US Bans Rare Earth Magnets From China

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BHP Billiton (BLT LN) – Record final dividend after strong operating year

Mkango Resources* (MKA LN) – Mkango intersects extensive zones of rare earth mineralisation at the Songwe Hill project

Metals prices recover from China hammering

• Base and metals prices are recovering following a summer of sustained assault as global growth continues and China supports ongoing growth in local manufacturers.
• We speculate selloff led by copper may have signalled China’s displeasure over Trump Tariffs with China potentially using copper to direct metals and other markets lower when Trump makes Tariff demands.
• Copper led metals lower in July with a sharp and unexpected fall in prices followed by reports of a US$1bn liquidation by Gelin Dahua Futures Co. Ltd in China.
• Gelin cut its copper holdings on the Shanghai Futures Exchange to 16,022 lots from 43,538 lots in a few days cutting some 140,000t of copper.
• The move sparked a wave of ‘momentum selling’ in our view which may have been helped lower by comments from Trump on Tariffs and trade negotiations with China which has caused some nervousness by investors.
• Copper slid further against a background of a rising US dollar and prospects for higher US interest rates as US dollars are repatriated back into the US led by Trump tax cuts.

 

Rare earth – US defence law bans magnets from major China, boosting rest of world supply in move which should boost non-Chinese REE miners (see Mkango Resources below)

• United States President Donald Trump announces signing the John S. McCain National Defence Authorisation Art, with section 871 of the law preventing the purchase of rare earth magnets from prohibited countries such as China, Russia, North Korea and Iran.
• The principal use for rare earth metals are permanent magnets, which find themselves consumed across the automotive, renewable energy, aerospace, robotics and telecommunications industries globally.
• The United States recently produced a list of 35 fundamental minerals of high importance with high risk related to supply. The act aims to boost the security of procurement of these strategic minerals.
• However, China currently produces 85-90% of the world’s rare earth magnets, with capacity seriously limited outside the Asian nation due to significant investment in technology and manufacturing over decades. The law specifically targets the use of NdFeB (Neodymium, Iron, Boron) and SmCo (Samarium, Cobalt) magnets.
• In 2016, now banned imports represented 92% of US imports (with China representing 91%), highlighting the serious shortfall implications for other global production. The move is a significant boost for producing nations and advanced-stage rare earth companies including Mkango Resources’ Songwe Hill project in Malawi, with US Department of Defence desperately seeking approved supply.
• In signing the act into law, President Trump described it as “the most significant investment in our military…in modern history”.
• Jeff Green of J.A. Green & Co, dealing with government relations, notes the change is “the single biggest legislative development in the rare earth sector since 2010 Chinese embargo created an awareness of our military’s reliance on foreign rare earth materials”.
• The Trump Administration seeks to eliminate the strategic vulnerability of foreign reliance for critical minerals – this bodes well for prospective producers. The distinct shortfall in non-embargoed production is likely to support elevated rare earth prices as global supply catches up with demand and the deficit widens.
• The move may impact Tesla as it has just decided to use permanent magnets in its Model 3 cars. Rare earth magnet motors offer improved efficiency and performance.

 

China emissions reductions structural says Fortescue 

• Fortescue reports China's drive to reduce greenhouse gas emissions is a structural change, with the Chinese steel sector set to run hard in coming months amid expectations of a winter shutdown
• The comments came as Fortescue accelerated spending on its next Australian iron ore mine and said the higher quality product from the project should not suffer "huge discounts" on pricing
• Fortescue see strong margins at Chinese steel producers as enabling mills to pay premiums for higher grade iron ore

 

Dow Jones Industrials		+0.35%	at	25,759
Nikkei 225		+0.09%	at	22,220
HK Hang Seng		+0.39%	at	27,705
Shanghai Composite		+1.31%	at	2,734
FTSE 350 Mining		-0.26%	at	16,773
AIM Basic Resources		+0.25%	at	2,212

 

Economics

US – The US$ index weakened this morning following President Trump interview to Reuters where he said he was “not thrilled” over the Fed decision this year to raise interest rates.

