SP Angel – Morning View – Tuesday 25 09 18

Base metals retrace demand optimism as trade war becomes reality

MiFID II exempt information – see disclaimer below

 

Cradle Arc* (CRA LN) – Management push forward on raising production despite equipment breakdowns

Medusa Mining (MML AU) 0.39p, Mkt Cap £81m – FY19 production and AISC guidance

Randgold Resources (RRS LN) – Merger combined stretched balance sheet with high-risk assets in the DRC

Barrick Gold (ABX US)

Savannah Resources (SAV LN) – Option to acquire mining lease application executed on significant Portuguese lithium resource potential

Trans-Siberian Gold (TSG LN) – Earnings climb on stronger production and higher gold price

 

Vanadium - South Korea funds 4MWh Vanadium trial that targets doubles energy density

  • South Korea has provided $2.1 million (£1.6m) of funding to support the trial of a 4MWh vanadium battery, targeting double the energy density of competing technologies.
  • The Korean Institute of Energy Technology Evaluation and Planning (KETEP) awarded Australian firm Korid Energy with finance to supply its patented V-KOR stack technology to a project seeking to devise an industry-standard for vanadium battery solutions.
  • The funding forms part of a broader $7.05 million (£5.4m) project, in which the V-KOR stack technology will be integrated with a 1MW vanadium redox flow battery.

 

New battery absorbs Carbon Dioxide before it reaches atmosphere

  • A new type of battery developed by researchers at MIT could be made partly from carbon dioxide captured from power plants.
  • Rather than attempting to convert carbon dioxide to specialised chemicals using metal catalysts, this battery could continuously covert carbon dioxide into a solid mineral carbonate as it discharges.
  • While still based on early-stage research and far from commercial deployment, the new battery formulation could open new avenues for tailoring electrochemical carbon dioxide conversion reactions.

 

Wireless electric car charging pads

  • WiTricity has announced a breakthrough innovation in the form of wireless charging pads for electric car batteries
  • While the wireless charging technology employed in the designing of these charging pads is yet to be practically implemented, industry experts already anticipate it to shift the mechanism of charging electric vehicles over the years.
  • The pioneer of this technology – WiTricity, is currently proposing collaborations with auto giants with an objective to introduce an exceptionally easy, convenient, and efficient means of charging electric vehicle batteries

 

Dow Jones Industrials

 

-0.68%

at

  26,562

Nikkei 225

 

+0.29%

at

  23,940

HK Hang Seng

 

-1.62%

at

  27,499

Shanghai Composite

 

-0.58%

at

   2,781

FTSE 350 Mining

 

+0.64%

at

  17,858

AIM Basic Resources

 

+0.91%

at

   2,229

 

Economics

US – Third rate hike is broadly priced in as the FOMC looking to release its monetary policy statement tomorrow.

 

Japan – A seven day rally sees local equities trading at the highest level since the start of the year.

  • The market benefited from a weaker yen which had depreciated to the weakest since January and expectations that the Trump administration will not levy tariffs on local automakers.
  • The Topix has been the best performing developed market in the past seven days, as it recorded the longest winning streak since October last year.

 

ECB – Mario Draghi comments at the European Parliament saw local bond yields and euro surging against the US$.

  • Draghi said the ECB is confident it can consistently reach the inflation target moving forwards due to the strength of the eurozone’s jobs market.

 

France – Industrial confidence dropped to the weakest since March 2017 and coming in weaker than forecast.

 

Italy – Government bond yields are trading lower as the government is preparing to announce its budget and growth targets for the coming year on Thursday.

 

Currencies

US$1.1753/eur vs 1.1737/eur yesterday  Yen 112.90/$ vs 112.58/$  SAr 14.366/$ vs 14.337/$  $1.311/gbp vs $1.310/gbp  0.725/aud vs 0.727/aud  CNY 6.862/$ vs 6.857/$

 

Commodity News

Precious metals:         

