SP Angel . Morning View . Monday 02 03 20

Equities ‘dead-cat’ bounce on fiscal and monetary stimulus

 

 

MiFID II exempt information – see disclaimer below   

Beowulf Mining* (BEM LN) – Year-end results

Cora Gold* (CORA LN) – Metallurgy testwork for production of concentrate to be processed at Yanfolila

Strategic Minerals* (SML LN) –Cobre rolls over magnetite access for 8th year

 

Metals prices recover on disruption to supply and new economic Stimulus

We expect China to unveil the ‘mother-of-all-Stimulus packages’ to get the nation back on track following massive disruption of logistics chains, a near-total collapse of auto sales and disruption of other manufacturing and construction activity.

  • China’s ‘shock’ PMI of 35.7 down from 50 indicates China could head into recession if the government does not move fast to stimulate industry.
  • Italy’s ‘surprise’ €3.6bn stimulus program is designed to offset the economic impact of the Coronavirus.
  • Italy was already heading into recession and the lockdown of towns in the north of Italy is likely to lead to recession.
  • Hubei province reported just 196 new cases of the Coronavirus on Sunday indicating that measures to control the spread may be working
  • Base metals prices rising: all the base are rising this morning as confidence returns to manufacturing and China starts to lift transport restrictions
  • Metals supply out of China is also disrupted as ships avoid Chinese ports and shippers struggle to get containers dockside
  • Many Chinese smelters and miners will struggle to maintain production levels if the Coronavirus spreads through the nation
  • Nickel prices are rising today as Indonesia reports rising cases of Coronavirus. Indonesia is a major producer of nickel ore and nickel pig iron which are mainly processed in China.
  • Nickel: Indonesia produced around 12% of global nickel supply in 2018 with 33% from China and 11% from other Asia indicating that 56% of global nickel production may be affected by the Coronavirus..  
  • Copper: 2019 57% of refined supply came from Asia with 73% of this coming from China, despite just 18% of global mine copper production came from Asia.
  • Tin: supply will be majorly affected with: China producing 48% of global production, Indonesia at 22% and Malaysia 8% indicating that 78% of global tin production could be impacted by the Coronavirus.
  • Lead: mined supply 2018: 83% came from China
  • Zinc: mine supply 2018: 76% from China

Conclusion: We further disruption of metal refining and mine production in China and Asia. This combined with new manufacturing confidence and restocking of inventory will likely continue to drive metals prices higher.

 

Iron ore prices fall as steel mills prepare for lower demand in China

  • Iron ore prices are falling on major Asian exchanges as consumers worry about falling demand relating to the Coronavirus.
  • Steel mills are reported to be gradually reducing their Fe grades in blast furnaces cutting demand for better quality ores in favour of cheaper material.
  • Demand for steel for construction has pulled back on the suspension of activity at building sites in Hubei and other Coronavirus hot spots.
  • We expect demand for iron ore to accelerate again as stimulus for new infrastructure comes through.

 

Coronavirus: other news

China producing over 100m face masks a day

  • China is also producing disinfection robots which they claim will reduce cross-infection risks in public spaces.
  • Nike closes European HQ in the Netherlands.
  • Italy: Coronavirus cases jump 50% in 24 hours to 1,577 infected with 34 fatalities so far
  • Governments should stop signalling that they will stop the spread of covid-19. They need to start preparing their people for the onslaught (The Economist).

Coronavirus leads to drastic improvement in China’s air quality (Bloomberg)

  • Satellites operated by NASA and the European Space Agency have detected significant drops in air pollution across China’s industrial heartland.
  • Before-and-after images show how the mean tropospheric NO2 density, emitted by factories and power stations, plummeted in February compared to before the lockdown in January.
  • A NASA air quality researcher told Bloomberg: “This is the first time I have seen such a dramatic drop-off over such a wide area for a specific event,”
  • Other previously observed drops in nitrogen levels include the global financial crisis and the Beijing Olympics in 2008.

 

Dow Jones Industrials

 

-1.39%

at

25,409

Nikkei 225

 

+0.95%

at

21,344

HK Hang Seng

 

+0.62%

at

26,292

Shanghai Composite

 

+3.15%

at

2,971

 

Economics

G7 finance ministers will be discussing measures to limit the impact of the coronavirus outbreak on economic growth this week, French Finance Minister Le Maire said today.

