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Today's Market View - US China rare earth threats escalate

Today's Market View - US China rare earth threats escalate

SP Angel – Morning View – Wednesday 05 06 19

US China rare earth threats escalate

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MiFID II exempt information – see disclaimer below 

ARC Minerals* (LON:ARCM) – Drill rigs mobilised  

Ariana Resources (LON:AAU) –2018 results

Kvango Resources (LON:KAV) – SkyTEM low frequency AEM penetrating below 400m of cover in Botswana to show new mega-structures

Bacanora Lithium (BCN) – Feasibility study positive economics for Zinnwald Lithium

Talga Resources* (ASX:TLG) – high-grade graphite discovery confirmed at Niska

 

China looks at imposing export restrictions on Rare Earths…

  • Like a game of Mahjong China loves playing games with the West where it holds most of the cards.
  • The China State Planner, which is definitely filled with Mahjong players, is getting ready for its next move in the game of Rare Earth restrictions.
  • We could assume the US military and other agencies saw all this coming and stockpiled REEs in preparation for this day but that would be to potentially credit more organised intelligence to a system better known for other things.
  • China tells us that the National Development and Reform Commission met with industry experts who suggested a mechanism for tracking and approving REE exports. That’s code for we are going to restrict your supply suckers!
  • Just to make sure the American’s get the hint Departments of the NDRC have indicated they will put measures ASAP and will crack down on, normally tolerated, illegal mining,  processing and smuggling of REEs so there’s full compliance this time.
  • The funny thing is the strategy has been playing out for years so there is not much that is really new in all this from what we see, though it may still hit US manufacturers which are trying to compete with counterparts in China.
  • Problem is that it will take the West some time to start production of the heavy REEs needed for permanent magnets in motors and even non-Electric Vehicles and other devices use the properties of these REE materials to drive the electric windows, air conditioning and other servos.
  • Fortunately China does not control all REE processing with four significant process plants outside China though they do still influence much supply.
  • Sadly China still effectively controls the price of REEs offering very large and often prohibitive prices for concentrate material which cuts into the margins of aspiring Western miners.
  • If the Competition Authorities could have a go at China, they would have a field day but while they may painfully investigate price collusion over punnets of Strawberries at Wimbledon they seem ineffective when it comes to REEs in China.

Conclusion: We recommend  Mkango Resources* as a key, near-ready REE project company and we reckon you should buy your next iPhone before the REEs that make it work run out.

 

…as the US Commerce Department scrambles to secure alternative supply

  • The growing trade war stand-off is focusing on critical minerals required in everything from washing machines to military hardware, as the US Commerce Department promised “unprecedented action” to ensure that the US won’t be cut off from supplies of rare earths.
  • The Department’s release of a report outlining steps to ensure supply came hours after the Asian nation’s top state economic planning body said it’s studying proposals to establish export controls on the materials.
  • China’s state media highlights the value of rare earths as a potential trade weapon, with more than 80% global supply and higher proportion of processed product.
  • Any attempt to curb exports would add to a rift between the world’s two biggest economies that already encompasses sweeping tariffs, the blacklisting of China’s top telecommunications group and warnings from China to its citizens traveling to the U.S.
  • The report highlights “if China or Russia were to stop exports to the United States and its allies for a prolonged period -- similar to China’s rare earths embargo in 2010 -- an extended supply disruption could cause significant shocks throughout U.S. and foreign critical mineral supply chains.”
  • The U.S. Commerce report recommends a number of steps, including improving the government’s understanding of domestic sources of rare earths and expediting approvals of mining permits.
  • US reserves total 1.4Mt, 93x the nation’s 2018 output, according to US Geological Survey figures.

 

Dow Jones Industrials

 

+2.06%

at

  25,332

Nikkei 225

 

+1.80%

at

  20,776

HK Hang Seng

 

+0.29%

at

  26,838

Shanghai Composite

 

+0.01%

at

   2,863

FTSE 350 Mining

 

+0.64%

at

  18,967

AIM Basic Resources

 

-1.38%

at

   1,959

 

Economics

US – A rebound in equity markets is led by Fed Chairman Powell dovish comments suggesting central bank’s openness to a rate cut.