Gold US$1,199/oz vs US$1,197/oz yesterday

  • Gold prices retain value ahead of expectations that the Federal Reserve will raise rates for the third time this year at Wednesday’s meeting. Bullion for immediate delivery held +0.1% at $1,199.78/oz, after dropping for two-days as trade war reality sets in with the US and China stick to their guns.
  • The world’s two biggest economies are testing the resilience of the strongest global upswing in years, with the Trump administration slapping tariffs on $200bn of Chinese goods just after midnight on Monday. China responded with duties of its own on $60bn in US products, as the Chinese government also called off planned talks with US officials as the consensus grows in Beijing that substantive discussions will only be possible after U.S. midterm elections in November.
  • US stocks and base metals tumbled as investors faced the reality of a protracted trade war, as President Donald Trump ignored warnings of business leaders and economists to confront China over what he argues are its unfair trading practices and abuse of US intellectual property. Chinese President Xi Jinping is refusing to bow to U.S. aggression, preparing stimulus measures to cushion the impact on the Chinese economy.
  • Trump has said that Chinese retaliation would spur new duties on another $267bn in Chinese imports. If the president follows through on the threat, U.S. tariffs would cover all goods the nation imported from China last year, risking an escalating conflict that could upend the supply chains of multinational companies.
  • Fitch Ratings chief economist adds “the trade war is now a reality”. The ratings firm downgraded its world growth forecast for 2019 by -0.1% to 3.1% and warned of further downside risk.
  • Continued efforts at diplomacy have failed, with no breakthrough since high-level talks began in May. China withdrew from planned trade talks on Saturday, which was also hampered by US State Department’s move to sanction China’s defense agency and its director ahead of discussions. According to a white paper carried by the state-run Xinhua News Agency, “The door for trade talks is always open but negotiations must be held in an environment of mutual respect”. Vice commerce minister Wang Shouwen added that China won’t negotiate with a knife to its throat,
  • It appears both sides are targeting negotiations to appease the escalating trade war as deputy White House press secretary said “President Trump has an excellent relationship with President Xi and our teams have been in frequent communication since President Trump too office. We remain open to continuing discussions with China, but China must meaningfully engage on the unfair trading practices”.
  • The knock-on effect of tariffs is already hitting US retailers, with thousands of consumer products stung by latest levies leaving businesses scrambling to prepare for rising costs.
  • Investors are also looking at Brexit developments and some action is expected in gold if the Fed releases their intent for future rate increases.

   Gold ETFs 67.7moz vs US$67.7moz yesterday

Platinum US$827/oz vs US$828/oz yesterday

Palladium US$1,052/oz vs US$1,053/oz yesterday

Silver US$14.26/oz vs US$14.27/oz yesterday

           

Base metals:   

Copper US$ 6,252/t vs US$6,325/t yesterday

  • Base metals continue to slump on continuing concerns surrounding the US-China trade impact on global growth. LME copper lost -1.5% as nickel, lead and aluminium also declined, paring last week’s closing surge on optimism around resilient global demand. Senior commodities strategist at ANZ notes the markets are “being weighed down by concerns around trade conflict, but fundamentals are still positive. Even though we’re not seeing a follow-up to last week’s rally, I do think that was an initial sign of what’s going to happen when the tightness in the physical market really starts to have an effect”.
  • Falling Q4 treatment & refining charges across China hints at a market in oversupply, however rising Chinese smelting capacity, growing by around 1Mt in 2018, highlight underlying greater demand and competition for ore.
  • China’s top smelters have set their floor treatment and refining charges (TC/RCs) for the fourth quarter at $90/t and 9c/lb which represents the minimum miners pay smelters to process their copper concentrate into refined metal. The agreement follows a meeting of the 10-member China Smelters Purchase Team (CSPT) on Friday, which represents a -5.6% fall from last year’s charges set at $95/t and 9.5c/lb.
  • The fourth-quarter rates are more significant since they influence the negotiations for global TC/RCs for 2019 which will start next month at the LME Week conference in London. The global price greatly determines the profitability of both miners and smelters.
  • Falling TC/RCs can signal supply of copper concentrate declining or the amount of capacity rising. A trader who supplies copper concentrate to members of the CSPT said the fourth quarter charges were “in line” with his expectations, adding that smelter currently had enough ore for their needs.
  • The shutdown of Vedanta Ltd.’s smelter in southern India in May has resulted in greater flow of concentrate into China, giving rise to increased supply competition and growing spot TC/RCs in Asia. The Tamil Nadu government has ordered the permanent closure of the copper smelter on environmental grounds in the wake of protests by locals.

Aluminium US$ 2,040/t vs US$2,076/t yesterday

Nickel US$ 12,885/t vs US$13,165/t yesterday

Zinc US$ 2,510/t vs US$2,526/t yesterday

Lead US$ 2,019/t vs US$2,041/t yesterday

Tin US$ 18,900/t vs US$18,900/t yesterday

           

Energy:           

Oil US$81.6/bbl vs US$80.3/bbl yesterday

Natural Gas US$3.053/mmbtu vs US$2.962/mmbtu yesterday

Uranium US$27.40/lb vs US$27.35/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$68.9/t vs US$68.9/t

Chinese steel rebar 25mm US$695.2/t vs US$695.8/t

Thermal coal (1st year forward cif ARA) US$98.6/t vs US$99.2/t

Coking coal futures Dalian Exchange US$192.6/t vs US$192.8/t

           

Other:  

