SP Angel Morning View -Today’s Market View, Friday 20th October 2023

China blocks graphite exports as domestic gigafactories ramp up production

Ghana grants mining lease on Atlantic Lithium’s Ewoyaa project

Rising geopolitical risks keep gold well bid

MiFID II exempt information – see disclaimer below

Atlantic Lithium* (ALL LN) – Ghana grants mining lease for Ewoyaa lithium project

We are looking for investors for a private exploration opportunity on a newly discovered copper / moly porphyry system in South-East Asia

• Annamite Resources has an ongoing joint venture with a Rio Tinto and is currently drilling its principal copper porphyry in Hinherb District, Laos
• >2,000m in 9 holes already drilled with intersections of visible chalcopyrite and molybdenite both disseminated and in B-veins
• Positive indications of grade at shallow depths. Total funding $2.34m to date. Current implied valuation $4.4m. Best drill result:

• • 60m grading 0.4% copper, 0.2% gold plus molybdenum from 24m eg. below the leached cap
  • 3m grading 0.51% copper, 9.2g/t gold, and 49g/t silver from 64m down hole
  • 2m grading 0.3% copper, 6% zinc and 9g/t gold, 40 g/t silver from 33m down hole related to a massive pyrite-magnetite-sphalerite-chalcopyrite vein

• Annamite also has two gold and silver epithermal structures with low capital potential.
• The projects are within 100km of the capital near the border with Thailand.
• The company is led by Chris Goss and Didier and Didier Fohlen ex IFC. See more info at: https://www.annamite-resources.com/

*SP Angel’s role is limited to making introductions and interested parties should be aware that investment in a private company can present certain risks not present in listed companies (e.g. limited or no liquidity and no rules compelling disclosure of information to investors).This offer is open to professional investors only and is not offered to retail investors.

IGTV:  New lower lows in base metals keep coming – why? https://youtu.be/1KWgI2HTUGw?si=VlVfQtpW-mrI7slD

           Copper will still move up despite a gear shift down in carbon-zero targets  https://youtu.be/jbywf2hmEU8?si=yxJcwGiE1_V121Ok

VOX:  06/10/23:  https://audioboom.com/posts/8379837-john-meyer-on-diamond-price-weakness-petra-anglo-asian-bushveld-power-metal-resources

           29/09/23:  https://audioboom.com/posts/8375969-john-meyer-on-china-s-property-implosion-plus-atlantic-lithium-bushveld-sovereign-metals

*SP Angel almost invariably acts as nomad or broker or nomad and broker to companies mentioned in the above videos and podcasts. We speak more about these companies as we have a good understanding of their business and can talk with a greater degree of confidence. As ever, however, it should be noted that our views do not take into account the circumstances and needs of any particular investor or investor type. So enjoy the talks, but please do your own research, including other companies not mentioned by us but operating in the same areas, and get professional advice where appropriate.

China blocks graphite exports as domestic gigafactories ramp up production

• China announced overnight that it plans to impose export restrictions on two primary graphite products crucial to the EV anode sector.
• From December 1^st, China will require export permits for both synthetic graphite and natural flake graphite products.
• The ban is a similar structure to the restrictions placed on Gallium and Germanium exports in July.
• Flake prices have fallen 25.5% ytd to between $540-$635/t.
• China dominates graphite supply, producing 79% of total world graphite production, split between 24% synthetic and 76% natural flake.
• Furthermore, China refines over 90% of graphite for Active Anode Materials.
• The decline of China’s natural flake output has been forecast for some time, with analysts expecting their share to fall to below 40% by the end of the decade. This reflects declining ore grades among other factors.
• We hold the view that China has been flooding the market with unsustainably cheap synthetic graphite to rebuild anode material supplies before the winter.
• We remind readers that much of graphite demand (53%) goes to the refractory and foundry end markets, which have been hit by weak steelmaking margins and construction demand from the China property market.
• However, China traditionally sees a seasonal slowdown in natural flake production between October and November, thus the export curbs likely reflect domestic concerns over supply limitations.
• Additionally, synthetic graphite production is highly energy intensive, and the curbs may also reflect anticipation of higher costs limiting production capacity as winter looms.
• Synthetic graphite prices are also directly linked to coke material supply and pricing, with a potential slowdown in crude refining activity also set to weigh on synthetic production margins.
• We expect last night’s developments to provide some needed stimulus to natural flake prices.
• Downstream graphite demand trends remain positive, with EV sales growing over 40% yoy in Q3 – anode production in China also up c.40% over same period.
• The summer saw anode material inventories rise, although industry reports suggest these elevated levels are easing, expected to add additional demand for graphite products.
• Despite reports that China has implemented the ban in reaction to the US crackdown on chip sales, supply/demand dynamics suggest Beijing is taking an opportune moment to inflict maximum pricing pain on western graphite product buyers.
• Graphite mine and downstream facility developers with Western backing will be set to benefit as the market wakes up to China supply threats:

