SP Angel – Morning View – Friday 10 05 19

Industrial metals hold despite escalating Trump tariffs

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MiFID II exempt information – see disclaimer below 

Bluejay Mining* (JAY LN) – Submission of social impact assessment

Bushveld Minerals* (BMN LN) – Vanchem acquisition unlocks Mokopane Project adding 5,000mtVpa of vanadium production capacity

SolGold (SOLG LN)* – Strong copper-gold porphyry results returned in Coangos project, S. Ecuador

 

Dow Jones Industrials

 

-0.54%

at

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Nikkei 225

 

-0.27%

at

  21,345

HK Hang Seng

 

+1.02%

at

  28,600

Shanghai Composite

 

+3.10%

at

   2,939

FTSE 350 Mining

 

+1.57%

at

  18,945

AIM Basic Resources

 

-0.76%

at

   1,995

 

Economics

US – Tariffs on $200bn worth of Chinese imports have gone up to 25% overnight while Trump threatened to see more levies on the remaining $325bn “starting… paperwork today”.

  • Consumer products including cell phones, computers, clothing and toys are especially hard hit.
  • China responded that it deeply regretted the move and promised “countermeasures”. Beijing has previously considered to impose tariffs on $60bn of imports from the US should the US follow through with a hike to 25% that was postponed until yesterday.
  • The news came as Chinese delegation was readying for a second day of negotiations with its US counterparts.
  • Chinese VP Liu He, US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin met on Thursday and are expected to resume talks today.
  • US stocks closed lower on Thursday with futures pointing to further losses today as markets awaited more news on the Chinese retaliatory actions.
  • President Trump tried to calm markets down insisting that the deal may still be reached this week.
  • The yen and gold are little changed this morning after having gained +1% and $5/oz this week as concerns over deterioration in trade talks’ prospects intensified.

 

Germany – A welcome bit of positive economic data released this morning showing exports posted a 1.5%mom increase in March v a 0.4%mom drop expected.

  • On annual basis, exports climbed 1.9%yoy to a new record high of €118.3bn during the month.
  • The numbers offer some optimism that economic conditions may see a recovery in H2/19 after a soft patch recorded lately.
  • The data comes amid a series of disappointing data including poor PMIs, factory orders, retail sales and business confidence.
  • Exports (%mom): 1.5 v -1.2 in February and -0.4 forecast.
  • Imports (%mom): 0.4 v -1.6 in February and 0.5 forecast.

 

France – Poor industrial production reported in March with previous month’s data revised downwards.

  • The report highlights fragile state of the second largest economy in the Eurozone and represents a reversal on a more upbeat report for the previous month.
  • Industrial Production (%mom/yoy): -0.9/-0.9 v 0.1/0.5 (down from 0.4/0.6) in February and -0.5/-0.1 forecast.

 

Italy – Industrial production is down 0.9%mom and 1.4%yoy in March coming in worse than expected highlighting risks of a prolonged economic downturn.

  • Previously, the European Commission raised prospects for the nation to breach the 3% of GDP fiscal deficit rule by a wide margin next year.
  • The deficit is expected to climb 1pp to 3.5% in 2020 on the back of slowing economic growth and higher government spending.
  • Industrial Production (%mom/yoy): -0.9/-1.4 v 0.8/0.9 in February and -0.8/-0.8 forecast.

 

UK – Growth accelerates in Q1/19 in line with estimates (+1.8%yoy) driven by a business stockpiling and resilient consumer spending.

  • Household consumption contributed to 1.2pp to growth with business investment adding 2.9pp.
  • Manufacturing output jumped the most since 1988 over the quarter.
  • Net trade remained a drag on the economy subtracting 2.7pp.
  • GDP (%qoq/yoy): 0.5/1.8 v 0.2/1.4 in Q4/18 and 0.5/1.8 forecast.

 

South Africa – The ANC is set to maintain majority in the National Assembly securing just over 57% of the vote with three quarters of bulletins counted.

  • The rand is up 0.5% this morning.

