SP Angel Morning View - Western manufacturing hit by Coronavirus impact on supply chains

SP Angel . Morning View . Wednesday 19 02 20

Western manufacturing hit by Coronavirus impact on supply chains

 

MiFID II exempt information – see disclaimer below   

Altus Strategies - FOLLOW La Mancha investment and share consolidation approved by shareholders

BlueRock Diamonds  FOLLOW (BRD LN) – Oversubscribed placing raises £1.9m enabling management to expand diamond production in South Africa

Chaarat Gold  FOLLOW (CGH LN) – Kapan EBITDA grows while Tulkubash construction works progress for first gold in 2021

 

China Coronavirus looks increasingly likely to have more of an impact on industry and on related commodity prices

• We notice updates on prices in China for industrial commodities appear to be less frequent with very little change reported since the Chinese New Year
• We suspect the reporting of trades and prices has become very difficult since the lockdown with less trade to report on
• Lorry-drivers are unable to cross regional boundaries and containers are stuck at locations.
• Jaguar Land-Rover has already suspended production of Electric Vehicles due to a lack of batteries and is now looking at a wider shutdown on a lack of components.
• Many other Western-based manufacturers are also on reduce working hours and facing shutdown as just-in-time supply chains fail on a lack of Chinese components.
• Even Western manufacturers which had planned for disruption from China through diversification of their supply chains are discovering that their alternative suppliers are struggling to ramp up production to make up for reduced Chinese supply.
• It gets worse - components produced by third party suppliers often utilise smaller but critical components which are made in China.
• For example: China is a huge manufacturer of LEDs causing a major issue for manufactures who use LEDs in critical parts in automotive and other machinery.

Conclusion: The Coronavirus is showing up how vulnerable Western manufacturing is to disruption in supply chains from China. This disruption is going to be a major cost to manufacturing industry and will provide opportunity for some to restart the manufacture of critical components in the West.  Government planners, is that an oxymoron?, will need to address these issues to ensure this situation is not repeated in future years.

German automotive manufacturers will take a huge hit if they are not able to source some basic components outside of China.

Chinese industry may also recover ahead of Western manufacturers as the Coronavirus recedes as Chinese manufacturers may supply into local contracts first on the restart of production.

It will also take several weeks for containers to arrive in the West and for the whole supply chain to return to a new sense of normality.

 

Jaguar Land Rover warns of UK production hit due to coronavirus (FT)

• The auto manufacturer is flying components out of China in suitcases as it tries to prevent its UK plants closing by the end of the month.
• Jaguar has thee factories in the UK and is the latest carmaker to warn of the impact of the virus on its supply chain, following Fiat who announced earlier this month that one of is European plants would be forced to halt production.
• Chinese manufactured components are used in millions of vehicles around the world and according to Reuters, the Hubei province is a major hub for vehicle parts production and shipments.
• Britain’s biggest automaker is the latest multinational to announce that output is going to be affected by the coronavirus, after Apple warned of supply chain disruptions earlier this week.

 

China Central Bank destroying bank notes on fears the money helps spread the corona virus

• The bad news is other coronaviruses  can last on surfaces such as metal, plastic and glass for up to 9 days (Livescience.com).
• The good news is the virus can easily be destroyed with household disinfectants.
• Coronaviruses generally don’t remain active at temperatures above 30^oC (86^OFahrenheit) so ironically global warming may be good for something

 

Dow Jones Industrials		-0.56%	at	29,232
Nikkei 225		+0.89%	at	23,401
HK Hang Seng		+0.46%	at	27,656
Shanghai Composite		-0.32%	at	2,975
FTSE 350 Mining		+1.59%	at	18,294
AIM Basic Resources		+0.81%	at	2,310

 

Economics

Chinese firm Jingye to axe 10% of British Steel workforce (Telegraph)

• Jingye announced its cost-saving plan as it closes in on the takeover of British Steel.
• Under the cost-saving plans, Jingye is set to axe 400 jobs at the firm’s Scunthorpe plant.
• The Chinese firm has begin sending out new contracts to staff detailing updated terms and conditions, which are being supported by steelworkers’ union and detail that no staff offered contracts will have to take a pay cut.

