[cid:image001.png@01CF733B.08C7CBD0] Monday, 19 May 2014 [cid:image006.jpg@01CF733B.09141710]
Snapshot ¢ Company news highlights: Anglo aims to double profitability, Roy Hill rail track underway, Polyus Gold maintains credit rating, Asia Mineral Resources demerger update, AngloGold Ashanti quarterly, CGM Mining to purchase Kazakhstan uranium mines, Amara quarterly, Weatherly International operational update, Discovery Metals re-profiles debt, Elemental Minerals raises A$3.1m, Hengxing Gold files IPO prospectus, China Coal operational update ¢ Commodity review highlights: 25% of Queensland coal is loss making, Vale to close Australian Integra coal mine, Iron ore turmoil continues, Chinese steel rebar prices slump, precious metals lacklustre, Indian jewellery exports up ¢ Other economic news: Japanese core machinery orders increase ¢ African resources update: African Development bank to step up funding, Impala to keep Rustenburg mine shut on safety fears, Ivory coast bounces back, today’s African proverb ¢ Market notes: FTSE futures down 5 points this morning.

US markets rallied in the last 2 hours of trading on Friday with strong housing starts offsetting weak consumer sentiment data (Dow 0.27%, S&P 0.37%).

European markets expected to be relatively unchanged today with very little economic data and the market participants focusing on 2 big deals – the revised offer for AstraZeneca from Pfizer and the €8bn Deutsche Bank capital raising to ease capital concerns.

There will be some comments from the ECB governing council later in the day (Jen Weidmann & Yves Mersch) that may give some signals to the banks intentions regarding stimulus when they meet in June.

Asian stocks are trading lower (Nikkei -0.64%, Hang Seng -0.36%, ASX200 -1.28%) with the Chinese market dropping over 1 % following data the new home prices rose at a slower pace last month adding to concerns about property prices.

The ASX is being dragged down by the iron ore sector with the likes of FMG AU off 4.59%, RIO AU off 2.99%, and steel stock BSL AU off 3.74% on Chinese growth concerns. Commodity markets – gold +0.24 $1,297/oz, silver +0.62% $19.49/oz, platinum +0.27% $1,470/oz, copper +0.89% $3.17/lb, nickel +1.45% $18,981/t, iron ore -2.04% $100.70/t, thermal coal $75.30, WTI +0.15% $102.17/bbl, Brent +0.22% $109.99/bbl, zinc +0.29% $2,060/t.

Dual listed – BHP -1.58% A$37.48, RIO -2.97% A$60.14.

Nickel has rallied for a second day as the supply concern speculation, gold is holding in the US$1,285-1,300/oz band as investors assess the health of the US economy and the impact on monetary stimulus again tension in Ukraine.

Iron ore remains under pressure, falling 2% on Friday to flirt with the US$100/t level as Chinese steel demand collapses with rebar futures trading at 3,076 Yuan per tonne. Economic data due today: US – no data.

Eurozone – Rightmove house prices (3.6% actual), EC construction output.
Company news ¢ Anglo America (AAL LN) aiming to double profitability.

The company expects to double profitability once the company’s balance sheet and asset holdings are cleaned up.

CEO, Mark Cutifani, has set a goal of improving the company’s ROC to minimum 15% by 2016 (with 20% ROC longer term) and will dispose of any of the 69 assets that pull down the average.

The Rio Tinto (RIO LN) CEO has meanwhile said that it is not actively divesting assets this year, but will still consider offers.

Source: Bloomberg ¢ Roy Hill rail track underway.

The first official laying of rail track has occurred today at Hancock Prospecting’s $A10bn Roy Hill project in the Pilbara, the start of a new 344km heavy-haul railway track.

First ore on ship is expected in Sept’15 before the mine ramps up to 55mtpa.

Source: MiningNews Investec view: The current iron ore price doesn’t set a particularly attractive background to bringing on a new mega-mine.

While Roy Hill is expected to be low cost (it has not released numbers in this regard), parallels have been drawn between it and Fortescue Metals (FMG AU), which at the end of 2012 came under immense pressure from its high debt levels as the iron ore price fell. ¢ Polyus Gold (PGIL LN) credit rating.