 

Currencies

US$1.1229/eur vs 1.1197/eur yesterday  Yen 109.80/$ vs 109.74/$  SAr 14.255/$ vs 14.339/$  $1.302/gbp vs $1.301/gbp  0.700/aud vs 0.697/aud  CNY 6.804/$ vs 6.809/$

 

Commodity News

Precious metals:         

Gold US$1,285/oz vs US$1,283/oz yesterday

   Gold ETFs 70.4moz vs US$70.4moz yesterday

Platinum US$859/oz vs US$858/oz yesterday

Palladium US$1,309/oz vs US$1,305/oz yesterday

Silver US$14.79/oz vs US$14.84/oz yesterday

           

Base metals:   

Copper US$ 6,171/t vs US$6,118/t yesterday

  • Copper holds onto gains despite escalating trade war threats, with Washington raising tariffs on mainland goods and Beijing promising a response even as talks between the two sides are due to continue.
  • While Donald Trump had said a deal is still possible after he received a “beautiful letter” from Xi Jinping, the U.S. government proceeded with the planned tariff hike just after midnight.
  • Tariffs on $200bn worth of Chinese goods increased on Friday after a pivotal round of trade talks between the U.S. and China on Thursday evening failed to produce an agreement to forestall the higher levies.
  • Higher tariffs would hit only products that leave China as of May 10, not those already in transit, giving some additional negotiating time. The White House said that talks will continue on Friday between top Trump administration officials and Chinese negotiators, but it remains uncertain whether the two sides can bridge the differences that have arisen over the past week.

Aluminium US$ 1,814/t vs US$1,793/t yesterday

Nickel US$ 12,015/t vs US$11,850/t yesterday

Zinc US$ 2,649/t vs US$2,637/t yesterday

Lead US$ 1,850/t vs US$1,863/t yesterday

Tin US$ 19,365/t vs US$19,400/t yesterday

           

Energy:           

Oil US$70.6/bbl vs US$69.7/bbl yesterday

Natural Gas US$2.589/mmbtu vs US$2.602/mmbtu yesterday

Uranium US$24.95/lb vs US$25.05/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$91.8/t vs US$91.6/t

Chinese steel rebar 25mm US$635.7/t vs US$639.1/t

Thermal coal (1st year forward cif ARA) US$70.5/t vs US$72.1/t

Coking coal futures Dalian Exchange US$169.0/t vs US$168.1/t

           

Other:  

Cobalt LME 3m US$34,500/t vs US$34,500/t

NdPr Rare Earth Oxide (China) US$39,465/t vs US$39,431/t

Lithium carbonate 99% (China) US$9,701/t vs US$9,692/t

Ferro Vanadium 80% FOB (China) US$49.0/kg vs US$49.5/kg

Antimony Trioxide 99.5% EU (China) US$6.0/kg vs US$6.0/kg

Tungsten APT European US$270-280/mtu vs US$270-282/mtu

 

Battery News

 

Company News

Bluejay Mining* (JAY LN)  11.1p, Mkt Cap £94.8m – Submission of social impact assessment

  • Bluejay announce the submission of the Social Impact Assessment to the Ministry of Industry, Energy and Research for its Dundas Ilmenite Project in Greenland, the world’s highest-grade mineral sands ilmenite project.
  • The SIA constitutes three years of surveys and baseline studies and is built on the requirements determined in the Terms of Reference for the SIA.
  • The SIA enables the authorities to evaluate and understand the impact of exploitation of the ilmenite-bearing sand at Dundas, as well as the broader regional and national significance for Greenland, and forms the cornerstone of an exploration permit.
  • The submitted Study concerns the onshore mining processing within the licence area for the 440,000tpa development scenario. Findings highlight:
    • Creation of up to 175 direct employment positions and a number of indirect jobs for Greenland once the Dundas mine is fully operational.
    • Increasing skills within the workforce; the Project will elevate the level of training among the workforce within the mining sector in Greenland.
    • Expected positive impact on local and national economy through provision of goods and services from local companies and through payment of royalties, corporate taxes and income taxes.
    • The Project will provide training and skill upgrading opportunities to Greenlandic students.
  • Submission of the EIA and SIA leave the final components of the mineral reserve, mine plan and impact benefit agreement.

