Morning View Euro recovery this week surprised markets and the rumour of Swiss National Bank intervention remains unexplained.
- If the Euro continues to recover then the mining sector will continue to gain value - If the Euro sees further collapse then miners and commodity market rallies will be sold - Gold prices, which have been set back by traders covering margins and on some profit taking should recover in either event on ongoing concerns for European banks. We believe French and German banks are exposed to Greek and other European sovereign debt issues.
Economic News - Dow Jones Industrials -3.60% at 10,068.01 - Nikkei 225 -2.45% at 9,784.54 - HK Hang Seng -0.17% at 19,545.83
Please refer to the Economic calendar at the end of the note
US – US Senate approved new financial regulation bill. It is aimed to increase derivates oversight, ban banks from proprietary trading and create consumer protection agency.
China – import numbers show a month on month fall in copper and iron ore imports as traders adjust positions
- Strong rise in Coal and grain imports reflects ongoing GDP growth
Europe - Protests continued in Athens, although less people were involved. Around 15-20,000 people gathered near Parliament demanding to undo sever cuts in pensions and salaries.
- A. Merkel said she will promote Tobin tax at G20 meeting in Toronto on 26-27th of June. German Chancellor also appeared to be willing to introduce state rating agencies that will provide true and possibly unbiased rating estimates.
- Merkel and Sarkozy agreed to prepare a joint economic growth strategy and will present it to the rest EU members in mid-June.
- Recent ban on short selling of sovereign bonds, CDS and 10 major stocks raised concern that German authorities are trying to protect financial institutions from continuing deterioration in their investment portfolio. Another “to big to fail” rescue may be not easy to approve given the scale of recent financial aid.
- ECB announced on Monday it will sterilize its sovereign bond purchases by offering 1% interest on one week deposits within the ECB. - ECB announced it purchased Eur16.5bn of sovereign bonds last week. That helped to reduce yields: Greece down to 7.8% vs 12.4%, Portugal 4.6% vs 6.3%. Japan – BOJ left rates unchanged, but said it will provide 1 year loans to banks at 0.1% level in order to fight deflation. Currency – Euro rose to highest level on week on rumored intervention from Swiss National Bank and short covering. - Swiss National Bank may have intervened to the currency market in order to reduce deflationary risk brought by stronger Swiss frank.
- Swiss core inflation dropped to 0.3%, the lowest level since April 2007.
- Short covering in Euro may have helped currency to gain against US dollar. Investors may have required additional money to shore up losses in other markets.
- Major investment banks have cut their Eur/US$ exchange rate forecast to 1.1-1.5US$/Eur by the end of the year.
- Vix volatility index, the indicator of risk aversion rose to the highest level since March 2009 on concerns over spreading sovereign debt crisis.
- Rising volatility prompts investors to get out of carry trades prompting yen strengthening and AUD weakening. It may have also supported US dollar recently. South African rand weakens to 7.94:USD, SA government is looking for ways to frustrate carry trade to reduce strong rand. - Euro weakness earlier in week pulls rand lower. US$1.251/eur vs $1.242/eur yesterday. Yen89.98/$ vs 91.45/$ SAr7.928/$ vs 7.793/$ $1.440/GBP vs 1.438/GBP
Commodity News Precious Metals
Gold US$1,177/oz vs US$1,189/oz yesterday – We expect gold prices to bounce off $$1,180/oz today
- We see market support at this ‘technical’ level and see renewed buying of physical metal by manufacturers and investors. ETF investment may see some selling but is generally regarded as ‘sticky’.
