Mark Latham Commodity Equity Intelligence Service

Tuesday 14th April 2015
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The Shocker Crushing The US Economy Revealed

We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather.There is quite obviously some serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward.These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage. The data from the CMI is not the only place where this distress is showing up, but thus far, it may be the most profound.

MGL: Gas?

Former senior Chinese energy executive seeks leniency at graft trial

The former head of CNPC, China's top energy group, on Monday admitted his guilt and asked for leniency at the opening of his trial on charges of bribery and abuse of power, the latest in a string of top officials caught in an anti-graft campaign.

Scores of senior figures in the ruling Communist Party, the military and state-owned enterprises have been felled in President Xi Jinping's two-year war on corruption.

State television showed pictures of a grim-faced Jiang Jiemin, who also ran the state asset regulator for five months before being sacked in September 2013, standing in the dock with two policemen at his side.

He was formally charged last month.

Jiang was a close associate of Zhou Yongkang, the once-powerful domestic security chief and member of the elite Politburo Standing Committee, the most senior person to have been charged with corruption.

Zhou had also been at CNPC, the parent company of PetroChina Co. Ltd. , having risen through the ranks to serve as general manager from 1996 to 1998.

"The facts of my crimes are clear, the evidence is true and conclusive," Jiang said, according to a statement by the Hanjiang Intermediate People's Court in the central province of Hubei, which is trying him. "I admit my crimes and am penitent."

Jiang did not defend himself when the evidence was presented, the court said.

He needs to be held accountable under the law for his crimes, which include "bribery, not being able to account for a large number of assets and abuse of power by a staff member at a state-owned company", the court cited the prosecutor as saying.

Jiang is willing to serve his time, and "earnestly requested leniency", the court added, saying the verdict would come at a later, unspecified date.
MGL: Law and Order Chinese style. On state TV. Message received and understood!

Chinese labour agency remarks:

"More than 10,000 civil servants are looking to quit their jobs, according to a report by the local employment website Zhaopin, which found new sign-ups from government employees have spiked since the Lunar New Year in late February.


Those numbers, which rose 30% from a year ago, are startling for a profession once regarded by the Chinese as a highly sought-after lifelong sinecure."


China set to splurge 800 billion yuan on railways in 2015

China is set to invest over 800 billion yuan in railway infrastructure in 2015 as Beijing moves to further bolster its slowing economy.

According to a report in the 21st Century Business Herald, Vice Premier Ma Kai told a railway conference in Chonqing that investment in rail for 2015 will need to exceed 800 billion yuan in order to reach the 8000 km of track target.

Total railway investments could hit a total of 3 trillion yuan ($482.69 billion) during the 13th five-year plan which will run from 2016-2020, the newspaper calculated.

Investment in rail has grown steadily in recent years with fixed asset investment growing from 580 billion in 2011 to 800 billion yuan in 2014 according to official figures. An extra 800 billion yuan investment is slated for 2015.

Rong Chaohe, a professor at Beijing Jiaotong University, agrees the country’s investment in the infrastructure is likely to surpass 800 billion yuan this year.

“Looking at the trend over the past two years, it looks like investment in 2015 is likely to exceed 800 billion yuan” he told 21st Century Business Herald.
MGL: More stimulus? 

Russia can deliver S-300 missile system to Iran quickly - Interfax

Russia's Defence Ministry will be ready to swiftly deliver the S-300 missile system to Iran if it gets the green light to do so, Interfax news agency quoted an official at the ministry as saying on Monday.

Earlier on Monday Russia lifted a ban on deliveries of the advanced anti-missile system to Tehran, which has reached an interim deal with world powers on curbing its nuclear programme in exchange for the lifting of international sanctions.
MGL: Inflammatory! Iran's re-entry just notched down a touch.

Oil and Gas

Cash flow break-evens down by $20, deeper cuts needed: Wood Mac

The rapid and aggressive response by oil and gas companies to low oil prices has stabilized the sector. According to Wood Mackenzie, the price required for companies to be cash flow neutral in 2015 has dropped by over $20/bbl to $72/bbl.

The Edinburgh-based consultancy believes further cuts would be required to achieve cash flow neutrality if oil prices remain around current levels. For some companies, this will mean selling assets, others may suspend or limit dividend and buyback programs.

"Capital cost cutting has been both rapid and in some cases dramatic. Individual companies have had one, two and sometimes three bites at the cherry, and industry has for the time being settled on a 24% or $126 billion fall year-on-year. Dividends and share buyback programs have also been targeted, while companies have turned to both the debt and equity markets to boost liquidity,” Tom Ellacott, head of corporate upstream analysis for Wood Mackenzie, said.