• • GreenRoc* (GROC) with Amitsoq project in Greenland,
  • Beowulf Mining* (BEM) with their Grafintec downstream anode materials production facility project in Finland alongside the Aitolampi exploration project,
  • Sovereign Metals* (SVML) with their Kasiya project in Malawi, which sits at the bottom of the graphite cost curve at c.$400/t FOB.
  • Australian producers and developers Syrah (SYR AU), Renascor (RNU AU) and Talga (TLG AU).

*SP Angel acts as Broker/Nomad or both to GreenRoc, Beowulf Mining and Sovereign Metals

Gold jumps again as escalation continues in the Middle East

• Gold prices are enjoying a ‘war premium’ at the moment, climbing to $1,980/oz, despite US Treasury yields pushing past 16-year highs.
• Iranian-backed Houthis and Iraqi militants have added to concerns of the conflict in Gaza triggering a wider Middle Eastern conflict.
• Gold has abandoned its tight correlation to real yields, which pushed higher again yesterday as Treasuries weakened on the back of a soft unemployment claims report and continued hawkishness from Powell.
• The dollar is also strengthening, although gold prices are shrugging the Greenback headwind off as investors rush to haven assets.

Copper weakens on dollar and rate pressure as Freeport warns current prices limit new projects

• Copper prices have fallen below $8,000/t again after Treasury yields jumped to 5% across much of the curve.
• Higher rates limit traders’ financing abilities, forcing them to sell down inventory to cover margin requirements.
• They also push the dollar higher, weakening international (China specifically) buying power.
• Inventories remain high and copper is in contango across both COMEX and LME, suggesting physical supply is ample.
• Freeport-McMoran’s earning call revealed management’s view that the current pricing environment is too low to justify them to ‘commit to major multibillion-dollar projects.’
• The Company is guiding towards $5.4bn in cash flows at a $3.6/lb copper price for FY.

Economics

US – Strong US economics data may require higher borrowing conditions to bring inflation down, although, rising market interest rates make action by the central bank itself less necessary, Reuters cited Fed Chair speech yesterday.

• Fed Chairman agreed with some of its colleagues in the FOMC that the bond market is doing dome of the central bank’s work for it.
• Higher market rates “in principle” was helping to further tighten financial conditions and “at the margin” might lessen the need for additional Fed rate increases.
• Rates pulled back on Powell remarks while futures now price in less than a one-in-three chance of another rate hike this year, down from around 40% before the speech.

China – Banks follows the queue from the central bank leaving prime lending rates unchanged this month.

• The 5y loan prime rate, the benchmark for new mortgage rates, was left at 4.20% for a fourth consecutive month.
• The decision comes following the announcement from the PBOC held its one year medium term lending facility rate at 2.50% for a second month.

President Biden appealed to US citizens to support funding for Israel and Ukraine in his 15 minutes address yesterday.

