspective ever since the Brexit vote showed video of Corbyn offering wholehearted support for President Chavez in an excellent program on the politics of Venezuela. See link: https://www.bbc.co.uk/iplayer/episode/b0byvs08/revolution-in-ruins-the-hugo-chavez-story
• The program reminds us of the saying ‘power corrupts but absolute power corrupts absolutely’.

The last previous vote of No Confidence defeat in Her Majesty’s Government was on Wednesday 28 March 1979

• The vote was brought by Margaret Thatcher, the opposition leader against Jim Callaghan marking the end of ‘Old Labour’.
• The motion came shortly after a debate in the House of Commons on the Redundant Mineworkers Pension Scheme Order which occurred on the Monday.

 

UK – Brexit, just a thought

• If the UK is not able to easily leave the EU then maybe the UK should put itself at the heart of the European Union and shape it into a union that is acceptable to the people of the UK and Europe

 

EU - McDonald’s Corp has lost the rights to its trademark ‘Big Mac’ in Spain

• Ireland’s Supermac fast food chain defended the case in the EU Intellectual Property Office ‘EUIPO’ based in Spain.
• EUIPO said McDonald’s had not proven genuine use of it over the five years prior to the case being lodged in 2017.
• We have to wonder what evidence do McDonald’s need to demonstrate that their trademark ‘Big Mac’ is being used.
• McDonalds produce some 900 million Big Mac’s worldwide a year. Clearly not enough evidence for the EUIPO office in Spain.
• Maybe the EU would like to rule on the Google trademark which has an estimated value of $44bn according to Brand Finance

 

Currencies

US$1.1388/eur vs 1.1411/eur yesterday  Yen 108.76/$ vs 108.58/$  SAr 13.736/$ vs 13.676/$  $1.285/gbp vs $1.287/gbp  0.716/aud vs 0.720/aud  CNY 6.772/$ vs 6.756/$

 

Commodity News

Precious metals:         

Gold US$1,295/oz vs US$1,291/oz yesterday

• Safe haven gold climbed on renewed Brexit turmoil as British Prime Minister Theresa May’s government won a no-confidence vote and builds towards a compromise with her political enemies to deliver a Brexit deal, with just 10 weeks left before the exit deadline. Irish Prime Minister Leo Varadkar said he didn’t see “much room” for further negotiations around the Brexit divorce agreement
• The House passed the latest in a series of bills to end the partial U.S. government shutdown with little Republican support. The measure would provide $12.1bn in disaster aid and reopen the nine shuttered federal departments and dozens of agencies through Feb. 8
• The still-strong U.S. economy showed signs of slowing in recent weeks amid declining optimism, though most regions continued to record modest to moderate growth, a Federal Reserve survey reported.
• Holdings in bullion-backed exchange-traded funds rose for 14th day as of Wednesday to highest since May. Exchange-traded funds added 40,241oz of gold to their holdings in the last trading session, bringing this year's net purchases to 911,607oz, according to data compiled by Bloomberg.

   Gold ETFs 72.0moz vs US$71.9moz yesterday

Platinum US$804/oz vs US$802/oz yesterday

Palladium US$1,392/oz vs US$1,331/oz yesterday

•  

Silver US$15.58/oz vs US$15.62/oz yesterday

           

Base metals:   

Copper US$ 5,981/t vs US$5,981/t yesterday

Aluminium US$ 1,845/t vs US$1,870/t yesterday

• Global benchmark prices and the total cost paid by US consumers are expected to extend their declines according to Harbor Intelligence, as the Treasury Department appears likely to lift sanctions against metal producer United Co. Rusal.
• Macquarie Group Ltd. Estimated in October that Rusal has about 200,000 to 250,000t of unsold metal, which could enter the global market at the time when inventories tracked by the London Metal Exchange have already rebounded by more than two-fifths since touching a decade low in mid-October.
• “Trade flows are going to normalize, which means Russian metal will be able to flow into the Western world market freely,” Jorge Vazquez, managing director at Harbor Intelligence. “This is going to adjust LME prices and premiums for value-added products such as billet, slab, foundry and wire rod to the downside.”
• Prices of the metal used in airplanes, trucks and cans fell in December by the most in six months after the Treasury Department announced the plan to lift the sanctions against Rusal, the world’s second-largest aluminum producer. A failed block to lift sanctions by Senate Democrats caused the metal to fall as much as -1.1% to $1,839/t.

