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Commodities Week in a Minute: A quiet summer week makes the mind mischievous... Diamonds, gold, base metals, bulks and tech minerals

Commodities Week in a Minute: A quiet summer week makes the mind mischievous... Diamonds, gold, base metals, bulks and tech minerals

Commodities

Diamonds and precious stones

Not much to chat about his week so will keep it brief.

 

1. Don’t expect fireworks from next week’s De Beers Sight. Given the commentary last time out that some demand had been pulled forward and with many enjoying their summer holidays, pricing could be weaker than some expect.

2. Global volumes contracted further with declines registered in India, the US, Israel and Belgium when compared to 2016.

 

Oh and diamond rain generated in a lab?

 

Precious metals

 

On reflection, gold is certainly higher now than when we last spoke and all eyes are on the “hole”.

 

Mr French, our sometimes forward looking economist, made the following observations this morning: Yellen speaks at 3pm UK time. The Jackson Hole symposium has the theme of "fostering a dynamic economy" so expect a long preamble about productivity, regulation, the recovery since the GFC and in particular financial stability. But no-one outside Jackson will care - what they will be looking for are signals on the timing of the $4.5tn balance sheet rolloff, how this will be assessed once it has started, and how it will dovetail with interest rate changes. This has rather large implications for asset prices and Treasury yields. With inflation so low (and set to say low) I think this happens very slowly and so yields remain subdued and asset prices supported but a more hawkish tone risks a 2nd iteration of the taper tantrum. Draghi on at 8pm and signs of 2018 tapering from the ECB will increase the squeeze on GBPEUR which is below our price target from our Q3 outlook of

 

So there we have it, the runners and riders at the “hole”. .

Latest probability of another raise in 2017 is up to 40% from 33% two weeks ago… but that could all change later!

Base metals

Well two things to cover off from the last WIAM – Zinc: Through $3,000/t was correct. Copper: Short term profit taking, not yet.

 

Various positive catalysts for the red metal this week include violence at the massive Grasberg operation, a confirmation that grades are to stay below 1% long term at Escondida and some chunky inventory draws, both in London and Shanghai.

 

Andy whilst the longer term outlook remains positive, a quick review of our summary tables (in the attachment) shows short term trading positions to be very much in overbought territory.

 

Bulk commodities

Iron ore prices have flattened out a little this week, well in the lower grades anyway, the premium 65% remains the place to be, +8%. Amusingly I was reading about the average holding period of an iron ore contract in China was now 3.8 hours (Nymex crude is 47 hours). But this was not even close to where peak speculation lay; apparently ferrosilicon is where the action is right now with the average holding period of 39 minutes! No wonder the regulators are in a tizzy.

 

The scale is significant too, Wednesday more than 705,000 ferrosilicon contracts were traded as prices reached Y7,726/t as prices jumped 25% since the start of the month. For reference, the average volume for ferrosilicon last month was 22,000 contracts/day.

 

Iron ore and Chinese inventory levels – burning through the fat?

 

Elsewhere coking coal is back above $200/t, but words of warning from South32 CEO Graham Kerr who said on the analyst call that coking coal “certainly was not sustaining at the price levels we actually see today”. Shame as I am sure many would like to see it continue.

 

Technology minerals

A segment of the electrification theme that interests me (beyond the mining side) is in the downstream segments. This week saw Ningbo Shanshan commit to increasing global lithium-ion battery anode material capacity by 50% through the $569 million investment into a new manufacturing facility at Baotou in Inner Mongolia. Output is set to commence by June 2019. Global capacity for lithium-ion battery anode materials was estimated to be around 200ktpy in 2016; the largest producers are located mainly in China along with Hitachi Chemical in Japan. Production of anodes is often split between the use of natural and synthetic graphite or graphite and carbon blends but synthetic graphite is often used in Chinese anodes because of the availability of low cost secondary synthetic graphite supplied as waste material from the graphite electrode industry, ensuring near unbeatable cost advantages.

 

The point, which relates back to the many miners spoofing investors into their new white gold investments is simple, current in-place Li-ion battery production capacity is between 2 and 3 times current demand and is set to expand by a further 50% in the next twelve months. Chinese environmental closures, which have been on-going for years, is having a bigger impact on prices than anything else, ultimately will see a normalisation in many technology metal prices before 90% of the small-cap funds raising money ever reach production… Just in my personal opinion.

 

Company announcements/news/meetings:

Daily company commentary is now covered in our Boom Ore Bust publication (sent by Jamie Campbell). I will reiterate some of interesting updates or comments that I feel may have been missed/underappreciated below.

Naturally, if you wish to discuss any of these names in more detail, do get in touch.

Companies covered in the BoB this week include: PDL, S32, THS, BMN, APF, GLEN, VED, KMR, ANTO.   

 

Petra Diamonds – Erratum note (LON:PDL, Mkt cap: $623.5m) – Neutral

 

We have published an updated version of our 27 July note on Petra as our previous cash flow and balance sheet forecasts were incorrect.

 

We make no changes to our recommendation or target price.