• The administration is seeking ~$100bn in resources for Israel, Ukraine, Taiwan and the US southern border.
• “I know these conflicts can seem far away, and it’s natural to ask why does this matter to America,” Biden said Thursday.
• “Hamas and Putin represent different threats. They share this in common: they both want to completely annihilate a neighboring democracy.”
• “History has taught us that when terrorists don’t pay a price for their terror, when dictators don’t pay a price for their aggression, they cause more chaos and death and more destruction,”
• “It’s a smart investment that’s gonna pay dividends for American security for generations,” President Biden said.
• Israel continued to bomb the Gaza Strip with airstrikes ahead of an expected ground invasion with no exact timing on the latter yet offered.

Japan – The central bank refuses to tighten policy despite a build up in inflationary pressures.

• Governor Ueda said in a speech in Tokyo that the central bank will continue patiently keeping rates on hold in order to achieve stable and sustainable 2% inflation goal, Bloomberg reports.
• Core inflation came in at 4.2% in September marking the second highest level in decades.
• CPI (%yoy): 3.0 v 3.2 August and 3.0 est.
• CPI ex Fresh Food, Energy (%yoy): 4.2 v 4.3 August and 4.1 est.

UK – Retail sales recorded a larger than expected drop in September reflecting tight household budgets as well as warm weather.

• Retail sales are down 0.8%qoq in Q3/23 implying strong consumer spending headwinds for the economy over the past quarter.
• Separately, BOE Governor Bailey reiterated central bank stance that borrowing costs will need to stay high for now given strong growth in labour earnings.
• Odds of another 25bp hike before Q1/24 have been coming down lately and currently stand at around 50%, down from ~%75 earlier in the week.
• Retail Sales (%mom): -0.9 v 0.4 August and -0.4 est.
• Retail Sales (%yoy): -1.0 v -1.3 (revised from -1.4) August and -0.2 est.
• GfK Consumer Confidence: -30 v -21 September and -20 est.

Currencies

US$1.0572/eur vs 1.0543/eur previous. Yen 149.88/$ vs 149.79/$. SAr 19.075/$ vs 19.054/$. $1.211/gbp vs $1.214/gbp. 0.631/aud vs 0.631/aud. CNY 7.318/$ vs 7.317/$.

Dollar Index 106.33 vs 106.55 previous.

Commodity News

Precious metals:

Gold US$1,979/oz vs US$1,948/oz previous

Gold ETFs 86.3moz vs 86.5moz previous

Platinum US$894/oz vs US$887/oz previous

Palladium US$1,107/oz vs US$1,115/oz previous

Silver US$22.99/oz vs US$23/oz previous

Rhodium US$5,500/oz vs US$5,500/oz previous

Base metals:

Copper US$ 7,925/t vs US$8,002/t previous

Aluminium US$ 2,174/t vs US$2,187/t previous

Nickel US$ 18,320/t vs US$18,545/t previous

Zinc US$ 2,406/t vs US$2,423/t previous

Lead US$ 2,078/t vs US$2,103/t previous

Tin US$ 25,000/t vs US$25,425/t previous

Energy:

Oil US$93.2/bbl vs US$91.0/bbl previous

Natural Gas €50.900/MWh vs €47.700/MWh previous

Uranium UXC US$69.00/lb vs US$72.75/lb previous

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$117.1/t vs US$115.9/t

Chinese steel rebar 25mm US$535.1/t vs US$536.0/t

Thermal coal (1st year forward cif ARA) US$136.0/t vs US$138.0/t

Thermal coal swap Australia FOB US$141.5/t vs US$146.5/t

Coking coal swap Australia FOB US$325.0/t vs US$321.0/t

Other:  

Cobalt LME 3m US$33,420/t vs US$33,420/t

NdPr Rare Earth Oxide (China) US$71,395/t vs US$71,619/t

• Lynas shares fall as it will temporarily close most of its Malaysian processing facility due to low prices.