• He also accused China and the Eurozone of manipulating their currencies.

 

Japan – The yen retreated from an eight-week high as risk aversion eased.

 

UK – The pound grows stronger today on the back of US$ weakness as well as positive budget numbers released earlier today.

• Budget surplus excluding state-controlled banks came in at £2.0bn in July, more than double the number last year and well above a median forecast of £1.1bn (Reuters).
• This brings total deficit for the first four months of the 2019 financial year to £12.8bn, down 40% from the same period last year.

 

South Korea – Nation’s exports, an indicator of global growth and demand, posted strong 15%yoy increase in the first 20 days of August.

• These ease concerns about the impact of global trade battles.
• Shipments to China which account for roughly a quarter of total exports were particularly strong and surged 24%yoy during the period.

 

Australia – The RBA minutes demonstrated a reserved central bank stance over future policy adjustments saying the progess inreducing unemployment and lifting inflation was likely to be “gradual”.

• Although, the bank noted that the next move was more likely to be up rather than down.
• Markets are currently pricing in only a 49% chance of a hike over the next 12 months.
• While the central bank was more optimistic over the private consumption given higher household income combined with a minimum wage increase, tax cuts in the offing and a tightening labour market, the RBA noted that business confidence and investment may be deterred by increasing risks of trade protectionism.
• Commenting on the US growth outlook and a continuing tightening in the monetary policy, the RBA said that a faster withdrawal of US stimulus than markets anticipate would imply “stronger global growth and could be associated with a depreciation of the A$, both of which would support the Australian economy”.

 

Russia – The UK Foreign Secretary asked the EU to place sanctions in response to the Salisbury attack.

• Previously, US administration enacted limits on Russia’s access to some technologies under the Chemical and Biological Weapons Control and Warfare Elimination Act which are coming into force tomorrow.
• US sanctions have a second tranche “more draconian” set of sanctions unless Russia provides “reliable” evidence that it is no longer using chemical or biological weapons and allows on-site UN chemical inspections within a 90-day period.

 

Venezuela – Inflation is estimated to have reached 83,000% in July and is on its way for 1,000,000% by year end.

• Form Monday, new measures have come into effect including devaluation of the bolivar by a 100,000 factor and pegging new currency called “sovereign bolivar” to petro cryptocurrency.
• Unfortunately, it is hard to come up with a value on Venezuela’s cryptocurrency given that petro is not trading while national parliament labelled it illegal way to mortgage the nation’s cash-strapped oil reserves.
• Among other measures announced last week included highly-subsidized gas prices, a higher corporate tax rate and a 60-fold increase to the minimum wage, all likely to make things even worse.

 

Currencies

US$1.1511/eur vs 1.1382/eur yesterday  Yen 110.07/$ vs 110.75/$  SAr 14.437/$ vs 14.712/$  $1.283/gbp vs $1.271/gbp  0.735/aud vs 0.727/aud  CNY 6.844/$ vs 6.888/$

 

Commodity News

Precious metals:         

Gold US$1,194/oz vs US$1,175/oz yesterday

• Gold reverses trends as President Donald rump complains about the Federal Reserve raising interest rates, hurting the dollar. Bullion for immediate delivery climbed +0.4% to $1,194.75/oz in early London trading, after rising +0.5% Monday.
• Trump said he expected Jerome Powell to be a cheap-money Fed chairman, telling donors at fundraiser on Friday his nominee had instead raised rates, driving the Bloomberg Spot Dollar Index down -0.2%.
• The growth will have struck short investors, as exchange-traded funds tracking the metal have bled assets for 13 consecutive weeks, the longest run in five years, as investors have placed the biggest gold short on record. Hedge funds and other large speculators increased net-short bets on the precious metal in the week ending Aug. 14 to the most on record, according to data published Friday going back to 2006.
• The precious metal has tumbled 9% this year despite turmoil in emerging markets and jitters over technology companies, the anchor of the US equity bull market. Head of precious metals at Marex Spectron notes “The long suffering holders of ETFs have finally given up hope of the yellow metal returning to its former glories and have decided there is better protection in the dollar, the stock market and pretty much anything other than gold”.
• Investors in the world’s largest ETF market have pulled $1.4bn from gold-backed funds this year.