"Two peer groups are particularly interesting: for the Majors, cutting or suspending buybacks have been the key levers which have contributed to a 25% reduction in cash flow breakevens. For the smaller North American onshore players, the ability to rapidly dial-back spend has been a key competitive advantage. Some players have cut costs by up to 80%, and these companies join a select group with cash flow breakevens below $60/bbl," Ellacott continued.

While stock market performance indicates that investors believe there will be an oil price recovery, Wood Mackenzie says that a period of sustained prices at $60/bbl will need further measures to conserve cash.

"The Q1 results will underline how much still needs to be done if oil prices do not continue to recover. More cuts to dividends and buybacks are likely if $50-60/bbl prices persist," he said. But Ellacott believes there are opportunities for the financially strong, as evidenced by Shell's $82-billion offer for BG.

Wood Mackenzie's analysis shows that there is a huge inventory of assets on the market, with 340 potential deals worth over $300 billion. But activity has collapsed.

"Buyer and seller expectations remain far apart, and buyers of material size are limited to the most financially secure. But a buyer's market in M&A might emerge as companies are forced to sell assets to balance the books. The $300-billion question is: with Shell having made the first move, who will follow?" Ellacott said.

"Investors will be watching the upcoming first-quarter results season for indications of how effective the reaction to oil prices at below $60/bbl has been. Companies are facing a choice of paring-back investment or maintaining momentum throughout the cycle, depending on their financial position. There is a high degree of optionality regarding planned spend in 2016 and 2017, much of which is discretionary. How companies react to this strategic challenge will affect their production growth and positioning in the future," Ellacott said in closing.
MGL: No argument here. Just a note that major currency moves have also had a big impact: CAD, RBL, AUD, BRL, all big producers have effectively cut breakevens 25-50% via the currency market.  As per usual, all this actually does is extend and deepen the bear market. 

It is now very hard to find a price point above $30 that will balance the market IF, or when storage fill completes. The probability of complete price collapse is increasing here.

Middle East spot crude premiums surge on Asian demand, ChinaOil

Spot premiums for June-loading Middle East crude oil surged this week as Asian demand was expected to recover after the end of the peak refinery maintenance season and ChinaOil's buying spree for June cargoes was causing a scramble for refiners to secure spot barrels, traders said Monday, April 13.

Abu Dhabi's Murban began trading in the June-loading cycle at a premium of about 70 cents/barrel to the grade's official selling price, up from a premium in the 30s cents/b last month for May cargoes.

Itochu was heard to have sold a June Murban cargo to SK Energy at a 70 cents/b premium to the OSP, traders said.

Earlier, Japan's Mitsui was heard to have sold a similar June cargo of Murban to Cosmo Oil at a premium in the low 50s cents/b last week.

Traders said part of the strength in Murban premiums comes from the cut in the flow of North Sea Forties blend crude to Asia.

BP plans to shut the Hound Point terminal's VLCC jetty for maintenance from May 6 to June 8, a spokesman told Platts Wednesday.

Jetty number 1 is where VLCCs load on the North Sea to Northeast Asia route for Forties crude.

Its closures means Forties cargoes will have to find a home with local refiners during this period, given the higher costs of exporting crude on smaller vessel sizes than a VLCC.

Among medium-sour grades, SK Energy was heard to have bought a June cargo of Qatar Marine from Unipec at a premium of 50 cents/b to the grade's OSP.

The Qatar Marine premium was also up from a deal at about 35 cents/b earlier last week.

Traders said ChinaOil's buying of a number of June-loading medium-sour spot cargoes has increased competition among regional refiners to secure supplies, driving up spot premiums.
MGL: Month long closure at the Forties delivery point cause a rare burst of premiums to appear in Asian crudes.

Oil ETF investors head for exit, risking new slump

Oil investors who amassed a $6 billion long position in exchange traded funds, occupying as much as a third of the U.S. futures market, are now racing for the exit at a near record pace.

Outflows from four of the largest oil-specific exchange traded funds, including the largest U.S. Oil Fund, reached $338 million in two weeks to April 8, according to data from ThomsonReuters Lipper. That is the first two-week outflow since September and the biggest since early 2014, marking a turnaround from heavy inflows in December and January on bets that oil prices would quickly rebound from six-year lows.

