Today’s Market View – US blacklists Chinese companies. Sirius Minerals lays off 300 workers

News

SP Angel . Morning View . Tuesday 08 10 19


US blacklists Chinese companies


Sirius Minerals lays off 300 workers


Markets rangebound amid trade talks uncertainty


MiFID II exempt information – see disclaimer below




Central Asia Metals (LON:CAML) – H1 2019 operations on track to meet full year 2019 guidance


Metal Tiger (LON:MTR) – Kalahari drilling


MOD Resources (LON:MOD) – Court approves Scheme of Arrangement


Sirius Minerals (LON:SXX) – 300 workers laid off at Sirius’s Woodsmith mine site


Vast Resources* (LON:VAST) – Funding update




Dow Jones Industrials -0.36% at 26,478


Nikkei 225 +0.99% at 21,588


HK Hang Seng +0.28% at 25,893


Shanghai Composite +0.29% at 2,914


FTSE 350 Mining +0.26% at 17,455


AIM Basic Resources +0.13% at 2,113




Economics


US – The US administration blacklisted eight Chinese technology companies on Monday ahead of the high-profile trade meetings scheduled for later this week.


  • Companies were singled out on the ground of human rights violations against Muslim minorities in the far-western region of Xianjiang of China.
  • Among targeted firms were two video surveillance companies that are estimated to control around a third of the global market for surveillance equipment and artificial intelligence startups including SenseTime and Megvii Technology.
  • Companies on the list need to seek US government license before being allowed to trade with American companies, although some have maintained relationships with banned companies through international subsidiaries.
  • VP Liu He is set to meet with US Trade representative Robert Lighthizer and US Treasury Steven Mnuchin on Thursday/Friday with only days before another round of US tariffs come into effect on October 15.
  • The Chinese delegation to Washington includes officials from the commerce ministry, central bank, information technology ministry and agricultural ministry.
  • The Chinese Ministry of Foreign Affairs urged to ‘stay tuned’ for retaliation over US tech blacklist.

China – Private sector PMIs picked up slightly in September led by faster growth in the manufacturing sector while services’ measure slowed to the weakest in seven months.


  • Also, on a positive front is a pick up in growth rates for new business orders in both sectors led by domestic demand with overseas interest either sliding (manufacturing) or growing only modestly (services).
  • “China’s economy showed signs of marginal recovery in September, as the labour market improved and domestic demand increased at a faster pace,” Caixin commented on the data.
  • On a separate note, State broadcaster CCTV will be removing NBA games (National Basketball Association) from its schedule following the tweet from Houston Rockets General Manager expressing support for protesters.
  • “Fight for freedom, stand with Hong Kong,” read the message by Daryl Morey which was quickly deleted afterwards.
  • The incident comes during a high-profile promotional week for the league in one of its biggest markets as players and fans are preparing for the start of the new season.
  • Caixin Manufacturing PMI: 51.4 v 50.4 in August and 50.2 forecast.

    Caixin Services PMI: 51.3 v 52.1 in August and 52.0 forecast.
  • Caixin Composite PMI: 51.9 v 51.6 in August.


Japan – Household spending picked up for ninth month in August ahead of a sales tax hike that took effect this month.


  • Expectations are for a sharp slump that would match the pattern recorded during the previous tax increase.
  • As a confirmation of coming weak data, consumer confidence slipped to the lowest since June 2011 last month, according to government figures published last week.
  • Household Spending (%yoy): 1.0 v 0.8 in July and 1.0 forecast.


Germany – Industrial production unexpectedly climbed 0.3%mom in August following two months of declines, although YoY the output is down 4% and outlook remains weak.


  • The data follows the report on Monday that showed factory order continued to fall.
  • “Despite the recent slight revival, industry remains mired in a downturn,” the economy ministry said in a statement.
  • Industrial Production (%mom/yoy): 0.3/-4.0 v -0.4/-3.9 in July and 0.0/-4.3 forecast.


China increases central bank gold reserves by 5.9t in September (Kitco.com)


  • China has continued its policy of buying large amounts of bullion, and has added almost 100t of gold over the last ten months (ft.com)
  • The People’s Bank of China announced holdings of the yellow metal rose to 62.64m ounces last month, an increase of 190,000 from August.
  • China is not alone by following a policy of central bank purchasing. Last year, central banks led by Russia purchased 651.5t of gold- the largest amount since 1971 (WGC).
  • The majority of banks that have been bolstering their gold reserves so far this year are primarily from emerging markets, such as Kazakhstan and Turkey.
  • Gold is considered a safe haven asset, and is being bought as central banks attempt to reduce their exposure to the dollar amid the US-China trade war.