Cobalt LME 3m US$62,250/t vs US$62,250/t

China NdPr Rare Earth Oxide US$47,214/t vs US$47,250/t

China Lithium carbonate 99% US$10,346/t vs US$10,354/t

Tungsten APT European US$275-290/mtu vs US$275-290/mtu

 

Company News

Cradle Arc* (CRA LN)  2.4p, Mkt Cap £6.5m – Management push forward on raising production despite equipment breakdowns

(Cradle Arc holds 60% of the Mowana Copper Mine)

  • Cradle Arc continues to work on improving throughput and recovery rates at the Mowana copper mine in Botswana.
  • Management are looking to install a Dense Media Separator ‘DMS’ to significantly improve performance by raising effective plant capacity and lowering copper production costs.
  • The DMS plant is second stage to the more immediate target to raise existing plant throughput, recovery rates and equipment performance.
  • The team report Q3 copper production is now likely to be some 10-20% lower than previously targeted at 1,000t of copper but still reckon they can produce 4,000t through in H2 as the mining ramps up and recoveries improve.
  • Costs should fall significantly as throughput and recovery rates improve in the short term and unit costs should also fall significantly when the proposed DMS plant is commissioned.
  • Kevin van Wouw, the ceo at Cradle Arc is considered to be a global specialist in DMS plant operation and is well regarded by former colleagues in this respect.
  • Management report copper production of just 292t and 242t in July and August due to ‘intermittent equipment breakdowns and, most recently, a delay in the delivery of a new part for the primary crusher hydraulic power pack’.
  • The team caution that Q4 production will be dependent on ‘improved material throughput and recoveries going forward’ though ‘management is confident of an improvement in performance in Q4’.
  • Cradle Arc also state; ‘the Board has decided to focus in the near term on securing the requisite funding to improve and rehabilitate the current processing facilities and establish an inventory of certain key spare parts, to seek to mitigate the occurrences of further processing plant breakdowns and interruptions during the critical ramp-up phase and which are a pre-requisite to installation of the potential DMS upgrades. Further updates will be made as and when appropriate.’
  • The company recently renewed two licences extending to the north of its Mowana copper mine covering the same structural trend that hosts the mineralisation at Mowana where the team reckon the copper bearing structure continues. The new licences gives Cradle Arc an overall 36km strike length.
  • The Mowana copper mine has a measured and indicated resource of 55mt grading 1.17% copper and an inferred resource of 20mt at 1.08% copper.
  • Drilling to the north of the Mowana licence area, at the Mowana North Extension shows 50m @ 2.11%TCu from 667m depth and 19.28m @ 2.94%TCu from 272.38m.

Conclusion: Management are focussed on raising copper production and cash flow through the second half. They are looking to finance short-term mine improvements ahead of the instillation of a DMS plant which should significantly enhance plant throughput and performance.

*SP Angel acts as Joint Broker to Cradle Arc plc

 

Medusa Mining (MML AU) 0.39p, Mkt Cap £81m – FY19 production and AISC guidance

  • FY19 (Jun YE) production is forecast to come in at 90-100koz at AISC of $1,050-1,150/oz.
  • This is in line with FY18 results – 96koz in production and $1,083/oz AISC.
  • E15 shaft development works are nearing completion with commissioning targeted for October this year.
  • The shaft will expand underground operations skipping capacity and accelerate development and production at lower mine levels.
  • Guided costs are reported to have included significantly increased exploration costs in regards to testing of down dip extensions of the Co-O orebody as well as high grade priority targets adjacent to the Co-O mine including the Royal Crown Vein and Durian.

 

Randgold Resources (RRS LN)  5,298p, Mkt Cap £5bn – Merger combined stretched balance sheet with high-risk assets in the DRC

Barrick Gold (ABX US) US$11, Mkt Cap US$12.9bn

  • Two of the world’s more expensive gold mining companies have declared their intention to merge in an all-share deal to create ‘New Barrick Group’.
  • New Barrick Group will be listed in Toronto and New York but will delist in London which makes little sense to us as Randgold has done well in London as as FTSE 100 company.
  • The deal appears to make good sense for Randgold as it diversifies the company away from it’s focus on the DRC and into the US.
  • It should also give larger Randgold shareholders added liquidity to sell into so they can reinvest into better value gold stocks with production in less risky jurisdictions.
  • The DRC recently introduced a new, tougher, mining code with no concessions made to the mining industry.
  • The new code imposes a wind-fall profit tax and removes 10-year protection for existing projects against change to the fiscal regime among other changes. The code is likely to be challenged legally in the DRC though it seems unlikely that the DRC government will back down.
  • Rising mining costs in the US are a good reason for Barrick to seek an overseas merger where weaker local currencies should continue to help non-US miners.
  • In the deal Barrick is offering Randgold shareholders 6.1280 New Barrick shares for each Randgold share valuing implying no premium for shareholders.
  • Randgold shareholders will own 33.4% of the new group with the Company appointing one-third of the directors to the combined Board.
  • The new group is likely to be a difficult place to work with Barrack chairman, john Thornton, due to work alongside Mark Bristow, CEO of Randgold who will be President and CEO of New Barrick Group.
  • Thornton lost two joint CEO’s in recent history with the last one fleeing to take on the challenge of Anglogold in South Africa and we can’t see Bristow pulling any punches round the boardroom table.
  • Randgold has no experience of managing gold mines in the US while Barrick’s experience of Acacia in Tanzania may prove to be a bitter taster for assets in the DRC.
  • Barrick reported a net loss of US$94m in Q2 in US$1.71bn of sales. Total debt is US$5.8bn in a rising interest environment
  • Barrick gold production is targeted at 4.5-5moz at a total cost of US$810-850/oz