If the exodus gathers pace it could signal new pressure on crude oil prices that had begun to stabilize at around $50 a barrel this year following their 60 percent plunge, says John Kilduff, a partner at energy fund Again Capital LLC in New York.

Retail investors may have been "trying to bottom fish and got washed out with the recent new low," he said.

Global oil ETF holdings were equivalent to 150 to 160 million barrels' worth of crude oilfutures as of last week, according to ETF Securities. That would represent as much as 30 percent of open interest in the most-liquid U.S. oil futures contract, which saw record open interest of 530,000 lots in March, although some of those fund holdings are in other contracts.

It is probably premature to say the two-week outflow marks a sustained sell-off that could trigger another slide in crude prices given the ETFs saw their biggest ever weekly inflow of $818 million just weeks earlier.

In any case, the funds have become an unpredictable irritant for Saudi Arabia and other OPEC producers, first slowing the slide in prices that could force higher-cost producers such as U.S. shale drillers to curb output, and now blurring the outlook.

"Passive investors have become a problem," Philip K. Verleger, a consultant and energy economist, said in a note on Monday. ETF inflows are "denying those in the Middle East the decline in non-OPEC output they hoped to achieve".

Traders say two factors may be behind the recent exodus.

First, there is a growing sense that any rebound in crude prices may be months if not years away. Secondly, there is a growing awareness of the financial penalty of the current "contango" market, in which investors must sell cheaper near-term futures contracts to buy more costly next-month contracts every month.
MGL: This is Oil, not Oil equity.Image title
Its the first evidence we've seen that expectations are degrading.Image title
We're close to the Saudi 'line in the sand'.Image title
Here's floating oil in storage, the last potential source of capacity.

Time to put the shorts back on.


Oil prices rise on expected dip in U.S. shale output

Crude prices rose on Tuesday on expectations U.S. shale oil output will record its first monthly decline in over four years, but analysts warned that the broader market remained oversupplied.

The U.S. Energy Information Administration expects U.S. shale production to fall by 45,000 barrels to 4.98 million barrels per day in May from April.

That would underscore how record crude output from the U.S. shale boom may be backtracking after global markets saw prices effectively slashed by 60 percent since June on oversupply and lacklustre demand.

While political instability in the Middle East also helped push up prices, analysts said that high global production and stocks were capping gains.

"Geopolitical risk in oil markets remains elevated. From a fundamental perspective however, supply from the Middle East is expected to remain high, with Saudi Arabia and Iraqi production on the rise," JP Morgan said in a note.

"Our base case is for crude stocks to decline through 2015, as U.S. production is expected to turn lower in 2Q2015. If production, however, remains unchanged through the remainder of 2015, U.S. crude stocks will likely increase to above 540 million barrels during the fall refinery maintenance period," it said.
MGL: We think Oil shale output is already down, and by at least 1mbpd, largely due to the Fracklog.

Data is just playing catchup.

Lukoil last to leave Saudi Arabia's search for gas

Lukoil will likely pull out from Saudi Arabia where the economics of its search for gas have been crushed by the collapse of the oil price, three industry sources said.

Lukoil is Russia's largest private oil company. The Russian energy industry's ventures abroad often parallel Kremlin foreign policy, which has turned cooler towards Saudi Arabia. Some in Moscow blame Riyadh for allowing the oil price drop, which has hobbled Russia'seconomy, by not cutting output.

Lukoil was the last company left active in the consortia of international oil firms Saudi Arabia invited in 2003-2004, part of a high profile drive to find gas in its southeast Empty Quarter, the Rub al Khali.

It has a majority stake in Luksar -- a joint venture with state oil company Saudi Aramco -- which was set to drill deep for the unconventional gas, called tight gas, this year after more than a decade-long hunt for conventional deposits that has proved futile.

Luksar was winding down, an industry source said.

It may also leave almost all of its projects in West Africa as it has made no large discoveries there, a company executive said last month.
MGL: Exxon and Phillips amongst others both had a good look at the empty quarter and walked away disappointed. The best oil and gas geology is on the eastern flank, and thats where ARAMCO is developing its gas resource. Lukoil walking away does nothing except tell us that Exxon and Phillips were right.

ISIS: assault on one of Iraq's most important oil refineries

The Islamic State has launched a new assault on the Baiji oil refinery in Iraq’s Salahaddin province. The Iraqi military claimed it has repelled the attack.

