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Today's Market View - Short covering may turn metals higher

Today's Market View - Short covering may turn metals higher

SP Angel – Morning View – Friday 31 05 19

Short covering may turn metals higher

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MiFID II exempt information – see disclaimer below  

 

Anglo Asian Mining* (LON:AAZ) – Research update

ARC Minerals* (LON:ARCM) – New board member

Beowulf Mining* (LON:BEM) – Local support in Sweden and Funding in Finland suggests good progress

Goldplat (LON:GDP) – Closure of Kilimapesa gold mine

Kodal Minerals* (LON:KOD) – Development and exploration activities update at Bougouni lithium

Mkango Resources* (LON:MKA) – Q1 2019 results

Phoenix Global Mining* (LON:PGM) – 2018 results

Tertiary Minerals* (LON:TYM) – Interim results

Trans-Siberian Gold (LON:TSG) – Mineral resource update and Director appointment

Savannah Resources* (LON:SAV) – Significant upgrade in Mina do Barroso Mineral Resource

 

Short positions in commodities indicate potential for significant turnaround.

  • Headlines suggest Trump is risking recession in the US and further slowdown in China in his Trade War with China.
  • The US Fed has said the bank will act if inflation stays too low.
  • This indicates strong potential for Fed easing in H2 eg a cut in interest rates and potential for new stimulus in the US.
  • Funds and speculators are seen as significantly short in metals and commodities indicating potential for a major swing on the upside when the market turns more positive.
  • While equity markets tend to look 6-9 months ahead commodity markets appear more reactive to near-term news.
  • While copper Tc/Rcs are low this more indicates  new capacity in China as the nation is forecast to add >1mtpa of smelting capacity this year as it competes with Japan.
  • Trump is enacting Republican Policy on intellectual property/theft and other trade issues but his overriding policy is pro business.
  • His style is to negotiate tough and to extract the best he can, but the aim is still to close a deal though it may be a rough ride along the way.
  • This all suggests to us that any positive news on the Trade War front could spark an almighty rally in commodities as funds and speculators move to close out short positions, as seen recently in US grain.

 

China’s rare earth retaliation ready to go if trade war deepens

  • Beijing readies a plan to restrict exports of rare earths to the US, in a last ditch effort to control the outcome of the protracted dispute. The government has prepared the steps it feels necessary to use, relying on its stranglehold on the critical minerals in a targeted way to hurt the US economy.
  • The measures would likely focus on heavy rare earths, a sub-group of the materials where the U.S. is particularly reliant on China. The plan can be implemented as soon as the government decides to go ahead, according to those familiar with the matter, without giving further details.
  • The development follows a flurry of threats this week from state media and officials, highlighting the potential use of the strategic minerals as a trade weapon. China produces about 80% of the world’s rare earths, and an even higher proportion of the elements in their processed forms.
  • Controlling global supply is likely to significantly boost prices, which surged in 2010 when China curbed its shipments to Japan.
  • Shares in rare earths companies continued to surge this week, with China Northern Rare Earth High-Tech Co. climbing as much as 5.9% to the highest level this year. In Sydney, stock in Lynas Corp. took monthly gains to 51%.
  • Any action on rare earths would deepen a confrontation that’s roiling markets and damaging global growth.
  • Beijing will firmly defend its national interest, and can’t accept its own rare earths supply being used “to crack down on China’s development,” commerce ministry spokesman Gao Feng.
  • For heavy rare earths, “China definitely dominates supplies, and if China abandons those exports, I don’t think the U.S. can find alternatives,” SMM’s Hu said. Dysprosium may be one of the more critical elements because of its use in permanent magnets, he said.

 

Dow Jones Industrials

 

+0.17%

at

  25,170

Nikkei 225

 

-1.63%

at

  20,601

HK Hang Seng

 

-0.59%

at

  26,955

Shanghai Composite

 

-0.24%

at

   2,899

FTSE 350 Mining

 

-1.47%

at

  18,693

AIM Basic Resources

 

+0.13%

at

   1,981

 

Economics

US – Escalation in protectionist policy risks drives risk sentiment down.

  • President Trump threatened to hit all Mexican imports with a 5% tariff form June 10 until illegal immigration is stopped.
  • The tariff would stay in place “until such time as illegal migrants coming through Mexico, and into our country, STOP,” Trump said on his Twitter account.
  • Additionally, tariffs are expected to “gradually increase until the illegal immigration problem is remedied at which time the tariff will be removed.”
  • Tariffs may reach 25% on October 1, Trump said in a statement released by the White House.
    • The news comes on the heels of deteriorating state of US/China trade negotiations as well as poor economics data released in China today.
    • Global equities are trading lower (S&P futures are off 1%) while gold is up nearly $6/zo this morning.
    • Yesterday, Q1 GDP growth rate was revised 0.1pp lower to 3.1% on the back of stronger consumer demand and government spending with revised lower housing and business investment.
    • Q1 GDP (%qoq, annualised): 3.1 v 3.2 estimated previously and 3.0 forecast.

