Morning View - FOMC expected to cut US rates by 25bp

Morning View - FOMC expected to cut US rates by 25bp

Proactive Investors

Published

SP Angel – Morning View – Wednesday 18 09 19 UK recognizes vulnerability of access to Critical Materials FOMC expected to cut US rates by 25bp   Anglo Asian Mining* (LON:AAZ) – H1/19 results – EBITDA up 14%, 3.5c interim dividend announced and investment in exploration ramped up Kodal Minerals* (LON:KOD) – Bougouni project update   Access to Critical Materials – UK Parliamentary Office of Science and Technology reports on critical materials for UK manufacturers The UK Parliamentary Office of Science and Technology has recognised the vulnerability of restricted access to certain raw materials to UK manufacturing. They say; ‘Critical materials (CMs) are key to UK manufacturing, including for the aerospace, automotive, energy and chemical sectors, which rely on materials typically extracted and processed abroad. CMs are vital components of several emerging technologies, including electric vehicles, renewable energy infrastructure such as wind turbines, and digital technologies such as computers and smartphones. The UK imports most of its CMs and faces international competition for key resources. ‘ They go on; ‘The UK imports the majority of its Critical Materials but does not have a specific strategy for CMs and their supply. Security of supply can be increased by opening or expanding mines, diversifying suppliers and increasing resource efficiency. Resource efficiency can be improved through recycling, reuse and substitution of CMs. Recycling CMs is challenging due to the low quantities of materials present in most consumer goods. CM recycling rates could be improved through circular economy approaches, such as design-to-recycle practices, or specific extended producer responsibility (EPR) schemes.’ https://researchbriefings.parliament.uk/ResearchBriefing/Summary/POST-PN-0609 Our view is that if the UK wants to get serious about protecting its raw material supply chain then it needs to support the AIM mining sector which has been funded by institutions and other investors in recent years but could use some extra help to meet the capital requirements of drilling, feasibility and construction work. The UK stock market has nurtured some significant dedicated talent supporting the development of some incredible companies over the years. Investors should remember the gains made in Antofagasta, First Quantum Minerals, Xstrata (now in Glencore), Billiton (now in BHP), Randgold Resources (now incorporated Barrick Gold) to name just a few of London’s larger success stories, though we remember when these were much smaller companies. More recent smaller mining company success stories are SolGold*, Bushveld Minerals* and Anglo Asian Mining* More specifically, the UK needs to find ways to support the next generation of strategically important value generators such as; Arc Minerals* - copper discovery in Zambia Bluejay Mining* – ilmenite in Greenland Horizonte Minerals – nickel in Brazil IronRidge* – lithium in Ghana Keras Resources* – manganese in Togo Mkango Resources* for its Rare Earth Project at Songwe Hill in Malawi Phoenix Copper* – copper and cobalt in the US Rainbow Rare Earths – Rare Earths in Burundi Savannah Resources* – lithium in Portugal and copper in Oman Strategic Minerals Limited* – copper in Australia, tin and tungsten in Cornwall (UK) *SP Angel act as nomad and or broker to marked companies.   Dow Jones Industrials +0.13% at 27,111 Nikkei 225 -0.18% at 21,961 HK Hang Seng -0.18% at 26,742 Shanghai Composite +0.25% at 2,986 FTSE 350 Mining +0.64% at 18,729 AIM Basic Resources +0.00% at 2,167   Economics US – The FOMC is widely expected to announce a 25bp cut in rates this afternoon The industrial production climbed at the strongest pace in a year with all four major sectors including consumer goods, equipment, construction and business supplies and materials showing gains. Although, trade uncertainties and US$ strength are likely to weigh against a sustainable near-term rebound, as would a prior inventory build in the retail sector and softening orders from recent surveys, Bloomberg reports. Industrial Production (%yoy): 0.6 v -0.1 (revised from -0.2) in July and 0.2 forecast.   