SP Angel Morning View -Today’s Market View, Wednesday 26th July 2023

Metals pause as investors digest CCP statement and await Fed rate decision

MiFID II exempt information – see disclaimer below

Anglo American (AAL LN) – DeBeers reports rough diamond sales continued pull back

Great Western Mining* (GWMO LN) – Placing raises £500k to fund mill completion and commissioning

Centamin (CEY LN) – Interim results show rising gold production and sliding costs

Fresnillo  (FRES LN) – Production results show slowing output as labour restrictions weigh

Rio Tinto (RIO LN) – Interim results highlight softer commodity prices across major segments

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.

Copper slides from spring highs as traders assess impact of China policy support

• Copper prices have weakened from their highs yesterday around the $8,690/t mark.
• The rally was fuelled by further indications from China’s policymakers that the property sector would be supported by the next round of stimulus measures.
• Importantly, the statement removed the key phrase ‘housing is for living in, not for speculation,’ suggesting Beijing’s efforts to de-lever the sector may be cooling.
• We suspect copper’s subsequent sell-off is most likely traders taking profits in advance of today’s Fed meeting, where the indication of further rate hikes could support the dollar, weighing on greenback-denominated copper.
• China Passenger Car Association noted this morning that sales are expected to fall 4.8% in July to 1.73m units yoy.
• The beleaguered Chinese property sector remains structurally oversupplied, with primary copper demand growth likely to stem from large-scale renewable energy investment.

Iron ore hits three-month highs on hopes of a steelmaking resurgence in China

• Iron ore prices have rallied 1.6% to hit their highest since April at $115.7/t in Singapore.
• The pro-growth sentiment struck on Monday by key Chinese policymakers is expected to lift China’s steelmaking sector out of an extended dry spell.
• China’s faltering property sector accounts for over 40% of domestic steel demand, with a rally in construction and real estate equities seen as a green light for base metal traders to begin buying again. 

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

US – Consumer confidence surprised on the upside climbing to the highest level in two years in an indication of robustness of the labour market

• The FOMC will release its monetary policy statement today with expectations for a 25bp hike.
• Conference Board Consumer Confidence: 117.0 v 110.1 (revised from 109.7) June and 112.0 est.
• We expect a modest 0.25% increase in US Fed Fund rates to 5.5% today.
• A higher rate rise could hit markets with greater concerns over sticky inflation and cause concerns that the Fed has another agenda.
• We do wonder if the US is also keen to drawing money away from investment in China, Russia and potentially some other developing markets.

China – CCP Politburo meeting analysis suggests targeted support to maintain economic growth and contain risk

• China is still working through enormously high debt levels at property developers.
• China is also working to reduce carbon emissions. It knows too well the cost of floods, drought and extreme heat.
• Ongoing infrastructure projects like the $10bn,  84-mile long Pinglu Canal

Pan Gongsheng is replacing Yi Gang, who retires, as new PBOC head.

• Pan has been helping Yi for a month already through a transition period.
• A former deputy governor at the central bank for more than a decade, Pan has advocated for the cautious monetary policy of his former boss Yi.

Authorities crack down on corruption as official gets life imprisonment for bribery

• A former senior Communist Party secretary in Hangzhou has been served with life imprisonment for taking >CNY193m in bribes.
• Zhou Jiangyong was found to have taken bribes from 2001 – 2021 for aiding deals, including construction and land acquisition.
• Zhou is the first ministerial level official caught in Zhejiang since the 19th CCP National Congress in 2017.
• Zhou’s older sister and another relative, Zhou Wenyong were also arrested, presumably part of the same investigation.
• The life sentence sends a message to other officials that corruption will not be tolerated.
• We suspect a number of officials will be booking longer-term overseas holidays via their banks in HK, Singapore, Panama, BVI.