Lithium carbonate 99% (China) US$22,204/t vs US$22,347/t

China Spodumene Li2O 6%min CIF US$2,110/t vs US$2,170/t

Ferro-Manganese European Mn78% min US$1,020/t vs US$1,017/t

China Tungsten APT 88.5% FOB US$300/mtu vs US$300/mtu

China Graphite Flake -194 FOB US$635/t vs US$635/t

Europe Vanadium Pentoxide 98% 6.2/lb vs US$6.2/lb

Europe Ferro-Vanadium 80% 26.25/kg vs US$26.25/kg

China Ilmenite Concentrate TiO2 US$314/t vs US$314/t

Spot CO2 Emissions EUA Price US$85.5/t vs US$84.7/t

Brazil Potash CFR Granular Spot US$340.0/t vs US$340.0/t

EV and Li-ion battery News

Battery giant CATL reports sharp slowdown in profit growth

• CATL reported a 10.7% increase in third-quarter profit, the weakest growth since the beginning of last year, due to slowing demand and stiff competition.
• This profit growth is a significant drop from the 63.2% increase in the second quarter and the 188.4% surge in the third quarter of 2022.
• CATL’s China market share fell to 39% in September, the lowest in over a year, down from 45% three months earlier.
• Rival companies like BYD and CALB boosted their shipments in China by more than 71% in the first nine months of the year, far surpassing CATL’s 18.8% growth.
• The company faces pressure to cut prices and secure its market share amidst the intense price war among automakers and slowing EV sales in China.
• CATL’s partner Ford Motor paused work on a $3.5bn EV battery plant in Michigan amid concerns by U.S. politicians about facilitating the flow of U.S. EV tax subsidies to China.
• CATL’s shares have dropped about 16% this year, underperforming the broader market’s 8.7% decline.

Japan doubles target for EV charger instalments

• The Japanese government has doubled its target for EV charging stations to 300,000 outlets by 2030, ten times the current level.
• The new plan aims to increase the number of standard charger outlets to 270,000 and fast charger outlets to 30,000.
• The goal is to accelerate the installation of EV chargers to support the government’s target of achieving 100% electrified vehicles for new car sales by 2035.
• The revised target reflects the expectation of increased domestic sales of EVs by Japanese manufacturers, such as Toyota.

Toyota becomes latest EV manufacturer to adopt Tesla charging standard

• The Japanese automaker will adopt Tesla’s charging technology by 2025.
• Ford, GM and Nissan have already adopted Tesla’s North American Charging Standard (NACS).
• NACS is closer to becoming the industry standard at the expense of the rival Combined Charging System (CCS).
• Tesla’s NACS is widely available, with the US Department of Energy estimating they make up about 60% of the fast chargers in the United States.
• CCS is backed by Volkswagen, but the German company has recently held talks with Tesla about adopting the NACS.

Changan Auto sign deal to build EV plant in Thailand

• The Chinese auto ginat has signed a deal with Thai authorities to invest $240m on developing an EV plant.
• Thailand is looking to establish itself as a manufacturing hub for EVs in Southeast Asia and Chinese companies are looking to expand globally.
• The first phase of the plant will have an annual capacity of 100,000 vehicles, and the second phase will increase the annual capacity to 200,000 vehicles.

Indonesian Ministry pursuing EV ecosystem development target

• Indonesia’s Industry Ministry is supporting the development of its EV ecosystem with a plan to have 9m two- and three-wheeled EVs and 600,000 electric cars and buses on Indonesian roads by 2030.
• This initiative aims to reduce fuel oil consumption by 21.65mb per year, equivalent to cutting CO2 emissions by 7.9mt.
• Indonesia has seen rapid growth in its EV ecosystem, driven by strategic government policies, business certainty, and a clear roadmap for EV development.
• Indonesia currently has two , PT HLI Green Power and PT International Chemical Industry, both aiding in the acceleration of the EV ecosystem.
• PT HLI Green Power’s battery factory, with a capacity of 10GWh, is planned to be completed in 2023 and will supply electric car factories by 2024.
• The battery cell industry is expected to supply around 150,000 to 170,000 EVs.
• The government is providing incentives to consumers, including 0% sales luxury tax, low-interest rates, special number plates, and incentives for purchasing two-wheeled EVs.
• Manufacturing industry incentives include tax holidays, tax allowances, import duty facilities, and super tax deductions to boost the production of various types of KBLBB in Indonesia.