Currencies


US$1.0988/eur vs 1.0964/eur yesterday. Yen 107.17/$ vs 106.88/$. SAr 15.152/$ vs 15.152/$. $1.227/gbp vs $1.229/gbp. 0.675/aud vs 0.674/aud. CNY 7.131/$ vs 7.148/$.




Commodity News


Gold US$1,499/oz vs US$1,501/oz yesterday – Impala Platinum to acquire North American Palladium for US$758m (mining.com)


  • The South African company announced yesterday it would buy the Canada-based Palladium firm, making it the miner’s first purchase outside of Africa.
  • Impala Platinum agreed to pay private equity firm Brookfield Business Partners C$570m for its 81% stake, or C$16 a share (financial post).
  • It is offering C$19.74 per share to minority shareholders, which the company called a 15% premium on the 30-day weighted average price.
  • The deal sees Impala Platinum acquire the Lac des Iles mine, with around 235,000oz per year and means the firm would control around 13% of the global palladium supply.
  • Palladium hit a record price of $1,700 last week, and the metals price has risen more than 30% in 2019 (ft.com).
  • Chinese demand for palladium has increased due to the 2020 nationwide emissions standard, and global supply remains tight.


Gold ETFs 81.5moz vs US$81.3moz yesterday


Platinum US$881/oz vs US$876/oz yesterday


Palladium US$1,646/oz vs US$1,652/oz yesterday


Silver US$17.51/oz vs US$17.45/oz yesterday




Base metals:


Copper US$ 5,710/t vs US$5,662/t yesterday


Aluminium US$ 1,742/t vs US$1,719/t yesterday


Nickel US$ 17,540/t vs US$17,795/t yesterday


Zinc US$ 2,289/t vs US$2,317/t yesterday


Lead US$ 2,176/t vs US$2,180/t yesterday


Tin US$ 16,305/t vs US$16,570/t yesterday



Energy:


Oil US$58.7/bbl vs US$58.7/bbl yesterday – Oil prices edged lower yesterday, erasing an earlier gain as the dollar rose and investors looked ahead to another round of trade talks between the U.S. and China


  • U.S. crude futures were off 0.1% at $52.75/bbl on the New York Mercantile Exchange, on the back of the strengthening dollar
  • US-China trade tensions and the outlook for Fed policy remain the single largest drivers of oil prices in our view


Natural Gas US$2.303/mmbtu vs US$2.313/mmbtu yesterday


Uranium US$25.20/lb vs US$25.25/lb yesterday



Bulk:


Iron ore 62% Fe spot (cfr Tianjin) US$88.5/t vs US$88.4/t


Chinese steel rebar 25mm US$566.5/t vs US$559.4/t


Thermal coal (1st year forward cif ARA) US$67.0/t vs US$65.8/t


Coking coal futures Dalian Exchange US$182.2/t vs US$181.8/t




Other:


Cobalt LME 3m US$34,500/t vs US$34,500/t


NdPr Rare Earth Oxide (China) US$44,521/t vs US$44,416/t


Lithium carbonate 99% (China) US$6,941/t vs US$6,925/t


Ferro Vanadium 80% FOB (China) US$38.2/kg vs US$38.3/kg


Antimony Trioxide 99.5% EU (China) US$5.1/kg vs US$5.1/kg


Tungsten APT European US$205-215/mtu vs US$205-215/mtu




Battery News


Volkswagen in talks to share electric vehicle technology with other automakers (business Insider)


  • EV technology used in upcoming Porsche and Audi vehicles could be shared with other automakers according to Audi’s head of development for the joint Audi-Porsche project, Ulrich Widmann .
  • The technology is called Premium Platform Electric (PPE) architecture- a platform that can be adapted for vehicles of different length and width (Autocar).
  • It features an 800V system capable of 350kW charging, and can accept different sizes of battery, with the larger offering a range of more than 300 miles.
  • As of April 2019, VW has committed spending $91 billion on EV technology, more than any other automaker (reuters).
  • Licensing the PPE platform would help VW begin to recoup its huge investment into EV technology.
  • Widmann told Automotive news that the massive cost of developing electric car tech from scratch might make VW’s platform an attractive option for smaller firms like Aston Martin, McLaren, and Maserati.

Transocean run first Semi-Submersible platform drilling under battery power


  • The rig is a hybrid using battery storage to improve fuel consumption and reliability.
  • If the rigs engines go down the rig should be able to maintain position till power is restored.
  • The rig is also able to recharge its batteries using power that would otherwise be wasted.