In photos released on April 11, the Islamic State showed its forces attacking the refinery and penetrating the perimeter of the complex. Several images detail the use of US-made Humvees and home-made rocket launchers cobbled together from civilian vehicles. Other pictures show the use of camouflaged howitzers and tanks.

Two photos highlight the deployment of a suicide bomber by the name of Abu Ma’awiya al Khorasani; the moniker “Khorasani” implies the bomber was from the Afghanistan-Pakistan region.

Two other photos document Islamic State commanders directing the fight from an “operations command center.” Those commanders appear to be using footage from drones flying overhead to exercise command and control of the fight.

Read more:
MGL: Due north of Baghdad.

Novatek aims for $5 bln from export agencies for Yamal LNG

Russian gas producer Novatek hopes to secure $5 billion from global export credit agencies for its Arctic liquefied natural gas (LNG) project Yamal LNG by mid-year, chief executive Leonid Mikhelson said.

Speaking in a northern port where the facilities for Yamal LNG are being built, Mikhelson and the head of French partner Total were upbeat about financing, which has been complicated by Western sanctions imposed on Russia over Ukraine.

Novatek, the major shareholder in Yamal LNG and co-owned by Gennady Timchenko, an ally of President Vladimir Putin, was placed under U.S. sanctions last year, limiting its access to global financing.

But Moscow has vowed to make sure Yamal LNG goes ahead. The project is key to Putin's drive to maintain Russia's energy dominance and for plans to carve out a greater share of the frozen sea-borne gas market for Russia.

"Today, the intentions expressed by the export agencies are valued at $5 billion," Mikhelson told reporters in the northern port of Sabetta, some 2,120 km (1,325 miles) northeast of Moscow.

Patrick Pouyanne, chief executive of Total which owns a 20 percent stake in Yamal LNG, said they had also been in talks with Chinese institutions to raise between $10 and $15 billion.

"If not for sanctions, the financing for the project would have been done already," Pouyanne said.

Novatek owns 60 percent in the $27 billion Yamal LNG project, alongside Total and China's CNPC.

The first production unit, with annual capacity of 5.5 million tonnes, is due to be launched in 2017. Peak production of 16.5 million tonnes a year is expected to be reached in 2021.

Apart from bank financing, Novatek has secured 150 billion roubles ($2.8 billion) from Russia's rainy day National Wealth Fund. Novatek received the first tranche of 75 billion roubles in February and hopes to get the rest this quarter.

The Russian company has also been in talks to sell 9 percent in Yamal LNG to raise funds.
MGL: The problem with the being the Kremlin's favourite, is you are roped in to build the Kremlin's favourite project. $27bn for 16.5m mt of LNG? Its actually not a bad project on the LNG cost curve, but the 2017 LNG market is pretty much guaranteed to be oversupplied. So we're not optimistic on returns here.Image title

Noble announces acreage addition and drilling update

Noble Energy, Inc. today announced that it has acquired a 75 percent interest and operatorship of the PL001 License in the North Falkland Basin from Argos Resources Limited.

The PL001 License covers an area of nearly 285,000 gross acres and is located to the northwest of the PL032 License, which includes the Sea Lion oil discovery. Edison International SpA has obtained the remaining 25 percent interest in the PL001 License. Noble Energy and Edison will provide to Argos a 5 percent royalty override from all hydrocarbon development on the license.

The Company’s initial operated Falkland Islands prospect, Humpback, is now expected to commence drilling by early May 2015. Humpback, located in the South Falkland Basin, is the first of multiple stacked fan prospects clustered together in the Fitzroy sub-basin.
MGL: No price disclosed. Extends NBL's interest to the northern section of licenses.Image title
PL001 is the most NW block on this map, due north of the western island.

Laredo Petroleum More Bullish On 2015 Production

Laredo Petroleum was more bullish on its 2015 production forecast Monday, even as it slashes capital spending amid low oil prices.

The independent exploration and production company now sees full-year output of 15.6 million barrels of oil equivalent to 16 million barrels of oil equivalent, up 13% to 16% from 2014.

In December, Laredo predicted production would grow more than 12% from estimated 2014 volumes. On Monday, it also said it produced 4.27 million BOE during Q1, up 47% from a year ago.

Late last year, Laredo Petroleum said it would cut its 2015 capital budget by nearly 50% from 2014 levels, joining its peers Continental Resources (NYSE:CLR), Sanchez Energy (NYSE:SN) and others.

"Although we have reduced our budget in response to lower commodity prices, we continue to generate highly economic production growth and anticipate improvement as service costs adjust appropriately to reflect the recent decline in oil prices," CEO Randy Foutch said in a release at the time.

