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Morning View - US FOMC and payrolls to dominate dollar and metals this week

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Herencia Resources (LON:HER) – High grade copper intercepts in Pastizal drilling

Metminco* (LON:MNC) – Miraflores Plan of Work submitted

Petra Diamonds (LON:PDL) – FY 2018 production guidance reduced

 

Lithium - Tesla eyes global lithium dominance in talks with Chile’s SQM over lithium investment

  • Tesla in talks with Chile’s largest lithium producer SQM about investing in supplies of the key battery material as it ramps up production of its first mass market electric car.
  • Could agree to build processing plant in Chile to produce high quality lithium it needs for its batteries and if successful would mark first foray into securing battery raw materials
  • SQM has recently just resolved long running dispute with Corfo which will allow the miner to quadruple lithium production by 2026
  • Eduardo Bitran of Chilean development agency Corfo, commented that Tesla could invest in processing technology in Chile to produce the high-grade lithium hydroxide, marking the first foray into securing battery raw materials. It could also bring a partner to make the battery cathode in the country, as Chile has some of the world’s cheapest solar power.
  • With an increasing supply of lithium, Chile is key for any company that wants to become global in electro-mobility. Being close to Chile or having a strategic alliance in Chile becomes a strategic factor for a company like Tesla”.

 

The Men Who Built the Liners (BBC4 Timeshift)

  • A magnificent program about the decline of the shipyards on the Clyde and the way in which the shop stewards worked to keep the yards going.
  • ‘Despite some of the harshest working conditions in industrial history and dire industrial relations, it was here that the Queen Mary, the Queen Elizabeth and the QE2 were built.’
  • http://www.bbc.co.uk/programmes/b00nnm7k

 

Cryptocurrency $534m theft

  • The world of cryptocurrencies was rocked on Friday by the hacking of Coincheck, Japan’s largest digital exchange which affected 260,000 customers.
  • The exchange has promised to refund some $423m worth of stolen cryptocurrency coins covering nearly 90% of the value of the coins stolen to those customers who lost their NEM cryptocurrency coins.
  • The exchange suspended trading in all cryptocurrencies except Bitcoin and mainly its NEM coin.
  • While the exchange knows the digital address of where the assets were transferred to we suspect the hackers may be one step ahead. MtGox, another Japanese cryptocurrency exchange lost some 850,000 bitcoins though some 200,000 bitcoins in an old digital wallet.
  • Japan is global leader in crypto currency - as of January 15th 2018
  • yen accounted for 56.2% of bitcoin (source: Japan Times/coinhills.com)  
  • This recent news follows South Korea Police and tax authorities raiding Cryptocurrency exchanges on January 10th 2017.
  • $400m value in gold weighs around 8.3 tonnes making it a safer investment, less easily stolen and potentially easier to trace.

 

SP Angel Mining team will be at the 121 Mining Investment Conference in Cape Town on 5th & 6th February

  • The event is hosting 85 mining companies and ~400 investors at the historic Welgemeend Farm in the Gardens district of Cape Town
  • >1,500 meetings have been organised with an average of 18 pre-arranged meetings per company
  • We look forward to meeting investors and companies at the 121 event or by appointment thereafter.
  • See:  https://www.weare121.com/121mininginvestment-cape-town/

 

SP Angel rank No 1 in Copper price forecasting in the Q4 2017 MB APEX report

SP Angel analysts ranked:  See MB APEX report link for further details

  • 1st for copper, 1st = for gold, 2nd for Palladium, 3rd for Coking Coal, 5th for Zinc

3rd in Q4 Precious Metals forecasts in Q4, 4th in Base Metals forecasting in Q4

SP Angel ranked No 1 for research by ‘Research Tree’ according to investor demand

 

Dow Jones Industrials

 

+0.54%

at

26,393

Nikkei 225

 

-0.16%

at

23,632

HK Hang Seng

 

+1.53%

at

33,154

Shanghai Composite

 

+0.28%

at

3,558

FTSE 350 Mining

 

-0.73%

at

18,944

AIM Basic Resources

 

+0.57%

at

2,719

 

Economics

US – Q4 GDP came in below market estimates weighed down volatile trade and inventories performance; while underlying growth drivers like consumers and business investments performed well during the quarter, markets are doubting prospects for sustained growth of 3%-plus recorded in the previous two quarters.

