SP Angel Morning View -Today’s Market View, Monday 24th July 2023

Growth concerns build up on deteriorating Eurozone PMIs

MiFID II exempt information – see disclaimer below

Core Lithium (CXO AU) – Shares pull back as production ramp up disappoints

Galan Lithium (GAL AU) – Galan reports delivery of premium quality 6% lithium chloride conc from pilot plant

NGEx Minerals (NGEX CN) – Private placement increased to C$85m following strong demand and Lundin commitment

Power Metal Resources* (POW LN) – Commercial update highlights effective value creation strategy

South32 (S32 LN) – Quarterly production results and Hermosa impairment on inflationary and dewatering costs

Pre-IPO financing for High-Purity Alumina project

Li-ion batteries use a separator membrane made out of High-Purity Alumina

• High-Purity Alumina (HPA) is an inert chemical with high thermal stability. It gives good heat resistance and insulation making it ideal as a coating for separator membranes.
• The project alumina has been shown to be suitable for Li-ion batteries, LED lighting and synthetic sapphire for smartphones and tablets,
• The resource contains a JORC inferred resource sufficient for 10,000 – 20,000tpa of HPA >30 years
• The process uses an innovative process flowsheet combining commercial proven technologies with recent metallurgical tests producing 99.995% alumina.
• CRU estimate demand for HPA powder could reach 187,000t in 2028 from 19,000t in 2018.
• CRU predict substantial demand growth led by Li-ion battery and LED production,
• Price: High-purity alumina sells for ~$30,000/t today up from $24,000/t in 2018,
• The company looking to fund HPA studies, metallurgical work, working capital and listing costs

*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.

China’s state planner reveals financing support for infrastructure projects, disappointing base metal traders

• China’s NDRC revealed plans today to attract increasing private capital for the construction of national infrastructure projects.
• Priorities will be made for clean energy, water, transport and modern agriculture projects.
• The group stated that ‘the significance of improving private investment should be fully recognised.’
• Investment by state groups into infrastructure projects rose 8% over the past six months, whilst private investment fell by 0.2%. (Reuters)
• Beijing is also introducing a new, state-backed fund to support cities with private investment growth.
• Copper’s reaction was muted, falling 0.74% to $8,388/t whilst aluminium fell 0.64%.
• China is working on construction of the Pinglu Canal, its first major new waterway in 700 years.
• The canal will be 84 miles long and cost US$10bn. The canal will help trade between Southeast Asian nations
• The project better connects Guangxia to the Gulf of Tonkin on the South China Sea
• The project is expected to carry 108mt of cargo by 2035 and 130mt by 2050.

Gold eases from recent highs as traders wait for Fed meeting and dollar climbs

• Gold prices have retreated from their mid-$1,970/oz highs following an uptick in the dollar.
• The dollar is strengthening against the Euro, which fell 0.45% following weaker-than-expected Eurozone economic data.
• COMEX reports that hedge funds are ramping up their bullish bets on gold, with net long positions increasing by over 30%.
• The FOMC is set to meet this week, with a July 25bp rate hike priced in by the markets.

VOX Markets:  

24/07/2023: https://audioboom.com/posts/8338437-john-meyer-on-improved-liquidity-plus-cornish-metals-beowulf-rainbow-rare-earths-solgold-sove

14/07/2023: https://audioboom.com/posts/8334912-john-meyer-on-china-s-deflation-plus-bushveld-minerals-empire-metals-strategic-minerals

*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.

Economics

FOMC rate decision due this Wednesday with market expectations for a 25bp hike to 5.25-5.50%.

• ECB is to follow with its announcement on Thursday with rates expected to be increased by 25bp taking the main refinancing rate to 4.25%.

Eurozone – Pace of contraction in the private sector accelerated in July with the composite PMI hitting the lowest level since November.

• Manufacturing in particular has weighed on the region with the PMI falling to the worst level since the early months of the pandemic.
• Services continued to expand albeit at a reduced rate, the weakest since January.
• New business orders slumped at an increasing pace suggesting companies will be reducing output in coming months in response to weakening demand.
• Manufacturing recorded one of the steepest declines in orders since 2009 while services sector recorded the first decline in seven months.
• Employment increased at the weakest pace since Feb/21.
• Meanwhile, final goods prices inflation slowed down to an almost two-and-a-half years low.
• Flash Manufacturing PMI: 42.7 v 43.4 June and 43.5 est.
• Flash Services PMI: 51.1 v 52.0 June and 51.6 est.
• Flash Composite PMI: 48.9 v 49.9 June and 49.6 est.

