05.08.14 - 09:54 Uhr
  [cid:image001.png@01CFB086.0C843190] Tuesday, 05 August 2014



Company news highlights: KGHM confirms US$4.16bn capex for Sierra Gorda, Fresnillo interims include special dividend, Sierra Rutile provides Ebola update, Royal Bafokeng interims, Gem Diamonds recovers 198 carat white type IIa stone, Avocet tough interim but options evolving, Tawana targeting pilot iron ore plant from start 2015, Lonmin appoints COO

Commodity review highlights: Western areas sees strong interest in offtake contract, coal mine workers in Colombia consider extending strike action but mines largely unaffected, Peru approves US$1.4bn Tia Maria copper project environmental study, Peabody cuts 1.5mtpa coking coal output, Atlas Iron defiant against iron ore majors

Other economic news: Weaker Chinese data, Bank of Japan to maintain massive asset purchases, Australian mining legislature captive to whim of minorities

African resources update: Soros requests Chinese disclosure on African government pay-outs, GE to invest US$2bn in African infrastructure, Todays African proverb

Company news

KGHM (KGH PW) confirms final cost of Sierra Gorda copper mine in Chile at US$4.16bn, over a third more than originally expected when the asset was acquired as part of a C$3bn takeover of Canadas Quadra FNX. Annual production is forecast to reach 220ktpa Cu. KGHM controls 55% of the asset with Sumitomo holding the remainder. Source: Thomson Reuters

Investec View: Capex escalation for greenfield mine developments remains a major problem with numerous major developments running significantly over budget.

Fresnillo (FRES LN) half year results include special dividend. As a result of reduced commodity prices (silver and gold down 18% and 12% YoY) and temporary disruptions (Herradura), the company reported reduced 1H profit of $130.1m (EPS of 17.7cps, down 11.5% YoY) and cash generation of $336.7m (down 32% YoY). However, with a good balance sheet (cash and equivalents of $1.2bn and debt of $836m), the company has announced a special dividend of 5cps, reflecting its confidence in the business and the outlook. 2014 guidance has been maintained at 43moz silver and 450koz gold. Source: Company

Investec view: A reasonable result given prices largely outside the companys control. The special dividend follows the trend of precious metals companies giving shareholders what they want, i.e., a share of the earnings that the companies generate. Fresnillos regular dividend policy remains in place: total dividend of 33-50% of NPAT, one-third as an interim, two-thirds as a final.

Sierra Rutile (SRXR LN) provides Ebola update. With the Ebola outbreak in West Africa making global news the company has provided an update, highlighting that there have been no cases at its operations in Sierra Leone and no disruptions to operations. It has, however, implemented precautions, including restriction on travel to affected areas. Source: Company

Investec view: The statement follows similar updates from African Minerals (AMI LN) and London Mining, (LOND LN) both also based in Sierra Leone. While this is certainly a disease to be taken very seriously, it has to be acknowledged that it makes good press copy and the markets negative reaction against the companies located there appears to be well overdone (assuming it at least partly reflects the virus.

Royal Bafokeng Platinum (RBP SJ) had guided that its EPS and HEPS would be between 106-121cps and achieved 116cps versus 87cps 1H13. The company achieve 3% increase in production to 134.2koz PGM for the half with a 7.2% increase in cash cost per tonne milled, 8.5% per ounce produced - above inflation but well better than peers. Cash on hand of ZAR 2.2bn supportive as it ramps-up Styldrift. Source: Company

Investec View: We dont expect significant response by the market to this announcement

Gem Diamonds (GEMD LN) recovers exceptional 198 carat white type IIa diamond from Letseng expected to achieve an exceptional price. The mine is famous for its production of large, to colour, exceptional white diamonds. Source: Company

Avocet (AVM LN) tough interim results reflects quarterly production of 21,650oz down 6% qoq due to processing lower grade ore ahead of commissioning of carbon blind circuit. H1 output reached 44,798oz down 27% yoy for cash cost of US$1,246/oz. H1 loss in the period came to 26.5cps (-29.78cps last year) including a US$25.8m impairment. Full year production guidance has been trimmed to 105koz. The company indicates a funding requirement of US$15-20m (previously US$20-30m) for Inata and is negotiating with Ecobank and other parties to achieve funding requirements that the company appears optimistic will be satisfied. AVM is investigating heap leach processing options of low grade stockpiles and oxidised ores in the region, as well as a steeply plunging shoot of mineralized ore below the current north pit that could support underground mining. Preliminary estimates indicate that a combination of heap leach and underground operations with current open pit mine plan could double the life of the mine and achieve as much as 200kozpa of gold output. At the end of the period AVM had cash of US$10.3m and debt of US$77.9m. Source: Company

Investec View: The company continues to struggle operationally but management appears to be making progress at identifying opportunities within the portfolio to turn the situation around. We await financing updates to give the company breathing room to work to progress the asset base and hopefully deliver a profitable operation once again.