Company News


Central Asia Metals (LON:CAML) 200 pence, Mkt Cap GBP352.0m – H1 2019 operations on track to meet full year 2019 guidance


  • Central Asia Metals reports that it produced 4,039t of copper from its Kounrad operation during the three months ending 30th September, bringing year to date output to 10,633t leaving it on track to achieve its full year guidance of 12,500-13,500 tonnes.
  • The company comments that “During Q3 2019, preparations for the forthcoming winter operating period were substantially completed”.
  • At the Sasa mine in North Macedonia, production of 6,186t of zinc in concentrates and 7,362 of lead in concentrate during the quarter brings year-to-date output to 17,703t of zinc and 21,718t of lead keeps the mine on course to meet its full year guidance targets of 22-24,000t of zinc in concentrate and 28-30,000t of lead in concentrate.
  • The Sasa mine produces a 50%zinc concentrate and a 72% lead concentrate and is typically paid for 84% of the value of zinc in concentrate and for 95% of the value of the lead, “Accordingly, Q3 2019 payable production of zinc was 5,195 tonnes and of lead was 6,993 tonnes, bringing total 2019 payable production to 30 September to 14,847 tonnes of zinc and 20,632 tonnes of lead”.
  • “During the first nine months of 2019, Sasa sold 254,617 ounces of payable silver to Osisko Gold Royalties, in accordance with its streaming agreement”.

Metal Tiger (LON:MTR) 1.35p, Mkt Cap GBP21.0m – Kalahari drilling


(Metal Tiger holds approximately 12.5% of MOD following the sale of its 30% interest in the T3 copper project in Botswana)


  • Metal Tiger reported yesterday on the progress of its 59.81% owned Kalahari Metals’ drilling programme on the Ngami Copper project and the Okavango Copper project in Botswana.
  • To date, nine holes have been completed for a total of 2008m across the two project areas
  • At the Ngami project, seven holes (1381m) have been completed for initial testing of fold hinge zone targets and “has successfully intersected the D’Kar formation (“DKF”) – Ngwako Pan formation (“NPF”) contact in fold-hinge settings with associated Cu mineralisation” identified from airborne electromagnetic interpretation.
  • Hole NCP06 intersected the DKF/NPF contact at a depth of 254.9m and encountered “trace amounts of Cu carbonates” in what has “the potential for fold-hinge related mineralisation in this project area”.
  • A further two holes (627m) have been drilled on the Okavango project area “In both cases, drill holes (OCP01 and OCP02) have intersected the prospective DKF-NPF contact and … recent understanding of the AEM conductor is now being used to accurately position additional drill hole positions without a requirement for expensive stratigraphic pilot holes.”
  • The first of the holes at the Okavango project intersected copper carbonates in fractures within the hinge zone of a plunging anticline, while the second hole, located 1.6km to the west, “proved more successful, intersecting a broad mineralised zone which included visible Cu sulphide mineralisation from 240.5-264.1m. This mineralised package … is associated with thin, cross-cutting carbonate and quartz veinlets”.
  • The company says that the “core is currently in the process of being cut and sampled, prior to being sent to an analytical laboratory for geochemical analysis. Additional drilling is planned to test for continuation of mineralisation along strike from OCP02”.

Conclusion: Early stage drilling of targets defined by geophysics has identified mineralisation in the expected geological setting. We look forward to further news and to the assay results from the work completed so far.




MOD Resources (LON:MOD) 22.5p, Mkt cap GBP76.4m – Court approves Scheme of Arrangement


  • MOD Resources has announced that the Supreme Court of Western Australia has approved the Scheme of Arrangement under which Sandfire Resources will acquire MOD Resources.
  • The Court’s decision will be formally lodged with ASIC and thereafter the company’s shares will be suspended.
  • “Based on the number of MOD shares held by those shareholders who have made a cash election on 25 September 2019, shareholders who have made a cash election will receive A$0.4111607 per MOD share (Cash Consideration) and 0.005731 Sandfire shares for every MOD share held”.
  • Previously published feasibility work on MOD Resources’ T3 project describes a 3mtpa open-pit mining operation producing an average of approximately 28,000tpa of copper and 1.1mozpa of silver over a mine life of 11.5 years. These studies envisage pre-production capital expenditure of US$182m, plus additional sustaining capital of US$84m over the T3 mine’s life, is expected to produce a pre-tax NPV8% of US$368m and generate an IRR of 33% at a copper price averaging US$3.08/lb (US$6,790/t).
  • Extensions into underground mining at T3 are under investigation.
  • In addition, T3 Resources is advancing exploration of several other projects within the Kalahari Copper Belt including the T20 project where drilling of the T23 Dome has intersected disseminated copper mineralisation in a similar geological setting to that seen at T3.