France – The start of Q3/23 sees the sharpest reduction in business activity since Nov/20 amid waning demand as demonstrated by a dropping new business orders.

• Flash Manufacturing PMI: 44.5 v 46.0 June and 46.0 est.
• Flash Services PMI: 47.4 v 48.0 June and 48.5 est.
• Flash Composite PMI: 46.6 v 47.2 June and 47.7 est.

Germany – Manufacturing production hit the lowest rate in 38 month while services sector continued to slowdown on the back high inflation, destocking and rising interest rates.

• Overseas demand is also reported to have contracted over both sectors.
• Flash Manufacturing PMI: 38.8 v 40.6 June and 41.0 est.
• Flash Services PMI: 52.0 v 54.1 June and 53.1 est.
• Flash Composite PMI: 48.3 v 50.6 June and 49.8 est.

Japan – Business activity expanded for the seventh consecutive month in July, although, demand conditions are reported to have been less buoyant than before.

• PMI numbers draw attention to strengthening inflation pressures in the Japanese private sector on the back of higher input costs driven by increased labour, fuel and raw material expenses.
• Flash Manufacturing PMI: 49.4 v 49.8 June.
• Flash Services PMI: 53.9 v 54.0 June.
• Flash Composite PMI: 52.1 v 52.1 June.
• Equity futures rise >1% on report BoJ officials see little need to counter effects of loose monetary policy

US – Market braces for another rise in interest rates

• Higher interest rates help keep the US dollar strong, reducing the impact of imports on inflation,
• US economy continues to perform despite higher interest rates as manufacturing re-shores,
• Chinese product prices and shipping costs fall importing some deflationary impact into the US,
• The environment allows the Fed ample room to continue to raise rates, though this is tough on the rest of the world.

UK – PMI falls to 50.7 in July from 52.8 in June.

• Manufacturing PMI falls to 45.0 in July from 46.5 in June, a 38-month low
• Services PMI fell to 51.5 in July from 53.7, a 6-month low
• Composite PMI fell to 50.7 in July from 52.8 in June, another 6-month low
• EY Item Club sees lower growth of just 0.8% in 2024 as rate rises hurt growth.

Currencies

US$1.1124/eur vs 1.1218/eur last week. Yen 141.32/$ vs 139.50/$. SAr 17.995/$ vs 17.809/$. $1.287/gbp vs $1.292/gbp. 0.673/aud vs 0.683/aud. CNY 7.197/$ vs 7.185/$.

Dollar Index 100.97 vs 100.77 last week.

Commodity News

Precious metals:

Gold US$1,966/oz vs US$1,971/oz last week

Gold ETFs 91.8moz vs US$91.8moz last week

Platinum US$972/oz vs US$966/oz last week

Palladium US$1,285/oz vs US$1,287/oz last week

Silver US$24.83/oz vs US$24.85/oz last week

Rhodium US$4,050/oz vs US$4,050/oz last week

Base metals:   

Copper US$ 8,381/t vs US$8,537/t last week

Aluminium US$ 2,208/t vs US$2,208/t last week

Nickel US$ 20,927/t vs US$21,330/t last week

Zinc US$ 2,367/t vs US$2,398/t last week

Lead US$ 2,139/t vs US$2,131/t last week

Tin US$ 28,494/t vs US$28,735/t last week

Energy:           

Oil US$80.5/bbl vs US$80.3/bbl last week

• The US Baker Hughes rig count was down 6 units to 669 rigs last week (-89 or 12% y/y), with oil rigs down 7 to 530 units and gas rigs down 2 to 131 units, and the frac spread count estimated up 3 to 263 units.
• Baker Hughes and rivals Halliburton and SLB (SLB.N) last week warned of weakness in US shale activity due to growing economic uncertainty driving commodity prices lower, with private E&Ps accounting for the bulk of the decline this year as consolidation by public E&Ps and costlier debt also contribute to reduced activity.
• Equinor will acquire Brazilian renewables developer Rio Energy, which has a pipeline of ~1.2GW of onshore wind and solar projects that it expects to generate a 4-8% real base project return, including acquisition price.

