Miners lead FTSE 100 2.8% lower as metals prices follow Euro down
- Gold is at $1,187/oz today as concern over the Spanish banking crisis offsets the impact of a stronger US dollar
- The Euro is under renewed pressure eroding nearly all the gains posted following support for the Euro through the Swiss National Bank
- Sterling is also seeing substantial downside pressure according to the FT although there is big buying of government bonds suggesting a risk off approach and a flight to ‘quality’.
- The ‘short sterling’ trade may be seen as safer than ‘short Euro’ as there is little or no support for sterling yet the UK economy is exposed to the Eurozone, its largest trading partner.
- Metals are likely to trade lower in the short term as the US dollar rises versus the Euro and as some key commodity producing weaken by definition against the dollar.
- Miners look likely to weaken through this period as investors take a ‘risk off’ approach despite their exposure to hard assets and their natural hedge against US dollar strength.
- More positively the South African rand has weakened to SAr8:USD this morning helping local producers.
- We reiterate our view that the market will ‘sell the rally’ as the Euro crisis develops
Dow Jones Industrials -1.24% at 10,066.57
Nikkei 225 -3.06% at 9,459.89
HK Hang Seng -3.39% at 18,999.13
US – Existing home sales continued to rise in April as buyers rushed to benefit from home tax credit scheme that ended on 31st of April. Existing home sales rose by 7.6% mom to 5.77m units annualised.
- Although existing home sales improved in April, the number of unsold and ready for sales houses increased as well. Amount of time required to clear existing stock of houses rose to 8.4 months just a step away from February high of 8.5 months.
· Rising number of foreclosures and increasing number of unsold houses pressure house prices.
Europe – Spain/Germany 10 year sovereign bond spread rose slightly to 1.41% on CajaSur bail out.
· Irish cost of borrowing rose yesterday as Ireland will need to repay Eur2.15bn Euro on 31st of May.
UK – £6.2bn spending cuts is just the beginning of the broader plan to reduce significant £156bn budget deficit recorded in 2009. Total public debt rose to 62.1% of GDP in April 2010.
- George Osborne said that details of the £6.2bn spending cuts will be available to public by June 22. The reduction in spending to come from freeze in public employment, costs of travel and consultancy as well as withdrawing support to the Child Trust Fund.
Spain – Cost of borrowing continue to increase after CajaSur Bank rescue.
- Market participants fear other Caja’s, unlisted saving banks may require government support.
- Lending rose fivefold in the regional saving banks during the real estate boom 2000-2010.
- Today four regional saving banks agreed to merger in order to improve their financial position. The merger will form fifth largest financial group in Spain with Eur135bn in assets.
- Spanish Caja’s account for around half of the national banks’ assets.
- Low interest rates, raising defaults and weak loan demand contribute to deteriorating position of Spanish Caja’s.
- Spanish authorities are pushing to merge weak saving banks that should help to cut costs.
Japan – BoJ report showed that domestic economy advances on stimulus measures and export growth.
- Last week Japans officials decided to extend stimulus measures in order to fight deflation. It was decided to provide 1 year loans to banks at 0.1% level.
- Japans financials minister reported that recovery is still not sustainable and depend heavily on global recovery.
China – First day of US-China summit in Beijing
- China’s president Hu Jintao reiterated his previous statement regarding exchange rate policy. He said that China will move steadily and independently. Debt crisis in Europe threatens to slow global growths and thus reduces chances of near term movement in Chinese currency policy.
- US-China relationships show signs of improvement as China appears to be prepared for a change in currency policy, although the timing is still uncle
Auto industry – Brazil may overtake Germany as the 5th largest auto market this year.
- Brazil industry specialists reckon sales will rise by a long term sustainable rate of 5% in 2010.
- Total number of licensed vehicle sold my rise to 3.06m this year given 5% rate.
- German auto sales figure has shown drastic performance since the beginning of the year. Sales dropped by 25.5% yoy in the first four months. We believe sales may fall by 20% yoy to 3.05m vehicles this year. Given that scenario Brazil have a potential to become 5th largest auto market this year.
South Africa – the biggest trade union accepted the wage offer while smaller one continue to demand higher pay.