Japan/South Korea – The dispute between two nations escalates as South Korea removes Japan from its list of most trusted trading partners. The change means shipments of some strategic goods to Japan will receive greater scrutiny than shipments to 28 other fast-track destinations, South Korea’s trade ministry said. The decision comes as a retaliation to the Japan’s decision to strike South Korea of its own white list of nations deemed safe for export of strategic materials. The conflict adds further pressure onto exporters that are battling with weakening global growth outlook amid US/China trade dispute. Japan posted a 8.2%yoy drop in overseas shipments in August and a 13.3%yoy drop in exports was reported in South Korea over 20 days in September.   EU – European new car sales fell 8.4%yoy in August marking the steepest decline this year. Although, part of the drop is accounted for high base as manufacturers rushed out models ahead of tough new emissions-testing rules a year ago.   UK – Inflation slowed to the weakest pace since 2016, driven down by the price of computer games and clothing. A welcome set of news for the central bank potentially offering some room for the monetary policy support in the wake of weakening growth outlook on Brexit related concerns. Consumer prices climbed 1.7%yoy in August, down from 2.1% in July and below the BoE’s 2% target. Core inflation was off to 1.5%. The pound is off 0.4% against the US$ this morning.   Saudi Arabia – Oil prices pulled back yesterday as Riyadh said it has managed to restore 41% of capacity at the crude-processing complex days after the attack. Aramco is expecting to see production levels coming back to pre-attack 11mmbbl by end of this month. Meanwhile, the Pentagon is currently preparing an assessment on who was responsible for the strike and hopes to make it public, according to ta US defence official. Saudi Arabia will show evidence of Iran’s involvement in the strike, state television reported.   Israel – The nation is facing a hung parliament again. With 81% of ballots counted as of this morning, Netanyahu’s nationalist Likud slightly trailed former military chief Benny Gantz’s centrist Blue and White with 26.9% of the vote to 27.3%. This suggests both parties may lose some of their seats in the Knesset from 35 each held following April elections. “The results here are less good for him than in April, and in April he didn’t make a government,” one of political commentators said of Netanyahu. The shekel was little changed against the US$ this morning.   Currencies US$1.1053/eur vs 1.1014/eur yesterday.  Yen 108.20/$ vs 108.18/$.  SAr 14.632/$ vs 14.785/$.  $1.247/gbp vs $1.241/gbp.  0.684/aud vs 0.684/aud.  CNY 7.090/$ vs  7.094/$.   Commodity News Gold US$1,501/oz vs US$1,498/oz yesterday Gold ETFs 79.1moz vs US$78.9moz yesterday Platinum US$939/oz vs US$932/oz yesterday Palladium US$1,599/oz vs US$1,597/oz yesterday Silver US$17.82/oz vs US$17.85/oz yesterday             Base metals:    Copper US$ 5,805/t vs US$5,822/t yesterday Aluminium US$ 1,787/t vs US$1,783/t yesterday Nickel US$ 17,150/t vs US$16,990/t yesterday - Philippines mine suspension likely to bolster nickel prices (Reuters) The Philippines' Mines and Geosciences Bureau (MGB) said on Wednesday that it has granted a breather of another six months or until the year-end to five suspended mining companies to rectify previous violations of environmental regulations. The suspension will not be lifted until environmental issues have been rectified according to GB Director Wilfredo Moncano, who told reporters "They have to take major corrective measures, including correcting tailings pond issues and river siltation" This includes two nickel ore producers, which could improve nickel prices due to the constrained supply.  According to BMO, the suspension would lead to a further reduction of 40ktpa in nickel exports from the Philippines to China. Nickel producers in the country are keen to resume production as quickly as possible, as Nickel prices have risen sharply of late after the Indonesian government confirmed late August a ban on nickel ore exports would come into at the beginning of 2020.   Zinc US$ 2,324/t vs US$2,351/t yesterday Lead US$ 2,053/t vs US$2,080/t yesterday Tin US$ 16,800/t vs US$16,900/t yesterday             Energy:            Oil US$64.3/bbl vs US$68.8/bbl yesterday Natural Gas US$2.672/mmbtu vs US$2.681/mmbtu yesterday Uranium US$25.50/lb vs US$25.30/lb yesterday             Bulk:    Iron ore 62% Fe spot (cfr Tianjin) US$93.1/t vs US$93.9/t - Indian state run steel authority to sell 25% of iron ore from its captive mines (Business Standard – India) The government has allowed the state run steel authority (SAIL) to sell 25% of its iron ore produced from captive mines and dispose old stock of 70 million tonnes (mt) of low-grade iron ore at mines across the country. This policy goes against previous regulations which do not permit SAIL to sell these materials to domestic end-use companies. The move by the ministry through two separate notifications on September 16 is seen as an effort to reduce concerns regarding the expiry of mines. SAIL was unable to consume low-grade ores was because the company was not having enough beneficiation and pelletisation capacity.   