   Gold ETFs 68.2moz vs US$68.2moz yesterday

Platinum US$799/oz vs US$779/oz yesterday

Palladium US$917/oz vs US$896/oz yesterday

Silver US$14.78/oz vs US$14.64/oz yesterday

           

Base metals:   

Copper US$ 6,021/t vs US$5,886/t yesterday - 2018 iPhones may have faster wireless charging thanks to a new copper coil

• According to the China Times, Apple is considering replacing the ferrite polymer composite (FPC) of the charging coil of at least one of its new iPhone models with copper wire
• In theory, copper coils will allow for faster and more efficient wireless charging, possibly bringing the iPhone up to par with its Android rivals
• Apple is expected to announce three new iPhone models next month, including a 6.5-inch iPhone X Plus, 5.8-inch iPhone X sequel, and 6.1-inch model with an LCD display

Aluminium US$ 2,066/t vs US$2,027/t yesterday

Nickel US$ 13,735/t vs US$13,270/t yesterday

Zinc US$ 2,420/t vs US$2,337/t yesterday

Lead US$ 1,998/t vs US$2,008/t yesterday

Tin US$ 18,745/t vs US$18,670/t yesterday

           

Energy:           

Oil US$72.2/bbl vs US$71.5/bbl yesterday

Natural Gas US$2.977/mmbtu vs US$2.919/mmbtu yesterday

Uranium US$26.15/lb vs US$26.25/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$68.1/t vs US$66.8/t

Chinese steel rebar 25mm US$699.4/t vs US$675.9/t

Thermal coal (1st year forward cif ARA) US$89.7/t vs US$88.1/t

Premium hard coking coal Aus fob US$181.7/t vs US$182.2/t

           

Other:  

Cobalt LME 3m US$64,250/t vs US$64,250/t

• The race to improve battery costs to boost mass adoption of electric vehicles, Iconic Materials start-up targets an invented material to remove costly cobalt from existing chemistries. Backed by impressive technology and automotive shareholders, the company developments reflect increasing concerns over current battery technologies and their reliance on contentious dominating supply from the DRC.
• Iconic counts highly-respected computer scientist and investor Bill Joy among shareholders including the Renault Nissan Mitsubishi carmaker alliance, Hyundai and French oil company Total.
• Owner professor Zimmerman notes “the world wants to electrify vehicles. I’ve never seen such a massive industry say [it wants] to completely switch technologies. Every single company, government and country – they all want to do it worldwide”.
• DRC production equates to around 60% global output, with supply dominated by a handful of mining companies, including Switzerland-based Glencore, or mined by hand and sold to Chinese traders in the country. Child labour is common, according to human rights groups.
• Without a big shift in battery technology, cobalt demand is set to more than double during the next decade — with the share from the DRC set to rise to more than 70%.
• Cobalt is essential for stopping batteries from overheating and the stability it brings allows multiple charge cycles over many years. But it is also the most expensive of the metals used — hindering the ability of carmakers to lower the cost of electric cars to compete against their petrol counterparts. Analysts at Liberum, the London-based brokerage and investment bank, estimate that the cost of cobalt in a kg of battery cathode material is about $12, compared with $8 for lithium and $5 for nickel.
• Iconic Materials propose solid conductive polymers which replace the predominantly unstable liquid electrolyte. Ionic is one of a number of start-ups hoping to commercialise the next battery breakthrough. Ionic says it has tested its polymer material with cathodes that have either little cobalt or none at all and is working with companies to commercialise the technology. If successful, it says it could find its way into batteries within a few years and into electric cars after that.