 

China – Business activity surveys point to slowing growth momentum in May.

  • Manufacturing PMI gauging the sentiment among SOEs came in below estimates while sub-index tumbled to the lowest level since the aftermath of the global financial crisis.
  • Manufacturing PMI: 49.4 v 50.1 in April and 49.9 forecast.
  • Services PMI: 54.3 v 54.3 in April and 54.3 forecast.

 

Mexico – The peso is off c.3% on the back of Trump threats to levy 5% tariffs on Mexico’s imports that may potentially rise to 25%.

 

Currencies

US$1.1138/eur vs 1.1154/eur yesterday  Yen 108.84/$ vs 109.24/$  SAr 14.801/$ vs 14.877/$  $1.261/gbp vs $1.264/gbp  0.692/aud vs 0.691/aud  CNY 6.905/$ vs 6.908/$

 

Commodity News

Precious metals:         

Gold US$1,295/oz vs US$1,276/oz yesterday

   Gold ETFs 70.5moz vs US$70.6moz yesterday

Platinum US$793/oz vs US$794/oz yesterday

Palladium US$1,366/oz vs US$1,341/oz yesterday

Silver US$14.54/oz vs US$14.40/oz yesterday

           

Base metals:   

Copper US$ 5,840/t vs US$5,882/t yesterday

Aluminium US$ 1,785/t vs US$1,794/t yesterday

Nickel US$ 12,090/t vs US$12,045/t yesterday

Zinc US$ 2,536/t vs US$2,557/t yesterday

Lead US$ 1,793/t vs US$1,824/t yesterday

Tin US$ 18,790/t vs US$18,750/t yesterday

           

Energy:           

Oil US$65.6/bbl vs US$69.8/bbl yesterday

Natural Gas US$2.562/mmbtu vs US$2.607/mmbtu yesterday

Uranium US$23.95/lb vs US$24.10/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$99.9/t vs US$101.5/t

Chinese steel rebar 25mm US$614.2/t vs US$614.1/t

Thermal coal (1st year forward cif ARA) US$65.3/t vs US$66.5/t

Coking coal futures Dalian Exchange US$186.3/t vs US$186.2/t

           

Other:  

Cobalt LME 3m US$33,500/t vs US$33,500/t

NdPr Rare Earth Oxide (China) US$48,518/t vs US$47,061/t

Lithium carbonate 99% (China) US$9,631/t vs US$9,629/t

Ferro Vanadium 80% FOB (China) US$36.0/kg vs US$36.0/kg

Antimony Trioxide 99.5% EU (China) US$5.7/kg vs US$5.7/kg

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

 

Battery News

Barcelona to receive 100+ new electric buses, replacing diesel buses

  • Barcelona will soon be the latest city to add a large number of electric buses to its fleet, replacing aging diesel buses in the process.
  • The European Investment Bank is granting a €73.5m loan to the city’s public transport operator, Transports Metropolitans de Barcelona (TMB).
  • TMB will be replacing diesel and first-generation compressed natural gas buses with more than 250 new buses.
  • Not all of the buses will be electric, however. Of the 254 “new, safer, less polluting and more modern vehicles” to be put into service, 116 will be electric.
  • The remainder of the order will be made up of hybrid and new compressed natural gas buses. Hybrids will replace 20 diesel double-decker buses.
  • The EIB notes the new buses will help reduce pollution in the city as the service continues to become more popular, “This will enable TMB to accelerate the transition to a zero-emission bus network and to improve service quality and reliability. In addition to improving air quality, the goal is to increase demand for this service to cut private transport use.”
  • Barcelona’s public city buses have seen a 17% increase in use over the last six years – transporting 203m people in 2018 – a figure that is still growing.”

 

Company News

Anglo Asian Mining* (LON:AAZ) 96p, Mkt Cap £110m – Research update

BUY – 127p (from 126p)

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  • The Company released FY18 earlier in May showing strong growth in earnings and cash flow generation with the Board proposing 4USc final dividend which together with 3USc paid in respect of H1/18 brought total dividend payments for the year to 7USc or 10.2% dividend yield on 2018 average price of 53p.
  • Earning and FCF benefited from full year contribution from the Ugur deposit supplying easy to mill and leach ore as well as good cost control while the expansion of the crushing circuit in July 2018 is expected to improve operational flexibility and allow to increase copper concentrate production this year.
  • As mentioned in May/18 update, reported EBITDA came in better than expected at $49.8m (our estimate: $39.8m); however the Company also reported higher than we expected capital expenditure numbers ($18.2m v our estimate of $11.5m) that included a proportion of waste stripping and development costs that were capitalised.
  • For the sake of consistency and comparability with reported financial numbers, we have adjusted our earnings estimates capitalising $10m of expenses in 2019 and 2020 that in turn increases our EBITDA but is offset by higher capital expenditure projections.
  • We have prepared line-by-line comparison with our previous estimates below:

 

 

Previous

 

Updated

 

Change, $m

 

 

2019e

2020e

2019e

2020e

2019e

2020e

Production

GE koz

85.3

86.9

85.3

86.9

-

 -

AISC

$/oz

569

536

509

506

-60

-30

Revenues

$m

95.4

99.1

95.4

99.1

-

 -

EBITDA

$m

37.4

41.2

47.4

51.2

10.0

10.0

Tax

$m

-7.8

-9.2

-10.4

-11.3

-2.6

-2.1

Net CFO

$m

31.5

32.8

38.9

40.6

7.4

7.8

Capex

$m

-11.0

-8.0

-16.0

-16.0

-5.0

-8.0

FCF(post%)

$m

20.5

24.8

22.9

24.6

2.4

-0.2

Dividends

$m

8.0

6.9

8.0

6.9

-

 -

Net Debt/(Cash)

$m

-18.6

-36.5

-21.0

-38.8

-2.4

-2.3

  • Our changes to 2019 and 2020 estimates involve reclassifying expenses from operating costs to capital costs. Our EBITDA estimates rise by $10m to $47m and $51m, respectively on reduced operating costs. However, this would have seen a corresponding increase in expected capital expenditure of $10m for both 2019 and 2020. We understand from the company that it now expects lower underlying capital expenditure costs than we had originally forecast and we therefore only increased our capital estimates for 2019 and 2020 respectively by $5m and $8m - this to give $16m for both years. Savings in sustaining capital costs of $4m (extra $1m comes from exploration) in 2019 and $2m in 2020 bring a drop in AISC of $60/oz and $30/oz, respectively (exploration costs are not included).
  • The cash tax paid increases as a result of higher earnings in both years.
  • Dividends remain unchanged as the 25% of FCF policy for both years gives lower than a minimum assumed payment commitment of 6USc per annum (i.e. c.$27m in minimum annual FCF).
  • Net cash position improves by $2.4m to $21.0m as a reduction in capital spend outweighs higher tax bill in 2019, with little change in 2020 as the two nearly match.
  • Please refer to the pdf file for production forecasts breakdown between different process routes.

Conclusion: Our above adjustments are aimed at better aligning reported and estimated numbers. Capitalisation of a proportion of expenses raised our EBITDA estimates incurring higher tax bill, which was compensated by a downward revision in capital costs (mostly sustaining). On a net basis, the overall effect on cash flows is slightly positive with net cash position improving by $2.3m over two years.

EBITDA margins reduce slightly as flotation circuit begins to contribute more to total production while higher margin AGL contribution pulls back. Counterintuitively, AISC are coming down during the period which in turn reflects higher share of by-product revenues in total sales (32% of pre-PSA revenues in 2019 v 17% in 2018).

Gedabek operations remain highly FCF generative benefiting from low cost jurisdiction and good infrastructure that allows the team to invest in exploration, pay good dividend (5.1% DY on 92p) as well as maintain robust balance sheet should an attractive target come along.

With the latest revision having little change to forecast FCFs and a share of cash costs reclassified form operating to capital expenses, we adjusted our target EV/EBITDA multiple down to 4.0x which after applying to an average of 2019 estimated EBITDA of $47m and 2020 EBITDA of $51m and adjusting for $6.1m in net cash as of Dec/18 we arrive at our target valuation of $203m or 127p per share.

(Dec year end)

 

2014

2015

2016

2017

2018

2019E

2020E

Gold price

US$/oz

1,267

1,161

1,253

1,261

1,271

1,302

1,350

Copper price

$/t

6,828

5,505

4,872

6,196

6,554

6,368

7,000

Gold production

koz

60.3

72.0

65.4

59.6

72.8

67.1

65.7

Copper production

kt

0.8

1.0

1.9

2.0

1.6

3.2

3.6

GE production

koz

65.0

77.0

75.2

71.6

83.8

85.3

86.9

AISC (incl PSA, reported)

US$/oz

1,050

858

616

604

541

509

506

Revenue

US$m

68.0

78.1

79.2

71.8

90.4

95.4

99.1

EBITDA

US$m

10.1

18.7

33.7

32.0

49.8

47.4

51.2

FCF

US$m

-6.9

3.4

14.6

16.3

27.4

22.9

24.6

EV/EBITDA

x

7.7

3.1

1.7

1.7

1.5

2.7

2.5

PER

x

-

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