*The SP Angel mining analyst has visited the Dundas, Itelak ilmenite sands project in Greenland.

*SP Angel act as nomad and broker to BlueJay Mining. 

 

Bushveld Minerals* (BMN LN)  26.3p, Mkt Cap £294m – Vanchem acquisition unlocks Mokopane Project adding 5,000mtVpa of vanadium production capacity

BUY – Target price 90p from 87p

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  • Vanchem acquisition for $68m cash adds real value due to its combination with Bushveld’s nearby Mokopane project which can supply much-needed fresh ore to Vanchem.
  • Vanchem technically has capacity of 5,000mtVpa but currently produces just ~960mtVpa.
  • Capex est. $45m to restore capacity plus $20m for new Mokopane mine construction.
  • Our new Mokopane/Vanchem NPV looks good at US$461m, IRR strong at 63% due to  low capital outlay and faster production growth on 10% discount rate.
  • Vanchem currently in business administration due to lack of own resources and feedstock from closure of Highveld steel in 2016.
  • Production running off just one of three kilns at Vanchem.
  • Low-risk expansion using existing kilns, and equipment, simply replaces lost production.
  • Vanchem’s vanadium chemicals business helps diversify sales while the increase in production still leave scope for further expansion at Vametco.
  • Valuation: We have reduced our assumed vanadium price to $60/kgVfor 2019 and 2020 due to lesser compliance with the new Chinese regulations than expected, though we do expect punishment of Chinese officials to create better compliance this year. Vanchem acquisition offsets our assumed lower vanadium prices.
  • Our revised target price valuation rises to 90p/s from 87p/s previously.
  • Energy Tech: Bushveld Energy initial valuation as sales of Vanadium Redox Flow Batteries ‘VFRBs’ to ESKOM and others draw closer. Higher vanadium production give potential to significantly expand VFRB electrolyte sales. We value Bushveld Energy at 3.6/s as an initial starter valuation though the business should develop significantly greater value in time. 

Vametco & Vanchem

 

2018

2019

2020

2021

2022

2023

Price V2O5

$/lb

 

19.2

14.0

14.0

12.8

10.3

10.3

Ferro Vanadium

US$/kg

 

81.2

60.0

60.0

55.0

45.0

45.0

Vanadium sales

kg

 

2573

3096

4370

5432

6422

7911

Sales

US$m

 

178.0

171.6

242.3

276.1

267.0

328.9

Operating costs

US$m

 

70.5

74.9

94.5

113.5

127.3

152.6

Operating costs

US$/kg

 

27.4

24.2

21.6

20.9

19.8

19.3

Operating profit

US$m

 

107.5

97.1

149.2

164.8

142.1

180.2

Pre-tax profit

US$m

 

106.8

91.9

142.3

157.4

134.5

172.8

tax

US$m

 

30.4

26.2

40.5

44.9

38.3

49.2

Post-tax profit

US$m

 

76.3

65.7

101.7

112.6

96.2

123.5

EPS

US$c/s

 

6.9

5.9

9.2

10.1

8.7

11.1

PE

x

 

5.0

5.8

3.8

3.4

4.0

3.1

EV/EBITDA

x

 

3.9

4.3

2.8

2.6

3.0

2.3

EBITDA

US$m

 

107.5

97.1

149.2

164.8

142.1

180.2

Free Cash Flow

US$m

 

74.0

5.5

87.1

120.7

103.7

148.3

Vametco Cash Flow

US$m

74%

74.0

59.9

78.8

84.0

68.0

71.6

Vanchem Cash Flow

US$m

100%

 