Natural Gas US$2.699/mmbtu vs US$2.751/mmbtu last week

Uranium UXC US$55.75/lb vs US$55.75/lb last week

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$113.2/t vs US$115.2/t

Chinese steel rebar 25mm US$527.0/t vs US$524.4/t

Thermal coal (1st year forward cif ARA) US$114.0/t vs US$107.8/t

Thermal coal swap Australia FOB US$140.0/t vs US$139.0/t

Coking coal swap Australia FOB US$236.0/t vs US$229.0/t

Other:  

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

NdPr Rare Earth Oxide (China) US$63,032/t vs US$62,633/t

Lithium carbonate 99% (China) US$40,092/t vs US$40,712/t

China Spodumene Li2O 6%min CIF US$4,080/t vs US$4,080/t

Ferro-Manganese European Mn78% min US$1,097/t vs US$1,116/t

China Tungsten APT 88.5% FOB US$315/mtu vs US$315/mtu

China Graphite Flake -194 FOB US$675/t vs US$675/t

Europe Vanadium Pentoxide 98% 7.5/lb vs US$7.5/lb

Europe Ferro-Vanadium 80% 32.25/kg vs US$32.25/kg

China Ilmenite Concentrate TiO2 US$310/t vs US$310/t

Spot CO2 Emissions EUA Price US$96.8/t vs US$96.3/t

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

Battery News

Stellantis to build second US battery plant

• Together with South Korean battery maker Samsung SDI, automaker Stellantis have announced they plan to open a second JV battery plant in the US.
• The plant will have an initial production capacity of 34GWh and will target production in 2027.
• Stellantis, whose brands include Peugeot, Jeep, Ram, Alfa Romeo, Citroen and Opel, has announced plans to reach 100% electric passenger car sales in Europe and 50% car and light truck electric mix in the US by 2030 – to achieve that, it wants to secure about 400GWh of battery capacity globally.

Mercedes to make China sales focus for EVs

• For its 2025 EV campaign, Mercedes-Benz will make China central to is sales plans.
• From 2025, all of Mercedes-Benz’s new vehicle platforms will only make EVs under a strategy the German luxury automaker outlined in 2021.
• Germany is trying to reduce its exposure to China’s economy as part of efforts to de-risk the German economy that have intensified since Russia’s invasion of Ukraine exposed German dependence on a single dominant gas supplier.

EV charging chief loses patience with Northern Powergrid

• Chief Executive of Motor Fuels Group (MFG), William Bannister, has penned an angry letter to Northern Powergrid, the business managing grid connections in Yorkshire and the northeast.
• In the letter, Bannister, has voiced frustration and complained of “severe delays” that have prompted a “pause on further investment in the region.”
• MFG, which claims to be the largest petrol station operator in the country with nearly 900 forecourts, said it had 32 sites in conversion or planned conversion to facilitate EV charging in Northern Powergrid’s region over the next year and had committed to spending £400m.
• MFG has many of its forecourts in Yorkshire and the Humber and in the northeast, a region with one of the lowest proportions of public charging points for plug-in cars in the country at 66 to one. In London it is 11 to one and the national average is 36 to one.
• Mark Constable, chairman of Recharge UK, an association of electric charging supply chain companies, said: “Electric vehicle infrastructure needs to be designated ‘nationally critical infrastructure’ so it can be given a higher priority.”
• Ian Johnston, chairman of ChargeUK, an association of companies installing chargers, said: “ChargeUK members are investing over £6 billion in the UK’s charging infrastructure before 2030. Securing timely connections to the grid is one of the biggest challenges faced by the sector.”

Company News

Core Lithium (CXO AU) A$0.7, Mkt Cap A$1.4bn – Shares pull back as production ramp up disappoints

• Q4/FY23 spodumene production totalled 14.7kt (FY23: 18.3kt) at A$902//t (FY23: $1,230/t) C1 cash cost.
• Spodumene concentrate grade averaged 5.4%-5.6%.
• Maiden 5,500t spodumene concentrate shipment in April and second 13,100t shipment in early July.
• FY24 (Jun YE) guidance is for 80-90kt SC at A$1,165-1,250/t C1 cash cost.
• Lower production guidance compared to previous FS related estimates are lower metallurgical recoveries, a revised pit wall angles given more weathered nature of the rock as well as more conservative mining assumptions following the Company’s experience in  recent wet season.
• Recoveries averaged 49% during the quarter compared to >70% modelled in the FS (2021).
• Work is underway to better understand the lower than expected recoveries that appear to be a result of a greater proportion of fines than anticipated.
• FY25 production is guided to come in below FY24 amid a lack of supply of feed as BP33 is not expected to come online during the period.
• The team is in process of updating the BP33 FS that is due Q1/25 optimising the transition between Grants open pit and BP33 underground operation.