- Investors and traders have been taking profits following new record prices seen last week. Some covering of margins and positions in other areas are likely to have prompted the liquidation of some positions. - Recent price correction should be temporal and buying should resume on ongoing concern over EU sovereign debt issues. - Gold ratio to platinum and palladium is at a 2010 high. Growing fears that global economy will slow in the wake of EU debt crisis pushed industrial metal prices down. Both platinum and palladium are used in production of auto catalyst. Around 41% and 54% of global platinum and palladium production is consumed by the auto industry. - Kingsgate Gold mine, the biggest gold mine in Thailand delayed its expansion due to social unrest within the country. More than 80 people were killed in the clashed with policy and army forces. Expected expansion should increase production by 70,000oz to 200,000oz. - SPDR gold holdings rose by 3.04t to 1,220.15t (39.229moz), current value US$46.747bn. Platinum US$1,490/oz vs US$1,567/oz yesterday – Palladium US$414/oz vs US$440/oz yesterday – Rhodium US$2,775/oz vs US$2,775/oz yesterday – Silver US$17.64/oz versus US$18.04/oz yesterday –
Base metals: Copper US$6,612/tvs US$6,650/t yesterday – China import stats prompt weakening of copper prices in Asia - We recommend investors sell price rallies as uncertainty in the Eurozone persist - Chinese investors are being told that market movements on the back of the Eurozone crises is largely overdone - Recent decrease in copper price to a 3 months low last weak prompted arbitrage buying on increased discount to Shanghai prices. Aluminium US$2,015/t vs US$2,019/t yesterday – global production rose 18% yoy in Q1, while surplus has dropped by 68% yoy to 298,000 (WBMS). Nickel US$20,850/t vs US$21,700/t yesterday – Lead US$1,742/t vs 1,783/t yesterday – Zinc US$1,876/t vs 1,890/t yesterday – Nyrstar, biggest zinc producer in the world reported that fire at Hobart smelter may reduce output by 20%. The smelter may produce 260,000t if operated at full capacity. Tin US$17,340/t vs US$17,360/t yesterday –
Energy: Oil US$71.14/bbl vs US$74.00/bbl yesterday – Gas US$4.101/MMBTU vs US$4.193/MMBTU yesterday –
Other: Iron ore – concerns over slowing demand in the real estate market prompt biggest weekly decline in 8 months. - House prices in shanghai dropped to the lowest in 5 years last week as Chinese officials moved to curb speculation in the market. - Market expects further monetary tightening to come. However, we believe any policy action will now be smaller than initially anticipated as stronger US dollar and possibly slower EU demand will limit export growth and thus economic expansion. - Q3 price negotiations will begin next month. Vale appeared willing to push for >40% increase in prices to US$160/t. Steel – Baosteel, biggest steel producer in China reported it will reduce 2015 expansion target to 60mt from previous figure of 80mt.
Company News Mining: Mining Tax Summary - Tanzania (1-4% royalty rise), A new mining law proposing another 1% for existing producers is due to be signed by the president. This may cause royalty to rise by 1% to 4% and provide require government to hold 10-15% stake in future mining projects. - Zambia (no change) – decided not to reintroduce windfall tax on mining profits. - Ghana (2x royalties) – second largest gold producer in Africa may double royalties to 6%. - South Africa (royalties rise) – African National Congress Youth League accused Mining minister of lying that nationalisation of mines is not under consideration. The Youth League said it has start talks of 60% state stake in all future mining projects. - Australia (40% supertax proposal) – possible introduction of 40% supper tax on mining profits - Canada - Quebec may rise mining profit tax by 4% to 16% starting from January 2012. - Chile (royalty to 9% from 5% for two years only) – announced plans to increase royalties by 5% to 9% for 2010 and 2011.
Antofagasta (ANTO LN) 850p, mkt cap £8.4bn – New proposed royalty in Chile has marginal impact on valuation
Valuation adjustment to 1,115p from 1,122p
- We have run our newly updated model on Antofagasta to account for the introduction of a potential 9% royalty for 2010, 2011 only.
- By increasing the royalty to 9% from 4-5% at the various copper mines for 2010 and 2011.
- our valuation for the company falls by 0.7% 1,115p from 1122p, last price is 827p.
- The valuation uses an 8% discount rate and is on a $6,500/t copper price, long term.
Petropavlovsk (POG LN) 1104p mkt cap £2,011m – AGM lunch combines with expectations of new dividend policy to create attractive venue for investors
BUY – Valuation 1795p (formerly Peter Hambro Mining)
- Investors turned out in substantial numbers for the Petropavlovsk AGM, presentation and lunch yesterday.
