Mark Latham Commodity Equity Intelligence Service

Friday 19th August 2016
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    Oil and Gas

    Saudi Crude Oil Exports Hit Three-Month High

    Saudi Arabia raised its combined crude oil and refined-product exports to 8.83 million barrels a day in June, the highest on record for that month and the latest sign of the expansion of the kingdom’s share of global markets.

    The world’s largest crude exporter typically ships less oil overseas from June to September as it burns more crude to power local electricity stations and meet extra demand for air-conditioning during the sweltering summer. The surge in June exports, as reported Thursday by the Riyadh-based Joint Organisations Data Initiative, suggests the extra output went beyond what was needed to cover this seasonal increase in domestic consumption.

    “The only way for Saudi Arabia to maintain oil exports and avoid loss of market share in the summer is to increase production,” said Anas Alhajji, an independent oil analyst based in Houston. “Without record high production, the Saudis would lose market share" so they will keep boosting output for at least the rest of this year, he said.

    Saudi Arabia supplied its overseas customers with 7.46 million barrels a day of crude and 1.37 million of refined petroleum products in June. The combined total is the most for that month since JODI started tracking flows in 2002. Output rose to 10.55 million barrels a day from 10.27 million in May, the data show.

    Market Battle

    Saudi Arabia is engaged in a battle for market share with Iran and Russia and has cut prices to its customers in Asia. Iran is pushing for an increase in production following the loosening of international sanctions in January. Despite the growing competition, OPEC officials have hinted at a potential deal, including a production freeze, during the next meeting of the International Energy Forum in Algiers in late September.

    Brent crude, the international benchmark, has rallied above $50 a barrel on talk of a potential freeze, despite skepticism from several analysts after a similar proposal failed in April.

    “At this stage we view the mentions of a freeze as a diversion from a continued drive from Saudi Arabia to gain as much market share as it can," said Olivier Jakob, an analyst at consultants Petromatrix GmbH in Switzerland.

    Saudi crude and refined products exports were 450,000 barrels a day higher in June than in the same month of 2015 and up more than 1.1 million barrels a day from June 2014. Over the same period, Iran and Iraq have also boosted exports.

    Saudi Arabia told the Organization of Petroleum Exporting Countries last week that its production rose further in July, reaching an all-time high of 10.67 million barrels a day. Khalid al-Falih, the kingdom’s energy minister, last week said the country was boosting oil production not only to meet the surge in local consumption during the summer, but also "in part to meet higher demand" from overseas customers.

    "We still see strong demand for our crude in most parts of the world, especially as supply outside OPEC has been declining fast, supply outages increasing, and global demand still showing signs of strength," he told the Saudi Press Agency.

    Saudi Arabia’s crude oil exports in the first six months of 2016 averaged 7.52 million barrels a day, compared with 7.46 million barrels a day in the same period last year, JODI data show. Production for the period climbed to an average 10.29 million barrels a day from 10.14 million barrels a day.
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    The Saudis Did NOT See This Coming From US Oil

    The hottest oil play in the western world is the Delaware sub-basin of the Permian in SW Texas. Producers are seeing huge increases in flow rates as they figure out proper fracking techniques. Rates are doubling from 1500-3,000 boepd! And payout times for wells are now as low as seven months-at $45 oil.

    Nobody saw this coming-especially the Saudis.

    Junior producers especially need fast payout times on their wells so they can recycle that money back into another well. If they have longer than 12-15 month payouts, they really can't grow within cash flow, and end up diluting shareholders through debt and continued equity raises.

    In the heart of this Shale Revolution-Resolute Energy. I added it to the OGIB portfolio on July 12, and added 10,000 shares on Monday Aug. 8 at $7.32 and added another 1000 shares Monday Aug 16 at $16.27. Here is my original notice to subscribers:

    The stock of Resolute Energy (REN-NYSE) has doubled in three trading days, going from $2.80 - $6.07 on the strength of huge flow rates from its Permian Basin play.

    And it may double again as the market understands

    This is fortuitous, as I'm studying the juniors in the Permian right now. This is the low cost oil play in North America and Permian stocks are receiving the highest valuation.

    Resolute has just 15,000 bopd of production, and a whopping $490 million of long term debt-a Zombie Stock, like I wrote about last week with Athabasca Oil, Birchcliff Energy and PennWest Energy.

    Investors have forsaken these heavily indebted companies for good reason. But as Resolute Energy showed us this week, when a Zombie comes back to life it can be explosive for share prices.

    Now, I'm writing about this stock because I did buy 2000 shares at $5.60 today. It took me that long to notice the stock rocketing up, do the research, figure out what this thing could be worth & decide if I wanted to play or not-because this stock could still double from $6/share-IF oil holds up.

    Everything changed for Resolute with just one press release (July 8) proclaiming amazing drill results- but first let me give you some quick background on Resolute.

    Since the oil crash in 2014 Resolute has been selling off assets to try and stay alive. In 2015 the company sold three assets to bring down debt:

    March 2015 sold non-core Midland Basin assets for $42 million
    September 2015 sold its Powder River Basin assets for $55 million
    November 2015 sold the rest of its Midland Basin assets for $177 million

    Besides good drilling results, Resolute's most recent press release said it had sold some midstream assets and would be getting $32.5 million in cash ASAP. That hardly moves the needle on the company's $520 million of total long term debt.

    A Step Change In The Permian

    These recent drill results were awesome (don't worry, details are coming...) and this will significantly increase the amount of cash flow that Resolute can generate-and improve its net asset value.

    A company's total leverage is determined by how much debt it has relative to its cash flow. Just as shrinking debt reduces leverage, so does increasing cash flow.

    Resolute did this by getting a whole lot better at drilling wells into the Permian.

    Resolute's main remaining Permian acreage is located in Reeves County in the Delaware Basin. The primary formation that Resolute is chasing on this land is the Wolfcamp A.

    The last time that Resolute had released details on its Reeves county Permian production was on May 9, 2016. The company was then able to give IP30s on two recent 7,500 foot lateral wells-which came in at 1,552 boe/day and 1,475 boe/day.

    Friday's release on its most recent Permian wells blew the prior (good) wells completely out of the water.

    Resolute has now moved to 9,000 foot laterals and production rates are much higher. The initial production rates on these wells are hitting 3,000 boe/day with the IP30 rates expected to double those of the 7,000 foot laterals previously drilled.

    With these new data points on its wells and with results from competitors with offsetting acreage, Resolute has significantly updated its Wolfcamp A type curves.

    The 7,500 foot laterals are now expected to recovery 56% more oil and gas and the 10,000 foot laterals 51% more than previously believed. That is like night and day.

    In addition to getting 51% more oil, Resolute said they were able to lower cost 12-18%.

    Lower capex and increased flows puts the PV10 value of $10 million per well at these low oil prices. Wells costs on the longer laterals are $9.4 million and the shorter ones they're targeting $8.2 million. Ideally I want to see a PV10 that's 130-150% of the well cost, but that's...ok.

    Resolute has 22,420 gross / 12,940 net acres under lease in Reeves County where it believes it has identified 255 gross Wolfcamp A and Wolfcamp B locations to drill. The company has 80% of 2016 hedged at $80/b and 25% of 2017 production at $54/b.

    What is the stock worth? The secret here is that Resolute has only 15.5 million shares out. Callon has 118 million. At $6/share the Resolute market cap is $93 million. Add $490 million debt to get Enterprise Value (EV) of $583 million. Divide that by 15,000 boepd to get a per flowing barrel valuation of $38,866.67.

    Per flowing boe is the weakest valuation metric to use, but consider Callon paid $80,000 per flowing boe for its latest acquisition, you get a sense Resolute stock could still run up.

    If all the increase in EV to get to $80K/per flowing boe came from the stock -well, here's the stockbroker monkey math-15K x $80K=$1.2 billion - $490 million debt = $710 million market cap / 15.5 million shares = $45.8/share.

    That sounds ludicrous doesn't it? That math shows why per flowing boe is the weakest metric to use.

    But this is the Permian and there is a comparative bubble in the Permian. If someone paid $10/share for Resolute today, that's only $43K per flowing boe.

    That's hugely accretive to Callon or Diamondback (FANG-NYSE) or Matador (MTDR-NYSE)-why wouldn't they take it over now just as type curves and EURs are increased dramatically, reducing leverage-and before the Market really catches on.