Chinese steel rebar 25mm US$563.8/t vs US$564.3/t Thermal coal (1st year forward cif ARA) US$68.6/t vs US$70.5/t - US coal shipments reach lowest level since 1983 (electrek) According to the US Energy Administration (EIA) reports that  “nearly 600 million short tons of coal was shipped to the US electric power sector in 2018, the lowest level since 1983” and “Coal shipments to the electric power sector in 2018 were 7% lower than the previous year.” According to the EIA’s short term energy outlook, coal in the second half of 2019 would be 15% less than the second half of 2019. EIA also expects electric power generation from wind and solar to grow from 409 billion kWh in 2019 to 467 billion kWh in 2020.   Coking coal futures Dalian Exchange US$195.6/t vs US$202.8/t             Other:   Cobalt LME 3m US$36,500/t vs US$36,500/t NdPr Rare Earth Oxide (China) US$46,617/t vs US$46,589/t Lithium carbonate 99% (China) US$6,982/t vs US$6,978/t - Chile pushing investment in return for discounted lithium (Reuters) Chile is looking for countries to invest in the South American country, particularly battery technology investment in return for access to its lithium deposits. This news has seen interest from China, Japan and Europe as global firms look to control more of the supply of the metal to satisfy EV demand. The South American country, the world’s No. 2 lithium producer, has held global road shows which have attracted firms, such as Japanese battery makers like Toshiba Corp and Russia’s state nuclear agency Rosatom. The deal would offer a guaranteed supply of discounted Chilean lithium in exchange for a commitment to build battery parts plants in Chile as the government looks to move up the value chain. Oversupply and subsequent dropping of the lithium price has made the deal harder for the Chilean government to sell, as a previous tender in 2018 saw partners drop out. However, the government say that previous issues that caused partners to drop out have now been resolved.   Ferro Vanadium 80% FOB (China) US$38.5/kg vs US$38.5/kg Tungsten - China Molybdenum buys 28,336t of APT tungsten for $463m from the Administrators of the Fanya Exchange yesterday (MBFastmarkets) Tungsten APT European US$195-205/mtu vs US$195-205/mtu since 23 August Antimony Metal 99.65% EU (China) US$5,800-6,100/t – Refineries cut back antimony production in Lengshuijiang (Roskill) Roskill report that almost all the antimony smelters have stopped production in the Hunan Lengshuijiang are in China. The stoppages are reported to be due to a lack of available feedstock. We speculate the stoppages may also be related to the sale of antimony by the Administrators of the Fanya Exchange which was reported to have sold 18,661t of antimony for US$76m to China Minmetals around three weeks ago. *SP Angel act as Nomad to Tri-Star Resources which is commissioning an antimony roaster in Oman   Battery News Batteries: News from the Detroit Battery Show (Roskill) Many solid-state battery developers showing their wares but considered to be some way off commercialisation Commercialisation of NCM811 batteries will take more time due to warranty and fire safety issues Li-ion liquid electrolyte batteries to improve through improved cathode coatings, electrolytes, anode enhancement and better battery controls. Supply chains remain a major issue and production of ultra-thin lithium metal foil (<5 microns) remains a technical challenge.   EPA set to revoke California’s authority on car emissions (Automotive news) California’s role as an environmental leader may be overturned, as the Trump administration are seeking to revoke a rule that empowers California to set tougher car emissions standards than those required by law. By revoking the waiver that the state has relied on for years to set its own emissions standards, the government is declaring that no state can impose more ambitious pollution controls than those adopted by the federal government. Major automakers including Ford, Volkswagen and BMW have already negotiated a deal with the Californian government to gradually increase fuel efficiency standards, rejecting the Trump administration’s effort to relax exhaust pollution regulations. This policy is part of a wider rollback of automobile fuel economy and emissions standards adopted during the Obama administration.   