  • Private spending saw the best quarter in more than a year while business investment growth picked to the strongest pace in three years.
  • Government expenditures climbed 3.0%qoq, the most since 2015, contributing 0.5pp to GDP growth in the wake of post-hurricane rebuilding costs.
  • Trade and inventories made negative contributions deducting 1.8pp from the headline number; this compares to a 1.1pp contribution from net exports and inventories in Q3.
  • S&P 500 Index recorded its best day since March last year closing at another record high on the back of strong earnings from pharmaceuticals and tech sectors.
  • Nearly 120 companies included in the S&P 500 Index are due to report this week including the biggest tech companies such as Amazon, Apple, Alphabet, Facebook and Microsoft.
  • FOMC is meeting on Tuesday/Wednesday with expectations for no change in rates; non-farm payroll numbers are due this Friday with market estimates for a normalisation in the labour statistics following a series of significant swings recorded through Sep-Dec/17 reflecting weather related disruptions (+180k in Jan v 148k in Dec).
  • The market is looking for robust NFP payroll numbers at the end of the week
  • GDP (%qoq annualised): 2.6 v 3.2 in Q3/17 and 3.0 forecast.
  • Personal Consumption (%qoq annualised): 3.8 v 2.2 in Q3/17 and 3.7 forecast.
  • Core PCE ($qoq annualised): 1.9 v 1.3 in Q3/17 and 1.9 forecast.

 

Eurozone – Q4 GDP and inflation numbers are due Tuesday/Wednesday with expectations for robust output growth numbers (+2.7%yoy v +2.8%yoy in Q3/17) and a relatively modest reading of consumer prices changes (+1.3%yoy v +1.4%yoy in December).

 

Germany – Five year bond yields turned positive for the first time since late 2015 this morning amid improved economic growth outlook in the region and strong performance recorded by riskier equities.

 

UK – The EU counterparts to Brexit negotiations are demanding the UK to obide by the bloc’s laws “as if it were a member state” during a transition period starting in Mar/19 and lasting for 20 months.

  • Unconditional instructions are reported to have caused discontent among pro-Brexit Conservatives and are risking complicating and delaying any transition deal.
  • The pound is off 2.1% from highs of 1.43 against the US$ recorded on Thursday following a strong run recorded since the start of the year.

 

Miners hit as Congo Parliament approves reforms to mining legislation

  • Democratic Republic of Congo’s parliament adopted a major reform of the country’s mining legislation last week which will see a raise in royalty rates on key commodities including copper, cobalt and gold. According to Patrick Kakwata, the president of the National Assembly’s natural resources commission, and Evariste Mabi Mulumba, the president of the Senate’s economy and finance commission, the bill was accepted on the 27th Jan. and will now be sent to President Joseph Kabila to be signed into law. A Congolese government spokesman said the new taxes would give the country’s 80 million people “a fair share” of its natural resources.  
  • The move has been opposed by major miners, including Glencore, as the change of legislation is expected to suppress the supporting environment and detract foreign investment. Further to the hike in royalty payments, the bill introduces a profit windfall tax and is expected to double the state’s free stake in new project to 10%, having serious consequences on future project economic viability.
  • As demand from electric vehicles is expected to intensify, and the fundamental battery metal cobalt supply is dominated by DRC production, concerns are growing over the security and price of long-term output.

 

Currencies

US$1.2443/eur vs 1.2469/eur yesterday  Yen 109.25/$ vs 108.98/$  SAr 11.871/$ vs 1.842/$  $1.424/gbp vs $1.423/gbp  0.809/aud vs 0.808/aud  CNY 6.328/$ vs 6.320/$

 

Commodity News

Precious metals:         

Gold US$1,353/oz vs US$1,356/oz last week

  • Chair Janet Yellen’s concluding Federal Reserve policy meeting this week is expected to bring investors insight into the future path of monetary policy as gold steadies after posting its sixth weekly gain in seven. Bullion for immediate delivery topped $1,366.15 last week, the highest since August 2016 as the dollar slumped on conflicting comments on the US currency from President Donald Trump and his top officials.
  • While Fed officials aren’t expected to raise interest rates at Jan. 30-31st meeting, Goldman Sachs Group Inc. sees slightly hawkish upgrade of language. “A hawkish statement will likely put a dampener on the gold price. Gold continues to remain the preferred store in value in comparison to other options such as the cryptocurrency, bitcoin. US dollar weakness and continued uncertainty about global trade will limit any fallout”.
  • The dollar index continues to hover near three-year lows in early trading as Asian shares stretch their recent bull run amid upbeat corporate earnings and strong global economic growth, while more rumblings from the White House about ‘unfair’ trade practices keep the US dollar on the defensive.