 

Currencies

US$1.0805/eur vs 1.0830/eur last yesterday.  Yen 110.19/$ vs 109.70/$.  SAr 14.953/$ vs 15.076/$.  $1.299/gbp vs $1.300/gbp.  0.670/aud vs 0.668/aud.  CNY 6.990/$ vs  7.007/$.

 

Commodity News

Gold US$1,609/oz vs US$1,588/oz yesterday - Gold rises above $1,600/oz on coronavirus fears (Kitco News)

• The price of gold held steady above $1,600/oz this morning, after climbing higher yesterday as fear sentiment picked up and investors saw the impact the spreading coronavirus was having on the global economy.
• According to Kitco, analysts expect more equity volatility and more uncertainty, which may result in central banks pumping liquidity into markets to boost economic growth – something which should support the gold price.
• Investors await the minutes of the Fed’s 28^th-29^th of January policy meeting, due later today, as lower interest rates reduce the opportunity cost of holding gold (Reuters)

   Gold ETFs 83.8moz vs US$83.6moz yesterday

Platinum US$1,012/oz vs US$979/oz yesterday

Palladium US$2,801/oz vs US$2,519/oz yesterday

Silver US$18.37/oz vs US$17.90/oz yesterday

            

Base metals:    

Copper US$ 5,800/t vs US$5,766/t yesterday

Aluminium US$ 1,718/t vs US$1,715/t yesterday

Nickel US$ 12,820/t vs US$12,965/t yesterday

Zinc US$ 2,146/t vs US$2,158/t yesterday

Lead US$ 1,883/t vs US$1,860/t yesterday

Tin US$ 16,570/t vs US$16,665/t yesterday

            

Energy:            

Oil US$58.1/bbl vs US$56.7/bbl yesterday

Natural Gas US$1.968/mmbtu vs US$1.952/mmbtu yesterday

Uranium US$24.55/lb vs US$24.50/lb yesterday

            

Bulk:    

Iron ore 62% Fe spot (cfr Tianjin) US$86.5/t vs US$86.1/t

Chinese steel rebar 25mm US$539.2/t vs US$539.9/t

Thermal coal (1st year forward cif ARA) US$59.7/t vs US$61.6/t

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

            

Other:   

Cobalt LME 3m US$33,750/t vs US$33,750/t - Tesla in advanced talks to use cobalt free batteries in China (Reuters)

• The EV maker is in the advanced stages of talks to use batteries from Chinese battery company CATL, which contain no cobalt.
• This move would see Tesla adopt lithium iron phosphate (LFP) batteries for the first time, which will be cheaper than its existing batteries by ‘a double digit percent’.
• LFP batteries are typically less energy dense than NMC batteries which contain cobalt, however NMC told Reuters it has been working on its so-called cell-to-pack technology.
• Cobalt is one of the most expensive metals in EV batteries, and much of it is extracted in the DRC from operations that may exploit child labour (Clean Technica).

 

NdPr Rare Earth Oxide (China) US$40,986/t vs US$40,533/t - Defense Metals hydrometallurgy test programme achieves 90% rare earth element extraction

• The company has announced that its final bench-scale hydrometallurgical test programme has achieved approximately 90% REE extraction from Wicheeda flotation concentrate.
• The test also identified opportunities to increase recoveries even further, as treatment of the leach solution with limestone achieved 94%-100% removal of impurities such as iron with only minor (2-4%) REE losses.
• A flowsheet produced within the company announcement identified further areas that will be investigated through further testing including:
  • Optimization of the gangue leach circuit to limit REE losses
  • Reprocessing of leach residue back to the caustic crack stage to improve overall REE extraction
  • Adoption of two-stage impurity removal process to limit the overall extent of REE co-precipitation
• The company are planning to develop a continuous hydrometallurgical pilot plant to confirm operability, recoveries, grades and other factors once the treatment method has been optimised.
• The extraction rate of 90% is significantly higher than results from October 2019, which saw 40 batch flotation tests produce 48.7% total rare earth oxides (microsmallcap.com)

Conclusion: While these recovery rates appear to be relatively standard there is little information on the resource to pin any value on.

