SP Angel Morning View -Today’s Market View, Friday 5th May 2023

Copper prices weaken towards three months low whilst Cochilco raises price forecasts

MiFID II exempt information – see disclaimer below

Bushveld Minerals* (BMN LN) – Refinancing of US$45m Orion debt and convertible loan note

Gold – $2,051/oz – Prices climb again on Fed rate pause and US banking distress

• Spot gold prices spiked to $2,058oz yesterday before settling around $2,040/oz. Futures hit all-time highs of $2,072/oz.
• The move followed Powell’s signal of a Fed pause in its rate hike programme, with US 10-year yields settling below the 3.39% level, their lowest since September 2022.
• Alongside weaker yields, investors are also rushing to gold for safe haven reasons, with the US banking sector continuing to struggle with deposit flights.
• US Federal authorities are currently examining potential ‘market manipulation’ cases in the sector, with short sellers making over $400m in profit yesterday.
• The S&P Bank 600 index fell 3% in trading yesterday as PacWest fell 50% on rumours of a sale.
• The World Gold Council notes strong central bank demand in Q1, with a 176% increase vs 2022.
• Gold mine production grew 2% and recycling increased 5% in Q1 for a total gold supply in the period at 1,174t, equal to total demand for the period.
• The Council notes a resurgence in China gold spending but warns of lower central bank buying than 2022’s record.

 Copper prices weaken towards three month low whilst Cochilco raises price forecasts

• Copper prices are holding around $8,550/t, above their three-week low following three weeks of declines.
• Chinese factory activity showed an unexpected contraction, highlighting the muted recovery since the reopening from Zero Covid earlier this year.
• A weaker dollar following’s Powell’s move to pause hikes has provided some protection against further declines.
• Chile’s state copper commission, Cochilco, has increased its price target for copper in 2023 from c. $8,490/t to $8,600/t.
• Cochilco notes that the reasoning for the increased stemmed from supply risks, a weaker US dollar and their expectations of 5% economic growth in China.
• It states that refined copper is set to be in a deficit of 67kt this year with demand forecast at 25.74mt, climbing 2.2%.
• However, Cochilco expects a surplus of 396kt in 2024.

 Vietnam ramps up rare earths production as investors seek China alternatives

• USGS data shows Vietnamese mined output of rare earth elements increased 1,000% in 2022.
• Australian Strategic Materials announced plans to boost supply agreements in the long term in Vietnam, following a 100t REO deal on Monday.
• Vietnam has estimated reserves of 22mt REO, 50% of China’s and the second largest globally.
• It was the 6^th largest producer in 2022, climbing from 10^th in 2021.
• Production from neighbouring Myanmar and Thailand is falling.
• China doubled REO imports from Vietnam in 2022.

 Iron ore extends losses following China holiday as steel mill output continues slide

• Dalian iron prices fell further to $98/t, sliding to five-month lows and down 3.7% overnight.
• The move followed a report that output across 247 steel mills in China fell 1.3% wow to 2.41mt to today. (Mysteel)
• Steel mills are boosting equipment maintenance and slashing margins amid the lower price environment.
• Analysts expect port iron ore inventories to climb gradually as a result.
• Coking coal fell 3.1%, coke fell 2.37%.
• Reuters reports 21 blast furnaces are set to shut in May, slashing capacity by 78kt/day.
• Steel rebar down 2.66% to a six-month low, HRC down 3% and stainless steel down 1.2%.

 Covid – The Jakarta Post reports a significant spike in the Arcturus variant of Covid-19

• Thankfully while the Arcturus subvariant is highly contagious it does not appear any more severe than Omicron
• The indication is that Covid variants could evolve into something comparable with the flu or hopefully the common cold.

 Economics

US – NFPs are due later today with estimates for a slowdown in hiring in April although earnings growth is likely to remain strong.

Apple released its quarterly results yesterday showing a 2.5%yoy drop in revenues to $94.8bn driven by a drop in sales of Mac and iPads.

• iPhone revenues were up recovering from supply chain disruptions in the holiday period coming in at $51.3bn and accounting for 54% of the total.
• Sales were down in China (-3%), Americas (-8%) and Japan (-3%) while growing in Europe (+3%).
• Better than expected results saw the stock trading 2.4% higher in after hours trading.

China exports – a useful visualisation

• The Visual Capitalist has issued an interesting chart mapping the rise of Chinese merchandise exports to the world which total $3,594bn.
• See: https://www.visualcapitalist.com/cp/chinas-exports/
• The chart clearly depicts the rise of Chinese exports into the US, Europe and the rest of the world.
• The dramatic increase through Covid is particularly significant with an especially large rise in merchandise exports to the Rest of the Wold at $1.294bn.
• China is looking to reduce its dependence on the US and Europe and is successfully courting trade relationships globally.
• The CAGR rate of increase for Chinese merchandise exports to the world is 2.9%.