-54.5

8.3

36.7

35.6

76.7

  • Bushveld management have been looking over the fence at Vanchem in South Africa as combining the assets appears to be the best and most cost-effective way of developing their Mokopane vanadium project.
  • The deal to acquire Vanchem out of Business Administration for $68m in cash is subject to regulatory approvals and gives Bushveld immediate access to an additional 960tpa of vanadium production capacity plus infrastructure to expand to 4,200tpa.
  • Payment: US$6.8m is to be paid in cash on 30 April 2019 plus US$61.2m settled no sooner than 31 July 2019 and no later than 31 October 2019.
  • Vanchem is currently operating one out of three furnaces with production currently reduced to just 960mtVpa due to a lack of suitable feedstock and constrained resources, though this should more than double in 2021 as the Mokopane mine comes on stream.
  • Capital expenditure of $45m is planned to restore the plant to 5,000mtVpa of capacity in the form of various vanadium chemical products.
  • Mokopane: Developing the new open cast mine and infrastructure at Mokopane will cost just $20m which added to the $68m acquisition cost and $45m of capital is just $133m vs the previously estimated development cost at Mokopane of $298m.
  • Mokopane ore is a very high 70% magnetite which serves to offset transport and logistics costs when compared with Vametco.
  • The acquisition adds immediately to Bushveld vanadium production without adding any new vanadium to the market enabling management to take advantages of current vanadium prices.
  • Vanchem is a cheap deal for Bushveld as the business was starved of feedstock and was forced into business rescue by the closure of Highveld which formerly supplied slag and Mapochs mine feedstock to the Vanchem plant. We note some modification will be done to adjust to feedstock from Mokopane.
  • Comparing the Vanchem acquisition with the original Mokopane PFS shows the Vanchem deal to work better on virtually every metric and critically the deal serves to simply take over and replace Vanchem production which was lost to the market last year.
  • Our new Mokopane/Vanchem NPV is better at US$487m vs US$418m in the 2016 Mokopane PFS assuming a 10% discount rate and our IRR is at 66% vs 24% in the 2016 PFS.
  • Chemicals: Vanchem is a large chemicals business focussed on vanadium chemicals and products. It has multiple product streams and lots of big kit for spare capacity. It is also well connected to Vametco and Mokopane by rail and road which gives increased flexibility in its operations and potential for create for more value-added products.
  • Cheaper acquisition: Vanchem is a significantly cheaper acquisition on a per tonne of capacity basis than the Vametco deal due to its distressed state, need for feedstock and capex requirements.
  • The capital intensity of the Vanchem deal is around $17,000/t of V2O5 on our figures vs around $31,000/t in the Mokopane 2016 PFS.
  • Production is currently running off just one of three existing kilns at Vanchem and the new $45m capital program to restore production over the next five years is seen by management as relatively cautious.
  • The plan allows for existing production to continue while refurbishing capacity which was recently mothballed for lack of feed. Hopefully reality will be faster given the presence of so much infrastructure at site.
  • Replacing lost capacity: The strategy simply replaces vanadium production which was lost to the market after Highveld closed and should have little impact on vanadium prices.
  • Highveld Steel closed in 2016 left for dead by Evraz, its Russian owner which cut around 1,800 jobs in the process. We have seen reports suggesting the plant may reopen sometime though this may require higher steel prices, a weaker South African rand or both.
  • Vanadium deficit: Vanadium remains in structural deficit in the market according to Bushveld supported by 2.5% compound demand growth from steel and chemicals and potential for CAGR growth of up to 8.4% driven by vanadium redox batteries.
  • Vanadium prices have fallen this year due to China’s failure to fully implement its new standards on vanadium content in steel rebar. The result is that many smaller steel mills are still making brittle steel by quenching and tempering which is not good if corroded or unexpected strain is put on its reinforced structure.
  • Chinese officials are being punished for failure to implement government policies and we expect more officials to move to impose standards rather than risk several years in a correctional facility.
  • We have adjusted our model to replace our forecast $150m expansion at Vametco with new and less capital-intensive production from Vanchem.
  • While we suspect management will be busy restoring production at Vanchem it is possible that Vametco could also expand further in time if the supply deficit widens and prices continue to support additional supply.
  • This is good news for consumers as it offers the prospect for an additional vanadium supply into a market which could potentially see longer term constraint as banks may struggle to finance many other vanadium projects.
  • Assumptions: We have reduced our ferro-vanadium price assumption to $60/kgV from US$75/kgV for 2019 and 2020 based on the assumption that ferro-vanadium prices average current price levels through the rest of the year. 
  • Our price assumptions of US$55/kgV for 2021 and US$45/kgV for 2022 onwards remain the same.
  • We suspect ferro-vanadium prices may dip further before recovery later in the year as Chinese officials better implement government regulations introduced last year.
  • Production: We have combined our production assumptions for the Vametco and Vanchem plants. Our new production figures reflect our best guess for the combined output of the two plants. We see an acceleration in the increase in vanadium production but are more cautious as we assume production is around 80% of capacity going forward.
  • Bushveld Energy: We have modelled some basic assumptions for Bushveld Energy for incorporation into our valuation. We assume relatively modest margins for the business on project management of Vanadium Flow Redox Batteries ‘VFRBs’ into the South African grid. We also assume a more modest margin on the production of electrolyte based on the value of the vanadium pentoxide contained.

