FAIRFAX - Morning View - Friday 28.05.10 (QRES LN, ANTO LN, FENR LN)

Dow Jones Industrials                                  +2.85% at 10,258.99

Nikkei 225                                                                    +1.28% at   9,762.98

HK Hang Seng                                                          +1.98% at 19,817.07

US – Economic growth0 +3% qoq annualised in Q1 2010 vs 3.5% estimated earlier. Recent report showed that consumer confidence continues to improve indicting brighter employment outlook.

• Business investment was revised down by 1% to 3.1% yoy. Personal consumption was also revised  down to 3.5% yoy from 3.6% estimate released earlier.
• US mortgage rates fall to all-time low as funds flow back into US dollars

 

China – denied any speculation that it may revise composition of foreign exchange reserves to decrease exposure to EU sovereign debt.

 

Japan – Deflation deepens, while unemployment increased in April, showing slowing recovery.

• The BoJ said last week that recovery is still not sustainable and economy requires additional stimulus. Officials decided to provide 1 year loans to banks at 0.1% level in order to stop deflation.
• Exports, however, grew by 40.4% yoy, fifth consecutive increase. Japan’s economic growth is supported by robust exports, but deflationary pressure within the country persists and continues to weight on personal spending.
• Exports increased on strong demand for Japanese autos and semiconductors. Significant demand from other Asian economies was the major driving force.

 

UK - Chelsea flower show this week – does nothing much for metals demand, well why would it!

• Some garden designers do like to use stainless steel in their garden designs but this is top end stuff.

 

South Africa – ANC Youth League leader Julius Malema urges closure and then nationalization of mines

• Rhetoric has always been strong within the ANC Youth League
• Julius Malema whose statements are considered highly inflammatory is just one of a number of controversial leaders within the ANCYL movement.
• Malema was recently forced to apologies for an incident where he verbally abused and threw out a BBC journalist from an ANCYL meeting with journalists.
• Thankfully for South African miners, many investors do not take Malema’s comments particularly seriously.
• Those who are older and wiser in the ANC may realise that nationalization of the mines would likely lead to their collapse.  Few countries have ever managed successful nationalization processed and most end up significantly devaluing the value of their assets. 
• A rapid fall in tax receipts from the mines should cause policy makers to reverse any nationalization process relatively quickly. 
• Nationalization of South Africa’s mines would be beneficial for a number of other emerging economies which would be quick to pick up on the investment flows which are normally channeled through and into South Africa.
• If the mines are nationalised, the rand would collapse and the country could descent into economic paralysis relatively quickly. 

 

Australian mining ‘super tax’ proposal –

• Politics are getting interesting in Australia as the Rudd government counters claims that the ‘super tax’ proposal will be watered down.
• We now hear that the Rudd government are invoking emergency powers to pay for promotion of the new tax.  We feel this is hardly a matter for national security.
• The ‘super tax’ proposal has drawn substantial criticism from investors and groups across Australia and overseas.  Australia is now seen as corporately unstable and  

 

Currency – China denied recent speculation that it is reviewing structure of its foreign exchange reserves. This comment reassured market participants that China will maintain its investment into EU and helped Euro to strengthen against the US dollar.

 

US$1.239/eur vs $1.229/eur yesterday. Yen91.32/$ vs 90.22/$  SAr7.548/$ vs 7.673/$  $1.454/GBP vs 1.450/GBP

Commodity News

Precious Metals 

Gold US$1,215/oz vs US$1,211/oz yesterday – price hovers around US$1,210/oz  

• An Iraqi group has requested to sell US$2bn worth of gold (around 1.65moz) at the Istanbul Gold Exchanged. The deal is being brought to Turkey due to the security issues in Iraq.
• Digestion of this sale may hold back prices in the market for a few days at most
• SPDR gold holdings rose by 0.30t to 1,267.93t (40.765moz), current value US$49.348bn. 