  • “There will be a concerted action,” Le Maire said.
  • The Bank of Japan has already pledged to inject liquidity into markets and hinted at increasing assets purchases, according to FT.
  • “The Bank of Japan will closely monitor future developments, and strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases,” BoJ governor Kuroda said.
  • The BoJ followed up with ¥500bn ($4.6bn) in short term liquidity to banks.
  • Italy is planning to inject €3.6bn into the economy to soften the blow to the economy from the virus.
  • Comments follow similar remarks by Fed chairman Jay Powell over the weekend who promised to “act as appropriate to support the economy”.
  • The virus claimed over 3,000 lives so far with the majority of those in mainland China; over 89,200 cases around the world have now been infected with top three countries being China (80k), South Korea (4.3k) and Italy (1.7k).

 

China – PMI measures for government owned enterprises post unprecedented declines in February as the nation battles with the virus outbreak

  • Private PMI report has also recorded a record decline in the manufacturing sector (Caixin PMI 40.3 v 51.1 in January and 46.0 forecast).
  • The latter compares to 40.9 recorded in the midst of the financial crisis in Nov/08.
  • Manufacturing PMI: 35.7 v 50.0 in January and 45.0 forecast.
  • Services PMI: 29.6 v 54.1 in January and 50.5 forecast.
  • Composite PMI: 28.9 v 53.0 in January.

 

Germany – The number of confirmed coronavirus cases climbed nearly doubled to 117 on Sunday from 66 the previous day

  • More than half of the cases are in North Rhine-Westphalia, Germany’s most populous state with a number of schools and day-care centres to be closed on Monday in an attempt to minimise the spread of the disease.
  • Separately, Finance Minister did not rule out the possibility of a fiscal stimulus to be rolled out should it be required.

 

Italy – Manufacturing sector remained in the contractionary territory for a seventeenth month on the back of reductions in output and new orders

  • Expectations are building up the nation is n course to slip into a recession this quarter after posting a 0.3%qoq drop in GDP in Q4/19.
  • Markit Manufacturing PMI: 48.7 v 48.9 in January and 49.0 forecast.

 

Spain – Manufacturing, surprisingly, posted an above-50.0 reading ending an eight-month long period of contraction in February

  • Growth was supported by marginal gains in both output and orders, alongside a slower rate of labour redundancies.
  • “Whilst growth both in output and new orders are encouraging, the devil was in the report’s details with expansion supported by some notable destocking as global supply side disruptions began to emerge from the lengthy factory shutdowns in China,” Markit commented on data.
  • “Looking ahead the overall impact on the manufacturing sector in the coming months of the shutdowns will clearly be a function of how quickly Chinese factories can fully come back online plus levels of - and how quickly companies burn through their - existing inventories of input stocks.”
  • Markit Manufacturing PMI: 50.4 v 48.5 in January and 48.9 forecast.

 

Zimbabwe – Mine worker’s salaries to be tripled according to union 

  • The Associated Mine Workers Union of Zimbabwe have reached a deal with the Chamber of Mines that will result in members’ salaries being almost tripled in Q1 2020.
  • The improved terms will see the lowest-earning employee earning ZW$3,450 (US$192) compared with ZW$1,200 previously.

 

Congo – Central bank to buy dollars from mining companies

  • The government plans to use to country’s updated mining law to buy dollars from mining companies in exchange for Congolese francs, to “assure the resilience of the national economy”.

 

Currencies

US$1.1071/eur vs 1.1038/eur last week.  Yen 108.08/$ vs 108.62/$.  SAr 15.550/$ vs 15.668/$.  $1.277/gbp vs $1.288/gbp.  0.655/aud vs 0.653/aud.  CNY 6.960/$ vs  6.986/$.

 

Commodity News

Gold US$1,605/oz vs US$1,634/oz last week

   Gold ETFs 84.7moz vs US$84.4moz last week

Platinum US$883/oz vs US$882/oz last week

Palladium US$2,671/oz vs US$2,768/oz last week - Palladium price falls 10% one day after record high

  • Precious metals fell across the board on Friday, as coronavirus-led panic caused investors to liquid assets.  
  • Palladium fell 10.8% to $2,538/oz on Friday, after hitting $2,875/oz the day before (Reuters).
  • The autocatalyst metal fell nearly 13% earlier in the session, while gold fell 4.6% - its biggest daily drop in almost seven years as investors cash in to cover losses in other markets.
  • The price of platinum and silver also fell on Friday, dropping 6.1% and 7.4% respectively.  
  • Despite the significant drop on Friday, the latest PGM report from Johnson Matthey estimates the supply deficit for palladium to worsen beyond the 1.2Moz deficit seen in 2019 which is expected to support long-term prices.