Nickel US$ 11,750/t vs US$11,750/t yesterday

Zinc US$ 2,501/t vs US$2,501/t yesterday

Lead US$ 1,981/t vs US$1,981/t yesterday

Tin US$ 20,700/t vs US$20,700/t yesterday

           

Energy:           

Oil US$61.0/bbl vs US$60.9/bbl yesterday

Natural Gas US$3.509/mmbtu vs US$3.483/mmbtu yesterday

Uranium US$28.90/lb vs US$28.90/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$73.2/t vs US$72.8/t

Chinese steel rebar 25mm US$589.1/t vs US$588.6/t

Thermal coal (1st year forward cif ARA) US$86.0/t vs US$82.4/t

Coking coal futures Dalian Exchange US$208.0/t vs US$208.0/t

           

Other:  

Cobalt LME 3m US$45,000/t vs US$45,000/t

China NdPr Rare Earth Oxide US$46,252/t vs US$46,252/t

China Lithium carbonate 99% US$9,991/t vs US$9,991/t - Lithium 7 isotope – The US uses 200-300kg of Lithium-7 isotope in its nuclear reactors making this a critical material for the US

• This little known fact may be behind the reason for Chile’s close control and monitoring of lithium production and exports as a hangover from the Cold War.
• Much of US lithium-7 isotope now comes from Russia which has been decommissioning nuclear weapons and China.
• 20% of US power supply is from Nuclear with some 65% of US reactors being Pressurised Water Reactors.
• Lithium-7 isotopes are added to water cooling the reactor core to prevent the water from becoming acidic.
• The lithium-7 prevents corrosion within the reactor pipes, pumps and other infrastructure.

China Ferro Vanadium 80% FOB US$69.5/kg vs US$69.5/kg

China Antimony Trioxide 99.5% EU US$7.0/kg vs US$7.0/kg

Tungsten APT European US$260-270/mtu unchanged from previous week

 

Battery News

The struggle to stay top as China’s leading battery boomer

• Contemporary Amperex Technology Ltd. Is on course to become the biggest producer of lithium-ion batteries in China, building on its reputation for innovation, low costs, and quality, with the added advantage of long-term deals with both customers and suppliers.
• The prize for a top seat in the industry is the lion’s share of a global market for electric vehicle batteries that’ll be worth $500bn by 2050, according to Stanford C. Bernstein & Co.
• The company has surged more than threefold since it floated 10% of its stock in Shenzhen last year, although “the main problem for CATL is the high valuation – the fundamentals cannot support it”, according to China Post Securities analyst. “Although I give the company more than 30 percent profit growth in the future, there are still many risks,” citing challenges from competitors including car-maker BYD Co., which has a battery unit, and the scaling back of government subsidies.
• While the industry is facing significant demand growth, with capacity expected to grow about eighteen times by 2030, state subsidies that have powered China’s world-leading expansion in electric vehicles will taper to zero by 2021.
• Comparing to specialist battery makers, CATL’s 12-month price-earnings ratio is a heady 47, versus 17 for domestic rival Guoxuan High-Tech Co. Ltd. and 15 for South Korea’s Samsung SDI Co. Ltd. Its adjusted net income is forecast to grow to 5.4bn yuan ($800m) in 2020 from 3.5bn yuan last year, according to the consensus of 27 analyst estimates.
• Potential rivals could stretch to battery-makers from abroad, after a recent report that China may open up the sector to foreign entrants. As it stands, CATL had the biggest market share in China through the first nine months of last year, according to Bloomberg Intelligence, and was second globally to Japan’s Panasonic Corp., which is in partnership with Tesla Inc.
• Established battery makers are set to benefit from the scale and low-cost of manufacture as “the industry is consolidating, smaller battery makers are exiting, and this will make global battery supply very tight in the future”, reports lead analyst for the sector at Sanford C. Bernstein.