Platinum US$1,567/oz vs US$1,542/oz yesterday –

Palladium US$468/oz vs US$448/oz yesterday –

Rhodium US$2,675/oz vs US$2,675/oz yesterday –

Silver US$18.61/oz versus US$18.27/oz yesterday –

Jewellery – Tiffany&Co, second biggest luxury jewellery retailer reported better than expected Q1 profit.

• The company raised its sales forecast for this year on strong demand from the Asia-Pacif region as well as improving demand from the US.
• The news indicate that consumer spending outlook is improving that should support precious metal and diamond demand this year.

Base metals: 

Copper US$6,964/t vs US$6,890/t yesterday – copper is likely to record its first weekly advance this week after seven consecutive weeks.

• Copper is supported by strong economic data from the US.

Aluminium US$2,066/t vs US$2,034/t yesterday –

Nickel US$21,545/t vs US$21,500/t yesterday –

Lead US$1,840/t vs 1,805/t yesterday –  

Zinc US$1,946/t vs 1,918/t yesterday –

Tin US$17,900/t vs US$17,7530/t yesterday –

 

Energy: 

Oil US$75.23 vs US$72.51/bbl yesterday – Recent comments from Chinese officials to maintain investments into the EU and robust economic data from the US supported oil prices.

Gas US$4.33MBTU vs US$4.19/MMBTU yesterday –

Other:

Iron ore – Ferrexpo, Ukrainian iron ore producer with one of the largest iron ore resource in the world reported it expects prices for the main steel making ingredient to moderate until the end of the year.

• Prices may decrease by 10-20% from current levels this year on slower Chinese demand.
• Nevertheless, Ferrexpo believes that prices may rise by 25% in 2011 even if global growth average 0.5-2.5% next year.

 

Steel – Japan’s steel exports dropped by 17% mom to 3.46mt in April and may slide even further on temporal slowdown in the demand.

• Japanese steel producers believe exports should start to recover in Q3 2010.

Company News

Mining: 

Resources* (QRES LN) 16p, mkt cap £9m – New directors add serious mining expertise to Q Resources.

·         Bernie Prior and Dr Michael Price have been appointed to Q Resources.

·         Bernie Prior is the new CEO while Mike Price is a senior independent non-exec director.

·         Prior and Price will work closely with Gazprombank Invest MENA which is a consultant to the company.

·         Prior and Price are well known and respected in the mining industry

·         Michael Price has worked with Rothschilds, SocGen, BarCap in London, financing and structuring mining deals.  He has held board positions with EMED, Monterrico, Crew Gold and Tertiary Minerals.

·         Bernie Prior has recently stepped away from his role at Anglo American where he was head of business development where he led negotiations to buy the giant Minas Rio and Amapa iron ore projects in Brazil.  Anglo paid $1.7bn for 49% of Minas Rio and $5.5bn for 70% of the Amapa project. 

·         Q Resources listed as a shell company in London on AIM on 9th April.  The company is now putting its operating team together to lead the acquisition and potential development of mining projects in Africa.

·         The addition of Prior to the team suggests that the first new project acquisition could be in iron ore, while the presence of Mike Price indicates that the project will be of significant scale requiring senior financing expertise.

Conclusion:  We expect big things from Q Resources and advise investors to watch this space!

* Fairfax IS acts as Nomad and broker to Q Resources

 

Antofagasta (ANTO LN) 905p, mkt cap £8.9bn – Q1 2010 financial results show good progress at Chilean mines