  • Jerome Powell said the central bank was watching fallout from the trade war and would react “as appropriate”.
  • Comments come only a day after St Louis Fed President James Bullard said in a speech that a rate cut may be needed “soon”.

 

China – Private sector growth moderated to a three month low in May mainly driven by a slowdown in the services sector and a stagnation in the manufacturing sector.

  • Caixin Composite PMI: 51.5 v 52.7 in April.

 

Eurozone – The private sector growth accelerated slightly in may as faster growth in the services sector compensated for a fourth consecutive monthly contraction in May.

  • “Despite output at good and service providers collectively rising at a slightly faster rate in May, the survey data are merely indicating a modest 0.2% rise in GDP in the second quarter,” Markit commented on numbers.
  • Outlook remains challenging with new orders increasing by only marginally while companies’ expectations of growth over the coming year dropped to one of the lowest level in six years.
  • Markit Composite PMI: 51.8 v 51.5 in April and 51.6 flash reading.

 

UK – Boris Johnson warned his fellow Conservatives that the party faces an “existential crisis” if it does not deliver on Brexit by October 31 ruling out a snap general election, a second referendum or a further delay to the UKs exit form the EU, FT reports.

  • The Eurosceptic former foreign secretary appears to be the favourite in the race to replace Theresa May who will step down as Tory leader on Friday.

 

Australia – Growth slowed to the weakest level in a decade in Q1/19 amid slowing housing market and weakening Chinese economy.

  • “Overall, today’s data don’t inspire much confidence in the Australian economic outlook… and given that the housing downturn has so far continued in 2019 we don’t think that weakness was a one-off,” Capital Economics commented on results.
  • The central bank cut rates yesterday following a series of weak economic data.
  • GDP (%qoq/yoy): 0.4/1.8 v 0.2/2.3 in Q4/18 and 0.5/1.8 forecast.

 

South Africa – The economy recorded the strongest drop in a decade last quarter, numbers released yesterday showed.

  • A series of rolling blackouts from November to March were among the worst the nation has yet experienced weighing on manufacturing (-8.8%), mining (-11%) and agriculture (-13%).
  • The central bank warned that power cuts could bring economic growth for the year close to zero if they are not addressed.
  • The rand was down 1.4% against the US$ on the news and continued to slide this morning trading around the weakest level since Q4/18.
  • GDP (%qoq annualised): -3.2 v 1.4 in Q4/18 and -1.6 forecast.

 

VenezuelaDeutsche Bank took control of a gold collateral (20t) after the nation deafaulted on a gold swap agreement valued at $750m.

  • Venezuela borrowed US$ against a collateral back in 2016.
  • The agreement which was due to expire in 2021 was settled early after Venezuela missed interest payments.
  • Juan Guaido’s parallel government is reported to be in discussions with the bank regarding the difference between the amount owed and the collateral value.
  • The opposition asked the bank to deposit $120m into an account outside President Nicolas Maduro’s reach.

 

Currencies

US$1.1262/eur vs 1.1274/eur yesterday  Yen 108.11/$ vs 107.96/$  SAr 14.757/$ vs 14.409/$  $1.270/gbp vs $1.269/gbp  0.700/aud vs 0.699/aud  CNY 6.908/$ vs 6.908/$

 

Commodity News

Precious metals:         

Gold US$1,334/oz vs US$1,329/oz yesterday

   Gold ETFs 71.5moz vs US$71.3moz yesterday

Platinum US$826/oz vs US$824/oz yesterday

Palladium US$1,339/oz vs US$1,326/oz yesterday

Silver US$14.86/oz vs US$14.81/oz yesterday

           

Base metals:   

Copper US$ 5,897/t vs US$5,855/t yesterday

Aluminium US$ 1,790/t vs US$1,775/t yesterday

Nickel US$ 11,855/t vs US$11,890/t yesterday

Zinc US$ 2,480/t vs US$2,481/t yesterday

Lead US$ 1,852/t vs US$1,812/t yesterday

Tin US$ 19,120/t vs US$19,125/t yesterday

           

Energy:           