 

Electric cars are getting cleaner even where grids rely on coal

• The latest research from Bloomberg NEF suggests carbon dioxide emissions from battery-powered vehicles were about 40% lower than for internal combustion engines during 2018. The findings add clarity to the debate concerning lifetime emissions of electric vehicles – while they don’t pollute on the road, the consumption of electricity relies on fossil fuel generation.
• BNEF’s research assumes that electric cars will become cleaner in the coming years as utilities close coal plants and draw more energy from wind and solar farms, a process well underway almost everywhere except Southeast Asia.
• “When an internal combustion vehicle rolls off the line its emissions per km are set, but for an EV they keep falling every year as the grid gets cleaner,” Colin McKerracher, a transport analyst at BNEF said.
• The widespread adoption of renewables will decrease average emissions by as much as 90% in the U.K. and over a third in Japan out to 2040, according to BNEF.
• The global share of zero-carbon electricity generation is set to increase from 38% last year to 63% by 2040, according to projections from BNEF.

 

Tiny silicon particles could power lithium ion batteries with 10 times more capacity

• University of Alberta chemists have taken a critical step toward creating a new generation of silicon-based lithium ion batteries with 10 times the charge capacity of current cells.
• Silicon shows promise for building much higher-capacity batteries because it's abundant and can absorb much more lithium than the graphite used in current lithium ion batteries.

 

London Uber fares go up after electric car charge

• Uber fares in London have gone up to help drivers buy electric cars. A clean air fee of 15p per mile will be added to every trip taken in the capital from 16/01/19.
• The ride-hailing firm expects the scheme to raise more than £200m in the coming years, which will be used to help drivers convert to electric cars.
• Uber hopes to hand cash to 20,000 of its 45,000 drivers in London drivers to help them switch by 2021, increasing to every car by 2025.
• The fare increase will not overly impact consumers as Uber taxis are still significantly cheaper than some other alternatives

 

Jaguar Land Rover Confirms Battery Manufacturing Plans

• Jaguar Land Rover, Britain’s largest vehicle manufacturer, has reaffirmed its commitment to battery manufacturing plans despite laying off around 10% of its workforce.
• In a quarterly report released last July, Jaguar Land Rover said it had around five and a half months of order cover for the I-Pace and was expecting to ship 20,000 units over 2020 and 2021.
• The company also said it expected electric vehicles to account for 20% of sales in the medium term, and that it would be introducing mild hybrid, plug-in hybrid or battery-powered variants of all its models starting in 2020.

 

Porsche scraps production of diesel cars - Something to do with diesel auto sales halving and the VW emissions scandal perhaps?

• The German carmaker, part of the Volkswagen Group, is to focus on EV technology and remove diesel completely from its line-up, the first of the German carmakers to do this.

 

Company News

Avesoro Resources (ASO LN) 169p, Mkt Cap £137.9m – Initial drilling results from the Ndablama deposit

• Avesoro Resource reports that it produced 44,962oz of gold during the final quarter of 2018 bringing the total for 2018 to 220,458 oz – a 15% increase on the 2017 output of 192,073oz and within the previously announced guidance range of 220-240,000oz.
• The New Liberty mine increased gold production by 44% to 109,707 oz for the year while the Youga mine, with 110,751oz production was approximately 4% lower than the 115,751oz of 2017.
• New Liberty benefitted from “Improvements in mining fleet availability and in-pit efficiencies” to gain a 21% increase in total material movements during the quarter, albeit at a sharply higher waste:ore stripping ratio so that ore production declined from 396,000t during Q3 to 347,000t. The New Liberty plant treated 362,000t of ore at an average grade of 2.44g/t gold during the quarter (Q3 2018 – 354,000t at 2.82g/t).
• At the Youga mine, “Mined grade and plant feed grades were adversely impacted during the Quarter by unplanned ore dilution experienced during mining in the Gassore pit by -5% and -16% respectively.  However, this was compensated for by an increase of 24% in plant throughput”.
• Commenting on the results, Chief Executive, Serhan Umurhan said that “The substantial increase in gold production at New Liberty of 44% versus the prior year also underlines the strong performance of our team as we continue to optimise operational performance and add value at our mines.”
• Looking ahead to 2019, Mr. Umurhan highlighted that “The focus for this coming year will be on the delivery of strong cash flow and further debt reduction following the substantial reinvestment of cash generated by operations that characterised 2018.”
• During the current quarter, Avesoro Resources is expecting to report “the results of the ongoing prefeasibility study at the New Liberty underground project which is also expected to include the first open pit reserves from the Ndablama satellite deposit towards the end of the first quarter of 2019”.