- The Petropavlovsk board is considering its dividend policy to give greater clarity to investors following the reinstatement of the dividend.
- Petropavolvsk is now one of few companies which can deliver a tasty dividend and excellent AGM lunch
Conclusion: Buy Petropavlovsk shares for entry into one of the better mining sector AGM lunches and for what should hopefully prove to be a progressive and rewarding dividend policy going forward.
Patagonia Gold (PGD LN) 14.5p, mkt cap £96m – 2009 FY results highlight cost of developing new gold mine
- The company recorded a loss of £7.3m, including £1.26m reprising of existing and granting new options, £4.71m in direct exploration costs.
- Patagonia raised £9.3m at 7.75p/share in march 2009 and £13m at 16p/share in May 2010.
- Their cash position was £2.98m at the end of 2009. Additional £13m raised in recently should be sufficient to get company through to the production stage at H1 2011.
- Lomanda de Leiva: Main project of the company. Environmental impact study has been approved by the government and permit issued for the trial (50,000t) heap leach operation.
- Main 5Mtpa heap leach operation is expected to produce more than 21,000oz a year starting from the H1 2011. Total cash costs are forecast at US$299/oz. minimum mine life – 7 years.
- Preliminary results showed excellent leaching recoveries of 97% within 12 hours.
- Current Measured and Indicated resources are at 161,346oz, inferred at 73,725oz at 1.1g/t.
- Cap-Oeste: Second drilling campaign allowed to increase reserves by 61% to 655,930oz.
- 88% of the Resource is in indicated category meaning that the company will be able to progress to the scoping study.
- La Manchuria: Resource estimate is due to be prepared by Q3 2010.
Conclusion: Patagonia is well placed to start small scale gold production in H1 2011. The funds raised should be sufficient to get company through to this stage. Significant resources uplift at Cap-Oeste and near term approval of Resource estimate at La Manchuria should create additional value for the company and show potential for an expansion of gold production.
Aston Martin Rapide – test drive by Marc Elliott last night
Cambria Automobiles* very kindly invited Marc Elliott and other Fairfax staff on a very serious trip to drive the new four door super car, the Aston Martin Rapide. I’m not sure if we should tell Marc but I do not think that the Fairfax mining team bonus pool of $100,000,000,000 Zimbabwe dollars is going to stretch to a new Aston. Sorry Marc, its going to be the ‘Iron steed’ for a while longer.
Marc Elliott, Fairfax’s version of Richard Hammond on Top Gear has submitted the following road test:
- Drove the new Aston Martin Rapide last night as part of an event hosted by new Fairfax client Cambria Automobile who are a rapidly expanding UK motor retailer.
- The Rapide is quite simply an amazing car, quick smooth, comfortable and looks amazing. Took it round a few roads, paddle shift auto gear box fun to play with, give it the right foot, glance at the speedo and realise that you’re going a tad quicker than expected (couldn’t say how quick) and need to ease off. Easy to pick up a few tickets…
- Swung it round some bends and it corners amazingly and buzzed chavs in a BMW, who didn’t mind as it was a quality car, and if they did mind they’d never have caught us.
- I sat in the back when a colleague (who shall not be named) drove (like an old woman) and its rather comfortable you don’t have to be a small child to fit. There was a reasonable amount of space, little TV screen for the kids, so great for families.
- I recommend the Rapide to the average man or woman with no more than two children, no dogs either as there’s not enough space in the boot unless you like the ankle biter variety.
Marc, do you recommend the Rapide for average man or woman at a cost of £155,000, a bargain on an average UK salary of around £25,428pa? I think I might wait for one second hand!
* Fairfax act as nomad and broker to Cambria Automobiles*
Mining this week:
Anglo Pacific (APF LN) 248p mkt cap £266m – Acquisition of iron ore royalty
BUY – Target 306p
Shanta Gold* (SHG LN) 18.5p mkt Cap £21.3m – New director to drive development of new gold mines
BUY - target to 34p
* Fairfax IS acts as UK Nomad and broker
Pan African Resources (PAF LN) 6.57p mkt cap £92.53m – Resource upgrade at Phoenix Platinum
Iofina (IOF LN) 37.25p mkt cap £39m – New 3rd party brine contract signed
Carbine Resources+ (CRB AU) 33c, mkt cap A$29m - Madougou project shows potential for significant gold discovery
+Fairfax staff hold shares in Carbine Resources.