Silver US$17.01/oz vs US$17.23/oz last week

            

Base metals:    

Copper US$ 5,686/t vs US$5,566/t last week

Aluminium US$ 1,706/t vs US$1,675/t last week

Nickel US$ 12,560/t vs US$12,215/t last week

Zinc US$ 2,040/t vs US$1,987/t last week

Lead US$ 1,870/t vs US$1,785/t last week

Tin US$ 16,355/t vs US$16,165/t last week

            

Energy:            

Oil US$51.6/bbl vs US$50.9/bbl last week

Natural Gas US$1.753/mmbtu vs US$1.659/mmbtu last week

Uranium US$24.90/lb vs US$24.80/lb last week

            

Bulk:    

Iron ore 62% Fe spot (cfr Tianjin) US$81.3/t vs US$83.6/t

Chinese steel rebar 25mm US$529.2/t vs US$531.7/t

Thermal coal (1st year forward cif ARA) US$57.5/t vs US$56.7/t - Coal India production rises 14% in February

  • The state-run coal producer announced that its total provisional coal production in February 2020 stood at 66.26mt vs 58.05mt in February 2019.
  • Provisional coal offtake grew 6.8% in February 2020 to 54.97mt vs 51.46mt in February 2019.
  • India’s Minister of Coal and Mines announced last month that India will stop importing thermal coal from financial year 2023/2024, which is also the year when Coal India are targeting 1 billion tonnes of coal production.

Coking coal swap Australia FOB US$156.0/t vs US$160.0/t

            

Other:   

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

NdPr Rare Earth Oxide (China) US$40,374/t vs US$40,225/t

Lithium carbonate 99% (China) US$5,747/t vs US$5,726/t

Ferro Vanadium 80% FOB (China) US$28.3/kg vs US$28.5/kg

Antimony Trioxide 99.5% EU (China) US$5.2/kg vs US$5.2/kg

Tungsten APT European US$240-245/mtu vs US$240-245/mtu

Graphite flake 94% C, -100 mesh, fob China US$540/t vs US$540/t

Graphite spherical 99.95% C, 15 microns, fob China US$2,550/t vs US$2,550/t

 

Battery News

Toyota heading into China for EV manufacturing 

  • The Japanese automaker has plans to build a new $1.2bn EV plant in Tianjin, China in partnership with local player FAW Group. (Bangkok Post) It is not the first time these companies have worked together, on 2002 they established a long term corporate strategy including the  production of Toyota products and related technology transfers. (FAW)
  • The plant will manufacture 200,000 vehicles a year. Toyota is also expanding its manufacturing capacity in Guangzhou with partner GAC. (CX Tech news)
  • FAW Group is China’s oldest automotive producer, established by the Central Committee with assistance from the former Soviet Union as the ‘First Automotive Works’ in 1956. FAW Group has automotive tie ups with VW, Toyota, Mazda and a number of smaller players.
  • The partnership is part of a wider trend of global automakers partnering with local Chinese players. Volkswagen is in a JV with SAIC Motor to produce EV on a trial bases at a $2.5bn Shanghai plant, whilst Ford entered into a JV with Anhui Zotye Automobile to produce EV in 2017. (Techcrunch)
  • In 2019, despite an overall 8.2 % drop in sales in the Chinese EV market Toyota sold 1.62m Toyota and premium Lexus cars in China, a 9% improvement from 2018.

 

CATL to quadruple output following confirmation of deal with Tesla 

  • The Chinese EV battery producer will invest $3.7bn into increasing its production capacity for lithium-ion batteries. The company recently signed an exclusive deal to supply batteries to Tesla from July 2020 to June 2022. (Electrek)
  • Last week the Company announced they were looking to raise $3.85bn to find battery projects and working capital through a private placement. Those funds are to go towards increasing capacity at Fujian, Jiangsu and Sichuan plants. Capacity at the Jiangsu plant will increase up to 24GWh (Reuters).
  • It will take 2-3yrs for the new facilities to come online. CATL is also building facilities aboard with one currently being built in Germany and scheduled to come online in 2022.
  • CATL supplies batteries to Daimler, Honda, Toyota, Volvo and VW.