 

Management Resource Solutions plc (MRS LN) 4.75p, mkt cap £9.4m – Interim trading update and guidance

• Management Resource Solutions ‘MRS’ reports the group is trading in line with management expectations.
• Sales guidance is for an unusually specific A$73-75m for FY 2019 vs A$69.1m in 2018
• EBITDA guidance A$12-14m vs A$12.3m in 2018.
• Net profit before tax is estimated at A$8-9m vs A$6m last year.
• EPS est. 4.5-5.1c/s (2.6-3.0p/s assuming A$/GBP 1.7).
• Despite the cyclical nature of the mining sector MRS is seeing strong demand for it’s services in the resources and construction markets in Australia
• This combined with continued investment in core profitable assets, rigorous cost management and a focus on new markets growth is resulting in higher margins.
• The restructuring, review of assets and depreciation, and maximisation of internal synergies is said to continue through FY19 indicating further benefits to come.
• Ongoing work on debt restructuring should also serve to reduce interest payments and leading to further potential for improvement in the 2019 final results.
• Interim figures are due to be published on 28 February 2019.
• MRS core operations include Fabrication, Mechanical and Civil & Earthworks provide firm foundations for growth into Australia's increasingly strong resource sector as well as into new markets

Conclusion: MRS appears to be doing well under Paul Brenton, CEO and Tim Jones the FD. We wonder if future dividends might be in the offing?

 

Serabi Gold (SRB LN) 37.5p Mkt value £22.0m – Record Q4 gold production and 2019 guidance

• Reporting on what CEO, Mike Hodgson described as “a superb fourth quarter” Serabi Gold has reported record quarterly gold production of 10,256 ounces during the three months ending 31^st December 2018.
• The full production for 2018 amounted to 37,108 oz, marginally higher than the 2017 production of 37,004 oz consistent with the company’s comment in May 2018 that “Management expects that gold production for 2018 will exceed that of 2017” and in line with the recent guidance of 36-37,000oz which was included within the Q3 production report in October 2018.
• The annual production derived from the processing of 168,253 tonnes of ore at an average grade of 7.06g/t implying an average recovery rate of 97% compared to the 34% achieved in 2017 from treating 172,565 tonnes of ore at an average grade of 7.11g/t gold.
• Reporting on operational performance, the company reports that “Development and production of the Palito orebody remains focussed on the Pipocas, Senna, Zonta and Mogno veins, whilst lateral ore development of the Sao Chico orebody is now being advanced on the -3mRL and -19mRL levels” while the addition of plant capacity to treat stockpiled historic flotation tailings will “provide additional feed to the cyanidation plant instead of displacing feed, which has been the alternative for much of 2018.  This equipment is currently being commissioned and will, we hope, be fully operational by the end of January 2019.”
• The planned plant  improvements, which include the installation of an ore-sorter in the second half of 2019 encourage management to forecast 2019 gold production in the range 40-44,000oz.
• In addition to the operating performance, Serabi Gold highlights encouraging exploration geophysics results from its ground and airborne magnetic surveys which “show numerous pronounced magnetic anomalies, most notably a major east-west lineament crossing the entire tenement.  This feature is extremely interesting and we see a significant number of electromagnetic anomalies lying on the flanks of this magnetic high.”
• Ground based induced-polarisation (IP) results around the Sao Chico deposit has extended the known strike length of the anomaly from 4km to 7km and identified what is described as a “very compelling exploration target” which is being followed up, initially with geochemical exploration.
• Exploration drilling at the Coringa project is expected to result in “publishing a new mineral resource update before the end of the first quarter of 2019”, while progress on permitting and economic evaluation is expected to “put us in a good position to commence plant construction during 2019.”