Conclusion: The combination of Mokopane with Vanchem is a great way forward for Bushveld Minerals. The deal given immediate access to production and near-term expansion at relatively low capital cost and technical risk.

It broadens the range of value-added vanadium products and enables greater operational flexibility with vanadium pentoxide to feed Bushveld Energy’s planned electrolyte plant.

This should give the team greater confidence to take on contracts for vanadium electrolyte for the next generation of VFRB batteries to be built in South Africa for energy storage and grid balancing.

A worrying number of fires in Li-ion storage facilities suggests that VFRB may not only be a more economic way forward but may also be the only relatively fire-safe way forward for Megawatt-scale grid storage.

We retain our Strong Buy recommendation

Our valuation rises to 90 pence per share from 87p/s previously

 

SolGold (SOLG LN) * 38p, Mkt Cap £701.6m – Strong copper-gold porphyry results returned in Coangos project, S. Ecuador

  • Initial geochemical sampling from the regional exploration activities at the Coangos project has identified 4 anomalous targets.
  • The Cruz del Sol technical teams have recognised 12 priority targets, with the high success rate achieved by operating multiple field teams comprising 42 Ecuadorean geologists, led by highly experienced national geologists and applying the exploration discovery and appraisal blueprint developed over the last 4 years at Alpala.
  • The teams have discovered two areas of mineralised outcrops in the Coangos project, characterised by strong cooper-carbonates and copper-oxides exposed mainly in fractures outcropping up to 120m in length.
  • The copper-silver zones contain primary chalcocite and chalcopyrite, and secondary copper carbonates and oxides, chrysocolla, malachite, and tenorite.
  • In-situ outcrops have returned mineralisation including 9.27% Cu, 91.5g/t Ag and 8.31% Cu, 99.8g/t Ag. Near-source boulders occurring in local streams record grades as high as 23.2% Cu, 122g/t Ag.
  • Anomaly 2 has been sampled at the head of the Numpaim River in the Coangos 2 tenement. Mineralisation is associated with a fault breccia 1.5m wide containing quartz veins up to 8mm thick, sugary quartz clasts, rhodochrosite (a manganese carbonate mineral), barite and calcite in a zone of chlorite-sericite alteration.
  • Rock-chip samples from the breccia return 27.98% Cu, 227 g/t Ag, 0.98% Zn.
  • Strong anomalism in the area supports SolGold’s strategy to become a tier 1 copper and gold producer.

*SP Angel acts as broker and advisor to Solgold. SP Angel have raised funds for SolGold on eight previous occasions.

 

Analysts

John Meyer – 0203 470 0490

Simon Beardsmore – 0203 470 0484

Sergey Raevskiy – 0203 470 0474

James Mills -0203 470 0496

 

Sales

Richard Parlons – 0203 470 0472

Jonathan Williams – 0203 470 0471

Abagail 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.

 

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