08.05.14 - 10:54 Uhr

[cid:image001.png@01CF6A94.FDE79370] Thursday, 08 May 2014



¢ Company news highlights: Randgold Resources research published and Q1 results, Tony Hayward confirmed as permanent Glencore Chairman, Zanaga feasibility study confirms economics, Vale suspends production at Goro, Avocet Mining Q1 update, Goldfields Q1 results, Coal of Africa receives US$1.5m, Afarak Q1 results, Discovery Metals provides April production update, Eastern Platinum to delist from AIM, Arrium Mining MarQ14 production.

¢ Commodity review highlights: Chinese copper imports up 7%MoM, China Steel production has plateaued, Denham Capital to invest US$200m in Pembroke Resources.

¢ Other economic news: Two thirds of commodity hedge funds lost money in Q1, China’s trade rises, German industrial output falls unexpectedly.

¢ African resources update: ANC takes early lead in vote count, Cost of Somali piracy halved last year, Today’s African proverb.

¢ Market notes: FTSE futures +11.5 points this morning. Markets looking more optimistic this morning following Chinese import/export data indicating slight growth in April easing concerns over demand growth – exports grew by 0.9% whilst import grew by 0.8% compared to the 11.3% fall in March. Asian markets are responding positively (Nikkei +0.93%, Hang Seng +0.39%, ASX200 +0.75%). US markets closed up overnight (Dow +0.72%, S&P +0.56%), recovery from a tech sell off following comments from Yellan on interest rates being kept low even after employment and inflation return to healthy levels.

Commodity markets – gold +0.09% $1,291.05/oz, silver -0.18% $19.2857/oz, platinum +0.34% $1,439.70/oz, copper +0.21%, $3.0390/lb, nickel +0.53% $18,634.00/t, iron ore -0.85% $105.10/t, thermal coal $73.80, WTI -0.12% $100.65/bbl, Brent -0.14% $107.98/bbl, zinc -1.22% $2,025.00/t. Dual listed – BHP +1.29% A$37.65, RIO +1.42% A$61.46.

Economic data due today: US – initial jobless claims (325K), continuing claims (3758K). Eurozone – Irish CPI (forecast 0.1%). BOE rate announcement (0.50%), asset purchases (£375bn), ECB rate announcement (0.25%).

Company news

¢ Research note out on Randgold Resources (RRS LN). A challenge the company faces is preserving its premium rating in light of waning production growth and a falling gold price. Thus far, it appears to be up to the task, leading its international peers in long-term multiples and gaining market share from its local peers. Part of the explanation may lie in its status as a go-to gold stock and in the quality of earnings, but another part may be in the consensus dividend yield forecast, which we believe is too low. Source: Investec

¢ Randgold Resources (RRS LN) 1Q FY14 production update. RRS produced 284koz at cash costs of $685/oz (Investec 283koz at $693/oz). FY14E guidance is retained: production of 1.13-1.20moz at cash costs of $650-700/oz, with total capex requirements of $340m. Note coming out looking at RRS vs. international peers. Source: Company

Investec view: This was only marginally higher than the 4Q13 (281koz), which was a record quarter, but we expect to see an ongoing lift in production through the course of the year as average grades improve and as Kibali is bedded down. The company is doing well in maintaining a positive cash position, albeit down to $11m (vs. $38m at 31 December after having run down its cash position by $336m in 2013 as it developed Kibali), but with an undrawn $200m facility and no debt. We expect to see cash build again from here on.

¢ Glencore Xstrata (GLEN LN) appoints Tony Hayward as Chairman with immediate effect. He was appointed to the board in April 2011 and took on the role of interim Chairman in May 2013. The former CEO of BP, will reportedly step down from his current role as CEO of Genel Energy. Source: Company & Daily Telegraph