Japan – IMF advises Japan should prepare to raise interest rates

• The IMF chief economist is urging the BoJ to prepare to raise interest rates in relation to inflation.
• IMF forecasts Japan GDP to rise at 1.4% this year from 1.0% in 2022
• The huge difference between the West and Japan is that if the government politely asks businesses and consumers to limit price rises, then companies and consumers will dutifully follow this advice to their best ability.
• Unfortunately, in the West, supermarkets, petrol stations and most other major retailers and services have been happy to ignore government efforts to control inflation and have continued to raise prices and margins. Unilever being just one of many culprits)

Australia – The currency pulled back following the release of weaker than expected inflation data for Q2/23 bolstering the case for a potential RBA rate hike pause.

• The central bank is watching the rate closely after having raised rates for 12 times over the past 15 month in an effort to anchor inflation expectations down.
• Traders now see about a 20% chance of a rate hike at the RBA’s Aug. 1 meeting, down from a roughly 50-50 probability prior to the release, Bloomberg reports
• CPI (%qoq): 0.8 v 1.4 Q1/23 and 1.0 est.
• CPI (%yoy): 6.0 v 7.0 Q1/23 and 6.2 est.

South Africa – Load shedding

• 2019 – 534 hours (22 days)
• 2020 – 844 hours (35 days)
• 2021 – 1153 hours (48 days)
• 2022 – 3776 hours (157 days)
• 2023 – 4308 (179 days) year to 4^th July – could become 7,385 (307 days) by the end
• If it gets any worse the South Africa grid could collapse in its entirety, decimating the economy for a minimum two weeks till the grid is rebooted.

Currencies

US$1.1082/eur vs 1.1124/eur yesterday. Yen 141.50/$ vs 141.32/$. SAr 17.689/$ vs 17.995/$. $1.286/gbp vs $1.287/gbp. 0.677/aud vs 0.673/aud. CNY 7.143/$ vs 7.197/$.

Dollar Index 101.26 vs 101.27 yesterday.

Commodity News

Precious metals:

Gold US$1,968/oz vs US$1,962/oz yesterday

Gold ETFs 91.7moz vs US$91.7moz yesterday

Platinum US$971/oz vs US$971/oz yesterday

Palladium US$1,290/oz vs US$1,293/oz yesterday

Silver US$24.68/oz vs  US$24.58/oz yesterday

Rhodium US$4,100/oz vs US$4,000/oz yesterday

Base metals:   

Copper US$ 8,578/t vs US$8,617/t yesterday

Aluminium US$ 2,229/t vs US$2,243/t yesterday

Nickel US$ 22,095/t vs US$21,520/t yesterday

Zinc US$ 2,478/t vs US$2,462/t yesterday

Lead US$ 2,158/t vs US$2,179/t yesterday

Tin US$ 28,650/t vs US$28,850/t yesterday

Energy:           

Oil US$83.4/bbl vs US$82.9/bbl yesterday

Natural Gas US$2.727/mmbtu vs US$2.715/mmbtu yesterday

Uranium UXC US$55.75/lb vs US$55.75/lb yesterday

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$115.3/t vs US$112.7/t

Chinese steel rebar 25mm US$537.2/t vs US$535.8/t

Thermal coal (1st year forward cif ARA) US$133.3/t vs US$125.8/t

Thermal coal swap Australia FOB US$148.5/t vs US$144.0/t

Coking coal swap Australia FOB US$237.0/t vs US$236.0/t

Other:  

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

NdPr Rare Earth Oxide (China) US$66,068/t vs US$64,751/t

Lithium carbonate 99% (China) US$38,522/t vs US$39,270/t

China Spodumene Li2O 6%min CIF US$4,060/t vs US$4,060/t

Ferro-Manganese European Mn78% min US$1,090/t vs US$1,092/t

China Tungsten APT 88.5% FOB US$313/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% 32.05/kg vs US$32.05/kg

China Ilmenite Concentrate TiO2 US$311/t vs US$312/t

Spot CO2 Emissions EUA Price US$99.7/t vs US$99.6/t

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

Battery News

General Motors to begin assembling battery modules at some North American EV plants