Read More At Investor's Business Daily:

MGL: Image title
Laredo's only slide in the 168 slide pack that showed returns on current pricing. There's some wells that work, but its not many. 

Alternative Energy

Rare earth price rally evaporates

China produces nearly 90% of the world's rare earths and its downstream industry consumes 70% of the 17 elements used in a variety of hi-tech industries including renewable energy, medical devices and defence.

Following a World Trade Organization ruling, China is abolishing its decade-old export quota system for rare earths and is due to lift export tariffs of 20%-plus in May.

Beijing is also consolidating the industry under six large organizations led by the newly-named China North Rare Earth Group.

The Inner Mongolia-based company operates the Bayan Obo iron ore mine and before the 2010 price surge after Beijing reduced export quotes, produced more than half the world's REEs as a by-product.

Apart from combining mine output China North Rare Earth and the five groups are being vertically integrated to help modernize the country's mostly low-tech rare earth separation and refining businesses.

Over the weekend the country's Ministry of Industry & Information Technology released rare earth production quotas for 2015.

Rare earth oxide (REO) mining quotas were set at 52,500 tonnes while smelting and separating limits came in at 50,050 tonnes.

Productions quotas were up 12% from those set last year, while refining can expand by 10.6%. 60% of the mining quota were allocated to China North Rare Earth Group.

Statistics from China's Rare Earth Industry Association shows that after a slump in January ahead of the country's new year holidays, export of REEs recovered in February, jumping 24.7% to 2,052 tonnes year on year.

After rallying at the beginning of the year the price index (a rolling 20-day average of REE prices across the industry) has now turned down again.

Rare earth price rally evaporates
MGL: Following Aluminium, the REE rally dissapates when faced with weak demand. Plat/Gold continues to give recession readings.


Japan court halts restart of two reactors in blow to nuclear sector

A Japanese court on Tuesday issued an injunction to prevent the restart of two reactors citing safety concerns, in a blow to Prime Minister Shinzo Abe's push to return to atomic energy four years after the Fukushima crisis.

It is the second court ruling in less than a year against reactors operated by KansaiElectric Power, the country's most nuclear reliant utility before Fukushima.

The ruling is a snub to Japan's beefed up nuclear safety after Fukushima and threatens to set back government plans to restart reactors deemed safe by the atomic regulator.

Kansai's reactors, located on the coast of Fukui prefecture in western Japan, have met basic safety regulations set by Japan's Nuclear Regulatory Agency (NRA) and were expected to be restarted some time this year.

"The fact that the court ruled in favour of the injunction after regulators had already given the go-ahead carries weight and will have an impact," said Hiroshi Segi, a former judge who is now critical of the judicial system because he feels it is often reluctant to challenge government policy.

Local residents had sought an injunction against the No. 3 and 4 reactors at Takahama, arguing that restart plans underestimated earthquake risks, failed to meet tougher safety standards and lacked credible evacuation measures.

Safety at the Takahama plant west of Tokyo cannot be assured and the regulator's standards "lack rationality," according to a copy of the ruling obtained by Reuters.

"This is a decision that has a decisive impact on nuclear restarts," Yuichi Kaido, a lawyer for the plaintiffs told a group of supporters outside the court, who cheered and waved banners including one saying "The judiciary is still alive".
MGL: Same Judge who we reported blocked last years restarts, and for the same reasons.

Kansai Electric machinated to have him sacked last week, the the upper court threw the application out. 

There are two further court cases next week in Sendai and Kyushu province. 


China farm pollution worsens

Farm pollution in China is worsening, despite moves to reduce excessive use of fertilisers and pesticides, said the agricultural ministry, urging farmers to switch to organic alternatives to tackle severe soil and water pollution.

But experts say achieving the ministry's goal will be difficult without sacrificing food output, a top priority in the world's most populous country.

China consumes around a third of global fertilisers, with rapid growth in use in recent years driven largely by higher fruit and vegetable production. China is the world's biggest grower of apples, strawberries, watermelons and a range of vegetables.

Excessive use of chemical fertilises and pesticides has led to polluted water sources, contamination of soil with heavy metals and high pesticide residues on food, threatening both public health and agricultural productivity.

"Agricultural non-point source pollution is worsening, exacerbating the risk of soil and water pollution," said the agriculture ministry in a statement.