Galan Lithium (GAL AU) A$0.80, Mkt cap A$270m – Galan reports delivery of premium quality 6% lithium chloride conc from pilot plant

• It’s not every day when you look at a board and you say, yup, those guys look like they know what they are doing.
• The team at Galan have all worked on projects in Argentina with four of the management team formerly working for SQM, the giant Chilean lithium producer.
• Galan report today their pilot plant at the Hombre Muerto West (HMW) mine has produced and delivered a high quality 6% Lithium chloride concentrate, equivalent to 13% Li2O..
• The first pilot evaporation pond commissioned in Apr/23 delivered a premium quality product of 350l of 6% Li content with low levels of impurities (Mg, Ca, SO(-4) etc.) The product will also be used as a feed for a demonstration lithium carbonate plant to be installed at the HMW Project site in 2024.
• The HMW brine deposit is located high in the Andes in Argentina to the north-east of Copiapo in Chile.
• Brine grades at HMW run at an impressive 873mg/l measured, 904mg/l indicated and 887mg/l inferred
• This give the mine a theoretical total resource of 10.8mt of contained lithium and 20.5 KCL eq. though much of this might never be recovered
• The interesting part of the Galan story is its conventionality.
• The team have done this before and they are sticking to the tried and tested process of using brine ponds to concentrate the lithium before using sorbent technology to produce lithium chloride.
• There is no mention of Direct Lithium Extraction and hopefully no need for it.
• This doesn’t mean the team are not ambitious, they have plans to ramp up production in stages from 5,000tpa LCE in in 2025 in Phase 1 to 60,000t LCE in 2030 in Phase 4.
• The staged approach makes good sense given the high capex of building evaporation ponds in the Andes.
• The recent DFS shows Phase 1 Capex to be a manageable US$104m giving an IRR of 36% assuming an average price of US$20,252/t from 2025-2064.
• OPEX is estimated to be just $3,963/t of LCE.
• Full construction permits and start of Phase 1 pond construction expected in Q3/23.
• Phase 1 is projected to deliver5.4ktpa LCE in lithium chloride from 2025 with Phase 2 DFS currently in progress and targeted for completion in Q3/23 considering expansion to ~20ktpa LCE in lithium chloride.
• The company is down to its last $44m but we suspect will have little trouble raising the rest of the capex for Phase 1 of the new HMW operation.
• It rains more at Antofagasta de la Sierra than in the Atacama but we suspect it’s not enough to overly dilute the evaporation process.

Conclusion:  It is refreshing to see such a well presented company in the lithium space trialling and operating a no-nonsense plant using a tried and tested process.

NGEx Minerals (NGEX CN) C$6.9, Mkt cap C$1.2bn – Private placement increased to C$85m following strong demand and Lundin commitment

• NGEx Minerals, a Lundin Group copper and gold exploration company with projects in Chile and Argentina has announced a non-brokered private placement of C$85m at C$6.5/share.
• The Company had originally announced a C$40m placement on Thursday, with the Lundin family set to subscribe for the total amount.
• NGEx holds the Los Helados project with Nippon Caserones (49% owner of Caserones open pit lying 15km north of Los Helados).
• Funds will be used to further exploration at Lunahuasi and continued exploration at Los Helados.
• Los Helados has a 2.1bnt indicated resource at 0.38% Cu and an 827mt inferred resource at 0.32% Cu.

Conclusion: It is interesting to see new appetite returning to the exploration sector with the doubling of the fund raising for NGEx.

Power Metal Resources* (POW LN) 0.7p, Mkt cap £14.5m – Commercial update highlights effective value creation strategy

• Power Metal provides a commercial update on its portfolio of exploration and development assets.
• The Company notes it is accelerating exploration efforts at its Tati Goldfields project in Botswana and its suite of uranium licences in the Athabasca Basin.
• POW notes the value of their publicly listed equity holdings currently sits at £6.7m, helping reinforce the balance sheet and highlighting their effective strategy of spinning out assets via public listing.
• The Company notes it has appointed Beaumont Cornish to advise them on the listing of Uranium Energy Exploration in London, which is set to hold the Reitenbach and E-12 uranium properties in Saskatchewan.
• POW is also applying to list on the US OTC market to enable easier access to the Company’s equity for US investors.
• Management also draws attention to the growth in assets on POW’s balance sheet by 52% to £15.5m yoy, with shareholder equity increasing by 105%.
• With the Company’s 52.59%-owned First Development Resources, POW is currently in the stages of IPO financing.