- Strike action continues for the third week causing delays in shipment of metals, fruits, cars and other good.
- Smaller union represent 21,000 people, 39% of total Transnet staff.
- Optimum Coal declared force majeure due to the strike action. The company become the third mining company to make that declaration.
- Eskom workers may also elect to strike from Wednesday in advance of football world cup. The Unions clearly realise they have more leverage at present.
Currency – Euro weakened against US dollar as concerns over EU debt crisis remains and tensions increased on the Korean peninsula. Traders reckon 1.2Eur/US$ level will soon be tested.
- South African rand continued to weaken against the US dollar and moved to the lowest level against the US dollar this morning. A Weaker rand should help to lower domestic costs costs for South African producers.
US$1.222/eur vs $1.249/eur yesterday. Yen89.70/$ vs 90.28/$ SAr8.008/$ vs 7.812/$ $1.429/GBP vs 1.449/GBP
Gold US$1,188/oz vs US$1,190/oz yesterday – trading slightly higher this morning on fears over Spanish banking systems and military tensions between North and South Korea.
- Safe heaven demand may push price to a new record.
- SPDR gold holdings rose by 16.74t to 1,236.89t (39.767moz), current value US$47.188bn.
Platinum US$1,495/oz vs US$1,530/oz yesterday – Lonmin, the biggest platinum producer said that smelter problems threaten 700Koz target production this year.
- Commissioning of the troubled smelter may now take another 25-30days, according to the Lonmin.
Palladium US$426/oz vs US$453/oz yesterday –
Rhodium US$2,675/oz vs US$2,675/oz yesterday –
Silver US$17.66/oz versus US$18.02/oz yesterday –
Copper US$6,750/t vs US$6,897/t yesterday – prices slip as US$ firms with EU debt crisis raising concerns.
- Chinese copper imports for May expected to reflect a fall due to lack of price arbitrage and credit tightening.
- European crisis is likely to persuade the Chinese to ease fiscal tightening and other policy measures aimed at holding back excessive economic growth and the development of asset price bubbles.
- Estimates of lower levels of unofficial Chinese inventory may help sentiment for copper
- Sumitomo is planning to maintain cuts of 10% in the year from 1st April 2011 due to lower processing fees and well supplied domestic market.
Aluminium US$2,030/t vs US$2,065/t yesterday –
Nickel US$21,400/t vs US$22,000/t yesterday –
Lead US$1,772/t vs 1,840/t yesterday –
Zinc US$1,885/t vs 1,948/t yesterday – Arbitrage drying up likely to lead to a fall in Chinese imports for May similarly to copper.
- Chinese imports for refined zinc jumped 74% in April from March to 31,374t.
Tin US$17,475/t vs US$17,741/t yesterday –
Oil US$69.48/bbl vs US$72.00/bbl yesterday – price drops below US$70 as EU debt crisis puts global recovery under question.
Gas US$4.02/MMBTU vs US$4.05/MMBTU yesterday –
Iron Ore – Rio reported to have offered Chinese steel mills US$120/t ob for 62% Fe for Q2 according to Metal Bulletin.
- This around US$10/t higher than provisional prices adopted in the past three months. Chinese have not accepted this offer although there are reports that Japanese mills have accepted this.
- Spot prices reported at around US$148-152/t cfr China, slipping back from US$155/t at the end of last week.
Cluff Gold (CLF LN) 77.25p mt cap £95m – Disappointing results for 2010 & progress update at Baomahun
- Cluff Gold prelims for 2009 show a company that is in some difficulty with a loss of US$34m of which US$22m was an impairment charge against the Angovia mine.
- Group gold production came to 76,060oz.
- Kalsaka, Burkina Faso (78% owned) – Produced 54,428oz last year at a cash cost of US$767/oz. In Q1 of this year 21,481oz were produced at a cash cost of US$767/oz. A 10,000m RC drill programme is planned to start this quarter.
- Angovia, Cote D’Ivoire (90% owned) – Produced 21,632oz at an average cash cost of US$1,113/oz. In Q1 of this year the operation produced 6,709oz at a cash cost of US$750/oz. This is a short life asset, although the company is seeking to increase this through drilling. The reduction in cash cost is promising but the life of mine is short and needs further gold discovery to add significant value.