Growers apply 550 kgs of fertiliser to a hectare of fruit trees and 365 kgs of fertiliser to a hectare of vegetables, vice agriculture minister Zhang Taolin told reporters on Tuesday.

World Bank data showed China used 647.6 kgs of fertilizer per hectare of arable land in 2012, compared with 131 kgs in the United States and 124.3 kgs in Spain.

Pesticide consumption should be cut to 300,000 tonnes, down from the current 320,000 tonnes, said Zhang.

China's use of chemical fertilizer grew by an average 5.2 percent a year over the past three decades, reaching 59 million tonnes in 2013, Xinhua said last month.

"There is large space to reduce this growth," Zhang said, reiterating a target announced late last year to halt growth in fertiliser use nationwide by 2020.

"I believe it is absolutely possible to guarantee our food security strategy," added Zhang, while proposing farmers use more organic fertilisers.
MGL: Beijing turning on Fertilize inspired pollution now, a reduction in Chinese usage would force Urea makers into the export markets, so this is worth watching.

India’s potash imports forecast to rise

Indian potash imports will likely increase to a four-year high of about five-million tonnes in the 2015 financial year, which started on April 1. This will be the highest level of imports since 2011, when India went into a self-imposed “potash import holiday”. 

With the Indian rupee stabilising and the rise in domestic potash prices checked, farmers’ consumption of the nutrient was seen to be on an upward curve, resulting in the likelihood of higher imports during the current year, an official in the Department of Fertilisers said. 

However, importers are expected to conclude transactions at a maximum of $322/t on a cost-and-freight basis. Government-owned trading houses MMTC Limited, STC Limited, and India Potash Limited were designated authorised potash importers. 

The government subsidised the retail price of potash through part reimbursements to potassic fertiliser manufacturers. However, for 2014/15 the government cut the subsidy by 20% to a maximum of $151/t resulting in a rise in retail price and a drop in consumption during the year. 

The issue at hand for importers was the differing trends in offers, which saw potash exporters in Russia and North America seeking an increase over previous average offers, whereas exporters like Belarusian Potash Company Limited (BPC) were willing to keep offers in check, the official added.
MGL: India returns to the market in small quantity, and finds ample potash at spot. 

Precious Metals

Alamos Gold, AuRico Gold to merge in $1.5 bln deal

Canadian gold miners Alamos Gold Inc and AuRico Gold Inc said they would merge in a deal valued at about $1.5 billion, combining high-yield assets such as the Mulatos mine in Mexico and the Young-Davidson mine in Ontario, Canada.

Gold producers have been cutting costs, shedding assets or consolidating amid a slide in gold prices, which had fallen 8.4 percent in the past 12 months.

The deal is one of the biggest since Osisko Mining Corp sold most of its assets for C$3.9 billion to Yamana Gold Inc and Agnico Eagle Mines Ltd in April last year to thwart a hostile takeover bid from Goldcorp Inc .

Alamos and AuRico expect the combined company, Alamos Gold Inc, to produce 375,000-425,000 ounces of gold in 2015 in Mexico and Canada.

While Alamos produced 140,500 ounces of gold in 2014, AuRico produced 224,032 ounces.

Shareholders of Alamos and AuRico will each own half of the combined company, the companies said on Monday.

Alamos shareholders will receive one share of the combined company and $0.0001 in cash, for each share held.

AuRico shareholders will receive 0.5046 of the combined company's shares, for each share held.

Alamos also said it would buy about 27.9 million AuRico shares, or 9.9 percent of the company, in a private placement at $2.99 per share for gross proceeds of about $83.3 million.

The merger is expected to close in the second quarter.

The companies also said a new company, AuRico Metals Inc, will be formed and capitalized with $20 million to hold interests in certain AuRico mines, including Kemess project in British Columbia.
MGL: Two sub $1bn gold miners merge to form one bigger gold miner. 

This slide in the presentation caught my eye:Image title
Most of the intermediate gold miners are trading below NPV on consensus. We've been researching gold miners for 30 years, and most if not all the time we've been assaulted by valuations that assume high and rising gold prices, and an enormous premium to NPV. 

So if you a a bull on gold, mine equity is cheap.

Having said all that, the gold miners have not covered themselves with glory. Very few quoted miners managed decent returns on equity during the last big bull market.  

Here's the classic Gann Fann on gold drawn from the 2001 lows:

Image title
Support is never support until tested, but its worth a sidebar.