Tungsten APT European US$300-315/mtu vs US$300-315/mtu

Lithium - Tianqi Lithium files for $1bn Hong Kong listing

• Tianqi Lithium Corp, world’s second-largest lithium producer by sales,  is looking to raise up to $1bn in its Hong Kong stock market flotation
• The company has filed plans for Hong Kong’s second lithium listing this year with a the draft prospectus posted on the Hong Kong exchange website on Monday
• The final deal size may <$1bn due to a pullback in lithium carbonate prices

 

Company News

BHP Billiton (BLT LN) FOLLOW 1623p, Mkt Cap £94.3bn – Record final dividend after strong operating year

• Reflecting what the company describes as “strong operating performance”, BHP Billiton has declared a record final dividend of 63UScents per share for the year ending 30^th June bringing the total for the financial year to 118 cents, a 42% increase compared to the year to June 2017.
• Attributable profit, which reflects exceptional charges arising from the failure of the tailings dam at Samarco, and the impact of US tax changes as well as the sale of the onshore US oil and gas operations declined by 37% to US$3.7bn.
• Underlying attributable profit, however, increased by 33% to US$8.9bn and free cash flow before financing , after investment of US$5.9bn, amounted to US$12.5bn (2017 – US$13.1bn).
• As a result, net debt of US$10.9bn has reduced by US$5.4bn during the year and according to the company’s announcement, by US$15bn over the last years.
• In terms of overall underlying EBITDA of US$23.2bn, the group’s iron ore business contributed US$8.9bn (39%) supported by copper’s contribution of US$6.5bn (28%), coal’s US$4.4bn (19%)  and the petroleum business US$3.3bn (14%).
• The company highlights the strong operating performance of its Western Australian iron ore operations and the Escondida copper mine and reports that “Productivity gains of approximately US$1 billion are now expected for the 2019 financial year with strong momentum carried into the 2020 financial year”.
• Copper production increased by 32% during the year to 1.75mt as operations ramped up at Escondida and a record year at Spence, partially offset by reduced output at Olympic Dam “as a result of the planned smelter maintenance campaign.”
• Iron ore output “increased by three per cent to a record 238Mt as a result of improved productivity and stability across the supply chain, and production records at Jimblebar and Mining Area C.”
• The Group’s metallurgical coal production increased by 7% to a record 43mt while thermal coal output was flat at 29mt as “a strong performance at New South Wales Energy Coal (NSWEC) was partially offset by the impacts of wet weather and higher strip ratio areas being mined at Cerrejon.”
• The company has 5 major projects underway representing a capital budget of approximately 10.6bn. The South Flank iron ore project, due to replace production from the 80mtpa Yandi mine is due to achieve initial production at a budgeted cost of US$3.06bn in 2021.
• The expansion of the Spence copper concentrator, which is planned to increase the mine’s copper in concentrate output by around 185,000tpa by 2021 is budgeted to cost US$2.46bn.
• The company plans to spend US$216m to maintain its North West Shelf LNG plant in Australia and a further US$2.15bn on new floating production capacity for its Mad Dog Phase 2 petroleum business in the Gulf of Mexico.
• The wholly owned Jansen Potash project in Canada is currently almost 80% complete with a budget cost of US$2.7bn. Interestingly, the company comments that “there is an “Increase in budget of US$122m to fund support services at the site”.
• Commenting on the wider economic outlook, the company continues “to expect China's economic growth to slow modestly in the 2018 calendar year. The official GDP target of around six and a half per cent is likely to be achieved”.
• “Near-term prospects for the US economy are sound, with cyclical fundamentals solid. However, we expect the increase in protectionism to weigh on consumer purchasing power and international competitiveness. In Europe and Japan, business confidence and manufacturing momentum may have peaked early in the 2018 calendar year”.
• In commodities, BHP Billiton expects a “roughly balanced market” in crude oil, and warns that future copper mine developments in the face of grade declines “and a scarcity of high-quality future development opportunities will require attractive prices to secure sufficient investment to balance the market, with new mine supply required in the early part of the next decade”.
• “In the long term, the global steel market is expected to continue to grow modestly, with moderating demand growth in China offset by incremental demand from India and other populous emerging markets”.
• The company comments that although China’s “coal supply side reform, and its environmental policies, remain a source of uncertainty. Over the longer term, emerging markets such as India are expected to support seaborne demand growth, while high-quality metallurgical coals will continue to offer steelmakers value-in-use benefits”.
• BHP Billiton, which is advancing its US$2.7bn Jansen potash project in Saskatchewan, expects potash “annual demand growth of between two and three per cent over the next decade, resulting in demand outstripping supply by the mid-to-late 2020s.”