Conclusion: Serabi Gold is building its production base around its existing mines at Palito and Sao Chico, advancing its Coringa project through resource evaluation and permitting and generating encouraging targets from its earlier stage exploration efforts.

 

Shanta Gold (SHG LN) 5.5p, Mkt Cap £42.9m – Strong Q4 helps to hit 80koz guidance

• Q4 production totalled 23.9koz, up 21%qoq, with gold sales of 24.9koz at an average price of $1,225/oz.
• Underground mining operations delivered an all-time record 158kt of ore at an average grade of 5.55g/t.
• The New Luika gold plant processed record high 173kt at 4.74 g/t during the quarter (Q3/18: 160kt at 4.26g/t) with lower grade stockpiles added to ROM material.
• Gold recoveries improved slightly on the quarter (90.9% v 90.3%) but had a small adverse impact from the processing of lower grade stockpile.
• C1 and AISC cash costs came in at $514/oz and $701/oz, respectively.
• FY18 gold production amounted to 81.9koz v revised 2018 guidance for 80koz (2017: 79.6koz) with C1 and AISC cash costs at $538/oz and $731/oz compared to $750/oz guidance (2017: $747/oz).
• Annual EBITDA came in at $45.5m (2017: $37.7m) reflecting successful cost cutting programme as well as slightly stronger gold sales.
• “Audited net profit expected to be significantly higher than 2017,” the Company said.
• Ilunga development works run ahead of schedule with first development ore due in march versus previously expected mid-2019 target.
• On exploration, the reserve base at NLGM is highlighted a key focus in 2019 with exploration budget doubled to $3.6m for 2018.
• H1/19 drilling to focus on Bauhinia Creek underground deposit converting Inferred ounces into higher confidence category.
• At Singida, corporate restructuring to transfer Singida mining licenses into a separate entity is ongoing with site-visits with interested parties having been conducted during the period and funding plans having now been progressed to term-sheet stage.
• Unrestricted cash balance stood at $9m (Q3/18: $8.5m) and gross debt reduced to $40.5m (Q3/18: $43.6m).
• VAT rebates account climbed to $21.9m (Q3/18: $19.9m).
• Net debt cut to $31.5m, down 21%yoy.
• 2019 guidance is for 80-84koz at $740-800/oz in AISC.

Conclusion: Q4 delivered strong increase in production helped by higher plant throughput rates and processed grades with annual output coming slightly above previously revised 80koz annual target. FY18 EBITDA is up 21%yoy highlighting results of successful cost cutting programme while demonstrating impressive safety record with zero LTIs during the year. Ilunga development works are progressing well while the Company is highlighting an increased focus on exploration in 2019 targeting to replace mined ounces at BC as well as identify new sources of feed for the NLGM plant.

 

 

Talga Resources (TLG AU) A$0.36, Mkt Cap A$77.5m – LOI signed with Schunk over graphene product co-operation

• Advanced materials technology company announce signing a Letter of Intent with Schunk Carbon Technology GmbH, a subsidiary of the German based Schunk Group.
• Under the LOI, Talga and Schunk will co-operate on the exploration and incorporation of Talga graphene (Talphene®) into a Schunk product with applications in the automotive sector.
• The Schunk Group in a globally operating technology company, offering a broad spectrum of products and services in the fields of carbon technology and ceramics, environmental simulation and air conditioning, sintered metal and ultrasonic welding. In 2017, the Schunk Group achieved a turnover of about €1.2bn.

Conclusion: Continued expansion of working partnerships signals strong potential for the low-cost, scalable graphene production from Talga Resources. The LOI gives some validation towards the application of functional graphene in the automotive sector, with Talga significantly benefiting from advantages of vertical integration through its 100% owned high-grade Swedish graphite deposit and in-house process to product technology.

 

 

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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