 

Lithium carbonate 99% (China) US$5,579/t vs US$5,566/t

Ferro Vanadium 80% FOB (China) US$30.0/kg vs US$30.5/kg

Antimony Trioxide 99.5% EU (China) US$5.1/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

Defense Metals hydrometallurgy test programme achieves 90% rare earth element extraction

• The company has announced that its final bench-scale hydrometallurgical test programme has achieved approximately 90% REE extraction from Wicheeda flotation concentrate.
• The test also identified opportunities to increase recoveries even further, as treatment of the leach solution with limestone achieved 94%-100% removal of impurities such as iron with only minor (2-4%) REE losses.
• A flowsheet produced within the company announcement identified further areas that will be investigated through further testing including:
  • Optimization of the gangue leach circuit to limit REE losses
  • Reprocessing of leach residue back to the caustic crack stage to improve overall REE extraction
  • Adoption of two-stage impurity removal process to limit the overall extent of REE co-precipitation
• The company are planning to develop a continuous hydrometallurgical pilot plant to confirm operability, recoveries, grades and other factors once the treatment method has been optimised.
• The extraction rate of 90% is significantly higher than results from October 2019, which saw 40 batch flotation tests produce 48.7% total rare earth oxides (microsmallcap.com)

 

Company News

Altus Strategies* (ALS LN) 7.8p, Mkt Cap £17.5m – La Mancha investment and share consolidation approved by shareholders

• La Mancha C$11.2m (~£6.5m) investment was approved by Altus shareholders.
• On completion of subscription, La Mancha will become the cornerstone investor holding 35.4% of the then enlarged share capital.
• Altus will hold ~C$18.2m or £10.5m in cash and listed shares following the La Mancha investment.
• Additionally, the Company will be going through a five to one share consolidation effective as at the close of trading on 21 February 2020.

*SP Angel acts as Nomad and Broker to Altus Strategies

 

BlueRock Diamonds* (BRD LN) 88.5p, Mkt Cap £2.9m – Oversubscribed placing raises £1.9m enabling management to expand diamond production in South Africa

• BlueRock diamonds report the raising of £1.9m of new money at 89p/s in an oversubscribed placing with new and existing investors.
• The company plans to use the funds to raised production to 750,000tpa from 323,000t last year.
• Mike Houston, BlueRock’s exec Chairman expects diamond production to rise to >30,000cts by end-2020.
• Improvements to the process plant should raise recovery rates to >90% from around 70% currently estimated.
• The effect of higher throughput and better recovery rates should help reduce costs by around $50/ct.
• The Kareevlei diamond pipes produce around 90% gem quality diamonds from an estimated resource of some 7.7mt hosting a statistically estimated grade of 4.77cpht for some 367,000cts in total.
• So far mining appears to have approximately supported the statistical estimation of the resource after consideration of losses in the process plant.
• Teichmann, a local contractor working with BlueRock is also committing £805k to the placing and is raising its stake to 29%.
• We believe BlueRock remain in contact with the local community to resolve issues following a peaceful demonstration on the road to the Kareevlei as reported in January.

Conclusion: BlueRock have raised more than sufficient funds to support their planned improvement in production and performance at Kareevlei.