• GM will begin assembling EV battery packs near its commercial van plant in Ontario in Q2 ’22, before looking to add pack assembly to other North American plants.
• A statement released by GM Canada said, “the company is installing more battery module capacity at its other North American EV plants.”
• Currently, GM’s Ultium battery cells are manufactured at a joint-venture plant in Lordstown, Ohio, with additional plants slated to open in 2024-2025. The cells are stacked into modules, which are combined into large packs that are installed in EVs at North American assembly plants in Michigan and Tennessee.

Nissan to commit $663m to Renault’s new EV unit

• Nissan has agreed to invest up to $663m in Renault’s new EV unit, the Japanese automakers said on Wednesday.
• The two companies have been locked in negotiations as they attempted to revamp their alliance.
• Nissan had been concerned about protecting future IP which had help up talks.
• Renault, meanwhile, will lower its stake in Nissan to 15% from around 43%, putting their relationship on equal footing.

Porsche 911 to be sole combustion model after EV push

• Porsche’s plan to gradually electrify its car lineup so that EVs make up 80% of sales by 2030, will see the iconic 911 as the only internal-combustion engine model left standing, a top executive said.
• The German automaker already has investments in e-fuels and has pushed the EU to allow sales of vehicles running on e-fuels after 2035.

Company News

Anglo American (AAL LN) 2,469p, Mkt Cap 30bn – DeBeers reports rough diamond sales continued pull back

• Rough diamond sales continued to slide on the back of “ongoing macroeconomic challenges” and seasonal market softness.
• Cycle 6 measuring expected value of sales between July 10 and 25 amounted to $410m v $456m in Cycle 5 2023 and $638m in Cycle 6 2022.
• DeBeers missed a trick when they failed to command the Synthetic Lab Grown Diamond market.
• Prices look to be in a slow freefall with mined diamonds struggling to compete with their Lab Grown counterparts.
• With India and many jewellery retailers now promoting Lab Grown synthetics on their higher margins it is hard to see how mind diamonds will compete.
• Ultimately, the value destruction in the diamond wedding ring sector could also have disruptive consequences as consumers look for other forms of more stable and longer-term value.

Great Western Mining* (GWMO LN) 0.06p, Mkt Cap £2.65m – Placing raises £500k to fund mill completion and commissioning

• Great Western has raised gross proceeds of £500,000 through the issue of 909m shares.
• The shares were issued at a price of 0.055p.
• The company will use the funds to complete construction and commissioning at the Western Milling processing joint venture in Mineral County, Nevada.
• Funds will also be allocated to gold and silver exploration across the prospective licence package over the Walker Lane belt, with some exploration expenditure going towards the M2 Copper Prospect.
• Directors Brian Hall, Max Williams, Gemma Cryan, Alastair Ford and Andrew Hay have all subscribed for shares.

*SP Angel act as Broker to Great Western Mining, an SP Angel Analyst has visited Great Western’s Nevada claim blocks

Centamin (CEY LN) 96.7p, Mkt Cap £1,120m – Interim results show rising gold production and sliding costs

• Centamin reports interim results for the year to June 30th, 2023.
• The Company saw an increase in opre processed by 2% to 3,076kt qoq and a yoy increase of 4% to 6,082kt.
• Feed grade rose 5% to 1.26g/t on a quarterly basis, whilst gold recovery fell 1% on a quarterly basis to 88.3%.
• Gold production rose 8% on both a quarterly basis (114,687oz) and a yearly basis for the half year to 220.562koz.
• Gold AISC per unit fell 17% to $1,113/oz sold qoq, and unit cash costs fell 18% to $767/oz.
• Revenue rose 7% to $220.4m or the quarter and 11% vs same period last year to $425.5m.
• EBITDA rose 46% qoq to $114.7m, rising 26% for the half year to $193.4m vs same period last year.
• Going forward, Centamin is holding production guidance for the full year at 450-480koz, expecting in the middle of this.
• Cash cost guidance for the year expected at $840-990/oz with AISC guidance range at $1250-1400/oz.
• Capex guidance expected at $225m and exploration budget at $30m.
• In the second half of this year, Centamin expects to release an update Life of Mine plan with underground expansion factored for Sukari.
• The Company had $96m in cash at the time of publication, alongside $28m in bullion on hand.
• Centamin holds 240koz of production in put options at a $1,900/oz strike price, protecting cash flow amid elevated capex.
• Centamin is paying a total 2023 interim dividend of $23.2m.