ECB – The central bank raise rates by 25bp to 3.25%, in line with estimates and opting to dial down the pace of monetary policy tightening.

• The ECB has raised rates at each of its past seven meetings now.
• Although, the central bank highlighted that the slower pace does not mean a pause in potential rate hikes highlighting persisting inflationary pressures.
• “We have more ground to cover and we are not pausing, that is extremely clear”.
• The ECB said a credit crunch was a big factor in its decision to slow the pace of rate rises.
• Some Governing Council members backed a bigger increase of 0.5pp and said the “inflation outlook continues to be too high for too long”.
• Additionally, the ECB said it will increase the rate at which its portfolio of bonds will come down by to €25bn/month from July compared to current €15bn.
• The euro pulled back against the US$ on the announcement first but since then have recovered half of its losses trading around 1.1030.

Germany – Factory orders dropped more than expected in March with the gauge down 10.7%mom raising concerns over a sharp economic slowdown, FT reports.

• The data matches weak trade numbers released yesterday and reflect waning demand both domestically and externally.
• Foreign orders were down 13.3% while domestic orders dropped 6.8%.

Currencies

US$1.1036/eur vs 1.1067/eur yesterday. Yen 134.14/$ vs 134.77/$. SAr 18.28/$ vs 18.431/$. $1.261/gbp vs $1.257/gbp. 0.674/aud vs 0.667/aud. CNY 6.912/$ vs 6.914/$.

Dollar Index 101.23 vs 101.25 yesterday.

Commodity News

Precious metals:

Gold US$2,051/oz vs US$2,032/oz yesterday

Gold ETFs 93.6moz vs 93.6moz yesterday

Platinum US$1,052/oz vs US$1,053/oz yesterday

Palladium US$1,440/oz vs US$1,444/oz yesterday

Silver US$26.29/oz vs US$25.46/oz yesterday

Rhodium US$7,950/oz vs US$7,950/oz yesterday

Base metals:   

Copper US$ 8,546/t vs US$8,520/t yesterday

Aluminium US$ 2,306/t vs US$2,350/t yesterday

Nickel US$ 24,141/t vs US$25,185/t yesterday

Zinc US$ 2,654/t vs US$2,614/t yesterday

Lead US$ 2,126/t vs US$2,151/t yesterday

Tin US$ 26,770/t vs US$26,500/t yesterday

Energy:           

Oil US$73.8/bbl vs US$73.2/bbl yesterday

Natural Gas US$2.076/mmbtu vs US$2.233/mmbtu yesterday

Uranium UXC US$53.70/lb vs US$52.00/lb yesterday

Bulk:

Iron ore 62% Fe spot (cfr Tianjin) US$103.9/t vs US$102.2/t

Chinese steel rebar 25mm US$554.4/t vs US$553.5/t

Thermal coal (1st year forward cif ARA) US$134.0/t vs US$134.0/t

Thermal coal swap Australia FOB US$181.0/t vs US$190.0/t

Coking coal swap Australia FOB US$245.0/t vs US$245.0/t

Other:  

Cobalt LME 3m US$34,930/t vs US$34,930/t

NdPr Rare Earth Oxide (China) US$62,920/t vs US$62,876/t

Lithium carbonate 99% (China) US$23,360/t vs US$23,344/t

China Spodumene Li2O 5%min CIF US$4,090/t vs US$4,090/t

Ferro-Manganese European Mn78% min US$1,366/t vs US$1,364/t

China Tungsten APT 88.5% FOB US$325/mtu vs US$325/mtu

China Graphite Flake -194 FOB US$775/t vs US$775/t

Europe Vanadium Pentoxide 98% 8.2/lb vs US$8.3/lb

Europe Ferro-Vanadium 80% 32.75/kg vs US$33.25/kg

China Ilmenite Concentrate TiO2 US$341/t vs US$340/t

Spot CO2 Emissions EUA Price US$95.9/t vs US$95.6/t

Brazil Potash CFR Granular Spot US$390.0/t vs US$390.0/t

Company News

Bushveld Minerals* (BMN LN) 4.25p, Mkt Cap £54m – Refinancing of US$45m Orion debt and convertible loan note