 

Volkswagen in uphill battle to challenge Tesla for EV supremacy (Financial Times)

  • The Company has unveiled an ambitious plan to overtake Tesla as the largest EV maker and produce 26m vehicles in the coming nine years. The headline statement their plans for profitability from the get go in a market where that has been rarely achieved.
  • What’s this all going to cost….well €33bn. 
  • CEO Herbert Diess is following in the footsteps of Elon Musk with a futuristic perspective and an unshakable faith that he is pursing the correct road into the future. He hopes to change the markets view of VW, shifting from an old world car manufacturer to more like Tesla.
  • So the will is there and the costs are high but how achievable are these plans and how likely is it that VW in particular are capable of achieving them; it would seem the jury remains out on both counts.
  • The culture of VW is ambitious but is also prone to straying the wrong side of the line, recently reaching a €830m settlement on the 2015 ‘Dieselgate’ scandal when they set devices in vehicles to under-report emissions of nitrogen oxide. 400,000 drivers were affected by this in Germany.
  • It is also notoriously difficult to achieve profitability on EVs, with McKinsey estimating it costs $12,000 more to produce a mid-range EV than a petrol or diesel counterpart. This is in large part a result of the expensive and oft difficult to source metals used in production. Both Lithium and Cobalt are expensive and often mined in politically unstable regions through practices not particularly healthy for the environment. A bottleneck in supply has resulted in a number of players including Jaguar, Mercedes-Benz, Audi and now Kia having to suspend production or delay new models until the situation eases. (Electrek)
  • Competition in the market is red hot, with tech companies like Google and Uber deciding that they too can offer something and challenge the space.
  • VW has a unique ownership structure which may hamper its plans, Porsche and Piech families own indirect majority stakes and the state of Lower Saxony has a blocking minority. The unions on the supervisory board also mean a turnover or reduction in the 300,00 strong workforce is also hugely unlikely.
  • So why might Tesla be doing so well, with a stock price up 100% in 2020 before last week’s fall on the back of coronavirus pandemonium. The Company is the trail blazer, it has seen sales increase and delivery of the new Model Y vehicles brought forward, has signed a battery deal with CATL and is in the process of building a new Gigafactory in Germany (Bloomberg). It seems the market is buying into the idea that Tesla might not be caught. Despite all this Tesla has sold less than 1m vehicles in its 1yr history and has a record production and delivery delays whilst never posting a profit.
  • On the upside for VW plans, Europe has seen demand for EV sales improving markedly 2019 and the early weeks of 2020.
  • Italy has seen an 89% increase in demand for EVs and sales in Germany have improved by 587%, now constituting 6.5% of the market. (Yahoo Finance) The UK has brought forward plans to ban sales of new petrol, diesel and hybrid vehicles to 2035 from 2040.  (BBC)

 

Company News

Beowulf Mining* (BEM LN) 4.7p, Mkt Cap £28m – Results

(Beowulf holds 42.2% of Vadar. Beowulf also holds 100% Kallak iron ore in Sweden, 100% of Aitolampi graphite in Finland and 40% of the Mitrovica and Viti projects in Kosovo)

  • Beowulf reported a net loss of £419,076 for the year to end December.
  • Administrative expenses came in at £895,295.
  • The company reports a £563,431 gain on Acquisition and £37,080 Grant Income plus £6,298 of finance income.

*SP Angel acts as nomad and broker to Beowulf Mining.

 

Cora Gold* (CORA LN) 5.3p, Mkt Cap £6.8m – Metallurgy testwork for production of concentrate to be processed at Yanfolila

  • The Company launched a testwork programme in conjunction with Hummingbird Resources, the largest shareholder in Cora Gold.
  • The study will test the potential to produce Sanankoro concentrate (+25g/t) for trucking and processing at the Hummingbird’s Yanfolila operation.
  • Yanfolila is located ~100km from Sanankoro in southern Mali.
  • ~350kg oxide bulk sample is currently being shipped to a laboratory in North America for testing.

Conclusion: The option to process the concentrate at Yanfolila may potentially yield an accelerated low capex route to production as opposed to a standalone mining and processing operation.