    The Bonds Are Also Responding

    Stock market investors weren't the only ones cheering the news from Resolute. Bond investors also like what they see. Resolute bonds that were trading for not much more than twenty cents on the dollar just a couple of months ago are now over seventy cents.

    Another thing I have preached on and on about is...share counts matter. I LOVE finding low float companies with big revenues. I think it's incredible to find a 15000 boepd producer with only 15.5 million shares out. That is real leverage! That's why some monkey math takes this stock to $24-$42...of course commodity prices have to co-operate. But a low float stock in the highest value play in North America can be a lucrative and beautiful thing.

    The other thing I really liked about the stock was how well it traded today-in a straight line, not all over the map. Steady and real accumulation, not a flood of profit taking from daytraders throughout the day.

    The company should be able to use this news to almost get out of the woods and on the path to recovery. The value of its Permian acreage has permanently increased and will give the company several additional options to bring its balance sheet even more in line.
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    Argentina Reneges on Lower Oil Prices Promise

    The Argentine government has gone back on a promise to cut crude oil prices, after last week it emerged it had reached an unofficial agreement with oil producers and refiners to cut prices at the wellhead in order to trim the gap between local and international crude prices and make life a little bit easier for refiners. The cut would have been by 2 percent a month over the next three months.

    The oil industry got on board with the proposal, agreeing to put a ceiling on retail fuel prices in exchange. Prices at the pump have jumped 31 percent since the start of the year in Argentina, together with a 35-percent devaluation of the local currency. The devaluation followed the removal of capital controls, undertaken by the new government.

    As Omar Gutierrez, the governor of oil-rich Neuquen region, said following a meeting with stakeholders in the oil price issue, “The national government does not have in its agenda any type of decrease in the subsidy.”

    His words were echoed by Neuquen senator Guillermo Pereyra, who is also leader of the local oil workers’ union. Perreyra added that “A technical energy committee will be formed where the provincial government, producers, unions and the national government will participate.”

    Crude oil prices in Argentina are being held artificially at levels higher than those on international markets in a bid to stimulate the industry and avoid large-scale job losses. The subsidies also aim at controlling inflationary pressures that have seen Argentina record an inflation rate of 46 percent in the 12 months to July.

    As the deal fell through, local oil producers will continue to get US$67.50 for each barrel of Medanito crude they sell to local refineries and US$54.90 per barrel of the heavier Escalante blend. This is 10-12 percent lower than prices were in January, thanks to a cut the new government, which came into power last December, implemented.

    Opposition to the removal of subsidies was expected: communities in Argentina’s oil-rich regions depend on the royalties that international oil producers pay for the crude they pump there. This leaves refiners at a crossroads: if they can’t get oil cheaper, they would have to sell their products at higher rates, which excludes lowering prices at the pump.
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    PTT’s LNG imports to reach 5 million tons in 2017

    PTT of Thailand is set to import 5 million tons of liquefied natural gas in 2017, according to the company’s CEO Tevin Vongvanich.

    In comparison, PTT is expected to import around 3 million tons of LNG in 2015.

    Speaking at a news conference, Vongvanich noted that the company entered talks with a number of suppliers to work out long-term deals, Reuters reports. Among the suppliers are Shell and BP, and contract details are expected to be concluded in September.

    Vongvanich added that Thailand is at the last phase of gas production due to the decline in domestic resources, and the company’s investment budget, which has been set at around US$1.25 billion will focus on the infrastructure like LNG terminal and gas pipelines.

    Thailand’s energy minister Anantaporn Kanjanarat, was reported earlier in May as saying that PTT is aiming to invest about $28 million to increase the capacity of its Map Ta Phut LNG import terminal by 1.5 million tons of liquefied natural gas per year.

    With the expansion completion expected in 2019, the terminal’s capacity would reach 11.5 mtpa of LNG.
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    For Asian LPG buyers, it's an 'all-you-can-eat buffet'

    The acute state of oversupply in Asian LPG markets can be best described by the title of a 1966 song by The Beatles -- "Here, There and Everywhere."

    A steady influx of cargoes from the US, Iran's aggressive move to push cargoes at competitive prices, slower-than-expected demand growth in China on the back of a sluggish economy and Japan's inventory levels hovering at multi-year highs have all contributed to supply in Asia far outweighing demand, creating a glut not seen in recent years.

    "For a region that is structurally short of LPG and experiences the strongest demand growth globally, Asia is currently awash with LPG supplies," Andrew Echlin, global oil products analyst at Energy Aspects, wrote in a research report on LPG titled "Hero to Zero" published this month.

    Plentiful US exports, aided by VLGC rates falling to multi-year lows, have prompted gas carriers to put LPG into floating storage off Singapore. Energy Aspects said in the report that at least seven VLGCs were parked off the coast of Singapore, with some anchored for weeks.

    The precarious oversupply situation has pulled down prices sharply. The price of refrigerated propane on a CFR Japan basis first plunged to a record low of $271.50/mt on July 29, dragged down by a sluggish crude complex and chronic LPG oversupply. This was the lowest since Platts started publishing this assessment in October 2006.

    The first cycle propane price breached this level again on August 11. It has since rebounded and was assessed at $284.50/mt on August 15, underpinned by a firmer crude complex.

    In addition to bulging supplies and slower-than-expected Chinese demand growth, propane in Asia has come under significant downward pressure as third-quarter consumption is seasonally weak, in the absence of support from winter demand.


    Adding to the oversupply situation is fast rising exports from Iran, from where LPG exports grew by about 54% to 1.195 million mt in 2015 from 776,000 mt in 2014, data from Joint Organizations Data Initiative showed. Over January-May this year, exports totaled 459,000 mt.

    In addition, the US shipped more than 1 million mt of LPG to Asia in both June and July, well above the normal monthly volume of about 700,000 mt, Energy Aspects said.

    "The supplies are also arriving [in Asia] at a time when onshore inventories of LPG are at very high levels: inventories in Japan, for example, are the highest they've been since 2008 and were almost 11% higher year on year by the end of June. Inventories are also at multi-month highs in South Korea, Australia and Thailand," Energy Aspects said, describing the oversupply scenario in the region as "Asia's all-you-can-eat buffet."

    Sri Paravaikkarasu, head of downstream for Asia at Facts Global Energy, said that a few US LPG cargoes scheduled to arrive in Asia were facing the threat of being cancelled because of the lack of incremental demand.

    Chinese demand for LPG has also not grown as much as expected this year, due to sluggish macroeconomic conditions and the delayed commissioning of some downstream PDH plants. LPG supplies in the past one to two years have steadily outstripped demand growth.

    "China's LPG demand has not grown as quickly as some had earlier expected, mainly because new PDH capacity startups have not materialized," said Song Yen Ling, senior analyst at Platts China Oil Analytics.

    Apparent demand for LPG in China could grow at a similar pace in 2016 as 2015, when it expanded by 20.5%, according to Platts China Oil Analytics.


    High LPG inventories in Asian countries had caused domestic prices in China to fall to a level at which the residential and commercial sectors had incentive to switch away from LNG-derived natural gas, analysts said.

    "LNG substitution is likely already happening at refineries and petrochemical plants in Japan and South Korea, where access to storage makes switching a lot easier," Energy Aspects said. "LPG should also be attractive to Chinese buyers, although given the lack of heating demand at this time of year, switching volumes should be modest."

    Gordon Kwan, head of regional oil and gas research at Nomura, said naphtha continued to take a part of the demand away from LPG. With demand for naphtha for blending soft due to weak gasoline prices, a lot of the naphtha was being diverted to the petrochemical industry.

    "Until crude oil prices rise to about $60-$70/b, we might see that trend continuing," he said.

    Saudi Aramco lowering its August propane contract price by $10 to $285/mt and butane CP by $20 to $290/mt was expected to trigger an influx of cheap cargoes into the region.


    Looking ahead, buying interest could improve in Q4 on the back of the start-up of a new PDH plant in China, as well as better seasonal demand, sources said. "Everyone is piling their hopes on winter," said a Singapore-based source.

    China's Oriental Energy is due to bring online its 700,000-800,000 mt/year PDH plant in October. The company is expected to increase its LPG imports by one to two shipments of 44,000 mt/month from its current imports to feed this new plant, a source noted.