Oil US$61.5/bbl vs US$61.0/bbl yesterday

Natural Gas US$2.409/mmbtu vs US$2.410/mmbtu yesterday

Uranium US$24.00/lb vs US$24.00/lb yesterday

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$95.6/t vs US$94.0/t

Chinese steel rebar 25mm US$604.2/t vs US$610.3/t

European steelmakers demand action as US tariffs spark crisis

  • Europe’s biggest steelmakers urged policy makers to cap low-cost imports from July, claiming an influx caused by US tariffs had left the region’s industry in crisis.
  • Steel previously shipped to the U.S. has been deflected to the European Union, even as demand weakens and costs increase, 45 European steel chiefs from ArcelorMittal to the Romanian Steel Producers’ Union said in an open letter to EU leaders, the European Parliament and the European Commission.
  • Low-cost producers such as Turkey and Russia are boosting steel exports to the EU at a time when demand from the region’s key auto sector is declining.
  • Steelmakers requested an emergency meeting “to discuss solutions to ensure the sector survives,” even as the UK’s No. 2 producer, British Steel, was put into liquidation.

Thermal coal (1st year forward cif ARA) US$65.0/t vs US$63.7/t

Coking coal futures Dalian Exchange US$197.3/t vs US$197.3/t

           

Other:  

Cobalt LME 3m US$32,000/t vs US$32,000/t

NdPr Rare Earth Oxide (China) US$49,940/t vs US$49,217/t

Lithium carbonate 99% (China) US$9,626/t vs US$9,626/t

  • Lithium carbonate export prices from Chile tumbled to an average $10,655/t, the lowest since November 2017, according to data from Chilean customs compiled by Bloomberg.
  • The fall in price represents 17.6% drop yoy and 9% fall from March.

Ferro Vanadium 80% FOB (China) US$35.6/kg vs US$35.5/kg

Antimony Trioxide 99.5% EU (China) US$5.8/kg vs US$5.8/kg

Tungsten APT European US$260-270/mtu vs US$270-280/mtu

 

Battery News

Tesla Model 3 and Hyundai Kona EV push electric cars to over 100,000 units in Canada

  • With the Tesla Model 3 and the Hyundai Kona EV boosting Canada’s EV sales in the first quarter, the country has achieved a new milestone: 100,000 electric vehicles on the road.
  • Electric Mobility Canada, a national membership-based not-for-profit organization dedicated accelerating electrification, released its Q1 2019 EV sales report in Canada. It shows that the country added over 8,000 electric vehicles on the roads during the first quarter and it was enough to push the total to over 100,000 electric vehicles in Canada.
  • Overall EV sales grew 21% in Q1, but the growth almost all came from Quebec and British Columbia.
  • In Ontario, sales have unsurprisingly crashed since the province’s generous EV incentives have been cut after the election of Ford’s Conservative party. Ontario is the biggest province and having its EV sales crash is significantly slowing down the national growth.
  • As for the specific electric car models, Tesla Model 3 and the Hyundai Kona EV made all the difference last quarter.
  • Here are the top 3 EVs in Canada during Q1 2019:

- Tesla Model 3: 1,594 units   

- Hyundai Kona EV: 1,163 units

- Mitsubishi Outlander: 710 units

 

Company News

ARC Minerals* (LON:ARCM) 2.7p, Mkt Cap £18m – Drill rigs mobilised  

  • ARC Minerals is moving a number of drill rigs to further test some exciting results at a key new 10x8km area at Cheyeza in Zambia.
  • The 3x0.8km area at Cheyeza East target shows up to 2,792ppm (0.28%) copper in geochemistry.
  • The Cheyeza East XRF readings for copper in soils show very high results over an area of what looks like 3x4km on a map indicating good potential for a significant copper orebody underneath.
  • The team are moving quickly with drill pads and access completed at Cheyeza West and Easst with two rigs due to start turning shortly.

Conclusion: We are normally cautious of soil anomalies due to the potential for surface material to be transported over significant distances particularly in areas of high rainfall.

In this case, the soil anomaly at Cheyeza East appears so strong and consistent over such a large area that it indicates a substantial copper orebody must surely sit underneath.

We look forward to further news from the drilling when it starts and from work ongoing at the existing Kalaba copper / cobalt mine.