*SP Angel acts as Nomad and Broker for Power Metal Resources

South32 (S32 LN) 194p, Mkt cap £8.8bn – Quarterly production results and Hermosa impairment on inflationary and dewatering costs

• South32 report their quarterly production results.
• Copper equivalent production rose 9% over the quarter following weather disruptions earlier in the year.
• Aluminium production rose 14% yoy for the year, driven primarily by Hillside and investments into Mozal Aluminium and Brazil Aluminium.
• The Company reports total base metals production rose 17% yoy owing to the addition of Sierra Gorda alongside contributions from Cannington and Cerro Matoso.
• Manganese production from Australia and South Africa hit record output for South32, rising 4% for the year.
• Met Coal production from Illawarra saw a 21% increase in the quarter following optimised longwall performance.
• South32 is reporting a non-cash impairment expense for the Hermosa project, with the carrying value reduced to $1bn, comprising $482m for the Taylor deposit and $519m for the Clark deposit and land package.
• The impairment reflects a $365m required investment in dewatering and increased CAPEX vs PFS estimates, alongside COVID-19-related delays.
• South32 notes ‘significant inflationary pressure in current estimates for key inputs including steel, cement and electrical components.’
• The Company invested $42m in greenfield exploration over the year and $65m in exploration at existing and development projects.
• South32 paid $1bn in dividends over the year and repurchased $218m worth of shares via buy-backs at an average price of A$3.97/share.

Conclusion: Excluding the write-down in Hermosa, South32 reports a strong end to the year with increasing production in both copper and aluminium on a year-on-year basis. The Company reports that operating unit costs remained in line with expectations and management continued to return cash to shareholders via special dividends and buy-backs. South32 is looking to ramp up production in aluminium and base metals going forward.

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

SP Angel                                                            

Prince Frederick House

35-39 Maddox Street London

W1S 2PP

*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.

DISCLAIMER

This note is a marketing communication and comprises non-independent research. This means it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

This note is intended only for distribution to Professional Clients and Eligible Counterparties as defined under the rules of the Financial Conduct Authority and is not directed at Retail Clients.

This note is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published in whole or in part, for any purpose.

This note has been issued by SP Angel Corporate Finance LLP (‘SPA’) to promote its investment services. Neither the information nor the opinions expressed herein constitutes, or is to be construed as, an offer or invitation or other solicitation or recommendation to buy or sell investments. The information contained herein is based on sources which we believe to be reliable, but we do not represent that it is wholly accurate or complete. All opinions and estimates included in this report are subject to change without notice. It is not investment advice and does not take into account the investment objectives and policies, financial position or portfolio composition of any recipient. SPA is not responsible for any errors or omissions or for the results obtained from the use of such information. Where the subject of the research is a client company of SPA we may have shown a draft of the research (or parts of it) to the company prior to publication to check factual accuracy, soundness of assumptions etc.

Distribution of this note does not imply distribution of future notes covering the same issuers, companies or subject matter.

Where the investment is traded on AIM it should be noted that liquidity may be lower and price movements more volatile.

SPA, its partners, officers and/or employees may own or have positions in any investment(s) mentioned herein or related thereto and may, from time to time add to, or dispose of, any such investment(s).

SPA is registered in England and Wales with company number OC317049.  The registered office address is Prince Frederick House, 35-39 Maddox Street, London W1S 2PP.  SPA is authorised and regulated by the UK Financial Conduct Authority and is a Member of the London Stock Exchange plc.

MiFID II – Based on our analysis we have concluded that this note may be received free of charge by any person subject to the new MiFID II rules on research unbundling pursuant to the exemptions within Article 12(3) of the MiFID II Delegated Directive and FCA COBS Rule 2.3A.19.

A full analysis is available on our website here http://www.spangel.co.uk/legal-and-regulatory-notices.html. If you have any queries, feel free to contact our Compliance Officer, Tim Jenkins (tim.jenkins@spangel.co.uk).

SPA research ratings – Based on a time horizon of 12 months: Buy = Expected return of more than 15%, Hold = Expected return between -15% and +15%, Sell = Expected return of less than 15%