Company News Anglo Asian Mining* (LON:AAZ) 153p, Mkt Cap £175m – H1/19 results – EBITDA up 14%, 3.5c interim dividend announced and investment in exploration ramped up Revenues climbed to $43.3m (H1/18:$40.0m) helped by stronger sales volumes. Gold dore sales (post PSA) increased to 26.6koz (H1/18: 25.8koz) with no change in the realised gold price of $1,319/oz. Copper concentrate sales (post PSA) advanced to 4.3kt generating $8.1m in sales proceeds (H1/18: 2.3kt and $5.9m). Operating cash costs amounted to $22.3m (H1/18: $19.6m) on the back of higher costs for consumables and spare parts, haulage and excavation; although, those were partially offset by lower drilling costs. AISC came in at $603/oz (H1/18: $543/oz) reflecting higher mining volumes with some of the ore stockpiled and to be processed. EBITDA climbed to $23.6m (H1/18: $18.5m) with margins improving to 54.4% (H1/18: 46.3%). PAT and EPS increased to $6.6m and 5.8c, respectively, (H1/18: $5.1m and 4.5c). FCF (post interest) totalled $9.1m (H1/18: $15.2m) Net cash position has further strengthened during the period closing at $15.2m (H2/18: $6.1m) including $20.5m of cash in the bank as of end June. In the view of continuing positive FCF generation and strong balance sheet, the Company declared a 3.5c dividend per share equivalent to $3.3m or 34% of the unlevered FCF of $9.6m implying stronger payout to the declared dividend policy of 25% of FCF. This is equivalent to 3.7% annualised dividend yield on the latest share price of 153p. Capital costs amounted to $5.0m (H1/18: $8.3m) including mine development costs ($1.5m), deferred waste stripping ($0.9m) as well as exploration spend of $2.0m (H1/18: $0.1m). Exploration work is continuing in full swing with the team exploring potential to extend the life of mine of existing mines, identifying new mineralised bodies in vicinity to the Gebabek processing complex as well as carrying surface exploration works including drilling at Ordubad. Exploration and evaluation costs were spread between Gedabek ($0.7m), Ordubad ($1.0m) and Gosha ($0.3m). Touching on dore and concentrate sales, the Company said it signed up a second gold refinery for its gold dore sales in late 2018 helping to secure the best commercial terms while also bringing in Trafigura in mid-2018 for its copper concentrate sales. Minor delays in the shipment of flotation concentrates experienced in H1/19 as Trafigura established its logistical procedures have now been resolved and shipments continue as usual. Annual production reiterated at 82-86koz GE. Conclusion: Good set of results with strong FCF generation supported by low cost status of operations translating into ~55% EBITDA margins (close to SPA EBITDA and FCF estimates $22.2m and $9.3m, respectively). That coupled with >$15m in net cash, the Company decided to pay out 34% of its unlevered FCF (v 25% policy) in the interim dividend further highlighting directors’ confidence in Gedabek operations. Additionally, the Company invests heavily in organic growth focusing on both expanding the resource/reserve base around the existing Gedabek processing complex as well as greenfield exploration at Ordubad. The Company has also reported to be evaluating several opportunities outside Azerbaijan potentially offering growth in production profile through M&A. H2/19 is set to come in stronger led by stronger GE production driving unit costs lower as well as ~$150/oz increase in average gold prices (H1/19 av $1,306/oz v H2/19 (to mid Sep/19) av $1,467/oz). *SP Angel act as Nomad and broker to Anglo Asian Mining   Kodal Minerals* (LON:KOD) 0.058p, Mkt Cap £5.2m – Bougouni project update Kodal Minerals has provided a progress report on various aspects of its Bougouni lithium project in Mali as well as its gold exploration activities in Cote d’Ivoire. At Bougouni, feasibility study work is continuing with mine optimisation studies nearing completion ahead of more detailed mine scheduling and design work. Initial indications are that initial production may come from the Ngoualana deposit for the first 2-3 years of an expected 8-10 years mine life producing “in the order of 150,000-175,000 tonnes per annum of saleable concentrate product.” Ngoulana “could provide the Company with a low-cost start-up operation that will