Sirius Minerals (LON:SXX) 4.1p, Mkt cap GBP285m – 300 workers laid off at Sirius’s Woodsmith mine site


  • Sirius Minerals has hit the headlines again this time with the laying off of some 300 staff just two days after Sirius announced work was to slow at its sites.
  • The project is reported to have involved some 1,200 staff and contractors who were employed to build a mine which was evidently unfunded to completion.
  • Sirius management claim to be trying to solve the crisis but, sadly, we see little chance of a rescue and our thoughts are with those who have lost their jobs and the job losses that are likely to follow.
  • On one level we admire the determination of management and the workforce to look to build the Woodsmith project and if willpower was enough on its own then the workers determination could get the job done

    But:

Why did Sirius management start a project where a key component of the funding was not secured?


Why did Sirius go for such a large scale construction plan (est. US$3bn) – multi-billion dollar capital cost plans are not easy to fund for single project companies with no positive cash flow from existing mining operations?


Why did Sirius make the assumption that it could get sufficient offtake commitments for its Poly 4 (polyhalite) product?


Why would investors agree to finance a mine where offtake commitments could fail causing significant financial damage and potential collapse of the mining company?


Why did Sirius assume that offtake commitments would be sufficient to satisfy bond investors for a $500m bond?


Sirius were not just short of a few quid, they failed to secure a US$500m bond issue on which a US$400m convertible was contingent.


Why did Sirius assume that a $500m bond placement would be successful on a single project company making its entrance into the fertilizer market?


We speculate that some bankers may have offered assurances on the US$500m but we would consider it ill-judged to take these assurances as firm money in the bank.


Why did Sirius assume that it could ramp up production to 10mt and sell this into a market which is currently estimated to be around 2.5mtpa for potassium magnesium sulphate (SOPM) fertilizers?




  • Re: Capital costs: in the Apr 2017 prospectus SRK’s Technical report used total capex of $3,546.4m including $857.5m for the tunnel to the port and a further $640.5m for the port and materials handling facilities.
  • In July 2019, RPA (Roscoe Postle) wrote an “Independent Technical Engineer Phase 2 Due Diligence Report on the North Yorkshire Polyhalite Project, UK ” – on the company’s website at: https://siriusminerals.com/downloads/rpa-report/ which did not include a breakdown but reported the overall capital for the project as $4,056m
  • Given that BHP has had its giant Jansen potash mine in Canada on hold for some years despite the expenditure of $2.7bn over the six years give some idea of the risks of trying to enter the fertilizer market in this sort of scale.
  • BHP has said it would consider selling a stake in the Jansen mine but no successful offer has stepped forward.
  • We note that Potash is a different fertilizer feedstock to Polyhalite and Sirius’ Poly 4 product.
  • Furthermore we can quote instances where mine plans have had to wait till market conditions allow before financing and construction.
  • We note it is much easier to finance mines where the commodity to be produced is quoted on the LME where hedging and forward financing products are available and relatively normal.
  • This is not normally the case with industrial commodities and fertilizers.
  • Worse still the US$250m royalty sold to Hancock British Holdings Ltd last September is going to require some explanation and a few choice words from the very generous Gina Reinhart whose family trust put up the money.
  • We are concerned that costs have escalated and were surprised to see Sirius offer to build a 37km tunnel and some other infrastructure from the mine to the port costing some US$857m rather than a lower cost solution.
  • Negotiating a lower capital cost alternative might have helped to save the project.
  • We also understand that Sirius had secured just 40% commitments for its Poly 4 offtake. We would be interested to understand how these offtake commitments might have been considered sufficient to underpin a $500m bond issue?
  • Management have called for the UK government to bail out the mine in an emotional appeal to save hundreds of jobs which have been shed.
  • We would be surprised to see the UK government step in with substantial financial support for a project which could see cost overruns, delays and the potential difficulties in the sale of its offtake.

Conclusion: We would normally consider it to be extremely risky and unusual to start construction of a mine of this scale and this type of product without being certain of where the finance was coming from.




Vast Resources* (LON:VAST) 0.35p, Mkt Cap GBP36m – Funding update


  • The Company is finalising documentation for the expected $13.5m (net) finance facility.
  • A further update on the facility will be made shortly.

*SP Angel acts as Broker to Vast Resources




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


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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.




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



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