Conclusion: Centamin continues to increase production in Egypt at the Sukari Mine, maintaining grade control and recovery rates. The Company emphasises their commitment to cost control, visible in an 8% reduction in yoy AISC. Although free cash flow levels are low, management emphasises 2023 as a year of investment for growth, with gross capex budget for the year standing at $273m. Centamin anticipates this period of reinvestment to begin to slide from next year.

Fresnillo  (FRES LN) 620p, Mkt Cap £4,650m – Production results show slowing output as labour restrictions weigh

• Silver production rose 1.1% over 1H23 vs 1H22 at 26.472moz.
• Gold production up 5.4% to 325,415oz for same period.
• Silver equivalent production in Q2 rose 100koz to 27.1moz. H1 attributable silver ounces rose to 54.1moz vs 52.3moz same period last year.
• The Company expects to produce between 104-115moz silver equivalent for the period.
• Cost inflation of 6.2% is attributed to a stronger peso vs the dollar.
• Fresnillo’s production is benefiting from improving grades and volumes at Herradura and increasing gold production from Saucito,
• The Pyrites Plant is expected to ramp up contributions following its connection to the national grid.
• Fresnillo notes a write-off of $22m from ‘suspected illegal extraction of gold content at its leaching pads’ at Soledad-Dipolos.
• FY exploration expenditure of $175m expected to remain unchanged.

Rio Tinto (RIO LN) 5,298p, Mkt Cap £85bn – Interim results highlight softer commodity prices across major segments

• Revenues came down to $26.7bn (H1/22: $29.8bn) largely reflecting softer commodity prices during the period.
• EBITDA amounted to $11.7bn (H1/22: $15.6bn) with PAT attributable to shareholders coming in at $5.1bn (H1/22: $8.9bn).
• FCF totalled $3.8bn (H1/22: $7.1bn) after accounting for $3.0bn in capex (H1/22: $3.1bn).
• Iron Ore segment delivered $9.8bn in EBITDA (-6%yoy) as a 11% drop in prices ($107/t v $121/t) was partly compensated by higher volumes (+7%).
• Operating costs inflation was offset by a weaker A$ and higher produced volumes helping to bring unit costs down.
• Aluminium segment earned $1.1bn in EBITDA (-60%) reflecting a 25% fall in realised aluminium price on the back of weaker demand from western markets partly offset by a recovery in demand in China where inventories reached a seven-year low.
• Production was up 9% at 1.6mt as operations continued to benefit from the continued ramp up of the Kitimat smelter.
• Copper segment generated $1bn EBITDA (-29%) on the back of a 11% drop in prices as well as a 9% decline in attributable copper production.
• Lower output was driven by a conveyor failure and planned smelter and refinery rebuild at Kennecott.
• Higher energy costs and evaluation and exploration expenditure also impacted underlying EBITDA.
• Ramp up of production at the Oyu Tolgoi underground copper mine is ongoing with the operation on track to deliver ~500ktpa between 2028 and 2036.
• Interim dividend announced of 177p (H1/22: 267p), a 50% payout, in line with the Company’s policy.
• Net debt was little changed comfortably low levels of $4.4bn (Dec/22: $4.2bn).
• FY23 guidance was reiterated in line with Q2 operations review released earlier this month.

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%