Base Metals

Ivanhoe Assay results confirm high-grade zinc discovery at depth

Robert Friedland, Executive Chairman of Ivanhoe Mines , and Lars-Eric Johansson, Chief Executive Officer, announced today that additional, exceptionally high-grade zinc, copper and silver drill intercepts have been reported in the fifth batch of assay results from the company's underground diamond-drilling program at the historic, high-grade Kipushi copper-zinc-germanium-lead and precious-metals mine.

Assay results received for drill hole KPU072 have confirmed a high-grade zone of zinc mineralization exists at depth to the south of the historically defined Big Zinc zone. Follow-up drilling by Ivanhoe confirms the initial massive sphalerite discovery and suggests a geometry and orientation similar to the Big Zinc zone.

Highlights of the new assay results on the Big Zinc results include:

KPU067 drilled on section line 3: 18.9 metres, drilled length, grading 38.5% zinc, 0.2% copper, 7 grams per tonne (g/t) silver and 44 g/t germanium, plus a second intercept of 39.7 metres grading 23.0% zinc, 0.2% copper, 4 g/t silver and 34 g/t germanium.
KPU068 drilled on section line 15: 79.8 metres, drilled length, grading 28.3% zinc, 0.3% copper, 31 g/t silver and 31 g/t germanium, including an intercept of 23.8 metres grading 41.8% zinc, 0.1% copper, 28 g/t silver and 40 g/t germanium.
KPU069 drilled on section line 17: 40.2 metres, drilled length, grading 37.5% zinc, 0.1% copper, 57 g/t silver and 45 g/t germanium.
KPU070 drilled on section line 17: 6.7 metres true thickness grading 7.9% copper, 0.2% zinc, 55 g/t silver and 0.52% cobalt.
KPU071 drilled on section line 9: 85.0 metres, drilled length, grading 49.0% zinc, 0.3% copper, 12 g/t silver and 61 g/t germanium.

The new assay results were also returned for the Nord Riche area of the Kipushi fault zone,

KPU073: 7.9 metres true thickness grading 8.2% copper, 1.9 % zinc and 17.0 g/t silver and 0.26% cobalt.

KPU072: 57.7 metres, drilled length, grading 37.0% zinc, 0.6% copper and 6 g/t silver and 54 g/t germanium including an interval of 50.8 metres grading 40.7% zinc, 0.6% copper, 6 g/t silver and 54 g/t germanium.
MGL: Here's the PEA's on Ivanhoe's projects:
Image title
14% IRR with Platinum at $1700 does nothing for me.Image title
This is better, but no cigar!Image title
Deep, high grade.

Image title
New discovery is on trend, to the south and also deep.

Ivanhoe is $320m mcap, stock it trying to convince us that we have a base in place.  Unfortunately there's really not enough excitement in this project portfolio so far.


Steel, Iron Ore and Coal

China Q1 coal output down 3.5pct on yr

China produced 850 million tonnes of coal in the first quarter of the year, down 3.5% year on year, the China National Coal Association (CNCA) said during a meeting on April 10.

The CNCA didn’t give the March figures, which was calculated at 320 million tonnes, up 33.3% from February, as more mines resumed production after Lunar New Year holidays.

Total sales during the first three months reached 800 million tonnes, down 4.7% from the year before, said the CNCA.

By the end of March, stocks in coal enterprises stood at 90 million tonnes, up 4% from the beginning of the year, with stocks in key power plants at 62.81 million tonnes, down 9.6% on year. Total social coal inventories have surpassed 300 million tonnes for 39 consecutive months.

In the first quarter of 2015, coal rail transport in China reached 536 million tonnes, down 9.2% year on year, according to the CNCA.

Weak demand and falling prices continued to impact the sector’s performance. The CNCA data showed that the country’s 90 large coal producers suffered a total loss of 13.1 billion yuan ($2.11 billion), compared with 11.2 billion yuan of profit a year ago, with only 19 producers in profit.

Total loss of coal enterprises with annual core business revenue over 20 million yuan increased 32.4% from the year before to 16.55 billion yuan during the same period, it said.

China’s coal market has further worsened since April, with prices falling to new lows over the past eight and a half years.

The Fenwei/Platts CCI1 Index for domestic 5,500 Kcal/kg NAR coal traded at Qinhuangdao port was assessed at 416 yuan/t on April 13, inclusive of VAT, FOB basis, down 90 yuan/t or 17.8% from the beginning of the year.
MGL: Sales less than production. Production down. Inventory up. 

This is a very ugly piece of data.

Surrender on Iron Ore?