Sunwoda Electric Vehicle Battery moves towards domestic IPO, last valued at almost $4.9bn

• Sunwoda Electric Vehicle Battery (EVB), a spin-off of Sunwoda Electronic Co, filed for an IPO application with the China Securities Regulatory Commission.
• The IPO comes three months after Sunwoda’s decision to spin-off the EV battery unit for a separate listing on the ChiNext board in Shenzhen.
• Chinese EV battery makers, including CALB, have been raising capital for global expansions amid China’s dominance in the EV transition.
• Sunwoda EVB last raised capital in June, receiving investments from domestic investors including BOC Financial Asset Investment and China Life Private Equity Investment.
• The earlier investment valued Sunwoda EVB at almost 35.6bn yuan ($4.9bn).
• Its investors include Chinese EV manufacturers Li Auto, Nio, and Xpeng, as well as traditional automakers such as SAIC Motor, Guangzhou Automobile Group, and Dongfeng Motor Corporation.
• Sunwoda EVB has yet to turn a profit but was ranked ninth among the world’s top 10 EV battery producers in 2022, with a 1.8% global market share.
• The company’s revenue quadrupled to over 12.9bn yuan ($1.8bn) in 2022 from just under 3 billion yuan in 2021.

Company News

Atlantic Lithium* (ALL LN) 27p, Mkt Cap £168m – Ghana grants mining lease for Ewoyaa lithium project

(Piedmont is earning into 50% of the Ewoyaa project on funding of the first US$70m of Ewoyaa Capex and 50% of additional costs thereafter on US$185m of DFS capex.)

(Atlantic 40.5%, Piedmont 40.5%, MIIF 6%, Ghana 13%)

STRONG BUY

• Atlantic Lithium report the award of Ghana’s first lithium mining lease on the Ewoyaa lithium project in Ghana.
• This is the first time the Ministry of Mines in Ghana has issued a license for the mining of lithium requiring the ministry and government to overhaul their regulations and fiscal regime.
• We expect the new Ewoyaa mine to be Ghana’s first lithium mine and to produce first lithium concentrate within 12 months.
• Fiscal Regime

• • Free carry:  13% vs 10% used in the previous DFS, this has been flagged in Ghana press reports in recent months.
  • Royalty:  10% vs 5% used in DFS1. This was also speculated on in the Ghana free press.

• Capex funding: Atlantic highlight their need to contribute a further US$38m to the US$185m capex.

• • Management are running a competitive offtake partnering process to fund the US$38m shortfall. Eg, they are not proposing to issue additional equity.

• Key DFS parameters and changes to DFS estimates

• • Mining 2.7Mtpa steady state operation,
  • Production: 350,000tpa of spodumene concentrate
  • Mine life: 12-year current plan
  • IRR now 94% vs 105% on the DFS (post tax) due mainly to the higher royalty and free carry rates.
  • NPV8 now US$1,301m vs US$1,498m post tax
  • C1 cash operating costs of US$377/t FOB Ghana
  • AISC ‘All In Sustaining Cost’ now US$675/t vs US$610/t due to the higher royalty
  • CAPEX remains at US$185m;
  • Payback reduced to 17 months vs 19 months – using a more precise month-by-month assessment.
  • Payback on the modular DMS is just 3 months. Payback on the main plant is 9.5 months
  • Life of Mine revenues of US$6.6bn;
  • EBITDA, LOM US$280m per annum on average;
  • EBITDA, LOM now US$3,365m vs US$3,798m
  • EBIT, LOM now US$3,022 vs US$3,527m
  • NPAT, LOM now US$2,004m vs 2,284
  • Free cash flow, LOM: now US$2,091m vs US$2,438m (post tax)
  • Ore Reserves: 25.6mt grading 1.22% Li2O
  • Mineral Resource Est: 35.3mt @ 1.25% Li2O JORC resource including: 3.5mt @ 1.37% Li2O Measured and 24.5mt @ 1.25% Li2O Indicated + 7.4mt @ 1.16% Li2O Inferred.