    The current low price and upcoming winter demand were also likely to spur the market higher from October levels, sources said.

    "We remain bearish on LPG prices relative to crude throughout the remainder of Q3, but see some upside to prices in Q4 ... as a result of higher crude prices, winter heating demand and the possibility that US supply will start to fall at around that time," Energy Aspects said.

    Some industry participants said the market had almost hit bottom. Chinese PDH plant operators, some of whom were ordered to stop production ahead of the G20 summit in Hangzhou, are expected to resume production and imports of LPG after the summit. The production stoppage is a move to curb pollution ahead of the summit over September 4-5.

    Historical data showed that outright prices of propane rose in Q4 compared with Q3 each year between 2012 and 2015, with the exception of 2014.

    Q4 usually receives a boost from winter demand for the heating fuel. In 2014 however, prices fell in Q4 due to Brent crude futures hitting 28-month lows and an abundance of cargoes arriving from the US, West Africa and Algeria, data from S&P Global Platts showed.

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    Iraq resumes pumping oil through Kurdish pipeline

    Iraq has resumed pumping oil from fields operated by state-run North Oil Company (NOC) via a Kurdish pipeline to Turkey, a spokesman for the oil ministry in Baghdad said on Thursday.

    About 70,000 barrels per day (bpd) are being pumped through the pipeline controlled by the Kurdish regional authorities, spokesman Asim Jihad told Reuters, giving no further details.

    Pumping stopped in March due to a dispute between the government in Baghdad and the Kurdistan Regional Government (KRG) over the control of Kurdish oil exports.

    The resumption of crude flows through the Kurdish pipeline should ease the financial burden on the Kurdish government that was hard hit by the collapse of oil prices two years ago.

    Kurdish officials in February warned that the economic crisis could increase desertions from their Peshmerga fighters that battling Islamic State group which controls vast swathes of territory just west of their region.

    The new oil minister in Baghdad, Jabar Ali al-Luaibi, expressed optimism on the day of his appointment on Monday that the problem with the Kurds could be resolved.

    Kurdish forces took control of the long-disputed Kirkuk and its oilfields in June 2014 after the Iraqi army's northern divisions disintegrated in the face of Islamic State's advance.

    The Peshmerga and the Iraqi army have taken back territory from the militants in northern Iraq and are preparing the final onslaught on their capital Mosul, with the backing of a U.S.-led international coalition. Iranian-backed Iraqi Shi'ite militias are also fighting Islamic State near the Kirkuk fields.

    Former oil minister Adel Abdul Mahdi in March demanded that the Kurds return to a previous oil agreement or sign a new agreement in order to resume pumping through their pipeline.

    The previous agreement provided for the KRG to transfer to Iraq's central state oil marketing company 550,000 bpd produced in their region, in return for a 17 percent share in the federal budget. The Kurds stopped oil transfers to the government last year, at which point they also stopped receiving federal funds.

    OPEC's second-largest crude producer after Saudi Arabia, Iraq produces 4.6 million bpd, of which about 500,000 bpd from the Kurdish region and the rest from the oil-rich south.

    In comments on Thursday, Luaibi said he would focus on increasing the nation's oil and natural gas output and also develop its refining capacity in order to cut its fuel imports bill, the ministry said in a statement.
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    Woodside, Santos profits slump, focus on cost cuts

    Weak oil and gas prices hammered half-year profits at Australia's Woodside Petroleum and Santos Ltd on Friday, but investors sent their shares higher as both companies reported progress on cost-cutting.

    Woodside, Australia's biggest independent oil and gas producer, reported a worse-than-expected 50 percent slump in first-half profit, but tweaked up its output forecast for 2016, thanks to a strong performance at its Pluto liquefied natural gas (LNG) project.

    "It's really about squeezing our existing assets," Chief Executive Peter Coleman said on a conference call.

    Woodside managed to cut its gas production costs by 41 percent in the June half from a year earlier.

    "Those reductions are impressive," Deutsche Bank analyst John Hirjee told Woodside executives on a conference call after its earnings.

    Woodside's net profit fell to $340 million for the six months to June from $678 million a year earlier, well below an average of six analysts' forecasts around $391 million.

    It announced an interim dividend of 34 cents, down from 66 cents a year ago, but said it expects to produce between 90 and 95 million barrels of oil equivalent (mmboe) in 2016, up from an earlier forecast of 86 to 93 mmboe.

    Despite the profit fall, Woodside's low debt means it is in a much stronger position than many peers in the battered oil industry. It has been able to snap up assets cheaply, including a recent agreement to buy a 35 percent stake in three potentially oil rich blocks off Senegal for $350 million from ConocoPhillips.

    Santos Ltd, in contrast, slid to a loss in the first half of 2016, and is scrambling to slash costs and debt.

    Santos reported a loss of $5 million before one-offs for the six months to June, down from an underlying profit of $25 million a year ago. Analysts forecasts were in a wide range, but most were expecting a bigger loss.

    At the bottom line, Santos slid to a net loss of $1.1 billion, after booking a huge writedown on its Gladstone LNG stake, which it flagged on Monday. The project has been squeezed by a weaker outlook for LNG, having to rely on gas from other companies to help feed the plant and higher costs for that gas.

    Santos cut net debt in the first half by $220 million to $4.5 billion from December last year.

    Chief Executive Kevin Gallagher, in the job since February, said on Friday the company was on track to slash costs to be breakeven at an oil price of $43.50 a barrel this year. That compares with current oil prices just over $50.

    Woodside shares jumped 3.3 percent, while Santos shares rose 0.8 percent. Both outpaced the broader market's gains.
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    Exxon, Chevron, Hess in Joint Bid for Mexican Oil

    Exxon Mobil Corp., Chevron Corp. and Hess Corp. have agreed to bid together for rights to drill for crude in Mexico’s deepwater oil areas, according to a person with direct knowledge of the plans.

    The three U.S.-based producers have reached a Joint Operating Agreement, which allows the consortium to bid to produce oil in the 10 areas up for auction on Dec. 5, according to the person, who asked not to be identified because the information isn’t public. A Joint Operating Agreement is a contract that establishes the role and obligation of each company in the accord, and designates the party that will act as the operator of a production area should it be awarded in the auction.

    Mexico hopes to raise $44 billion in its first-ever sale of deepwater drilling rights in the Gulf of Mexico, located in the Perdido area near the maritime border with the U.S. and in the southern Gulf’s Cuenca Salina. Seventy-six percent of the country’s prospective oil resources are located offshore in deep waters, according to Energy Minister Pedro Joaquin Coldwell.

    The country approved final legislation in 2014 to allow foreign crude producers to operate in Mexico for the first time since 1938, in an effort to reverse an 11-year decline in production. The Dec. 5 auction has been lauded by the government as the most likely to attract large foreign oil operators that possess the expertise and capital to produce crude miles below the surface of the Gulf, which Pemex has been unable to exploit because it lacks the technology to do so.

    All of the 26 companies that qualified to bid in the auction, including Royal Dutch Shell Plc, Statoil ASA, and BP Plc, are expected to sign similar agreements because the government’s capital requirements for bidding are considered too large for individual producers to do so alone. Petroleos Mexicanos, the country’s state-owned oil company, announced in May that they were in talks with Exxon, Chevron and Total SA to sign agreements of mutual interest to consider the possibility of bidding together in the deepwater round.

    A Joint Operating Agreement can be dissolved if one of the companies withdraws its intention to participate in the contract, and the companies may opt not to bid even if the consortium is still in place.

    A Chevron spokesperson said that the company could not comment on “speculation.” Hess spokesmen didn’t immediately respond to calls and e-mails after normal business hours. Exxon would not comment on the proceedings, according to a press official at the company’s Mexico offices.
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    Pemex Woes Snowball as Cash Crunch Deepens Production Plunge

    Petroleos Mexicanos’ deteriorating finances are poised to get much worse, signaling no end in sight to years of declining oil production.

    The company’s output may dwindle to about 1.6 million barrels a day by 2020, less than half its 2004 peak, because it lacks the technology and funds to revamp aging fields, Morgan Stanley analysts led by Martijn Rats said in a July 24 report obtained by Bloomberg. Pemex has had cash flow shortfalls for the past three years, and this year the gap will almost double to a record $22 billion, from $13 billion in 2015, according to data and estimates compiled by Bloomberg.