Conclusion: Barrack has agreed a break fee of $300m, payable to Randgold. There may come a time when a $300m break fee looks like a small price to pay to end this ill-conceived deal.

 

Savannah Resources (SAV LN)  7.9p, Mkt Cap £68.5m – Option to acquire mining lease application executed on significant Portuguese lithium resource potential

  • Following technical and legal due diligence for the potential purchase of the 2.94km² Aldeia Mining Lease, Savannah Resources have acquired an option to purchase the concession proximal to the Company’s flagship 20Mt Mina do Barroso Lithium Project in Portugal.
  • The decision was based on excellent lithium prospectivity focusing on large-scale pegmatites within Block A. The Company are confident the Lease application provides further resource upside to enhance Mina do Barroso, and could help optimise the layout for any potential mine development. CEO David Archer notes “these blocks are highly accretive to our Mina do Barroso Project, bringing the potential for further lithium resources and extra area for mine infrastructure”.
  • A technical due diligence work programme to evaluate the potential of the Aldeia licence application included rock chip sampling and reconnaissance geological mapping on Block A. The largest and most extensive pegmatite on Block A occurs where quarrying operations are taking place and displayed:
    • Rock chip sampling with a maximum grade of 1.53% Li2O
    • Reconnaissance geological mapping and air photography interpretation suggest a pegmatite body of up to 300m long and 25m wide
    • Geometry and characteristics of the body appears to be similar to the 16.4Mt Grandeo deposit at Mina do Barroso, with the potential to develop into a significant resource amenable to open pit mining
  • The total purchase price for the acquisition of the Proposed Licence Area (once granted) is €3.25m, which would be paid €55k upon execution. All payments under the deal are structured to be staged with the majority of payments expected to be made from anticipated revenue generated from Mina do Barroso.

Conclusion: Preliminary assessment of the proposed Aldeia Mining Lease suggest coincident lithium mineralisation to enhance the existing Mina do Barroso resource. We look forward to further exploration work to delineate the deposit and understand potential mine optimisation developments. The work continues to strengthen the Portuguese project which has the potential to be Western Europe’s largest, near-term producer of spodumene lithium.

 

Trans-Siberian Gold (TSG LN)  36pp, Mkt Cap £40m – Earnings climb on stronger production and higher gold price

  • Record H1 revenue recorded of $27.6m (H1/17: $18.8m) driven by higher gold production (20.7koz, +38%yoy) and realised gold prices ($1,324/oz, +7%yoy).
  • C1 operating cash costs climbed to $644/oz (H1/17: $533/oz) on the back of higher fuel costs (both prices and volumes consumed) as well as higher staff costs.
  • EBITDA climbed to $8.8m (H1/17: $5.4m) while FCF increased to $2.2m (H1/17: -$3.3m).
  • PAT amounted to $2.6m (H1/17: $0.0m).
  • EPS (basic) totalled 2.32USc (H1/17: 0.03USc).
  • Net debt reduced to $10.3m (H1/17: $12.3m)
  • Interim dividend has been brought down to 0.9USc equivalent to $1m (H1/17: 3.6USc or $4m) implying a annualised dividend yield of 3.6% on the current 38p share price.
  • On operational side, major equipment for the main pumping station has been delivered to the site with construction works at the 150m level and on surface in progress; operational testing ongoing.
  • Development works for the Vein 25 adit are ongoing as well with decline construction scheduled for 2019 and stoping works expected to start in 2020.
  • Annual gold production target kept at 36-40koz (2017: 33.9koz).

Conclusion: A good set of results driven by processing of higher grade material and stronger gold prices. Water pumps installation works are in progress which should improve the ratio of high grade material drawn from stopes versus stockpiles once completed. The Company reiterated 2018 annual gold production guidance at 36-40koz.

 

 

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

 

SP Angel                                                            

Prince Frederick House

35-39 Maddox Street London

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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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