¢ Zanaga Iron Ore (ZIOC LN) feasibility study confirms economics of a staged development starting at 12mtpa, followed by an additional 18mtpa to take the total to 30mtpa over a 30 year life. Transport is to be via a 366km slurry pipeline in both stages. Stage one is expected to cost US$2.2bn followed by US$2.5bn for stage 2, ultimately delivering the original goal of 30mtpa, but well below original US$7.5bn budget. ZIOC estimates cash costs for stage one at US$32/t FOB (66% Fe pellet feed), with costs falling to US$26/t FOB in stage 2 (67.5% Fe pellet feed). ZIOC has also submitted its mining license. The first five years are to target higher grade ore producing at 13.2mtpa and powered from existing grid capacity (100MW requirement). Stage 2 (230MW total requirement) could be developed in parallel with power generation projects and could be financed from stage 1 cash flows. The company also indicates 2mtpa DSO potential that is being examined. Construction is hoped to start in 2016 with first shipment in Q1 2019. Source: Company

Investec view: The project economics appear attractive versus others, and the two stage development process will mitigate risks considerably, which should make it more attractive to JV partner, Glencore Xstrata (GLEN LN). While GLEN has indicated that it does not to take on greenfield developments, it does tend to prefer staged approaches to projects to mitigate risks of capital blow out. We wait to see how GLEN responds to these results, particularly upon granting of licenses, at which point financing for development will need to start.

¢ Vale (VALE US) has suspended production at major Goro nickel operation due to an effluent spill and awaiting permission to resume. It is estimated that Goro should produce 40kt of nickel this year and this could still be achievable if the suspension is short lived. Source: Thomson Reuters

Investec view: Like most nickel laterite projects, Goro has been a major struggle both over budget and behind schedule. A protracted outage would be supportive of the nickel price which has risen sharply in response to the Indonesian mineral export ban stopping nickel laterite exports to China that has been a major source of supply for the last few years depressing nickel prices.

¢ Avocet (AVM LN) quarterly gold output of 23,148oz down 10% qoq at a cash cost of US$1,178/oz down 2.5% qoq. New SAG mill base plate installed in March with construction of the new carbon blinding circuit to be completed in July. Mining and waste stripping has been considerably reduced with guidance for the year now forecast at 105-115koz at cash cost of US$1,000-1,100/oz (Investec 95koz at cash cost 1,024/oz). 9 days of lost production resulted from the SAG mill refurbishment. Carbonaceous ore is being stockpiled for processing once the blinding circuit is up and running. The company is assessing underground potential of a high grade zone below Inata North pit, and has a business review ongoing with discussions with a number of parties. Source: Company

Investec view: A tough quarter, but not unexpected as the company has been working to fix the vibrations on the SAG mill which have reduced. We wait to see the results from the carbon blinding circuit at treating carbonaceous ores that could support an upgrade to our assumed production profile and give confidence in the asset to meet targets.

¢ Gold Fields (GFI SJ) Q1 results. During Q1, GFI produced 557,000oz of gold at an all in cost of US$1,114/oz. The group delivered US$54m in cash flow from operating activities. Normalised earnings for the period are US$21m from continuing operations. The group reported a net loss of US$0.3m. The group has reiterated both its production and cost guidance. Source: Company

Investec view: GFI’s results seem to demonstrate an improving performance with the group also making good progress with reducing its net debt, and generating solid results from its Australian assets.

¢ Coal of Africa (CZA LN) receives US$1.5m. CZA has announced that, due to the derailment of Transnet wagons in February 2013, the company was able to negotiate a business interruption claim for the affected time period and has now received US$1.5m in cash. Source: Company

¢ Afarak Group (AFRK LN) Q1 results. AFRK delivered EBITDA of €3.0m (vs. €0.8m in 4Q13A) as well as reporting positive EBIT (€0.9m) and profit (€0.2m) for the first time since entering the minerals business in 2008, reflecting stronger sales across all divisions. However, the company notes that market conditions remain difficult and its outlook for FY14E remains unchanged. Afarak is expecting its FY14E financial performance to improve only “marginally” on FY13A (which included EBITDA of €14.0m and a net loss of €4.4m).Source: Company

Investec view: Product prices remain weak and Afarak maintains a cautious outlook, but the Q1 results certainly indicate an improving trend, with the FY14E results to be assisted by the start of production of higher-margin medium carbon ferrochrome from the 3Q14E.