    Once a bigger supplier to the U.S. than Saudi Arabia, Mexico’s weight has waned as the shale boom reduced American imports and the oil crash dealt a blow to hopes of luring billions in foreign investment. The country is now stuck in a vicious cycle where declining revenues from its traditional cash cow have led the government to slash Pemex’s budget, reducing further its ability to reverse the fall-off. Given insufficient liquidity and investment, Pemex will continue to shrink as it fails to restore output in areas where it lacks technical expertise, the Morgan Stanley analysts said.

    “We expect some mind-the-gap issues, the private sector being hesitant in terms of long-term commitment in Mexico,” the analysts said. “Lower oil prices have exposed important shortfalls that will need to be addressed over the coming years.”

    ‘Reform 2.0’

    The Morgan Stanley output estimate for 2020 would represent a decrease of about 700,000 barrels a day from current levels. The continued output declines have exposed flaws in the fiscal framework of the country’s 2014 regulatory overhaul that ended decades of state monopoly to seek much-needed foreign investment, according to the report. Those flaws are likely to require modification or an "energy reform 2.0," the analysts said.

    The investment bank expects “a revised energy reform to be on the agenda for the next administration beyond 2018," requiring provisional measures such as additional capital injections from the finance ministry.

    On May 15, the Finance Ministry assumed 184.2 billion pesos ($10 billion) of Pemex pension liabilities and transferred 47 billion pesos in bonds known as Bondes D to the company in an effort to boost its liquidity. The government also gave Pemex a capital injection of 73.5 billion pesos to pay off outstanding debts to oil service providers and absorb some of the company’s pension liabilities in April.

    The cash flow shortfalls, which mean the company is spending more than it earns from operations, will further complicate efforts by Chief Executive Officer Jose Antonio Gonzalez to seek joint ventures, stabilize production and improve ailing refineries. The company’s total debt has ballooned to almost $100 billion, and it may lose its investment-grade rating from Moody’s Investors Service, which has put it on a negative watch for a possible downgrade. Pemex has also had to weather cuts of 162 billion pesos from its budget in the past two years amid the oil market rout. It’s output is set to decline for a 12th straight year.

    Tax Burden

    “The sharp decline in oil prices that began in late 2014 has had a negative impact on our ability to generate positive cash flows,” the company said in a May filing. A “heavy tax burden” limits Pemex’s ability to fund capital expenditures and the company “will need to raise significant amounts of financing from a broad range of funding sources,” according to the filing.

    Pemex forecasts production to fall to about 2.1 million barrels a day this year, which the company aims to stabilize and slowly increase in the following years, according to an e-mailed response to questions.

    Pemex’s cash gap contrasts with positive projections for Russia’s Rosneft PJSC and Colombia’s Ecopetrol SA and far exceeds an estimated $1.4 billion cash flow shortfall expected for Petroleo Brasileiro SA and the $1 billion dollar deficit for Argentina’s YPF SA, according to analysts’ estimates compiled by Bloomberg.

    "There is little chance that Pemex will be able to slow the decline of production in the short term," George Baker, an analyst and publisher of Mexico Energy Intelligence, said in a phone interview. "There are opportunities to increase production, but there isn’t the money to do it."

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    Oil Debt Woes Reach Malaysia as Offshore Rig Bonds in Distress

    Bonds of a Malaysian offshore oil rig contractor have dropped to distressed levels, the latest sign that crude’s rebound this year hasn’t been enough to stave off pain in an industry beset by prices still about half their decade average.

    Perisai Petroleum Teknologi Bhd, which contracts out drilling rigs and charters vessels for towing equipment, said on Thursday it will start discussions with holders of its Singapore dollar notes, without providing further details. Its S$125 million securities due Oct. 3 have dropped 17 cents this month to a record low 60 cents, according to prices from DBS Group Holdings Ltd.

    Smaller Southeast Asian firms in the oil and gas industry are struggling along with global peers after a 49 percent collapse in oil prices in the past two years leaves them strapped for cash to pay off debt. In Singapore, Swiber Holdings Ltd. was placed under interim judicial management earlier this month and Kris Energy Ltd. said on Sunday it is exploring asset sales and refinancing as its debt covenants may come under stress.

    Perisai had 36 million ringgit ($9 million) of cash and bank balances as of March 31, according to company results.
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    The 100,000-Barrel Oil Output Increase That Didn’t Really Happen

    U.S. crude oil production is holding up better than the government previously thought.

    The output estimate jumped by 152,000 barrels a day for last week, the biggest increase since May 2015, according to the Energy Information Administration. Production didn’t actually increase by that amount but was modified to incorporate a “re-benchmarking” versus the agency’s Petroleum Supply Monthly, according to Jonathan Cogan, an EIA spokesman.

    The weekly data could also be adjusted after the release of the agency’s monthly Short-Term Energy Outlook. The next release is scheduled for Sept. 7, according to the EIA website.

    "The weekly data is based on models, with the exception of Alaska,” Cogan said. “When the monthly data or Short Term Energy Outlook differ from the weekly data, we re-benchmark”

    Alaskan crude production rose by 52,000 barrels a day to 477,000 barrels in the week ended Aug. 12, the EIA said. Alaskan output has been erratic week to week the last two months amid maintenance work.

    "I would caution anyone who takes the production number from one of our monthly reports and takes it as the beginning of a trend, and that’s certainly the case with the weeklies," Cogan said.
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    Continental Resources Announces $222 Million Sale Of Non-Strategic Assets In North Dakota And Montana

    Continental announced today that it has signed a definitive purchase and sale agreement with an undisclosed buyer to sell non-strategic properties inNorth Dakota and Montana for $222 million. The sale includes 68,000 net acres of leasehold primarily in western Williams County, North Dakota, and 12,000 net acres of leasehold in Roosevelt County, Montana. The sale also includes net production of approximately 2,800 barrels of oil equivalent (Boe) per day. The agreement provides for customary closing conditions and adjustments.

    "This is our third sale of non-strategic assets this year, with total expected proceeds of more than $600 million. We plan to apply proceeds to reduce debt and strengthen our balance sheet," said Harold Hamm, Chairman and Chief Executive Officer.

    In May 2016, the Company announced the sale of approximately 132,000 net acres of leasehold in theWashakie Basin in Wyoming for $110 million. On August 3, 2016, Continental announced it had signed a definitive purchase and sale agreement with an undisclosed buyer to sell approximately 29,500 net acres of non-strategic leasehold in the eastern SCOOP play in Oklahoma for $281 million.

    "Our guidance for the year has not changed. The combination of Continental's high quality drilling inventory, strong balance sheet and $560 million investment in drilled but uncompleted wells (DUCs) provides the Company with a robust platform for high-value future growth," Mr. Hamm said. The $560 million investment includes both operated and non-operated DUCs, approximately 80% of which are inNorth Dakota.

    Continental currently has approximately ­­­215 gross operated DUCs in inventory, of which approximately 165 are in the Bakken. The Company expects the total to grow to approximately 240 gross operated DUCs at year-end 2016, with approximately 190 in the Bakken. The Company said its Bakken DUCs have an average estimated ultimate recovery (EUR) of 850,000 Boe per well and can be completed at an average cost of between $3.0 million to $3.5 million per well.
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    Lawyer accused of fraud by U.S. in BP oil spill case is acquitted

    A prominent Texas lawyer was acquitted on Thursday of charges he made up thousands of fake clients to sue BP Plc for damages that the oil company caused in the 2010 Gulf of Mexico spill, court records show.

    Mikal Watts was among five defendants found not guilty by a Mississippi federal jury of charges related to an alleged scheme to defraud a program set up by BP to compensate people who suffered economic losses from the spill. Two other defendants were found guilty.

    The U.S. Department of Justice had accused the defendants of submitting claims on behalf of more than 40,000 people who had not agreed to be represented by Watts' firm, or else were identified with stolen or bogus Social Security numbers and other personal information.

    According to the indictment, one alleged victim, named Lucy Lu, who supposedly was a deckhand on a commercial seafood vessel, was actually a dog.