Standard & Poor’s have reiterated its BB+ corporate credit rating on PGIL although the outlook has been lowered from positive to stable.

According to the ratings agency, the rating confirms the company’s supportive credit metrics and concludes that the group has sufficient liquidity sources to cover 2014 and 2015 even if the gold price fell below US$1,200/oz.

The move to stable outlook reflects various factors, including a downward change in Standard & Poor’s gold price assumptions and its recent downgrade on Russia.

Source: Company Investec view: Given the well documented issues related to Russia and an uncertain outlook for gold, this review seems encouraging for PGIL. ¢ Asia Mineral Resources (ARMS LN) demerger update.

ARMS does not believe that the majority of its shareholders would like a dividend in specie of PT Berau shares to be distributed, so will not take this path.

The group intends to propose a B-share scheme to return US$465m to shareholders.

A general meeting should be undertaken on 27 June to approve this proposal.

Source: Company Investec view: Investors have waited a long time for some good news with this stock and we are sure that the cash return will be well received.

Shareholders will then have to decide the fate for the business after that distribution, once the company is left with its PT Berau investment and little else. ¢ AngloGold Ashanti (ANG SJ) Q1 results.

ANG has reported Q1 adjusted headline earnings of US$119m or 29c/share.

Q1 production beat expectations at 1.06Moz at a total cash cost of US$770/oz.

The group’s all in sustaining cost was US$993/oz.

Net debt declined modestly to US$3.095bn.

The group is on track to realise its targeted US$500m in annualised cost savings by year end.

The group continues to invest in expanding its Cripple Creek and Victor mine in the US.

Source: Company Investec view: ANG’s costs are being aided by the new Kibali mine moving into production in the DRC, which the group owns with Randgold Resources (RRS LN).

Overall, operationally the group looks to be performing well.

It is positive that it remains on track to deliver cost savings of US$500m/year, which is clearly significant.

While ANG is generating cash, its near US$3.1bn net debt figure is substantial, especially in the current uncertain gold market. ¢ CGN Mining (1164 HK) purchase Kazakhstan uranium mines for US$133m.

CGN Mining has agreed to purchase Beijing Sino-Kazakh for US$133m in cash from CGNPC-URC.

Beijing Sino-Kazakh has a 49% interest in Semizbay-U, which owns the Irkol and Semizbay in situ leach uranium mines in Kazakhstan.

Irkol has resources/reserves of 29.8ktU/12.7ktU and produced 1.70mlb uranium oxide in 2013 while Semizbay has resources/reserves of 15.4ktU/11.5ktU and produced 1.32mlb uranium oxide in 2013.

Beijing Sino-Kazakh reported net profit of HKD129m in 2011A, net profit of HKD9m in 2012A, and a net loss of HKD92m in 2013A.

Source: Company Investec view: CGN will become the flagship internal uranium mining platform for China Guangdong Nuclear Power (CGNPC) following the acquisition.

CGNPC also owns the Husab uranium project in Namibia, which it acquired for A$2.2bn in 2012 and we believe could be injected into CGN Mining at a later date. ¢ Amara Mining (AMA LN) quarterly update highlights progress at advancing Yaoure project with feasibility planned for Q1 2015 and infill drilling underway.

Production at Kalsaka is up 9% qoq to 16,263oz with EBITDA of US$1.76m and cash costs falling 16% qoq to US$1,082/oz.

Work continues on optimising Baomahun for a small lower capex solution.

Net loss in the period stood at US$4.6m.

Guidance for the year now toward the lower end of the 60-70koz range previously indicated.

Closing cash was US$7.3m and subsequently the company has raised US$30.5m in equity ensuring that the Yaoure feasibility study is fully funded.

Source: Company Investec View: The value in Amara to shareholders is focussed in the exploration portfolio as any cash generated from Kalsaka will be needed to conclude the Samsung debt that is to be repaid this year that stood at US$7.7m in December.