   Gold ETFs 72.5moz vs US$72.5moz last week

Platinum US$1,020/oz vs US$1,020/oz last week

Palladium US$1,097/oz vs US$1,101/oz last week

Silver US$17.41/oz vs US$17.52/oz last week

           

Base metals:   

Copper US$ 7,099/t vs US$7,126/t last week

Aluminium US$ 2,240/t vs US$2,234/t last week

Nickel US$ 13,730/t vs US$13,800/t last week

Zinc US$ 3,473/t vs US$3,453/t last week

  • Zinc spot has soared to the highest level in more than a decade as inventories on the London Metal Exchange slump to 2008 lows. Supplies have consistently dwindled amid the closure of several large mines and sweeping environmental reforms that have curbed Chinese output, driving LME zinc as much as 3.1% higher to $3,584/t, its highest since July 2007, while gaining 3.3% to 27,055 yuan on the Shanghai Futures Exchange.
  • “It seems a supply squeeze is taking place on the LME, given stockpiles are so low and canceled warrants are rising”, according to SMM Information & Technology Co. analysis, while it is expected a big trader is behind the squeeze, aiming to drive the market into a deeper backwardation in order to profit from higher immediate prices. The spot zinc premium has risen to $41.50 in recent months over the three-month contract.
  • As the greenback steadied near a three-year low against a basket of currencies last week, other metals have also received a lift while benefiting from the surge in zinc prices, with LME nickel gaining as much as 2.9% to $14,040/t to its highest since May 2015.

Lead US$ 2,604/t vs US$2,600/t last week

Tin US$ 21,685/t vs US$21,290/t last week

           

Energy:           

Oil US$70.2/bbl vs US$70.4/bbl last week

  • Hedge funds and money managers raised their bullish bets on US crude to fresh record highs, with prices remaining at three-year peaks curtesy of continued declining inventories. The speculator group increased its combined futures and options positions in New York and London by 7,612 contracts to 549,602 in the week Jan. 23rd, according to US Commodity Futures Trading Commission. Drill
  • Meanwhile, US energy companies ramp up the number of oil rigs, adding 12 additional rigs last week, the biggest weekly increase since March, as supportive crude prices hover near their highest levels since 2014. Drillers boosted the oil rig count to 759, the highest level since September, according the General Electric Co’s Baker Hughes energy services.

Natural Gas US$3.481/mmbtu vs US$3.487/mmbtu last week

Uranium US$23.00/lb vs US$23.00/lb last week

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$73.9/t vs US$73.9/t

  • Iron ore futures fall to six-week lows, contracting 0.9% to end at 514.5/t on Dalian Commodity Exchange as Mills’ demand is expected to slow. The most-active contract fell 4.5% last week to its lowest close since Dec. 15th, while nationwide rebar holdings have climbed for 6 weeks to the highest since November according to Steelhome Data.
  • While current steel inventory still seems relatively low, its sufficient to use over a number of days despite the winter restrictions in place”, according to Sinosteel futures, while “the pace at which mills would require iron ore will slow”.

Chinese steel rebar 25mm US$660.7/t vs US$661.5/t

Thermal coal (1st year forward cif ARA) US$87.8/t vs US$87.0/t

Premium hard coking coal Aus fob US$213.7/t vs US$213.7/t

Anglo American continues coal exit with $71m sale

  • Anglo American has agreed to sell its New Largo coal project in South Africa for approximately $71m marking its exit from South African domestic coal mining.
  • The miner announced a sweeping asset-sale program in February 2016 following a plunge in commodity prices, and outlined plans to focus on diamonds, platinum and copper.
  • The transaction is subject to conditions including regulatory approvals in South Africa and is expected to close in the second half of 2018.
  • It is ironic that Anglo American are selling South African coal assets at a time when Cyril Ramaphosa is poised to push out President Zuma and clean up much of the corruption which has become endemic in the ruling party.
  • It is believed that ESCOM may have been used by some for corrupt practices which may have had a knock-on impact on consumers and local coal producers.