    The convicted defendants were Gregory Warren and Thi Houng "Kristy" Le, who prosecutors said helped collect names and information.

    Also acquitted were Watts' brother David Watts and Wynter Lee, who both worked for Mikal Watts' San Antonio law firm, and field representatives Hector Eloy Guerra and Thi Hoang "Abbie" Nguyen, who was Le's sister-in-law.

    The Justice Department did not immediately respond to requests for comment. Mikal Watts, who represented himself at trial, and lawyers for Warren and Le did not immediately respond to a request for comment.
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    Alternative Energy

    Demand for renewables helps Vestas breeze past forecasts

    Wind turbine maker Vestas posted much higher than expected second-quarter results and lifted its 2016 revenue and profitability forecasts, showing it can exploit growing demand for renewable energy.

    Wind turbine makers are benefiting from a new focus on renewables, encouraged by the Paris global climate summit last year and the extension of a key U.S. tax credit.

    Vestas faces tougher competition from a planned merger of Gamesa and Siemens Wind Power, while China's Xinjiang Goldwind Science & Technology Co Ltd is another rival for market leadership.

    Vestas shares surged as much as 12 percent after second-quarter operating profit before special items increased 175 percent to 399 million euros ($451.4 million), more than double a forecast for 190 million in a Reuters poll of analysts.

    "Volume had a big impact in the quarter as well as a very good execution," Chief Executive Anders Runevad told Reuters, citing high levels of activity and solid margins on projects as primary drivers behind the 46 percent revenue growth.

    "I think we have a shown a good track-record of scaling up production and we have a flexible production set-up," Runevad told investors. He said turbine blades were the most critical point in production due to needing the most capital.

    Vestas derived nearly 27 percent of its quarterly order intake from the United States, showing the upturn in the American wind power business since the country extended its Production Tax Credit (PTC) last December.

    "We are very happy with the market share gained in the U.S. and we see it as a stable market midterm," Runevad told Reuters.


    On the backdrop of its strongest second-quarter results, the company upgraded its 2016 revenue forecast to at least 9.5 billion euros from a previous minimum of 9.0 billion. It also lifted its earnings before interest and tax (EBIT) margin to a minimum 12.5 percent from a previous minimum 11.0 percent.

    After posting a record high order intake in the last quarter, Vestas' capacity delivery rose 56 percent this quarter amounting to a total of 2,491 MW, testing its production limits.

    "It doesn't worry the investors, because Vestas has "delivered the goods" through so many quarters. They have an organization which works," said Sydbank chief analyst Jacob Pedersen. Ahead of the report Sydbank had a "Buy" recommendation on the share.

    The shares were also supported by the company launching a share buy-back programme of 400 million euros ($453 million). The company said its dividend policy would not be affected by the buy-back programme and would remain at 25-30 percent of the net result of the year.

    Shares traded 9 percent higher at 531.5 Danish crowns by 1020 GMT. It has performed very strongly since it bottomed out in 23.25 crowns in November 2012 but remains a distance from its all-time high of 700 crowns reached in June 2008.

    The industry has enjoyed a turnaround after overcapacity and the withdrawal of some government subsidies during the global economic downturn.

    Britain on Tuesday approved plans to expand an offshore wind farm project that could ultimately have more than 600 turbines spread across an area of the North Sea more than twice the size of London.

    Vestas ousted its CEO Ditlev Engel three years ago after a string of profit warnings, slashed its workforce and shut down some facilities. Engel was replaced by Anders Runevad who made turbines more price competitive.
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    EPA has not completed required review of biofuel mandate: report

    The U.S. Environmental Protection Agency has not complied with federal requirements to study the effects of the nation's biofuel use mandate, an agency watchdog said on Thursday.

    EPA's Inspector General concluded that the agency has not issued a report to Congress on the environmental impacts of the Renewable Fuel Standard (RFS) since 2011, even though federal law requires that the agency provide a report every three years.

    The RFS, which is administered by EPA, sets the amounts of biofuels, such as ethanol, that must be blended into U.S. gasoline and diesel supplies annually.

    The IG report also said the agency has not evaluated whether the program is causing any harm to air quality and it has no formal process to initiate an update of its data on the life cycle greenhouse gas emissions of biofuels.

    "Not having required reporting and studies impedes the EPA's ability to identify, consider, mitigate and make policymakers aware of any adverse impacts of renewable fuels," the report said.

    EPA said it mostly agreed with the report's findings. The agency said it has "agreed to a set of corrective actions and timelines" to address the report's conclusions.

    The agency estimated that it would complete a report on the impact of the biofuel mandate by the end of 2017.

    The renewable fuel program has faced intense opposition in recent years from oil companies, who argue that the program places undue financial burdens on refiners.

    A spokesman for the American Petroleum Institute said the oil and gas trade group is still reviewing the IG report.

    Some environmental groups have also questioned whether EPA has properly evaluated the life cycle greenhouse gas emissions of corn ethanol to calculate its global warming potential. They say land-use change associated with its production outweighs the environmental benefits of replacing gasoline.

    But, biofuel backers have strongly pushed back against these claims.

    "We are confident that once EPA conducts these required studies, they will show that biofuels like ethanol are significantly reducing greenhouse gas emissions, even above the threshold reductions," said Renewable Fuels Association President Bob Dinneen in a statement.
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    Nuclear developers have big plans for pint-sized power plants in UK

    A range of mini-nuclear power plants could help solve Britain's looming power crunch, rather than the $24 billion Hinkley project snarled up in delays, companies developing the technology say.

    So-called small modular reactors (SMRs) use existing or new nuclear technology scaled down to a fraction of the size of larger plants and would be able to produce around a tenth of the electricity created by large-scale projects, such as Hinkley.

    The mini plants, still under development, would be made in factories, with parts small enough to be transported on trucks and barges to sites where they could be assembled in around six to 12 months, up to a tenth of the time it takes to build some larger plants.

    "The real promise of SMRs is their modularization. You can assemble them in a factory with an explicable design meaning consistent standards and predicable costs and delivery timescale," said Anurag Gupta, director and global lead for power infrastructure at consultancy KPMG.

    In a nuclear power plant, heat is created when uranium atoms split. Different reactor designs use this heat in different ways to raise the temperature of water and create steam, which then powers turbines to produce electricity.

    Manufacturing advancements mean SMR developers are only a few years from being able to replicate this technology on a smaller scale, and plants could be ready for deployment by the mid-2020s.

    "From a technical perspective there is no reason why you wouldn't be able to make a smaller version of an already commercially viable nuclear technology such as PWR (pressurized water reactor)," Mike Tynan, director of Britain's Nuclear Advanced Manufacturing Research Center (NAMRC), said.

    There are already more than 100 nuclear plants using PWR technology in operation across the globe.

    NuScale, majority owned by U.S. Fluor Corp, is developing 50 megawatt (MW) SMRs using PWRs which could be deployed at a site hosting up to 12 units generating a total of 600 MW. The 50 MW units would be 65 feet (20 meters) tall, roughly the length of two busses, and nine feet in diameter.

    Rolls-Royce, which already makes components for PWR nuclear submarines, is part of a consortium developing a 220 MW SMR unit which could be doubled for a larger-scale project.

    Rolls-Royce Chief Scientific Officer Paul Stein said the first 440 MW power plant would cost around 1.75 billion pounds ($2.3 billion) but costs would likely fall once production is ramped up.

    "One of the advantages of the SMRs is that they cost a lot less (than large nuclear plants), and it is an easier case to present to private investors," Stein said.


    Critics, however, say there is no guarantee that SMR developers will be able to cut costs enough to make the plants viable.

    "SMR vendors say factory production will save a lot of money, but it will take a long time and a lot of units to achieve what they are calling economies of mass production," said Edwin Lyman, nuclear expert at the U.S.-based Union of Concerned Scientists (UCS).

    "Factory manufacture is not a panacea. Just because you are manufacturing in a factory, it doesn't mean you are certain to solve problems of cost overruns," he said.

    Costs are a sensitive issue and could have played a part in Britain's decision to review the $24 billion project to build the two new Hinkley Point nuclear reactors led by French utility EDF and Chinese partner China General Nuclear.

    Almost half of Britain's electricity capacity is expected to close by 2030, as older, large nuclear plants come to the end of their operational lives and coal plants shut as part of the country's efforts to meet its climate goals.