ADD valuation adjusted to 1107p from 1115p

• Higher production volumes combined with stronger copper and molybdenum prices prompted 80.3% yoy increase in revenue to US$981.9m in Q1 2010.
• Realised copper price rose 63% yoy to US$338.1/lb (US$7,452/t) while realised molybdenum price more than doubled to US$19.9/lb in Q1 2010.
• The company has also benefitted from positive adjustments to provisionally priced sales of US$48.5m due to higher copper prices and US$17.2m on stronger molybdenum price.
• EBITDA surged 135.6% yoy to US$623.4m. Higher revenue was in part offset by slight increase in per unit costs.
• Costs were higher due to stronger Chilean peso, higher energy costs and mill re-lining and maintenance work at Los Pelambres. Cash costs excluding tolling charges and before by-product credits rose to USc115.9/lb from USc99.6/lb in Q1 2009.
• Production update published on 5th of May showed that total copper output rose 5.2% yoy to 117,700t in Q1 2010 due to a rump up of the plant expansion at Los Pelambres.
• The Group plans to produce 543,000t of copper this year, 23% increase from 2009 figure. Los Pelambres processing plant is due to reach new full capacity of 175,000t a day this year from average of 137,900t a day in Q1. That expansion should be sufficient to bring production to the scheduled amount this year.
• Cash: Cash holdings increased by US$95.5m to US$3,222.3m by the end of March 2010 from the end of December 2009. Attributable cash position stood at US$2,968.1m at the end of Q1 2010, up by US$33.8m.
• Debt: Total debt stood at US$1,619.2m with US$1062.1 directly attributable to Antofagasta.
• Capex: Total 2009 capex stood at US$475m with US$400m spend on plant’s expansion at Los Pelambres. We estimate Capex for this year in excess of US$880m, excluding exploration.
• Valuation:  Our valuation of 1,107p per share at an 8% discount rate indicates further value within the group. 

Conclusion: Given relative strength in the copper prices, Antofagasta will continue to benefit from strong profit margins.

Antofagasta 

T/Over

Net Inc

EPS

DPS

P/E

EV/EBITDA

Mkt cap £m

8,892

US$m

US$m

Usc/share

c/share

X

X

Share price p/share

902

 

2007A

3,827

1,382

140

49.6

10.14

4.64

y/e December

2008A

3,373

1,707

173

60

3.58

2.45

2009A

2,963

1,120

68

23

13.3

8.73

2010F

4,153

1,489

89

31

10.1

4.53

2011F

5,722

2,024

125

50

7.2

2.87

2012F

5,822

2,229

140

52

6.4

2.27

2013F

5,802

2,327

150

52

6.0

1.67

2014F

5,702

2,332

153

52

5.9

1.07

 

Fenner (FENR LN) price 202p, mkt cap £392m – Mining conveyors drive Fenner profits higher

BUY - Price target 245p

We recently met with Fenner the Mining conveyor producer.  We were hugely impressed with progress and the relative stability of Fenner’s sales and gross profits through the financial crisis.  We reiterate a recent note published on 4th May this year.

• Fenner has exciting growth prospects in the conveyer mining belt market as Chinese and Indian demand for thermal and metallurgical coal expands and in Industrial Belt and Advanced Engineered Products as the global economy recovers. A high percentage of earnings will be protected long term by the stable outlook for electricity demand, and therefore thermal belt, in OECD countries. A prospective P/E of 13.5x does not reflect this solid medium term outlook.
• Steady long term growth from Mining Belts for thermal coal– About 66% of Conveyer Belts’ (CB) divisional sales (48% of Group sales) come from thermal coal producers. Global electricity demand has shown steady long term growth- it declined for the first time in 64 years in 2009 by 1.6% due to the severe recession.
• Several strong growth areas –
• (1) Strong need for power and steel in China and India - driven by growth in industrialisation and urbanisation in these countries. Major coal producers are planning extensive capital development projects in response. Shen Hua, the world’s largest coal mine producer, is looking to double capacity within China over next five years.
• (2) Advanced Engineered Products (AEP) and Industrial belt - to benefit from economic recovery. Sales are still around £50m shy of previous peak levels.
• (3) Medical and Seals – to benefit from new product introductions.
• Still to benefit from past heavy capital expenditure- a high % of the £129m capital expenditure over last 3 years has been directed into new growth areas e.g. belts for above ground mining in the Americas and belts servicing the iron ore miners in N.W. Australia. These benefits have stalled due to the recession.
• Operating margins are rising- margins are forecast to rise to 11.0% in 2011 from 8.3% in 2009 as sales recover from the recession and benefit from recent heavy capital expenditure.
• Valuation – Earnings are forecast to grow by an average of 23% p.a over the next two years due to continuing strong demand for electricity and steel in China/India and to a broad global economic recovery. Earnings will have some protection in the long term by the solid electricity demand outlook from OECD countries and from the growing belt servicing and the Medical divisions. We believe the Group should be on a 15% P/E premium to the Industrial Engineering sector i.e 15.3x against the sector on 13.3x to 12/10 (Source: Hemscott) due to this good mixture of profit centres. Price target 245p.