- Baomahun, Burkina Faso (100% owned) – Progress continues with the development of this flagship asset with ongoing drilling, a preliminary scoping study near completion and a resource updated planned for this quarter.
- Financials: With total production still short of the 100,000ozpa and strong gold prices we expect the company’s financial position to improve. However, at the end of December Cluff only had just over US$2m in cash and we note that trade and other payables were particularly high at US$23m. A producer of this size would normally have a figure of US$4-8m looking at other companies. The company may either need to raise funds or sell assets to advance the Baomahun project and to recover its financial position if gold prices fall.
Conclusion: These results are no doubt disappointing and cash costs remain high. However, gold prices are strong and we hope that costs continue to ease back as the operations stabilise. Longer term, the development of Baomahun will require a heavy spend and no doubt the company will need to raise funds. We look forward to the results of the scoping study to give a clearer impression of its development.
Discovery Metals *+ (DME LN) 39p mkt cap £107m – Management team strengthened
- Discovery Metals has strengthened its management team for the development of Boseto with new hires to work at an operational level as disclosed in the company’s latest presentation. The three key new hires include:
- Nick Franey – GM Exploration – Exploration geologist with 25 years experience having previously worked at senior levels at Anglo American, Anvil Mining and Oceana Gold. Nick will be focused on resource increases and new projects.
- Alan Smyth – Head of Owners Team – A civil engineer and experience project leader focused on design and construction of projects. Alan will be focusing on ensuring Boseto is built on time and on budget.
- Matome Malema – GM Operations – Experienced GM with operations experience in Botswana having been involved with trouble shooting and improving operations. Matome will be responsible for commissioning and optimising Boseto.
- Valuation: We upgraded our valuation to 79p/share yesterday for Boseto in response to the expanded plan from 2mtpa to 3mtpa ore processed leading to over 35ktpa copper in concentrate production once fully operational, please see yesterday’s note (or contact us for more detail). The recent more macro events that have led to a fall back in the share price present an excellent buying opportunity as the long term fundamentals to this project and the copper market remain robust.
Conclusion: The new hires are great news for the company and reduce the risk of delivery as experienced managers are essential for the delivery of mining projects to ensure necessary goals are achieved and minimise problems, building mines is never a simple process. It is part of the natural evolution of a company as it move from explorer to developer and eventually to producer and more resources are required.
* Fairfax acts as Nomad & Broker to Discovery Metals
Namakwa Diamonds (NAD LN) 39.5p £49.7m – US$15m debt facility
- Namakwa has signed a US$15m debt facility at 8.5%pa interest over a 12 month term to be drawn down in three equal tranches at the company’s option with the option to extend the term by 6 months for general purposes.
- The company is in discussions to secure additional banking facilities for working capital of SAr100m (US$12.5m) as well as exploring a medium term US$25m bank facility.
Chromex (CHX LN) 24.5p mkt cap £20m – US$5m facility agreed
- Chromex has signed a US$5m facility on a pre-payment for product basis to fund a DMS circuit and plant improvements at the Stellite open cash chrome mine that should be up and running in Q4 to take production to 40ktpm.
- The funding has been secured from Suzhou Kaiyuan Chemical Co, a Chinese steel manufacturing company. All lumpy chrome will be sold to Suzhou for a period of two years, a percentage of which will be used to offset the pre-payment.
- Construction has started with cold commissioning planned for October.
Mining this week:
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
* 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
Event: G7, AU, China
New Motor Vehicle Sales YoY
BOJ Monthly Report
Supermarket Sales (YoY)
Existing Home Sales
BOE's Posen Makes Speech in London
Nat'wide House prices nsa(YoY)
UK to unveil £6bn budget cuts
US-China annual summit. Strategic and Economic outlook
Retail Sales (YoY)
Gross Fixed Capital Formation
Industrial New Orders SA (YoY)
EU's Rehn, Spain's Salgado Hold Press Conference
S&P/CS Composite-20 YoY
House Price Purchase Index QoQ
API U.S. Crude Oil Inventories
ABC Consumer Confidence
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.