    The two new reactors at Hinkley Point are supposed to provide around 7 percent of Britain's electricity, helping to fill that supply gap. Nuclear developers are confident SMRs could be up and running by the late 2020s, in time to help bridge the looming electricity supply shortfall.

    A study carried out by the National Nuclear Laboratory, a government owned and operated advisory body, said Britain could host up to 7 gigawatts (GW) of SMR capacity by 2035, more than double the capacity of Hinkley.

    But anti-nuclear green groups such as Greenpeace argue that with advances in renewable technology, such as offshore wind, Britain may not need any new nuclear plants.

    This week Britain approved Dong Energy's plans to expand an offshore wind farm project that could ultimately span an area of the North Sea more than twice the size of London and produce up to 4 GW of electricity, more than Hinkley Point.

    Nuclear power defenders say the intermittent nature of renewable electricity production and lack of grid-scale storage mean nuclear plants are needed to ensure continuous supply of power if the country is to meet its emission reduction targets.

    "Working alongside renewables, nuclear provides the reliable low carbon energy required to balance variable wind and solar generation," said Tom Greatrex, chief executive of the Nuclear Industry Association.


    NuScale's UK and Europe Managing Director Tom Mundy said providing NuScale gets the necessary regulator approvals and partners its first SMRs could be running in Britain by 2026.

    All nuclear power projects need approval from Britain's Office for Nuclear Regulation (ONR), and its Generic Design Assessment (GDA), which tests the safety and design of new reactors and can take around two years to complete.

    The GDA is seen as the "gold standard around the world", KPMG's Gupta said.

    Nuclear power plants in Britain can also only be built on sites licensed by the government, and the first SMRs could be set up at existing nuclear plant sites or at licensed sites where older plants are being decommissioned.

    Britain said this year SMRs could play an important part in the country's energy future, and committed 250 million pounds to research, including a competition to identify the best-value SMR design for the country.

    NuScale, Rolls Royce and Toshiba Corp's Westinghouse were among 33 companies the government has identified as eligible for the competition. The Department for Business, Energy & Industrial Strategy has given no further details and had no further comment on SMRs.
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    Russia’s fertilizer tycoon says potash glut may last a decade

    Russian billionaire Andrey Melnichenko, whose fertilizer company is investing more than $6-billion in potash mining, said it could take at least a decade for the potash market to work off the excess because of the past “disruptive” actions by the largest sellers.

    Potash prices have collapsed since 2013, when a trade pact between Russian and Belarusian producers, which helped prop up the market, fell apart. At the time, Canpotex Ltd., a Canadian potash exporter, and Belarusian Potash Co. controlled about 80% of global exports.

    Their tactics kept prices at high levels, which encouraged new investment from other companies and led to excess supply, said Melnichenko, who owns EuroChem Group AG and isRussia’s eighth-richest man, according to estimates from theBloomberg Billionaires Index. Potash fell to a decade low of about $220 to $230 a ton this year on continued oversupply. In 2008, it reached above $900 a ton.

    Potash Slump

    EuroChem expects to weather the downturn because its potash production, due to start next year, will pay some of the lowest costs in the industry and the company has diversified into other products and more complex services, Melnichenko said.

    “Producing only commodity fertilizers and selling it to a trader doesn’t work anymore,” Melnichenko said in an interview at Bloomberg’s offices in London. “The market is becoming more sophisticated. Farmers are learning to use data and analyze it. That’s why we should offer something smarter.”

    The company sees opportunity to expand in China by selling specialty crop nutrients, which help increase crop yields and quality. It’s planning to begin construction of a new plant inKazakhstan by the start of 2018 to produce specialty fertilizer based on phosphate and potash.

    Field Experiments

    To expand in advanced products, EuroChem is doing hundreds of field experiments per year and widens distribution, Melnichenko said.

    “To be in this business, you have to understand the client’s needs and you can’t manage this process if you do not haveretail and do not have distribution," he said.

    The company will continue making commodity products, such as phosphate, potash and nitrogen, to supply the retailnetwork, he said.

    EuroChem is building two new potash mines in Russia’sVolgograd and Perm regions that jointly will be able to produce more than eight-million tons a year. At first, the mines will be used to create the company’s own complex fertilizers, but it may start supplying other clients after 2020, Melnichenko said.

    Other companies in the industry are considering scaling back. BHP Billiton Ltd. may end up mothballing its Canadian potash project by the end of this decade after spending $2.6-billion, CEO Andrew Mackenzie said this week.

    In fertilizers, the situation may stay tough, Melnichenko said, adding that it’s possible nitrogen prices haven’t reached the bottom yet and the phosphates market is still suffering from oversupply. Because of its low costs and business model that encompasses mining, retail selling and a variety of products, EuroChem still generates profits even in a depressed market, he said.
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    Base Metals

    Chile economy shrinks in second quarter from first as mining falls

    Chile's gross domestic product shrunk by 0.4% in the second quarter of 2016 from the first quarter, asmining in the world's biggest copper exporter contracted, the central bank said on Thursday.

    The fall was the first contraction from one quarter to the next since early 2010, when Chile was hit by a devastating earthquake. The setback followed higher-than-expected 1.3% growth in the first quarter.

    Cooling demand in China and new supply have weighed on the copper price, dragging investment in Chile downwards and leading companies to cut jobs and output.

    Copper mining contracted 6% in the April to June quarter, the bank said, as lower ore grades in Chile's mines and unfavourable weather also took their toll.

    However, domestic consumption and government spending have helped outweigh the mining slide, and the economy is still growing in annual terms. Compared with a year earlier, second-quarter growth was 1.5%.

    That topped the 1.1% expansion forecast in a Reuters poll but was below a revised 2.2% expansion in the prior quarter.

    The bank also revised 2015 growth to 2.3% from 2.1% previously, due to the inclusion of electronic tax receipts. It has forecast growth of between 1.25% and 2% this year.

    Attached Files
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    Copper - a tale of two South American producers

    The London Metal Exchange (LME) three-month price is this morning trading around $4,840 per tonne, translating to a year-to-date gain of just under five percent.

    And there are plenty of analysts expecting even lower copper prices over the coming months.

    Investors are shunning copper, preferring hotter metallic markets such as zinc, currently showing a year-to-date gain of almost 47 percent.

    But then zinc has an enticing bull narrative of a pending supply crunch, while copper is struggling to absorb a wave of new mine production, much of it coming from projects that were planned years ago when the price was double current levels and the market was characterized by structural supply deficit.

    Famine has turned to feast in the intervening years, extra supply hitting the market just when demand, particularly Chinese demand, is stuttering. Yet another commodities text-book case of bad timing to file alongside iron ore and nickel.

    But what's unusual about this particular copper production surge is where's it's coming from.

    It's coming from South America, but not Chile, the country most synonymous with copper production, but rather its northern neighbor, Peru.


    Peruvian production of mined copper jumped by a staggering 51.5 percent to 1.12 million tonnes in the first half of this year. National output was 741,000 tonnes in the year-earlier period, according to Peru's ministry of energy and mines.

    The core drivers of this surge are two new mines, Las Bambas and Constancia, and the expansion of another one, Cerro Verde.

    Las Bambas, majority owned and operated by MMG, the listed arm of China Minmetals, is the single biggest contributor to rising Peruvian copper output this year.

    The mine only came into production in the fourth quarter of last year but has ramped up extremely quickly to the point that MMG could declare commercial production at the start of July.

    First-half production was 118,600 tonnes of contained copper, compared with zero this time last year.

    Guidance is for full-year production of 250,000-300,000 tonnes and nameplate capacity of 400,000 tonnes next year.

    Constancia, owned by Canada's Hudbay Minerals, is a smaller project and has been ramping up longer since starting production in early 2015.

    But first-half 2016 output of 63,800 tonnes was more than double the 30,700 tonnes generated in the year-earlier period.

    The focus now, according to Hudbay, is on "optimization of plant performance" with the mine expected to produce 110,000-130,000 tonnes this year, which is actually above the anticipated life-of-mine average performance rate.

    Cerro Verde, majority owned by Freeport McMoRan, is now reaping the benefits of a major upgrade that was completed late last year. The expansion will deliver an extra 600 million lb (around 270,000 tonnes) of annual capacity.