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In a note released this week, Citi has slashed its iron ore forecast to $US37 a tonne in the second half of this year and a mere $US40 a tonne until the end of 2018.

Standard and Poor's now believes iron ore will remain at $US45 a tonne for the rest of this year, a significant discount to its previous optimistic forecast of $US65 a tonne.

UBS analysts estimate all Australian iron ore miners other than the majors would be underwater at a price of $US35 a tonne. BHP Billiton and Rio Tinto would be cash breakeven at $US34 a tonne.

Credit Suisse analysts wrote in a note on Thursday that "high cost production must be forced out" of the market to allow the price to recover. The investment bank expects prices to average $US45 a tonne in the second half of 2015 and the first two quarters of 2016.

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MGL: Here's the seasonals on Chinese demand:

Image titleImage title(Australian sourced iron ore production costs, we're sceptical on the Brazilian numbers in this chart)

Its now April, and the analysts are throwing in the towel because the Chinese faction fight between the politburo and Jiang Zemen placemen has crippled the March economy and numbers. So we know that the March Iorn ore demand numbers are going to be weak.

However in the last 2 weeks we've seen an interesting change in Beijing's mood music:

~tax cuts
~deregulation of property ownership
~talk aimed at addressing the plight of workers in distressed industries.

Beijing wants clean growth, and yes all the accent has been on the 'clean' word, but we're now detecting a nuanced bias towards the 'growth' word.

Most readers will be aware that it's now a year since we put out the 'perfect storm' presentation on iron ore. Its almost four years since we abandoned our buy recommendation on Vale.

So we feel justified in cashing in our bear chips on the sector. Make, no mistake we're not bulls, nor do we particularly disagree strongly with any of the points made by the disgruntled analysts. 

Here's our observation:

Shell 6% yield NOT covered by cashflow, enormous capex liability, overpaid for BG. Implied expectations too high.
BHP 6% yield covered-just- by cash flow. Negligible capex liability, ($4.8bn). Implied expectations on the mark.


Sinosteel second in Australia to shut iron ore mine

China's Sinosteel Midwest Corp said on Tuesday it will suspend iron ore production at its Blue Hills project in Australia - the second mining company to fall victim to low prices in less than a week.

The Blue Hills mine was opened in August 2013 and was originally scheduled to operate for five years, yielding a little over 3 million tonnes of ore, according to the company, known as SMC.

SMC said delays in gaining regulatory clearance to extend the life of its mine for another two years had also contributed to the suspension, which will take effect in mid-May.

"Tough economic conditions and lengthy delays in obtaining environmental approvals for extensions to the Blue Hills operation, had left no alternatives available," it said in a statement emailed to Reuters.

Atlas Iron said on Friday it was suspending mining rather than operate at a loss after exhausting all avenues to reduce costs.

SMC was formed in 2008 after Chinese state-owned metals group Sinosteel Corp acquired the assets of Australian iron ore miner Midwest Corp.

SMC and Atlas are among a handful of lower production miners in Australia locked in a fight for survival as iron ore prices sink.

Others under threat because their costs may exceed selling prices include BC Iron Ltd, Fortescue Metals Group , Arrium Ltd and Grange Resources Ltd, according to cost calculations by UBS.
MGL: Small beer, but everything helps.

Australia's Fortescue tells miners to work more

Australia's Fortescue Metals Group Ltd, the world's fourth-largest iron ore producer, said on Tuesday it was changing its roster to get more work out of its miners as it seeks to slash costs to cope with plunging prices.

Fortescue said it was changing to a two-week on, one-week off roster from a current schedule of eight days on, six days off in its remote mines in Western Australia's Pilbara region following a "thorough organisational review".

"While we would prefer not to have to change what has been a successful and differentiating roster for Fortescue, we are taking steps in response to the threat of oversupply in the market over the medium term," the company's chief executive, Nev Power, said in a statement.

"In this environment, bringing our costs down rapidly and sustainably is critical and will place our company in the strongest possible position for the future."

The move would bring Fortescue into line with standard rosters worked in the industry, the company said, without providing an estimate of the savings.

Benchmark 62-percent grade iron ore for immediate delivery to China .IO62-CNI=SI was trading at $48.80 a tonne on Monday, according to The Steel Index, down about 60 percent on last year.

Standard & Poor's warned on Monday it may soon downgrade Fortescue and other big miners as it lowered its iron ore price forecasts for the next couple of years.
MGL: Fortescue is fighting for survival. They need a good 10% plus cut in costs to restore even a vestige of profitability.
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