be supplemented with the deferred installation of a flotation plant thereafter” as it hosts the higher grade portion of the broader Bougouni project mineral resources with an indicated and inferred resource estimate of 5.1mt at an average grade of 1.2% Li2O within the overall total of 21.3mt at an average grade of 1.11% Li2O. Studies are continuing to confirm these options. Continuing exploration within the Bougouni project area includes an initial, four-holes, drilling campaign on the Marigo Prospect, located mid-way between the Boumou and  Sogola-Baoule prospects. Initial results have confirmed the presence of lithium bearing pegmatites striking in a similar east/west direction to the other  project areas, however “in this location the lithium mineralisation is low tenor”. Currently the company believes that this may be the result of “the degree of weathering and proximity to a creek area may have led to a dilution of lithium in the weathering process.” -  a characteristic which it has observed  elsewhere, including at Ngoualana. Future work in Marigo will concentrate on strike extensions “in areas where there is less weathering and potential impact of dilutive activity”. Exploration has also included an initial drilling programme on the Mafele concession approximately 25km west of the main Bougouni Lithium project area  which was acquired in February 2019. All the drill-holes intersected lithium-bearing pegmatite, however the grade “was generally low. Further exploration activity will focus on targeting the pegmatite ones in areas of less weathering and attempt to define zones of thicker pegmatite veins”. A bulk sample has been dispatched via Dakar to China for plant scale testing at the Ruifu Chemical lithium concentrator plant which “comprises a 2Mtpa processing plant incorporating a DMS circuit and floatation circuit”. The company comments that “results of this operational scale processing run will provide valuable plant scale recovery data to both the off-take partner and Kodal, the importance of which is often overlooked during the feasibility phase”. Examination of the future export logistics for concentrate product has included a site visit and discussions with the operators of the San Pedro Port (SPAP) in Cote d’Ivoire. The port “is currently servicing exports of many bulk commodities, including iron ore and manganese concentrate, most notably, the iron ore export tonnes out of San Pedro are more than double the Company's future demands.  Very positive feedback was received from SPAP personnel, expressing their interest to assist with the Project, and providing the confidence that the San Pedro Port has the knowledge and capacity to handle bulk material exports for the Bougouni Project.” Kodal Minerals has also “completed a survey of the proposed transport route from Bougouni to the San Pedro Port to confirm suitability for bulk commodity transport.  This information has been supplied to the local logistic group who have confirmed suitability of the preferred route.”  Elsewhere, early stage exploration focusing on geochemical sampling has been underway on the wholly owned Dabakala and Korhogo gold prospects in Cote d’Ivoire. At Dabkala, a “large surface anomaly, extending for over 10km of strike and up to 800m in width” was identified and further work is “required to define this prospect prior to initial drill testing”.  Similarly, at Korhogo, geochemical work has outlined an area of gold anomalism extending over an area covering “over 2kms in strike and up to 600m in width” for future follow up. Commenting on the work programme at Bougouni, CEO, Bernard Aylward, explained that “The finalisation of the metallurgical test work programme, the review of the proposed transport, port facilities and mining contractors all feed into our mining optimisation studies and scheduling that will complete the feasibility work”. Conclusion: Kodal Minerals’ feasibility study work for Bougouni is advancing on a number of fronts including the mining and processing studies, treatment of a bulk sample to assist with flowsheet design as well as logistics work and further exploration on the broader project area. We look forward to the feasibility study to provide a more detailed insight into the project. *SP Angel act as Financial Advisor and broker to Kodal Minerals. A partner at SP Angel acts as Chairman to the company.   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 DCE RRE Steelhome Lithium Carbonate, Ferro Vanadium, Antimony Asian Metal Tungsten Metal Bulletin  

Full Article