    First-half production jumped to 260,000 tonnes from 98,700 tonnes in January-June 2015.

    Significant tail winds to Peruvian production are also coming from Glencore's Antapaccay mine and the joint-venture Antamina mine.

    Production from Antapaccay rose by 22 percent year-on-year to 106,700 tonnes thanks to the restart of a concentration unit in May last year.

    A 31 percent output hike at Antamina, meanwhile, reflects sequencing between copper-rich and zinc-rich parts of this unusual bimetallic ore body.


    It's all a far cry from the trials and tribulations being experienced by South American neighbor Chile.

    Chile is still by some margin the world's largest copper producing nation but output in the first half of this year fell by 5.6 percent to 2.78 million tonnes.

    National production in June itself fell even harder by 7.7 percent year-on-year.

    In part this year's falling output is cyclical, resulting from grade variability at Escondida, the world's largest copper mine.

    Average grades at Escondida slumped to 0.94 percent in the second quarter of this year from 1.32 percent in the year-earlier period, according to operator and majority owner BHP Billiton.

    Copper production, a mix of concentrates and leached cathode, accordingly slid to 267,000 tonnes from 338,000.

    Escondida's output will recover next year thanks to a $180-million expansion project that is targeted to deliver additional capacity of around 200,000 tonnes per year.

    However, Chile's copper woes are also part structural with state operator Codelco in particular having to invest heavily just to maintain historic output levels as it seeks to overcome a long-term decline in ore grades.

    Such investment, of course, has become much harder to obtain in the current weak pricing environment and the company has warned that there will be an incremental impact on production over the coming years.

    There are new mines ramping up in Chile such as Antofagasta's Antucoya, which is expected to hit capacity of 85,000 tonnes per year in the second half of this year.

    But Antucoya in part is only compensating for the company's exhausted Michilla mine, which was put on indefinite care and maintenance last year.

    Others such as Sierra Gorda, owned by Poland's KGHM, and Caserones, owned by a consortium of Japanese entities, are struggling to master complex ore bodies and resulting high production costs.


    These starkly differing South American production trends have some way to run yet.

    There's a bit more to come from Las Bambas and Cerro Verde in Peru before they hit full design capacity.

    Chilean production, meanwhile, has been trending lower at an accelerating pace this year and Codelco, the country's top producer, has switched its attention to cutting costs with serious implications for medium-term production prospects.

    Further ahead, though, both countries and indeed just about every other copper producing are going to be hit by the current low price environment.

    Capital expenditure on new projects has been sliding for the last four years and it is becoming ever harder to find what the industry terms "world-class" deposits, witness the multiple teething difficulties of some of the latest generation of mines.

    This withering of the future project pipeline is the light at the end of the tunnel for embattled producers.

    But right now it is still a distant light as the market soaks up the Peruvian mine surge.
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    Kaz Minerals says can maintain profit in weak copper market

    Kazakhstan copper firm Kaz Minerals said it can carry on making profits even if commodity markets stay weak as it steps up low-cost output after achieving a 30 percent increase in core profits in the first half of the year.

    Analysts said Thursday's results were at the top end of the broad consensus, but were cautious about copper demand and said Kaz Minerals' debt levels could become a problem if commodity markets take another dive.

    The company's shares rose more than 12 percent, while the wider sector was 2 percent higher by 0845 GMT.

    Benchmark copper prices are struggling to sustain gains this year as economic data has raised new doubts about the strength of demand from China, which accounts for nearly half of global consumption.

    In a conference call with reporters, Chief Executive Oleg Novachuk declined to be drawn on the outlook for the copper market but said the London-listed company had conservative price assumptions and its low costs would protect its revenues.

    Kaz Minerals has two major copper projects under construction, which it describes as world-class open-pit mines -- cheaper than having to extract from deep underground.

    Bozshakol is on track to achieve commercial output in the second half, while Aktogay, the other, should start production in the second half of 2017 at a reduced budget of $2.2 billion, down $100 million from previous forecasts.

    Bozshakol's gross cash cost guidance for 2016 was cut to 140-160 U.S. cents per pound, while for the group it improved to 190 to 210 U.S. cents/pound from 200 to 220 cents/pound predicted previously.

    First-half core profit (EBITDA) rose to $115 million from $88 million a year ago.

    Kaz Minerals narrowed its 2016 copper output guidance to 135,000 to 145,000 tonnes from previous guidance of 130,000 to 155,000 tonnes.

    The group's net debt at the end of June was $2.5 billion, Kaz Minerals said, adding all repayments to its Chinese lenders were being met on schedule.

    It said it planned to start talks with its lenders in the near future with a view to "putting in place arrangements that are appropriate to the business for 2017 and beyond".

    Jeremy Wrathall, analyst at Investec, said the debt level was "way out of proportion to market capitalisation".

    "If things get bad again, it would be a problem," he said.

    The company's market value is around 800 million pounds.
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    Indonesia's Medco to invest $500 mln to build copper smelter after Newmont deal

    Indonesian oil and gas producer PT Medco Energi Internasional Tbk plans to invest $500 million to build a copper smelter following its deal to buy control of Newmont Nusa Tenggara (NNT), its president commissioner told Reuters.

    The smelter, which will have an annual capacity of 500,000 tonnes, is expected to start operations in 2021, Muhammad Lutfi said in an interview. Part of the funds to build the smelter will come from bank loans, Lutfi said.

    A consortium consisting of oil and gas tycoon Arifin Panigoro, who founded Medco, and banker Agus Projosasmito announced in late June that it will spend $2.6 billion to buy 82.2 percent of NNT, which operates Indonesia's second-biggest copper and gold mine.

    The Indonesian group is buying 56 percent of NNT from U.S. miner Newmont Mining Corp and Japan's Sumitomo Corp and its partners. It will buy the remaining 26.2 percent from local companies.

    The Jakarta-listed Medco, which will own at least 50 percent of NNT, is targeting a 25 percent increase in copper concentrate production at the mine to 500,000 tonnes by 2019, Lutfi said.

    Copper and gold may contribute 30-50 percent to Medco's revenue in future as part of its diversification, Lutfi said, adding that the company is planning to sell its products mainly to the domestic automotive, electronics and cable industries.

    Oil and gas will nevertheless remain a core business for Medco, which is currently exploring the acquisition of offshore oil and gas blocks in Indonesia, Lutfi said.
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    China smelters face lowest fees in 4 years as zinc market tightens

    China's huge zinc smelting industry has slashed its fees for turning ore concentrates into refined metal by 20 percent as competition for dwindling global mine output heats up, industry sources said this week.

    The move could signal an impending squeeze in refined zinc supplies and a further run-up in prices that have already gained 40 percent this year, because smelters typically lower their treatment charges (TCs) to attract raw material when ore supplies decline.

    Spot treatment charges have slipped to $100-$110 a ton, down by about a fifth since February, four industry sources said, nearing a four-year low.

    The fall-off came after huge mines such as Century in Australia and Lisheen in Ireland ran dry. Global commodities giant Glencore and Belgium's Nyrstar also slashed mine output when zinc prices slumped to a 6-1/2-year-low in January due to slowing demand in China.

    "Even if we allow for a major correction in Q1 2017 triggered by Glencore/Nyrstar capacity restarts, we think a 680,000 ton (refined metal) deficit over (2017) will propel prices to an average of $3,900 a ton by Q4-17, on route towards record highs in 2018," ICBC Standard Bank said in a research note this week. That would equate to a 70 percent rally from levels around $2,290 a ton now.

    The mine closures and output cuts have been exacerbated in recent months by a spree of smelter shutdowns by environmental inspectors in China.

    ICBC expects zinc prices to surge more than 20 percent by year-end to $2,750 a ton. The catalyst for the next leg up will be any signs of falling global stocks of the metal, such as rising premiums paid on top of market benchmarks for physical delivery.

    Traders in Asia said, though, that so far there is no issue finding metal, with China zinc premiums wallowing around $115, the weakest in one year.

    That means the recent gains in zinc prices have come mostly on the prospect of smelters producing less and the expectation that no new zinc mines are starting up anytime soon.

    LME stocks surged by 21 percent to around 460,000 tonnes from seven-year lows in early June. But Shanghai inventories have dropped by a quarter to just shy of 200,000 tonnes, still more than double levels seen at the start of last year.