We look toward updates on the feasibility work and how Baomahun could be advanced under a more optimised solution. ¢ Weatherly International (WTI LN) operational update sees economic parameters recalculated with an NPV of US$133m (8% discount rate and life of mine copper price of US$6,422/t), C1 LOM cash cost of 192c/lb and a break even cost of 212c/lb.

The project was 44% complete at the end of April and on target to deliver first copper in Q2 2015.

In the current operating mines the company is progressing its target of 6ktpa and now moving away from pillar mining to primary mining.

Source: Company ¢ Discovery Metals (DML AU) re-profiling of debt sees lenders to decrease existing interest bearing debt by US$59m to US$100m, a 12 month standstill on principal and interest payments, interest rate of LIBOR plus 5% with interest capitalised until September 2018 when repayments are scheduled to start with the debt to be paid back by June 2023, with a further up to US$20m paid to lenders from 30% of net cash flows after the debt is paid.

Management plan to raise 15% of their equity entitlement to help finance the Zeta underground project.

Source: Company Investec View: The agreement with debt holders is a substantial shift and haircut, this may perhaps allow another party to refinance and acquire the asset as it will be less burdened by debt repayments.

However, it also highlights the operational challenges faced. ¢ Elemental Minerals (ELM AU) raises A$3.1m.

Elemental Minerals, 93% owners of the Sintoukola project in RoC, has placed A$3.1m at A$0.25/share to sophisticated and institutional investors.

Source: Company Investec view: The placement was done at an 11% premium to the Friday, 16 May, closing price.

Following the 18 March 2014 collapse of the A$0.66/share Dingyi bid Elemental announced that they are in discussions with a large African conglomerate to advance the Sintoukola project. ¢ Hengxing Gold (2303 HK) files IPO prospectus.

Chinese gold miner Hengxing Gold has filed an IPO prospectus with the Hong Kong Stock Exchange seeking to raise >US$42m by selling 231m shares (excluding the overallotment option) at HKD1.60/share-HKD2.00/share.

Hengxing owns the Gold Mountain mine in Xinjiang province, which has JORC resources of 3.22moz gold at 0.74g/t Au and JORC reserves of 2.16moz at 0.74g/t Au.

Gold Mountain is currently in trial production and expected to produce c.

78kozpa gold over a 22 year mine life using heap leaching according to the independent technical report.

Operating cash costs and production costs are respectively expected to be US$598/oz and US$739/oz in 2015.

Source: Company ¢ China Coal (1898 HK) April operational data.

China Coal reported April 2014 commercial coal production of 9.73mt, up 1.5% y-o-y.

Coal sales volume of 13.35mt was however down 6% y-o-y with a significant 24.9% y-o-y decline in domestic coal trading to 3.17mt.

Source: Company
[cid:image007.png@01CF733B.09141710] Commodities news ¢ 25% of Queensland coal is loss making: QRC.

In its recent report, the Queensland Resources Council (QRC), with the assistance of consultants, Wood MacKenzie and Lawrence Consulting, claims that 25% of coal produced in Queensland is now loss making (on a cash FOB basis), including 50% of all thermal coal production, and 1t of every 10t of coal currently produced in Queensland is in the red to the tune of >A$14/t.

Some mines are only staying open because production is a more palatable option than closing operations locked into transport costs that are levied on a take or pay basis.

Source: QRC Investec view: Clearly there is increased likelihood of further mine closures in Australia without higher thermal and coking coal prices and/or a weaker A$.

Queensland coal producers are, however, paying an effective 50% tax rate and there is scope for the Queensland government to lower royalties in the short-term which, although a potential positive for Queensland coal producers, would be a negative for coal prices. ¢ Vale (VALE US) to close Australian 4.5mtpa Integra coal mine due to losses.

The company is looking to sell a 15-25% stake in its coal operations, and was not expecting any further closures.

The group lost US$480m on its coal business in 2013.

Source: Thomson Reuters Investec View: Coal is in the doldrums and a recovery may take a while.