Target under revision

• Bushveld Minerals are proposing to refinance the Orion convertible loan due later this year.
• The proposed loan and convertible notes cover some $45m of debt obligations to Orion by Bushveld wit details as follows:
• A new $27m three-year term loan note runs for three years .
  • A three-year term loan totalling ~$27m, repayable in escalating capital amounts,
  • A new convertible loan note of ~$13.5m, maturing in June 2028,
  • Conversion of c. US$4.5m of existing convertible loan note into shares at 6p/s,
  • Supplemental production financing agreement (“PFA”) at not more than 0.22% of gross revenues – reducing by 80% at loan maturity,
• Bushveld agreed a $65m financing with Orion in 2020 including a $35m convertible loan note and a $30m PFA ‘Production Financing Agreement’ on 9th November 2020
• Previous facility key terms:
  • 17p conversion price
  • 10% interest
  • 3 year maturity due in November this year
• The new facility:  
• 60% of the CLN Balance ~$27m will be converted into a 3-year secured term loan as follows:
  • Interest: 6.0% plus the greater of (i) 3-month SOFR1 and (ii) 3.0%pa ,
  • Interest payable quarterly in arrears in cash
• Principal repayments structured to
  • a.   25% of the facility amount to be repaid in June 2024,
  • b.   30% of the facility amount to be repaid June 2025 and
  • c.   45% of the facility amount to be repaid in June 2026.

• The facility may be prepaid in whole or in part at any time. Prepayment is subject to the following fee early redemption schedule based on the outstanding balance at the time of prepayment.

• • Prior to 30 June 2024: 4%
  • After 30 June 2024 until 30 June 2025: 3%
  • After 30 June 2025 until 30 June 2026: 2%

• 30% of the CLN Balance (c.US$13.5 million) to remain as a convertible loan note with the following revised terms (“New CLN”):

• • Interest: 12%
  • Exercise price: 8p
  • Maturity Date: 30 June 2028
• Bushveld shall have a one-time right to redeem 50% (in whole and not in part) of the New CLN in June 2026, subject to the right of Orion to elect for conversion of the same for a 30-day period
• Bushveld has the right to force conversion of the New CLN if the 60 Day VWAP of the Company’s share price is in excess of 16p.
• 10% of the CLN Balance ~$4.5m is to be capitalised into a subscription for shares in Bushveld at 6p/s.
• Gross revenue PFA ‘Production Financing Agreement’ top-up, on the same terms as the existing PFA during the tenure of the Term Loan, except for the following:
  • PFA repayment rate of 0.22% with a realised kgV of less than US$47/kgV.
  • PFA repayment rate of 0.18% with a realised kgV of greater than US$47/kgV.
  • Once the Term Loan has matured in June 2027, the top-up PFA rate will reduce by a further 80% for the life of mine.
  • At the option of Orion, the additional PFA shall rank junior to the PFA in terms of payment, voting and/or security.
  • The additional PFA will be a secured obligation of the Company.
• Vanadium pricing: While we see significant potential for vanadium prices to rise and strong cash flow generation we also see short-term headwinds in demand for vanadium.
• The US banking crisis is unlikely to help new construction activity though fresh economic stimulus in the US and China might improve prospects for vanadium
  • China appears to be slowing stimulus resulting in a collapse in Vanadium Nitride prices falling to CNY156,500/mtV from CNY206,500/mtV
  • Europe has also seen prices slow for ferrovanadium and vanadium pentoxide
  • US prices remain significantly higher than in the rest of the world at $36-36.5/mtV. We believe Bushveld is directing around 50% of its producing into the US market.
• VRFB batteries: The good news is that OEM manufacturers are taking orders for new VRFB battery instillations despite the cost of filling VRFB batteries with electrolyte.
  • Innovative financing arrangements for the leasing or lending of vanadium in electrolyte should help to improve the economics of VRFB instillations.
• FOREX: The recent depreciation in the South African rand is hugely helpful to Bushveld due to the company’s sensitivity to its local cost base.
• Oil prices: The recent fall in oil prices to $73.8/bbl today is another useful benefit in reducing unit costs at the mine though coal prices remain elevated.

Conclusion:  The refinancing with Orion is well timed and is good news in terms in that it removes the near-term overhanging debt repayment. The structure of the deal highlights the broad range of debt structures available from Orion with a number of options for to repay parts of the debt by Bushveld. If the US and China provide fresh stimulus for construction projects this could result in a significant uplift in vanadium prices providing Bushveld with an opportunity to repay Orion.

*SP Angel act as nomad and broker to Bushveld

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 – [email protected] – 0203 470 0490

Simon Beardsmore – [email protected] – 0203 470 0484

Sergey Raevskiy –[email protected] – 0203 470 0474

 Sales

Richard Parlons –[email protected] – 0203 470 0472

Abigail Wayne – [email protected] – 0203 470 0534

Rob Rees – [email protected] – 0203 470 0535

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

SP Angel                                                            

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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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