 

ArcelorMittal and Nippon steel joint bid for Essar steel

  • ArcelorMittal and Nippon Steel, two of the world’s largest steel companies in the world are planning to put joint bid in for bankrupt Essar Steel
  • Both ArcelorMittal and Nippon Steel had initially planned to submit separate bids for Essar Steel, with Tata Steel and Vedanta Resources also contenders in the bidding for the steel maker

 

Other:  

Tungsten APT European US$315-320/mtu vs US$310-318/mtu last week

Cobalt LME 3m US$79,750.0/t vs US$75,250.0/t

  • Supply disruptions at the Ambatovy mine in Madagascar this month reinforce concerns over global output, driving the metal to its highest levels since July 2008.

 

Company News

Herencia Resources (LON:HER) 0.07p, mkt cap £7.2m – High grade copper intercepts in Pastizal drilling

  • Herencia Resources has announced a number of high grade copper assays from its reverse-circulation drilling programme at the Pastizal / Picachos lease in Chile.
  • Initial drilling “of 25 holes for 2,400 metres demonstrated that the copper mineralised zones within the limestone and chert were near surface when compared with the copper zones identified at the adjacent Picachos lease.”
  • Initial indications are that the results “suggest further expansion of the zones is possible at depth and along strike.”
  • The Picachos-Pastizal exploration area is located on the western part of the Andacollo Copper-Molybdenum porphyry which has produced several millions tonnes of copper and significant silver over, at least, the last 30 years.
  • Among the results highlighted in today’s announcement are:
    • 4m at an average grade of 1.47% copper from a depth of 31m in hole PZ17051;
    • 4m at an average grade of 2.72% copper from a depth of 52m in hole PZ17057 which also contains a second intersection of 3m at an average grade of 4.13% copper from a depth of 59m
    • 4m at an average grade of 2.21% copper from a depth of 16m in hole PZ17063 which also contains a second intersection of 5m at an average grade of 1.69% copper from a depth of 32m and a third intersection of 2m at an average grade of 3.03% copper from a depth of 60m;
    • 3m at an average grade of 1.94% copper from a depth of 19m in hole PZ17064;
    • 3m at an average grade of 1.39% copper from a depth of 15m in hole PZ17065 and
    • 3m at an average grade of 1.44% copper from a depth of 32m in hole PZ17066
  • The copper silver mineralisation is reported to remain open to the east “where the extension and continuity of South East-North West faults from Picachos to the south need to be tested”.
  • Commenting on the results, Non-Executive Chairman, Peter Reeve, said “Herencia has completed its first RC drill program at the Pastizal project which identified high grade copper mineralisation over a 2-kilometre strike zone and a high success rate per hole.  We have an enviable ground position in an established copper belt and within 10 km of the Teck Resources Andacollo open pit copper mine processing up to 20 million tonnes per year at around 0.4% copper."

Conclusion: The initial results from Pastizal have shown encouraging results in close proximity to an established large scale mine. We look forward to further news as the company follows up the initial drilling with further exploration.

 

Metminco* (LON:MNC) 2.4p, Mkt Cap £3.1m – Miraflores Plan of Work submitted

  • Metminco has submitted its Plan of Work to the Colombian Mining Agency for the development of the Miraflores underground gold mine in Colombia.
  • The Plan of Work is a key approval, however, the company points out that, currently, “The critical path for the development of the project remains the completion of the EIA including the validation of the impacts on the local communities and the gaining of the social licence for the project.”
  • Completion of the EIA has been delayed by 4 months as a result of “Changes to the Terms of Reference including further water monitoring requirements” but, Managing Director, William Howe, confirmed that “Although further testing of water for the EIA will delay the submission of the document to the CARDER for approval, the Company is still on track to have all of its approvals for mine development during 2018.”