Kalaba is now looking like it may be one of ARC’s smaller prospects compared with the very strong soil anomalies shown in the regional geochemistry program.

*SP Angel acts as nomad and broker to Arc Minerals.

 

Ariana Resources (LON:AAU) 2.025p, Mkt Cap £21.5m –2018 results

  • Largely as a result of a sharp rise in its share of the profits from its share of the Red Rabbit joint venture, Ariana Resources reports a profit of £2.18m for 2018 (2017 - £0.42m). The company’s share of the profits of the joint-venture rose to £3.71m (2017 - £1.83m).
  • Ariana’s 50% share in the joint venture, which operates the Kiziltepe gold mine in Turkey, rose to £3.71m (2017- £1.83m) with the mine producing “in excess of 27,100 ounces [which]  was 36% above guidance for the year. The mine has achieved an average cash-cost of US$415 per ounce” placing it within the lowest cost quartile of international gold producers.
  • “The Kiziltepe Mine has been paying cash dividends to both joint venture partners while maintaining debt repayments” and progressing the Tavsan project, where an Environmental Impact Assessment is expected to be submitted to the regulatory authorities in late 2019 “following which the feasibility study will be concluded in line with the requirements of project finance and final permitting.”
  • The company comments that the future development of the Tavsan project would increase the output of the Red Rabbit joint-venture from “its current annual production rate of 25,000 ounces to an expected 50,000 ounces of gold per annum.”
  • Chairman, Michael de Villiers pointed to the company’s active exploration programme which he said “is continuing apace across all project areas and the coming year is on target to be our busiest year of exploration activity to date. Exploration has delivered excellent results with a Company average discovery cost of US$15 per ounce, placing Ariana within the lowest international cost quartile”.
  • The Chairman attributed the low production and discovery costs to a combination of the low cost operating environment in Turkey and to the company’s “rigorous approach to the compilation and interrogation of data … [and to its] … disciplined distillation and analysis of geoscientific information” to maintain a pipeline of projects from early exploration  and “Salinbaş as our large-scale exploration asset” through its development project at Tavsan and into its producing asset at Kiziltepe .

Conclusion: Ariana Resources’ earnings have benefitted from a better than expected year at Kiziltepe as it presses ahead with advancing its Tavsan project and progressing exploration at Salinbas – we look forward to further news.

 

Kvango Resources (LON:KAV) 4.1p, Mkt Cap £6.7m – SkyTEM low frequency AEM penetrating below 400m of cover in Botswana to show new mega-structures

  • Kvango, who appear to be rewriting the laws of probability with their drilling program in Botswana report results from their SkyTEM low frequency program AEM program.
  • The system feeds into a 3D model to show lithological units, structures, zones of conductivity and potential ore bodies on a line by line basis.
  • The system shows results down to 700m in some cases giving valuable information on the structures and magnetic characteristics of what lies below.
  • The team have identified a number of conductors closely associated with certain types of intrusives and faults.
  • SkyTEM 12.5Hz, which sounds like something out of the future, has revealed a 4.5km long conductor. Which is great given the system claims it can discriminate between false conductors and real conductors within its system.
  • Some 45 conductors have been identified with 24 of these detected on a single flight line.
  • Kvango’s geological team, which is almost all of them, will follow up on ground-based geophysical surveying and heinously dull but sadly all important soil geochemistry.
  • The work should follow up on the two drill holes which hit mineralisation under the Karoo sediments which show copper and copper and cobalt mineralisation.
  • The first drill hole hit a 200m zone of intensely altered rock with indicative cobalt values of up to 0.9%, averaging 0.2% cobalt and >70m of elevated copper, zinc, lead and nickel values as seen in very approximate XRF gun assays. We are waiting on the full assays from the two holes so we can confirm intersection lengths, minerals and grade.

Conclusion: Kvango may have found a new method for discovering large scale, metalliferous anomalies in Botswana. If their first round of drilling is any indication then more exciting discoveries are yet to come.   