August year end

2008A

2009A

2010E

2011E

Revenue

437.8

499.4

534.4

572

EBIT

49.3

41.3

52.7

62.9

PTP

42.1

31.1

42.5

52.4

Tax %

29.9%

28.0%

31.0%

31.0%

EPS (p)

17.6

12.8

15.9

18.7

Dividend (p)

6.6

6.6

7.2

7.8

P/E

12.2

16.7

13.5

11.4

Yield (%)

3.1%

3.1%

3.4%

3.6%

Source: Company data, Fairfax IS estimates

Analyst – Jeremy Browne, Fairfax IS. 

 

Mining this week:

Petropavlovsk (POG LN) 1171p mkt cap £2,139m – FTSE 100 potential

BUY – Valuation 1795p (formerly Peter Hambro Mining)

Discovery Metals *+ (DME LN) 41.5p mkt cap £123m – Options exercise takes Anglo Pacific over 3.01%

BUY, valuation 79p

* Fairfax acts as Nomad & Broker to Discovery Metals 

Churchill Mining (CHL LN) 99p, mkt cap £80m – Raises £16m from key investors

Centamin Egypt (CEY LN) 150p mkt cap £1,543m – Progress update reiterates 200,000oz for 2010

Chromex (CHX LN) 24.5p mkt cap £20m – US$5m facility agreed

Namakwa Diamonds (NAD LN) 39.5p £49.7m – US$15m debt facility

Discovery Metals *+ (DME LN) 39p mkt cap £107m – Management team strengthened

* Fairfax acts as Nomad & Broker to Discovery Metals

Cluff Gold (CLF LN) 77.25p mt cap £95m – Disappointing results for 2010 & progress update at Baomahun

First Quantum Minerals (FQM LN) 3647p mkt cap £3037m – Company update on DRC legal action

Discovery Metals*+ (DME LN) 41.75p mkt cap £113m – Project capacity upgraded to 3mtpa leads valuation higher – research note sent out earlier this morning

Corporate

* Fairfax acts as Nomad & Broker to Discovery Metals

Bellzone Mining (BZM LN) 34.5p mkt cap £182m – Binding MOU for funding of infrastructure for Kalia Iron ore

CoAL of African (CZA LN) 109p mkt cap £524m – New CEO John Wallington

Economic calendar:

 

Date

 

Event: G7, AU, China

 

Survey

Actual

Prior

Thu

00:50

JN

Merchnds Trade Exports YoY

APR

38.3

40.4

43.5

 

00:50

JN

Merchnds Trade Imports YoY

APR

23.3

24.2

20.6

 

11:00

CA

Royal Bank of Canada Releases Second-Quarter Results

May-27

 

12:00

ECB's Paramo Speaks in Barcelona

May-27

 

PO

Bank of Portugal Publishes May Financial Stability Report

May-27

 

13:30

US

GDP QoQ (Annualized)

1Q S

3.40%

3.00%

3.20%

 

13:30

US

Personal Consumption

1Q S

3.60%

3.5%

3.60%

Fri

GE

CPI - EU Harmonised (YoY)

MAY P

1.20%

- -

1.00%

 

00:30

JN

Jobless Rate

APR

5.00%

5.1%

5.00%

 

00:30

JN

Natl CPI YoY

APR

-1.10%

-1.2%

-1.10%

 

00:30

JN

Natl CPI Ex Food, Energy YoY

APR

-1.40%

-1.6%

-1.10%

 

13:30

US

Personal Income

APR

0.50%

- -

0.30%

 

13:30

US

Personal Spending

APR

0.30%

- -

0.60%

Source: Bloomberg

M&A

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.

Source: http://www.fairfaxplc.com/