Tawana (TAW AU) targeting pilot plant from start of 2015. The Liberian-based iron ore company has stated that it could have a pilot-scale bulk mining operation and plant at its Mofe Creek project, by the start of 2015, with a view to commercial production from 2016. Following the recent scoping study (key parameters: staged ramp-up to 2.5mtpa of 65% Fe product, capex $280m, opex $41/t) it has embarked on a PFS, due to be complete by April 2015. Source: MiningWeekly, Company

Lonmin (LMI LN) management changes announced yesterday sees new COO appointed, whilst two management team members depart. Johan Lesley Viljoen ex Goldfields, Anglo and AngloGold Ashanti to become COO. However, two experienced members of the management team Mark Munroe (EVP Mining) and Natascha Viljoen (EVP processing) are departing. To help bridge the gap from the changes LMI has appointed Ben Moolman ex Glencore Xstrata COO of the platinum division and 10years of experience at Lonmin. Source Company

Investec View: Stock traded down yesterday likely due to concerns that two key long standing members of the team are departing at a particularly challenging time as the company gets back on its feet after strike action.


Commodities news

Nickel producer Western Areas (WSA AU) sees strong interest in a tender for concentrate sales. The contract currently sits with Jinchuan group for 13ktpa is due to expire at the end of the year. The Indonesian mineral export ban triggered nickel prices to rapidly rise from around US$13,900/t to current levels of around US$18,380/t. However, inventories are hitting record highs (318kt in LME warehouses) as hidden stocks leave China following a fraud probe at Qingdaos port indicating plentiful supply. Source: Thomson Reuters

Contract workers at Colombias biggest coal mines to vote on whether to continue four week strike. Mining companies have indicated that the stoppage has had minimal operational impact. The c. 3,400 employees work for contracting company Dimantec. The largest part of the workforce involved work at Drummonds operations and Glencores (GLEN LN) Prodeco mine. Source: Thomson Reuters

Peru approves environmental study for US$1.4bn Tia Maria copper project that would produce around 120ktpa Cu. The asset is controlled by Southern Copper Corp (SCCO US) and is due to start construction this year and take around two years to compete. Source: Thomson Reuters

Peabody (BTU US) cutting metallurgical coal output by 1.5mtpa from its high cost Burton Mine in Queensland as it cant support the operation in the current pricing environment. Source: Thomson Reuters

Investec View: Coking coal markets remain in poor shape and we hope pricing has bottomed, although further production cuts may be required to enable prices to recover.

Atlas Iron (AGO AU) defiant in the face on increasing supply from its goliath neighbours. Speaking also at the conference, AGOs CEO stated that theres "limited logic" in the view that expansions from BHP Billiton (BLT LN) and Rio Tinto (RIO LN) will squeeze out the mid-tier producers in the Pilbara. Brinsden stated that the global iron ore trade was around 1.6bnt and that Vale (VLAE US), BLT, RIO and Fortescue (FMG AU) took up around 0.8bnt of the market, with the other half accounted for by smaller producers globally. The majors would have to "expand phenomenally" to displace the other producers and this is unlikely given shareholder demand for constraint on capital. Source: MiningWeekly

Other economic news

Growth in Chinas services sector slowed sharply in July to 9 year low indicating that the recovery in the broader economy remains fragile and could require additional government support. The services sector accounts for around 45% of GDP and the reading fell to 50.0 in July from 15month high of 53.1 in June. Source: Thomson Reuters

Bank of Japan to maintain massive asset purchases and optimistic view of economic outlook this weak despite weak data that has raise fears of a deeper than expected contraction in Q2. If the economy and prices undershoot projections the Central Bank may come under government pressure for further stimulus around the time it issues new long term projections in October. Source: Thomson Reuters

Australian mining legislature captive to the "whim of minority parties". Speaking at the Diggers & Dealers conference, chairperson Barry Eldridge said that despite the recent positive changes made by the federal government, the industry remained subject to the whim of minority parties, which had an influence on Australias legislative future, describing "narrow-minded politicians who remain committed to acting as though the resource industry is an enemy of Australia". Source: MiningWeekly

African resources update

Soros requests that China publically discloses what it pays African governments for extracting oil, gas and minerals in order to help level the playing field for companies around the world. The value of natural resources extracted from Africa is estimated at US$500bnpa, but government revenues collected for these exports is barely a tenth of this figure. A further US$50bnpa is estimated to leave in illicit finance. The US and EU have passed laws requiring extractive industries listed on public exchanges to disclose payments to governments. Source: Thomson Reuters

Investec View: The request seems perfectly reasonable, although we see little incentive for the Chinese to act accordingly without some political pressure.

General Electric (GE US) pledges to invest US$2bn in Africa by 2018 to boost infrastructure, worker skills and access to energy as a US summit takes place with nearly 50 African Leaders that are seeking to renew a trade deal with the US for another 15 years. Source: Thomson Reuters

Todays African Proverb. "Its only when a lion is sick that the antelope visits him to reclaim an old debt". Source: BBC

Investec Global Natural Resources Research Team:


South Africa

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

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

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

Investec Global Natural Resources Sales Team:


Hong Kong

South Africa

Adam Bidwell
Tel: +44 (0) 20 7597 5089

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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