 

Bacanora Lithium (BCN) 27.3p, Mkt Cap £36.6m – Feasibility study positive economics for Zinnwald Lithium

  • Lithium developer announce results for the NI 43-101 Feasibility Study for the Zinnwald Lithium project in Germany, confirming positive economics for the production of 5,112tpa (~7,285tpa LCE) of battery grade lithium fluoride – a high value, downstream product consumed in the manufacture of lithium battery electrolyte.
  • Bacanora acquired an initial 50% interest in Deutsche Lithium in February 2017 and has the option to acquire the outstanding 50% that it does not own. The Company announce it has reached an agreement with the administrators of SolarWorld AG, which holds the remaining 50% interest, to extend the Option period from August 2019 to February 2020.
  • The Zinnwald project hosts 35.51Mt ore grading 3,519ppm for 125kt of Li. Exploration upside focuses on ‘Falkenhain’ and ‘Altenberg DL’ claims, which have the potential to significantly increase Zinnwald’s resource base and project life.
  • Total Mineral Reserve for the Feasibility estimate 31.2Mt ore at a grade of 3,004ppm containing 94kt lithium.
  • An integrated conventional flow sheet utilised an established sulphate route for approx. 570,000tpa ore for capital cost €159m, including mining, processing plant, infrastructure, tailings management, general administration costs as well as the requisite contingencies.
  • FS includes sale of 32,000tpa of by-product potassium sulphate to the European fertiliser industry.
  • Base case modelling indicates a 30-year life of mine, which equates to revenue and EBITDA estimated at €3.86bn and €1.75bn respectively.
  • Project NPV provides €270m with a project payback of 6.1 years, for IRR 21.5%.
  • CEO, Peter Secker, adds “We are already working hard to secure strategic partners to develop the Project and we are actively considering a public listing for Deutsche Lithium, our 50%-owned subsidiary that holds Zinnwald, to help achieve our aim.”

 

Talga Resources* (ASX:TLG) A$0.59, Mkt Cap A$129.1m – high-grade graphite discovery confirmed at Niska

  • Advanced materials technology developer announce the first batch of diamond drillhole assay results from the recently completed campaign at Vittangi Graphite Project. A total of 28 diamond exploration holes for 3,046.5m were completed at Niska, located 1-2km northeast along strike of the Nunasvaara JORC-compliant Mineral Resource hosting 12.3Mt @ 25.5%Cg.
  • Discrete drilling focused on Niska North and South, separated by approx. 1,300m, which remains untested.
  • The North campaign covered a total strike length 250m on 25-50m spacing, defining two sub-vertical graphite units with a dolerite-gabbro interburden. The primary hanging wall graphite unit shows some variability in true width ranging 18->80m.
  • Highlights include:
    • NUN19010: 135.6m @ 25.75% graphite
    • Including 21.6m @ 25.92% Cg and 88.06m @ 29.83%Cg
  • The Niska South discovery completed seven holes, also intersecting Nunasvaara-type micrographite units up to 33m true width over approx. 100m strike.
  • Highlights include:
    • NUN19003: 30.16m @ 25.21% Cg
    • NUN19004: 33.27m @ 26.31% Cg
    • NUN19006: 18.8m @ 27.18% Cg
  • Assay results are published for 12 drillholes, with the balance expected over the coming 3-4 weeks.
  • Graphite mineralisation intercepted is understood to be direct extensions of the Nunasvaara North graphite units hosting the higher-grade portion of the Nunasvaara resource.
  • Subsequent exploration is based on stratigraphy, geophysical signature, exceptional high grades (up to 44.5%Cg), similar geochemical composition, distinct lack of primary sedimentary textures found in the lower grade units, common quartz-amphibole-sulphide tension veins and frequent hydrothermal brecciation.
  • First-pass metallurgical testwork and a JORC-compliant mineral resource estimate for Niska will commence once the balance of assay results have been received.

Conclusion – Preliminary drill results at Niska yield very positive graphite grades, with the discovery appearing appropriate to scale up the world’s highest-grade graphite deposit. Building on the successful PFS study, we look forward to understanding metallurgical testwork results and suitability to increase the resource to support the rapidly accelerating European battery market.

 

*SP Angel acts as UK broker to Talga Resources. SP Angel analysts have visited the leading battery R&D institution WMG partnering with Talga.  

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