SP Angel Morning View -Today’s Market View, Friday 9th June 2023

Weak Chinese inflation data fuel speculation for an increase in government stimulus

MiFID II exempt information – see disclaimer below

KEFI Gold and Copper* (KEFI LN) – FY22 annual results

Hummingbird Resources (HUM LN) – Kouroussa first gold pour

Versarien* (VRS LN) – Interims highlight need to focus on graphene product delivery

IGTV:  https://www.ig.com/uk/market-insight-articles/ev-metals-to-regain-momentum–despite-economic-uncertainty–sp-a-230606

VOX Markets Podcast:   https://audioboom.com/posts/8310999-john-meyer-on-china-s-mixed-manufacturing-figures-plus-atlantic-lithium-goldstone-res-anglo-asi

*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.

Customer destocking in consumer and industrial markets is causing sales to fall at Croda, the speciality chemicals group

• Logistics delays caused many companies to restock materials as customer orders picked up after covid and related lockdowns.
• Rising interest rates, fuel costs and product inflation combined with a general pullback in consumer and business confidence has led to a fall off in new orders.
• Industrial companies like Croda are now reporting results affected by destocking.
• Croda comment ‘customer destocking in consumer and industrial end-markets was now expected to continue into the second half’.

Copper – SHFE Shanghai stocks fall 11.7% this week to 76,473t

• We believe traders and consumers are anticipating new construction stimulus to support fall growth rates
• Another 9,693t was taken off warrant leaving on warrant stocks at 30,801t
• Aluminium stocks fell 15.9% to 123,669t
• Nickel stocks also fell 10.4% to 3,294t
• On the LME:  copper stocks also fell 1.8% at 1,800t to 97,650t
• Aluminium also fell 0.6% at 3,825t to 578,300t
• Nickel fell 0.4% at 156t to 37,230t

Economics

US – The S&P 500 index closed 0.6% yesterday helping the equity market gauge to cross the 20% mark from October lows and suggesting equities now entered the bull market.

• The rally has been driven by expectations for a pause in interest rate hikes and resilient earnings as well as lower energy prices and bets on a post Covid reopening in China.
• Donald Trump is reported to have been indicted for his refusal to return classified documents discovered at his Florida house, Bloomberg reports.
• The indictment contains seven charges including wilful retention of national defense information, corruptly concealing documents, conspiracy to obstruct justice, and making false statements, according to a person familiar with the case.
• The news comes ahead of the GOP nomination of presidential elections in 2024 with three of its rivals announcing their candidacy this week including Mike Pence (former Vice President), Chris Christie (former New Jersey Governor) and Doug Burgum (North Dakota Governor).
• Trump is expected to appear in court in Miami on Tuesday.
• Weekly Jobless Claims (‘000): 261 v 233 (revised from 232) the previous week and 235 est.

China – Inflation data shows economic growth momentum continues to struggle as consumer prices rise only slightly while factory gate prices continued to contract in May.

• The data adds to earlier reports that showed manufacturing activity falling, exports contracting for the first time in three months and the property market slowing down.
• Low inflation gives the Chinese government significant room for manoeuvre when it comes to new stimulus, though we note President Xi appears cautious in his use of stimulus.
• China is expected to continue to encourage builders to complete unfinished apartments, a long-running and very sore issue with owners who are paying mortgages but unable to move in.
• We also expect the government to reconsider its ‘dual-circulation’ policy where it stimulates domestic demand in certain provinces and cities, often using discount vouchers for appliances and other approved goods.
• CPI (%yoy):0.2 v 0.1 April and 0.2 est.
• PPI (%yoy): -4.6 v -3.6 April and -4.3 est.
• China and India continue to benefit from discounted oil, gas and other products out of China via unofficial traders.
• Renewed stimulus should also have the beneficial effect of reversing a potential slide into a deflationary environment in China.
• Many factory workers are paid according to their production with wages falling when demand falls and output is cut.
• Problem for China is that National debt is around $3.8tn with debt to GDP is running at >82%.
• China also holed around $23tn of local debt.
• China Chengxin International Credit Rating estimated the hidden debt of local governments at around CNY 52-58tn ($7.3-8.1tn) at end 2022, representing around 1.5-1.7 times the amount of explicit debt.
• Sometimes a bit of inflation to erode national debt may be preferential to sliding into a deflationary environment where slow economic growth struggles to pay down debt.

Eurozone – Slowing Eurozone growth causes technical recession

• Q1 GDP growth fell 0.1% in Q1 marking a second consecutive quarter of negative growth.

Turkey – Currency collapses further as sellers compete for increasingly scarce foreign exchange reserves

• The Turkish Lira has collapsed 13% this week, 20% over the past month and 37% over the past year.

Ukraine – Kiev says it has proof that a Russia sabotage group blew up the Nova Kakhovka dam

• Russia is also thought to have shelled and blown up an ammonia pipeline which connects the Russian city of Togliatti and the port of Odessa in Ukraine.