 

Anglo Pacific – Interim results (LON:APF, Mkt cap: $273m) – Positive

 

- FCF £18.9m – at the top end of the £18.5-19.0m range (H1 2016: £4.7m) includes the £3.3m from the Denison financing (£1.7m related to H2 2016)

- 295% increase in royalty income to £16.1m in H1 2017 compared to the equivalent 2016 period (H1 2016: £4.1m; FY 2016: £19.7m)

- 88% of sales from Kestrel within the Group's royalty land compared to 38% in H1 2016, along with a ~10% increase in total sales volumes

- Record royalty at Kestrel in Q2 2017 with royalties paid on ~95% of sales, 88% for H1 as a whole. This will be held for the foreseeable future

- Fair value decline of 8% £9.4m (better than the guided £10.5-11.5m) to £107.5m for Kestrel, largely as a result of resource depletion

- Net debt of £0.6m at June 30, 2017 (December 31, 2016: £1.0m) including repayment, within six months, of the C$12.75m drawn as part of the Denison finance arrangement

- Cash generated in July resulted in the Group returning to a net cash position

- Interim dividend of 3p. Future dividends to be paid in quarterly instalments. Q4 will likely be adjusted to reflect the actual level of income earned during the year.

 

Given the strong price performance of both coking coal and vanadium (where Chinese supply issues have seen domestic prices more than double) weak sterling and an extended period of production from the company’s royalty lands at Kestrel,  we think today’s update is largely positive and continues the trends we have been seeing for in recent periods. With the shares down 8% ytd in absolute terms, a conservative 5% yield and strong free cash generation, Anglo Pacific is an interesting opportunity for those seeking mineral exposure but no operational risk.

 

Kenmare Resources – Interim results (LON:KMR, Mkt cap: $358m) – Positive

 

Following on from the recent trading update Kenmare have provided their Interims. Salient points:

 

Rev: +82% $102.4m, Cons $101m

EBITDA: $29.8m, Cons $30.8m up from a loss of $10.7m

EPS: $9c, Cons: 9.2c

OPCF: $16.7m vs. $6.6m

Net Debt: $38m Cons: $23.8m

 

As a reminder, production highlights include Heavy Mineral Concentrate ("HMC") production 18% to 712,700t vs. H1 2016. Ilmenite production +25% to 504,800t as Q2 continued the strong progress already seen in Q1, with production +14%. Primary zircon production, which holds a significantly higher valuation than secondary, increased by 33% to 25,700 tonnes and rutile jumped 47% to 4,400t. Total shipments of finished products in Q2 declined 10% to 279,600 tonnes, due to normal variations in shipping schedules in Q2 but total shipments in the first half still rose 21% to 535,700t. Grades in Q2 declined to 4.46%, as forecasted but HMC production volumes are expected to be broadly maintained as improvements in operating times and supplementary mining operations kick in. Overall, management expect full year guidance of 900-1000kt of ilmenite to be met. (Current run rate is for 1,010kt).

 

As previously mentioned, Kenmare is on track to meet full year guidance. Ilmenite spot prices have declined in recent weeks given the influx of lower quality supplies but overall, pricing for both ilmenite and zircon are expected to remain strong in Q2 with the company agreeing further price increases for contracted supplies to be delivered in the period ahead. It is also worth considering that with Zircon prices are rising so fast (now 30% of KMR revenues) peer Iluka is now trading at 52w highs whilst KMR is still around the same prices that it was at the restructuring – an opportunity? We think so.

 

South32 – Full year results – mixed, but buyback will support shares (LON:S32, Mkt cap: $11.9bn) – Neutral

 

South 32 has benefitted from both strong base metals and bulk commodity prices and the company sees met coal as reasonably attractive commodity longer-term but interestingly CEO Graham Kerr said on the analyst call clarified their view that coking coal “certainly not sustaining at the price levels we actually see today,”. Optimism continues to be driven by China’s stronger than expected growth rate, aided by improvements in construction, infrastructure and housing

 

• Revenue up 20% to $6.95b, est. $7b

• FY17 Underlying profit $1.15b, est. $1.18b

• Full-year dividend 10c, est. 9.3c (up from 1c in 2016)

• FCF >300% to $1.9bn

• Buyback increased by $250m to $750m

 

Notes Cannington and South Africa Energy coal production will decline in FY18, as previously flagged.

Met reduced production targets following 20 July update.

 

It may just have been an attempt to cool the jets of a few enthusiastic observers but the comments that the company expects demand to soften by the end of the year although in our view the expectation for coking coal to return to a range of $110-130/t seems overly pessimistic to us (Closed at $201/t last night).

 

Tharisa – Strategic agreement with TISCO (LON:THS, Mkt cap: £220.5m) – Neutral

 

Tharisa has entered into a strategic co-operation agreement with Shanxi Taigang Wanbang Furnace Charge Co., Ltd., a Taiyuan Iron & Steel (Group) Co., Ltd. (TISCO) joint venture company (JV). Tharisa will supply the JV with a minimum of 240 ktpa, being approximately 25% of its metallurgical grade chrome concentrate production, at market prices from September 2017 for five years.

 

Given that Tharisa has historically supplied the JV with metallurgical grade chrome this is really just an extension of an existing agreement, which is mildly positive, but given the market has growth expectations in forecasts, this is just reassuring.

 

However the last paragraph is what investors should get excited about:  “It is also encouraging to note that spot chrome prices have increased above US$200/t on the back of improved stainless steel production," prices fell down to around $150/t earlier in the year.

 

That's enough from me today.

Stay strong

Kieron

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