¢ Discovery Metals (DML AU) provides April production update. Discovery Metals reported record April 2014 production of 2,011t of copper from its Boseto mine in Botswana, 40% higher than the monthly average for MarQ14. Source: Company

Investec view: Record production was attributed to improved haul truck utilisation and increased material movements. The company needs good news with cash as at end March 2014 of just US$3.2m and following an extension of the due diligence period for the proposed US$105m recapitalisation.

¢ Eastern Platinum (ELR LN) has announced that it plans to delist from AIM. The company will retain its TSX quote. Source: Company

¢ Arrium Mining (ARI AU) MarQ14 production. Arrium reported MarQ14 iron ore shipments of 3.03mt (dmt) bringing FY14 YTD shipments up to 9.3mt (dmt). Average realised iron ore prices were US$95/dmt with cash costs of A$47.4/wmt in the MarQ. Source: Company


Commodities news

¢ Chinese copper imports up 7% mom in April to 450kt, which is up 52% yoy, above what local traders had expected. SRB buying is reportedly pushing up premiums in the domestic market. Seasonal demand is also supporting volumes. However, supplies of refined copper actually fell in the month due to reduced sales by Chinese smelters, with the largest smelter, Jinchuan, cutting output by a third last month due to technical problems. Source: Thomson Reuters

Investec view: If local supplies have been reduced due to reduced domestic smelting activity, then the stronger imports may only be offsetting weaker domestic supplies. If smelters ramp up output then import requirements could ease off.

¢ China steel production has plateaued. Wang Xiaoqi, vice president of the China Iron and Steel Association (CISA), has reportedly said that steel mills in China are no longer expanding due to an emphasis on environmental protection. Source: Reuters

Investec view: Steel production in China reached 779mt last year and CISA has previously said it expects steel production to grow 3.1% YoY in 2014 reaching 810mt.

¢ Denham Capital to invest US$200m in Pembroke Resources. Private equity fund Denham Capital will reportedly invest US$200m in Pembroke Resources, a company set up by ex-Gloucester Coal CEO, Barry Tudor, to acquire coking coal projects. Source: AJM

Other economic news

¢ Two thirds of commodity hedge funds lost money in Q1 extending a dismal run as they bet against higher crop and energy prices that have rallied. The polar vortex across the US led to higher energy, power and grains prices. Source: Thomson Reuters

¢ China’s trade rises. Overseas shipments increased by 0.9% from a year earlier. This compared with a median estimate for a 3% drop from Bloomberg economists. Source: Bloomberg

¢ German industrial output falls unexpectedly. Industrial production, after seasonal adjustments, has fallen by 0.5% since February. Economists predicted a rise of 0.2%. Factory orders fell by the most since November 2012 and these results appear to be a sign that the German economy is slowing. Source: Bloomberg

African resources update

¢ ANC takes early lead in vote count. With 31% of the votes counted, the ANC had 58.7% of the vote, followed by the Democratic Alliance on 27.7%. Source: BBC

¢ The cost of Somali piracy halved last year as attacks slumped totalling US$3.2bn. At the height of attacks in 2011 up to a dozen or more merchant ships were being held captive at any one time for multimillion dollar ransoms. Shipping companies have been increasingly turning to using groups of armed personnel to dissuade attackers. Source: Thomson Reuters

¢ Today’s African proverb. “Bend the stick while it is still wet”. Source: BBC

Investec Global Natural Resources Research Team:


Hong Kong

South Africa

Hunter Hillcoat
Tel: +44 (0) 20 7597 5182

Matthew Whittall
Tel: +852 3187 5075

Albert Minassian
Tel: +27 (0) 21 416 1454

Marc Elliott
Tel: +44 (0) 20 7597 5189

Leavitt Pope
Tel: +852 3187 5074

Louise Collinge
Tel: +44 (0) 20 7597 5779

Investec Global Natural Resources Sales Team:


Hong Kong

South Africa

Jamie Campbell
Tel: +44 (0) 20 7597 5038

Will Robbins
Tel: +852 3187 5098

Hayden Smith
Tel: +27 (0) 21 416 1401

Thomas Lawrence
Tel: +1 212 2595604

Alistair Roberts
Tel: +852 3187 5097

Investec Commodity Hedging Team:


Callum Macpherson
Tel: +44 (0) 20 7597 5070

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