*SP Angel acts as Nomad and Broker to Cora Gold

 

Strategic Minerals* (SML LN) 0.525p, Mkt Cap £7.7m –Cobre rolls over magnetite access for 8th year

  • Strategic Minerals reports that access to the 700,000t magnetite stockpile at Cobre, New Mexico has been rolled over for a further, eighth successive, year.
  • Following a corporate review during the December 2019 quarter which led to a 20-25% reduction in corporate overheads, the post-tax operational cashflow from Cobre sales “is now materially higher than corporate overheads” which should, in our opinion, provide the company with the flexibility to maintain its operations at current levels without recourse to shareholders.
  • The company has also provided a progress report and a detailed timetable for the arbitration on its dispute with its major customer at Cobre. The company expects to receive a “reasoned decision” from the Arbitrator by 30th May 2020 at the latest and will then submit “a claim for in excess of US$ 21 million”.
  • Strategic Minerals explains that, following a favourable arbitration decision its wholly owned Southern Minerals Group (SMG) “will still have to apply to the courts for enforcement of payment, and the Board expects such court decision would be in favour of the Company. Payment would then be  subject to the Cobre client’s financial capacity to meet the claim.“
  • The company has also summarised its progress with its other projects  principally the Leigh Creek copper project and Cornwall Resources’ Redmoor tin/tungsten project.
  • At Leigh Creek, where the company is working to restart production of copper cement from a permitted site in South Australia, the company explains that the authorities require “an approved program for environment protection and rehabilitation (PEPR) to be in place prior to the commencement” of new mining activity.
  • Outlining the timetable the company expects to submit a draft PEPR by the end of March 2020 in anticipation of receiving approval during the“late June quarter/early September quarter”. The company expects that it will then require “approximately two months to establish suitable leach pads, source processing plant equipment and a mining mobile fleet, followed by up to a further three months until revenue commences”.
  • Strategic Minerals explains that although current copper prices are below the level of US$3/lb used in its feasibility work, Leigh Creek “is still attractive at current market prices, … [and] … market forecasts continue to predict a much higher copper price, especially given that China is likely to restock as their economy heals from the economic shock caused by the Covid 19 virus.”
  • The company takes the view that the “start up and working capital …is best sourced at the project level by either debt, trade related financing, joint venture with suitable parties or a combination of these” and confirms that “the Board’s intention is not to fund the route to production at LCCM by a capital raise at the parent level, given this would likely result in significant dilution were it to occur given the Company’s current low valuation. Fundraising at the parent company level is not an attractive option for the Company or its shareholders at this time”.
  • Funding of the company’s payments to New Age Exploration for the acquisition of its 50% share of Cornwall Resources remains on course and is being assisted “by R & D tax credit refunds received to date, which have also funded ongoing operations”.
  • Cornwall Resources’ operations at Redmoor remain at a modest level focussing on “building awareness of the project, building/maintaining relationships with stakeholders (including landowners) and generating strategies to obtain the greatest value for the Company’s investment”although “An option to complete a limited exploration drilling program aimed at testing the potential to expand the significant resource already developed is being assessed.”
  • The company says that its Central Australian Rare Earths (CARE) project has “curtailed expenditure” in the light of the cash requirements of Leigh Creek and Redmoor and that this situation is expected to prevail “throughout 2020”.
  • Commenting, Managing Director, John Peters, explained that, although it “has necessarily slowed, [reflecting] both changes in market conditions and a cautious approach by the Board” Strategic Minerals is continuing to progress its projects.
  • Referring to the arbitration at Cobre Mr. Peters said that “We are encouraged to see the Arbitration process move forward at minimal cost, and remain of the opinion that we have a strong claim in respect of the contract value in excess of US$21 million, although we remain cautious on the ultimate outcome.”

Conclusion: Strategic Minerals has explained that continuing access to Cobre cashflow following the roll-over of SMG’s access rights more than covers its corporate overheads while prudent financial management of its Leigh Creek, Redmoor and CARE operations should assist cash conservation during trying market conditions. The company has also confirmed that it does not currently envisage the need for fundraising. A successful outcome to the arbitration and settlement of its claim with its main client at Cobre could provide a potential windfall but the company does not appear be taking that for granted.

 

*SP Angel acts as Nomad and Broker to Strategic Minerals

 

 

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                                                             

Prince Frederick House

35-39 Maddox Street London

W1S 2PP

 

*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

SSY

RRE

Steelhome

Lithium Carbonate, Ferro Vanadium, Antimony

Asian Metal

Tungsten

Metal Bulletin

 

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