Currencies

US$1.0773/eur vs 1.0709/eur yesterday. Yen 139.53/$ vs 139.86/$. SAr 18.848/$ vs 19.052/$. $1.255/gbp vs $1.245/gbp. 0.672/aud vs 0.667/aud. CNY 7.124/$ vs 7.132/$.

Dollar Index 103.47 vs 104.02 yesterday.

Commodity News

Precious metals:

Gold US$1,964/oz vs US$1,946/oz yesterday

   Gold ETFs 93.9moz vs US$94.0moz yesterday

Platinum US$1,019/oz vs US$1,030/oz yesterday

Palladium US$1,359/oz vs US$1,398/oz yesterday

Silver US$24.41/oz vs US$23.67/oz yesterday

Rhodium US$6,200/oz vs US$6,300/oz yesterday

Base metals:   

Copper US$ 8,410/t vs US$8,323/t yesterday

Aluminium US$ 2,279/t vs US$2,227/t yesterday

Nickel US$ 21,550/t vs US$21,195/t yesterday

Zinc US$ 2,424/t vs US$2,375/t yesterday

Lead US$ 2,053/t vs US$2,028/t yesterday

Tin US$ 26,300/t vs US$25,595/t yesterday

Energy:           

Oil US$75.8/bbl vs US$77.2/bbl yesterday

• Crude oil prices edged lower after both the US and Iran denied media reports that they were close to a nuclear deal that would involve the removal of international sanctions.
• International natural gas prices were unchanged as the EIA storage report detailed a 104bcf build to 2,550bcf last week, with US storage levels now 28.3% above last year and 16.1% above the 5-year average.
• The UK Government announced a pricing floor for the Energy Profits Levy, pledging to remove the 35% windfall tax in the event that average energy prices fall below $71.40/bbl and 54p/therm for two consecutive quarters. The independent OBR does not forecast this to occur before the tax’s planned end date in March 2028.
• The EIA reported that the shale gas Haynesville Formation produced 33.4Tcf through March 2023, and is estimated to hold 3.7Tcf of economically recoverable natural gas when the price of natural gas at the US benchmark Henry Hub averages $2.50/mmBtu, rising to 64Tcf at $5.15/mmBtu.

Natural Gas US$2.317/mmbtu vs US$2.313/mmbtu yesterday

Uranium UXC US$55.50/lb vs US$54.60/lb yesterday

Bulk:

Iron ore 62% Fe spot (cfr Tianjin) US$111.3/t vs US$108.9/t

Chinese steel rebar 25mm US$528.0/t vs US$524.4/t

Thermal coal (1st year forward cif ARA) US$107.0/t vs US$100.0/t

Thermal coal swap Australia FOB US$145.0/t vs US$142.5/t

Coking coal swap Australia FOB US$224.0/t vs US$226.0/t

Other:  

Cobalt LME 3m US$29,525/t vs US$29,525/t

NdPr Rare Earth Oxide (China) US$70,263/t vs US$70,223/t

Lithium carbonate 99% (China) US$42,845/t vs US$42,120/t

China Spodumene Li2O 6%min CIF US$4,090/t vs US$4,090/t

Ferro-Manganese European Mn78% min US$1,255/t vs US$1,258/t

China Tungsten APT 88.5% FOB US$320/mtu vs US$320/mtu

China Graphite Flake -194 FOB US$750/t vs US$750/t

Europe Vanadium Pentoxide 98% 7.1/lb vs US$7.1/lb

Europe Ferro-Vanadium 80% 31.75/kg vs US$31.75/kg

China Ilmenite Concentrate TiO2 US$309/t vs US$309/t

Spot CO2 Emissions EUA Price US$85.8/t vs US$85.2/t

Brazil Potash CFR Granular Spot US$345.0/t vs US$345.0/t

Battery News

China to standardise EV battery requirements to maintain edge over growing markets?

• China’s former industry minister has said that China should standardise the requirements for EV batteries to maintain its edge over growing markets such as the US and Europe.
• Speaking to policymaker and industry executives, at the World Battery Conference in Yibin, Miao Wei said there was an urgent need to standardise battery specifications, adding there were 145 types of EV battery in the country.

ProLogium in talks with France over subsidies for $5.7b battery factory

• Taiwanese battery maker ProLogium is working with the French government to secure subsidies for a $5.7b battery factory it plans to build in the north of France.
• The size of the subsidy is unknown, but a joint announcement is expected by the end of the year.
• The French win over Germany and the Netherlands was a boost for Macron, who wants to turn the page on months of strikes and protests over his raising of the retirement age.
• It also highlighted the fierce competition for establishing EV supply chains in Europe as it desperately plays catch up with China.