*SP Angel acts as Nomad & Broker to BlueRock Diamonds

 

Chaarat Gold* (CGH LN) 37.0p, Mkt Cap £174m – Kapan EBITDA grows while Tulkubash construction works progress for first gold in 2021

• At Kapan, FY19 production amounted to 60.3koz GE (FY18: 56.4koz) with gold sales of 55.3koz (FY18: 50.9koz).
• Stronger production is attributed to higher throughput rates helped by better mining rates and an improvement in recoveries in the grinding and flotation circuits more than compensating for slightly lower gold grades.
• Mining fleet availability improved through H2/19 while retendering of all services and goods that brought previously outsourced contracts in-house yielded cost efficiencies.
• Underground development meters climbed to 23,136m in 2019, up from 19,868m in 2018, improving mining flexibility increasing availability of the number of faces underground.
• H2/19 EBITDA amounted to $7.7m implying $4.1m generated in Q4/19 and demonstrating an increasing trajectory towards the targeted $20m pa run rate.
• AISC (per oz produced) averaged 1,040/oz in FY19 (FY18: $1,183/oz) with realised gold price of $1,413/oz (FY18: $1,268/oz).
• 2020 production guidance has been revised to 55koz GE from 60koz accounting for higher than budgeted gold prices reducing conversion rates for by-product metals.
• At Tulkubash, construction works continued with first gold remaining on target for late 2021.
• Access road was upgraded, earthworks equipment mobilised, 360-man camp installation commenced for completion in Q3/20, ore haul road and stockpiling platform construction finished and detailed design of leaching heaps, crushing circuit and ADR started.
• 20,000m programme completed at Tulkubash in 2019 comprised of both infill and step out drilling updating mineral resources and reserves.
• Infill drilling demonstrated increased continuity in and between the ore zones providing more data for pit design optimisation.
• Mineral reserves increased to 25mt at 0.95g/t for 749koz, up from 22.2mt at 0.92g/t from 658koz (using unchanged $1,300/oz gold price).
• The previous reserve estimate was prepared in Apr/19 based on Dec/18 mineral resource and did not account for the latest round of drilling programme.
• The team is planning to update the mine plan using new reserves that would support a revision of the project FS.
• Mineral resources estimate has been revised to account for constrained pit shell parameters that a drop in tonnages and contained ounces, but no effect on the Reserve.
• Resources stood at 24.3mt at 1.21g/t for 944koz (v 44.3mt at 1.16g/t for 1,657koz estimated previously) including:
• 23.3mt at 1.22g/t for 918koz in the Measured & Indicated category (42.0mt at 1.20g/t for 1,624koz); and
• 0.9mt at 0.90g/t for 26koz in the Inferred category (2.3mt at 0.44g/t for 33koz).
• New mineral resource used $1,600/oz gold price.
• New ounces were added to the Resource long strike to the NE of the previous resource outline, mainly in the Shir Canyon area.
• Drilling in the NE part of the license area has also returned good grades that will be drill tested in the future to be included in mineral resources.
• Scope for expanding the MRE remains as only around 5.5km of a prospective 24km trend has been drilled.
• On project funding, one project financing group is carrying a due diligence with the Company in discussion to attract other lenders to form a lending syndicate.
• Chaarat is expecting the Tulkubash $110m capex to be covered by the project funding package after accounting for $31.5m project-level equity investment by Ciftay.
• The facility is expected to be closed in Q2/20.
• On corporate level, the team is in discussions to refinance the $17m loan maturing in Q1/20 including increasing debt capacity at Kapan in the view of its improved operating performance.
• The team is in active dialogue on potential M&A opportunities in the FSU region with details to be announced once a structure and path to closing is confirmed.

Conclusion: Kapan delivered production growth and stronger earnings helped by operating and cost optimisations as well as a more favourable gold price environment. Tulkubash is progressing towards funding package closure in Q2/20 and ultimately first gold in 2021. While mineral resource showed a drop in tonnages and contained ounces, new mineral inventory offers a more robust estimate allowing for higher conversion rates and leading to an increase in mineral reserves extending the life of mine and improving Tulkubash economics. The scope to improve on the latest estimate remains with more than 70% of the prospective geological trend remaining untested.

*SP Angel acts as Broker to Chaarat Gold

 

 

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                                                             

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

 

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