Conclusion: BHP Billiton is increasing its final dividend to a record 63US cents per share. On the economic outlook the company is  hinting that Japanese and European manufacturing momentum may already have peaked, that China’s economic growth may slow modestly this year and that despite strong fundamentals, the US economy may be held back by protectionism and issues of competitiveness.

 

Mkango Resources* (MKA LN)  FOLLOW 9.0p, Mkt Cap £9.7m – Mkango intersects extensive zones of rare earth mineralisation at the Songwe Hill project

New US legislation should be good for Mkango which holds one of relatively few new rare earth mining projects outside China

• The company are pleased to announce positive results for the first eight holes, totalling 944m of its targeted 10,000m diamond drilling programme at the Songwe Hill Rare Earths Project in Malawi.
• All eight drill holes intersected rare earth mineralisation, with Total REO grading 1.0%-2.2%. The updated results are consistent with the Pre-Feasibility Study life of mine, averaging 1.6% TREO, and initial mineralisation is set to enhance geological understanding of the deposit. The drill programme is focused on infill drilling to confirm and upgrade the existing Indicated and Inferred Mineral Resource Estimates, testing extensions to the mineralisation and geotechnical drilling.
• Infill drilling intersections provide consistent rare earth content across broad zones of mineralisation, as opposed to narrow veins or dykes, which continues to support the engineering concept of bulk tonnage, open pit mining operation with low mining costs.
• Two preliminary step-out results focus on testing the southerly extension of mineralisation, providing information on the carbonatite deposit contact at the summit of Songwe. The significance of the more than 42 m of mineralisation intersected by PX036 at depth (87.3 – 130.1 m), including 6.7 metres grading 2.2% TREO to the end of the hole (130.1m), is being evaluated and hopes to minimise development strip-ratio and draw down mining costs.
• A total of 8,466m of drilling, comprising 70 drill holes, has now been completed as at August 20, 2018.
• CEO William Dawes notes “these are an excellent first set of results from the current programme and we look forward to announcing results from the remaining approximately 75 drill holes”.
• Results of the drilling will form a planned update resource and NI 43-101 technical report, which will release the second tranche of Talaxis Limited investment of £7m to fund completion of the Feasibility Study.
• Production from the Malawi project falls outside of the latest sanctioned output as US President Donald Trump signs the John S. McCain National Defence Authorisation Art. With the US Department of Defence importing 90% of rare earth magnets from banned China, the advanced stage exploration deposit will become even more desirable as securing long-term strategic supply becomes a priority.

Conclusion: Early results from the current drilling program give positive early indication for broad mineralisation across the defined Resource, while confirming rare earth content in a southerly extension with no surface carbonatite definition. The programme also targets a distinct radiometric anomaly extending to the north of the define pit limits, which is coincident with carbonatite surface outcropping. We look forward to learning more assay results as the programme advances and the potential upside in the planned resource update. Mkango are very well positioned and fully funded following Talaxis Limited investment to capitalise on significantly improving market fundamentals.

*SP Angel act as Nomad and broker to Mkango Resources. Two SP Angel mining analysts have visited the Songwe Hill project in two separate 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 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.

 

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