Company News

KEFI Gold and Copper* (KEFI LN) 0.7p, Mkt Cap £31m – FY22 annual results

• In Saudi Arabia, the team is busy advancing Hawiah Copper Project (PFS stage) and Jibal Qutman Gold Project (DFS stage) along with a portfolio of early exploration assets working together with its ARTAR JV partner.
• Local JV assembled one of the largest exploration teams in the country.
• At Hawiah, the PFS is nearing completion with the plan to carry additional 56,000m of drilling over the next 18 months to establish reserves for both open pit and underground operations.
• Hawiah hosts 28.9mt at 0.89% Cu, 0.67g/t Au, 0.94% Zn and 10g/t Ag for 258kt Cu, 620koz Au, 272kt Zn and 9,408koz Ag in total resource.
• At Jibal Qutman, the team is carrying a 13,000m drilling programme focused on upgrading and expanding the existing 0.7moz resource along with necessary metallurgical, geotechnical and hydrological drilling.
• DFS is expected to be completed towards year end.
• Jibal Qutman hosts 28.4mt at 0.80g/t Au for 732koz in total resource.
• Regionally, the Company mobilised exploration teams to study recently granted 14 new exploration licenses that are now seen as four project areas.
• In Ethiopia, the Company signed the Final Umbrella Agreement for the development ready Tulu Kapi Gold Project in presence of senior officials as well as representatives of project funding partners.
• The agreement finalises all funding syndicate roles and terms precedent to final formal approval being granted.
• The $320 development capital costs is envisaged to be covered using up to $245m from co-lenders ($140m senior debt, $50m mezzanine debt and $55m convertible like instruments) with the remaining $75m coming in the form of equity commitments including $28m from the Federal and Regional Governments, regional investors (incl $15m from a British multination industrial group) and KEFI.
• Construction is expected to start Q4/23 once funding is finalised and the local dry season begins ahead of start to production in 2025.
• Financially, the Company recorded a loss of -£6.4m last year (FY21: -£4.9m).
• CFO were -£3.2m (FY21: -1.5m)
• FCF came in at -£8.4m (FY21: -£4.5m) including £3.6m spent in Ethiopia and £1.7m in Saudi Arabia (FY21: -£2.6m and -£0.5m).
• Closing cash balance stood at £0.2m with £1.2m in outstanding loans as of YE22.
• The Company is currently finalising a £6.4m equity raise at 0.7p with proceeds to be used for completion of project funding and launch of the Tulu Kapi Gold Project as well as funding its share of exploration and economic studies’ related costs at Saudi Arabia.

Conclusion: The Company remained focused on de risking its portfolio of precious and base metal assets in Ethiopia and Saudi Arabia aiming to move closer to start of construction works at the Tulu Kapi Gold Project while progressing PFS/DFS related work at Jibal Qutman and Hawiah. Having completed the equity raise recently the Company is in a strong position to capitalise on a number of near term rerating catalysts including Tulu Kapi funding sign off completion and a launch of development works.

*SP Angel acts as Nomad and Broker to KEFI Gold and Copper

Hummingbird Resources (HUM LN) 18p, Mkt Cap £108m – Kouroussa first gold pour

• First gold pour announced at the newly commissioned Kouroussa Gold Mine in Guinea, ahead of the end of Q2/23 target.
• Commissioning of the mine started early May/23 with operation expected to reach commercial production in H2/23.
• The mine and the 1mtpa CIL plant is estimated to average 120-140kozpa in the first three years and ~100kozpa at $1,000/oz AISC over the life of mine.
• The Company will provide FY23 production guidance later in the year once Kouroussa is ramped up.

Conclusion: First gold production at Kouroussa adds a second producing mine to the Group’s portfolio and is expected to take the Company’s production to >200kozpa.

Versarien* (VRS LN) 3.16p, Mkt Cap £8.4m – Interims highlight need to focus on graphene product delivery

• Versarien reported interim sales of £2.62m for H1 2023 vs £3.89m for H1 2022
• Sales of graphene fell to £0.09m vs £0.97m a year earlier due to the end of the UK government DSTL ‘Defence Science and Technology Laboratory’ development contract.
• The fall in graphene sales results in an EBITDA loss of £2.01m for the first six months vs £0.31m a year earlier
• Loss before tax rose to £3.40m vs £2.16m yoy
• Cash balances fell to £0.76m at end March 2023 vs £1.35m.
• Cash should now stand at around £1m following the recent raising of £0.53m
• Turnaround Strategy:
• Versarien are now focussing on their CementeneTM concrete modifier mix which reduced the amount of cement required in concrete cutting significant CO2 emissions.
• Banagher, the precast concrete experts, pours around 60,000m3 of concrete a year which could result in saving of ~4.4mkg pa of CO2 using CementeneTM.
• Management plan to ‘maintain and strengthen the Group’s scientific teams supported by grant funding applications’ and’ to use the Group’s internally generated know-how in the areas of construction and textiles to be a manufacturing light operation’..
• The company plans to divest non-core activities and Asian assets and is in the process of marketing these assets to reduce the requirement for funding from the capital markets

*SP Angel acts as Nomad and Broker to Versarien

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

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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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