Hambledon Mining* (HMB LN) 5.25p mkt cap £27.09m – Further ore purchases
Avocet Mining (AVM LN) 127p mkt cap £248m – Exploration to ramp up in West Africa
Petra Diamonds (PDL LN) 78p mkt cap £274m – Kimberley Underground acquisition completed
Shanta Gold* (SHG LN) 20p, mkt cap £22m – Results highlight progress made at Chunya and Singida
BUY - target to 34p
Aquarius Platinum (AQP LN) 417p mkt cap £1,928m – Everest concentrator re-start
Oxus Gold* (OXS LN) 8.5p mkt cap £32m – Oxus restarts mining at AGF
BUY Target price 32p reiterated
* Fairfax acts as a as UK Nomad and broker
EMED Mining (EMED LN) 9.75p, mkt cap £41m – Regulatory submissions extend Rio Tinto mine life to 14 years
European Nickel (ENK LN) 6.5p mkt cap £35.55m – Alternative financing being sought subject to permit
Event: G7, AU, China
Gross Domestic Product (QoQ)
BoJ Monetary Policy Meeting
Producer Prices (YoY)
Merkel, Schaeuble Host Pre-G-20 Meeting in Berlin
Retail Sales Ex Auto Fuel(YoY)
Retail Sales w/Auto Fuel (YoY)
Euro-Zone Consumer Confidence
Bank of Canada Publishes its Review
BOJ Target Rate
GDP s.a. (QOQ)
GDP wda (YoY)
Public Finances (PSNCR)
Public Sector Net Borrowing
Consumer Price Index YoY
Bank Canada CPI Core YoY
Bank of Portugal Releases Monthly Economic Indicators Report
MacArthur Coal (MCC AU) A$11.25 mkt cap A$2,861m – Revised offer from Peabody rejected
· Downgraded offer of A$15/share from A$16/share has been rejected by the board.
Red Back Mining (RBI CN) C$24.82 mkt cap C$5,769m – Kinross buys C$600m stake
- Major producer Kinross Gold Corp has paid C$600m for a 9.4% stake in Red Back as part of a private placement at C$25/share. The funds are to be used for future expansions at Tasiast, and provides Kinross with access into opportunities in West Africa.
Lihir Gold (LGL AU) A$3.75 mkt cap A$8,882m – A$9.5bn take over offer agreed
- News reports indicate that Lihir has accepted NewCrests latest offer in a deal that would create the world’s fourth largest gold company. The recent Australian Henry Tax being proposed may not affect the merger.
Polo Resources (PLM CN) 5.15p, mkt cap £120m – possible merger with Caledon Resources
- Polo and Caledon reached principle understanding regarding merger of two companies. In case management decide to proceed with the deal, Polo will be prepared to make all share offer for 100% stake in Caledon at 11.4 Polo shares for 1 Share in Caledon.
Rio Tinto apparently in talks with Chinalco to develop the Simandou iron-ore project in Guinea.
· The project is expected to cost $12bn
· Rio have declined to comment
Atlas Iron (AGO AU) A$2.31 mkt cap A$1,033m – Deal to acquire Aurox Resources for A$131m
- All scrip bid agreed to buy Aurox resources to expand Atlas’s port capacity and iron ore resources. The merger if agreed by shareholders is due to complete in May
Arrow Energy (AOE) A$5.11 mkt cap A$3,747m – Shell & PetroChina make A$3.3bn offer
- Cash offer made by Shell and PetroChina for Arrow Energy, which is the largest holder of coal-seam gas acreage in Australia.
Chariot Resources (CHD CN) C$0.64 mkt cap C$234m – Sale agreement with China Sci-Tech
- Copper exploration company Chariot with a deposit in Peru has signed a sales agreement with China Sci-Tech Holdings to purchase all shares for C$0.67/share.
- This highlights Chinese interest in securing copper assets.