However, distressed assets and weak pricing is prompting considerable interest from PE investors since it presents a cheap entrance to assets that could in a few years’ time be highly cash generative as demand catches up with supply eventually that would support a price recovery and a return to strong profits. ¢ Iron ore turmoil continues.

With the spot price having fallen close to $100/t (currently $100.7/t) iron ore futures out of Singapore are now trading below $100/t, with contracts for August at $97.85/t.

Demand is still robust, however, with steel mills consuming record volumes of iron ore: last week was 2nd straight week when 30 dry bulk vessels chartered in spot cargoes to China (there were only 4 weeks last year when 30 or more vessels per week were chartered).

Port inventories stand at 112.6mt, little changed since February.

Source: Bloomberg Investec view: Demand for iron ore is currently not the problem.

More concerning is the expectation that demand will weaken, just as additional supply comes on stream.

The good spot demand currently may suggest that some believe they are getting bargain prices. ¢ Steel Rebar continues slump as Chinese home price growth slows.

Rebar for October delivery on Shanghai Futures fell 0.5% to 3,076yuan/mt, the lowest close for the most-active contract since inception in 2009.

The futures are down 14% this year.

Weaker rebar prices are thought to reflect slowing growth China’s new-home prices, with prices last month increasing in only 44 of the 70 tracked cities, 56 in March.

This could, however, allow greater relaxation on curbs on speculative and investment home purchasing, as local governments will have greater incentive to do this.

Source: Bloomberg ¢ Gold prices relatively lacklustre in morning trading.

Major ETF SPDR Gold Trust saw holdings fall 0.26t on Friday to 781.99t highlighting softening investment demand.

Platinum and palladium prices appear relatively flat in morning trading despite continued strike action in South Africa and no sign of a resolution.

Source: Thomson Reuters ¢ Gold jewellery exports from India up for a third month following improved raw material supplies from the Reserve Bank of India (RBI) allowing banks to import more bullion.

Exports reached US$604.42m, and the outlook is improving for the Indian jewellery market as the RBI has indicated that it plans for a slow and steady removal of restrictions as the current account deficit comes under control.

Source: Thomson Reuters Investec View: It is positive for gold if Indian restrictions are removed, as typically India is the world’s largest consumer of gold, now eclipsed by China which demonstrated a surge in demand whilst government policies curbed India’s imports.
Other economic news ¢ Japanese core machinery orders increases.

Japanese core machinery orders rose by 19.1% from a month earlier, pointing to a continued recovery in business investment that could help to drive economic growth.

Companies forecast orders to rise by 0.4% in April.

Source: Bloomberg
African resources update ¢ African Development Bank to step up funding, as China dominates lending.

The bank is stepping up plans to finance power and rail projects, and is set to endorse the Africa50 Fund, targeting $10bn of equity from an initial capital of $3bn.

The AfDB’s spending has been dwarfed by China, which invested over $13bn in infrastructure in 2012, versus the AfDB’s $3.4bn in 2011.

China intends increasing its line of credit to African by $10bn to $30bn.

African nations have a funding shortfall of $50bn/pa to ease energy shortages and transport bottlenecks, according to the World Bank.

Source: Bloomberg Investec view: The AfDB will be hard pressed to compete directly with China, which is providing the lending with for several benefits to itself, including access to commodities and creating a market for Chinese goods and services. ¢ Impala Mining (IMP LN) to keep Rustenburg mine shut until it can guarantee safety of employees returning to work.

Recently quarterly update outlined some 131koz of lost platinum production, with performance at other mines and its refining services remaining stable.

Source: Mining MX ¢ Ivory Coast bounces back after 11 years of conflict.

The African development Bank is returning to its Abidjan headquarters in Ivory Coast after years spent operating outside the country due to the civil war and renewed issues in 2011 post a disputed election.

Since 2011, economic growth has accelerated and per capita income has returned to pre-war levels.

The IMF forecasts growth of 8.2% in 2014, the fourth highest in Africa and the country plans a US$500m sovereign bond.

Source: Company ¢ Today’s African proverb.

“Crowing cocks were once eggs”.

Source: BBC
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