• Assumes: concentrate price: US$1,587/t (long-term pricing of US$1,410/t FOB Ghana)

• • SC6 (Spodumene 6%) US$1,695/t FOB Ghana – vs US$2,110/t landed in China
  • SC5.5 (Spodumene 5.5%) US$1,478/t FOB Ghana
  • Secondary Product Sale US$186/t FOB Ghana

• Lithium spodumene and carbonate prices continue to soften in China with local analysts talking the market lower on reduced buying in the spot market by gigafactories.
• Chinese consumers have been signing long-term supply contracts and are said to be well stocked at present as a result of supply from these contracts according to one Chinese lithium analyst.
• Graphite: News today that China is restricting graphite exports indicates Chinese Li-ion production continues to grow with ongoing expansion of Li-ion EV battery demand.
• While, China’s restriction on graphite exports may impede gigafactory development outside China, we reckon the supply gap will be quickly filled via other graphite sources.
• Conditions:
• Time scale: Atlantic must achieve ‘commercial production’ within 24 months from the date of its ratification and comply with Ghana’s Local Content Regulations.
• MIIF (Minerals Income Investment Fund): to invest a total of US$32.9m in Atlantic and Ghanaian subsidiaries, including US$27.9m for a 6% interest in Atlantic’s Ghana portfolio.
• Downstream processing: Atlantic will also run a scoping study on downstream lithium conversion to evaluate the economics of further value addition within Ghana.

• • The Government of Ghana has publicly stated its ambitions for long-term lithium production in Ghana and its objective to establish itself as a major hub in Africa in the EV supply chain.
  • Livista, which is building a lithium refinery in Germany is also working with the Ghana government on the potential construction of a lithium refinery at Tarkwa.

• Feldspar:  The Government of Ghana is particularly keen to see Atlantic produce by-product feldspar to restart and rejuvenate the ceramics industry for which this region was once well known.
• This is a significant issue for the local area due to its creative employment but has not yet been incorporated into the feasibility study.
• The development of a feldspar recovery plant should be relatively simple, provide modest additional revenue, enable the enlargement of the pits, lower cutoff grade, lengthen mine life etc…
• The sale of feldspar will also reduce the amount of tailings to be stacked.
• Ghana Stock Exchange Listing: Atlantic will undertake to IPO on the Ghana Stock Exchange
• Recommendation: We continue to recommend Atlantic Lithium as a Strong Buy due to the substantial differential between the company’s market capitalisation and the value of its share of the Ewoyaa project. Atlantic hold 40.5% of the Ewoyaa project with an NPV8 value of US$527m on the revised DFS estimate above.

Conclusion:  We are very pleased to see this license award for the Ewoyaa project. The increase in 13% free carry and 10% royalty is painful but still enables a strong IRR of 94%.

*SP Angel acts as Nomad to Atlantic Lithium. Two mining analysts from SP Angel recently visited the Ewoyaa mine site in Ghana and drove onto Takoradi to check the quality of the road to port. Our analysts also visited the Ministry of Minerals Commission and MIIF, the Ghana Minerals Income Investment Fund.

No.1 in Copper:  “The winner of the 2020 Fastmarkets Apex contest for copper was the team at SP Angel comprising John Meyer, Sergey Raevskiy and Simon Beardsmore, with an accuracy score of 93.8%”

No1. In Gold:  “SP Angel’s trio took the top spot for the gold price prediction throughout the year, with an accuracy score of 97.59%”

The SP Angel team also ranked 1st in Palladium, 3rd in Tin and 5th in Silver in the fourth quarter of 2020

Analysts

John Meyer – John.Meyer@spangel.co.uk – 0203 470 0490

Simon Beardsmore – Simon.Beardsmore@spangel.co.uk – 0203 470 0484

Sergey Raevskiy –Sergey.Raevskiy@spangel.co.uk – 0203 470 0474

Sales

Richard Parlons –Richard.Parlons@spangel.co.uk – 0203 470 0472

Abigail Wayne – Abigail.Wayne@spangel.co.uk – 0203 470 0534

Rob Rees – Rob.Rees@spangel.co.uk – 0203 470 0535

Grant Barker – Grant.Barker@spangel.co.uk – 0203 470 0471

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*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.

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