Conclusion: The Miraflores Work programme has been submitted for approval and, despite delays to the Environmental Impact Assessment, the Company remains confident that all required approvals for mine development will be forthcoming during 2018.

*SP Angel act as broker to Metminco. SP Angel analysts have previously visited Los Calatos in Peru and the Miraflores project in Colombia.

 

Petra Diamonds (LON:PDL) 65p, mkt cap £346m – FY 2018 production guidance reduced

  • Petra Diamonds reports that it is reducing its diamond production guidance for the year to 30th June 2018 to 4.6-4.7 million carats from the previously announced 4.8-5.0m cartas. The lowering of expectations reflects a reduction in the expected grades at the Cullinan mine as well as the impact of industrial action in South Africa which occurred during Q1.
  • The guidance revision follows record six-monthly production during H1 to 31st December 2017 of 2,208,056 carats; in line with the 2.2-2.3m carats guidance and 10% higher than the 2,015,087 H1 production in FY 2017.
  • Production at the Cullinan mine, where throughput at the new plant is reported to be ramping up well, is likely to encounter lower grades  and although the smaller stones are recoverable, “Petra’s initial assessment that it would be uneconomic to do so and would not be in line with the Company’s strategic focus on value rather than volume production.”
  • On the positive side, however, The Cullinan mine has recovered five diamonds larger than 100 carats in size during H1. Although these were of “poor quality” they include a 574.15 carat diamond “being the largest stone recovered by Petra at Cullinan to date”.
  • In addition to the issues at Cullinan, Petra’s Williamson mine in Tanzania has been adversely affected by the Government’s action to block the export of a parcel of approximately 71,000 carats.
  • Operationally, Williamson’s production increased by 64% to 174,834 carats as a result of higher throughput and a 40% increase in grade to 7.0cpht. Among the stones recovered were two “of record size … a poor quality stone of 461.5 carats and a near gem stone of 396.1 carats. The largest diamond previously recovered bat the mine was 260 carats in 1959”.
  • The company reports that, following a dip in diamond prices between July and October 2017, there is a recovery underway with “higher average values … realised at Finsch, Cullinan and Koffiefontein further to the improved product mix associated with higher production levels of undiluted ore and lower contribution of tailings carats.”
  • An increased marketing budget by the Diamond Producers Association is expected to expand marketing efforts in the US “as well as supporting its first full year investment in India … as well as its commencement of marketing in China in April 2018”. Overall, Petra “expects market conditions to remain stable in H2 FY 2018”.
  • The company reports that “Net debt of US$644.7 million (30 September 2017: US$613.8 million) is at the high end of expected levels as it was impacted by the labour action and working capital locked up in the block Williamson parcel”. “Net Debt for 30 June 2018 is expected to fall to US$560-600 million.”
  • As previously guided to the market, Petra expects to be in breach of the 31 December 2017 EBITDA related covenant measurement ratios associated with its banking facilities; the Company has therefore commenced formal discussions with its lender group, evaluating both the December 2017 and June 2018 measurements, bearing in mind the risks to covenant compliance associated with potentially not selling the blocked Williamson parcel and the potential further strengthening of the Rand. These discussions are expected to be concluded during Q3 FY 2018. Petra remains confident that the lender group will continue to support the Company as it progresses towards its targeted production profile.”
  • Commenting on the decision to forego the recovery of smaller stones at Cullinan and the resulting expected decline in volumes, CEO, Johan Dippenar, commented “This has led to lowered production guidance for FY 2018, but does not materially impact our expected revenue, further to the positive uplift in Cullinan's average value per carat. Likewise, we have been very encouraged by the recovery of large diamonds and other higher value single stones through the new Cullinan Plant to date, which was in line with our expectations that the incidence of such stones would increase as they are historically associated with the Western side of the orebody.”

Conclusion: Petra Diamonds has faced a difficult half year impacted by industrial action, a stronger Rand, reduced production at Cullinan as well as the embargo on exports from its Williamson mine in Tanzania.  Even so, as its net debt is projected to decline, it expects continuing support from its lenders and operationally the recovery of large diamonds at Cullinan and the largest diamond for more than sixty years at Williamson offer the prospect of enhancements to revenue in future.

 

 

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