    With treatment fees so low, it is not clear how long smelters can hold out before having to cut output. Analysts estimate they hold some one to two months of concentrate supply and that fees can drop further, especially as mines in the north close ahead of winter.

    "That's when we'll really see the crunch start to hit," said a source at a global trade house in Shanghai.

    Already, environmental mine closures in China's Hunan province since the start of August come to some 150,000-200,000 tonnes of annual refined zinc supply, forcing local smelters in Hunan, to outsource for ore, a China-based fund source said.

    "The smelters should be losing money at these TC levels and should finally start cutting from here," a trader said.

    China's leading zinc smelters vowed in November to reduce 2016 production by 500,000 tonnes, equivalent to almost a tenth of their output. But a large scale cut has yet to appear, China state-backed researcher Antaike said.

    China produced some 6.15 million tonnes of refined zinc last year, although production growth has stalled this year. In July, its zinc output grew just 0.4 percent compared with a year ago to 506,000 tonnes.

    "Refineries are actively seeking for raw materials with the increasingly tight concentrate supply. In the second half, domestic (mine) supply will increase, but refining capacity will also grow, thus those refineries with poor raw material supply might be forced to cut output," Antaike said in a report.
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    Russian aluminium producer Rusal begins scandium oxide production

    Rusal has produced scandium oxide at a concentration exceeding 99% for the first time at its Urals smelter, the Russian aluminium producer said Thursday.

    The market price of the new product is up to $2,000/kg, Rusal said.

    The new production follows the installation and launch of a 96 kg/year pilot unit for the processing of scandium concentrate into scandium oxide, based on Rusal's carbonization technology for scandium extraction from red mud, which is a byproduct of alumina refining.

    Project investment has so far totalled around Rb64 million ($1 million), and work is in progress on the pilot unit to further improve the technology to reduce product costs, Rusal said.

    The scandium oxide produced will be used for the production of aluminium-scandium alloys at Rusal's smelters, the company said, noting that the use of scandium as a micro-alloying element improves the consumer properties of aluminium alloys, while producing its own raw materials for the production of alloys will allow Rusal to reduce costs associated with raw materials purchasing.

    Scandium has "vast potential" in the aerospace, transport and energy industries, with global consumption of scandium oxide currently estimated at 10-15 mt/year, said Victor Mann, director of Rusal's research and development, in a statement.

    "In this regard, Rusal has plans to develop a modular unit capable of increasing the capacity keeping up with market demand," Mann said. "The production will rely on the company's own raw material base and will fully meet demand not only in Russia, but globally."
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    Steel, Iron Ore and Coal

    India to tap into Russia’s undeveloped coal, iron ore deposits

    India plans to expand the scope of its current investments in the Russian commodity market by helping the European nation developed its large coal and iron ore reserves, as well as boosting Russia’s fertilizers sector, local media reported.

    During the 5th meeting of the India-Russia Working Group on Modernization and Industrial Cooperation, both sides also identified other fields for potential cooperation, including the modernization of steel manufacturing facilities in India and participation of Indian power equipment supplier in upgrading Russia’s power sector, Economic Timesreports.

    India has stepped up efforts this year to grab major stakes in Russian mining and energy companies.

    New Delhi has stepped up efforts this year to grab major stakes in Russian mining and energy companies. In March, a group of Indian state firms grabbed about 50% of a Siberian oil field run by Russia’s main crude producer, Rosneft.

    Three months later, India’s Oil and Natural Gas Corporation said it would allocate a total of $5 billion this year to speed up its projects in Russia, Sputnik Newsreported.

    India’s total investment in Russia's oil and gas sectors could reach $15 billion over the next four years, Minister of Industry and Commerce Nirmala Sitharaman said last month, RT reported.

    According to Sitharaman, New Delhi injected $8 billion into the Russian energy sector prior to 2015, while Moscow’s investments in India totalled $3 billion.

    Behind the transactions, there is India’s interest in securing supply of coal, liquefied natural gas (LNG), diamonds and fertilizers from Russia.
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    Indian utilities' April-July thermal coal imports down 17.5pct on year: CEA

    Indian utilities imported some 22.6 million tonens of thermal coal over April-July, down 17.5% from the year prior, showed the latest data from the Central Electricity Authority (CEA).

    Of this, some 7.6 million tonnes of thermal coal imported by 27 utilities were used for blending with Indian domestic coal, while around 15 million tonnes imported by 10 utilities were for plants depending on imported coal.

    A total of 16 utilities didn't import any coal during the same period, and data of two utilities was not yet available.

    Adani Power imported the highest volume at some 5.4 million tonnes over April-July, followed by Mundra ultra mega power plant under Tata Group of nearly 3 million tonnes, data showed.

    JSW Energy imported around 1.4 million tonnes, and state-run Tamil Nadu Generation and Distribution Co., Ltd (TANGEDCO) imported 1.2 million tonnes, CEA data showed.

    CEA has not assigned any import targets for utilities for the current fiscal year, as the supply of domestic coal from Coal India Limited (CIL) increased.

    However, they can import coal if they find imported material to be more economical than domestic coal, especially for coastal power plants, even though the government aims to halt coal imports within a couple of years.

    Indian utilities imported some 80.47 million tonnes of thermal coal in fiscal year 2015-16, down 11.8% on year, lower than the targeted 84 million tonnes.

    Of this, 36.98 million tonnes were imported for blending, while 43.49 million tonnes were imported for plants depending on imported coal.

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    Metallurgical coal poised for biggest weekly price surge since 2011 Queensland floods

    The seaborne premium hard coking coal market is poised to post its biggest weekly gain Friday since the 2011 floods in Queensland, Australia, as a supply shortage in China, the world's largest producer of the steelmaking raw material, prompts end-users to scramble for spot cargoes.

    Platts-assessed spot premium low-vol hard coking coal prices have risen $8.75/mt to date this week to $123.25/mt CFR China Thursday, already the largest weekly increase since February 2011, and to a price level not seen since September 18, 2014.

    Prices of prime hard coals from Australia have risen $8.75/mt to date this week, to be assessed at $117.25/mt Thursday.

    Logistics bottlenecks, including road repairs and slower rail haulage in China's coal producing hub of Shanxi, were responsible for the recent supply squeeze, according to industry insiders.

    As a result, end-users were this week seen scrambling for metallurgical coal cargoes from Australia, Canada and Indonesia, which were priced several dollars above domestic Chinese alternatives.
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    China Coal Energy July coal sales down 20.2pct on year

    China Coal Energy Co., Ltd, the listed arm of China National Coal Group, sold 10.92 million tonnes of commercial coal in July, sliding 20.2% year on year and 17.9% month on month, the company said in a statement.

    Of the sales, 6.63 million tonnes were self-produced commercial coal, dropping 7.7% from June.

    Analysts attributed the decline to the relatively high sales base in June, which climbed 22.1% month on month to 13.3 million tonnes. Meanwhile, the volume of outsourced coal slumped, due to a lack of supply as more coal was sold locally amid strong demand.

    In the first seven months of the year, the company sold 76.39 million tonnes of commercial coal, falling 1.8% from the year before.

    China Coal Energy posted a 25.7% year-on-year slump in its commercial coal production to 6.72 million tonnes in July, which, however, rose 2% from the previous month.

    The production during January-July reached 47.10 million tonnes, sliding 14.9% from the year prior.

    Thanks to the supply-side structural reform initiated by the central government, thermal coal supply has reduced notably, which also lent support to the rise of coal prices.

    The Fenwei CCI Thermal Index for domestic 5,500 Kcal/kg NAR coal traded at Qinhuangdao port was assessed at 481 yuan/t with VAT on August 17, FOB basis, up 61 yuan/t from a month ago, and up 116 yuan/t from the beginning of this year, showed data from China Coal Resource.

    In July, coal stocks at coastal power plants under the six major power producers dropped 3.9% from June to 11.78 million tonnes on average each day, while their daily coal consumption averaged 652,000 tonnes, gaining 9.6% on the month.

    With the ongoing overcapacity cut, supply of thermal coal is likely to remain tight in the coming months. And the price of 5,500 Kcal/kg NAR thermal coal may rise to above 500 yuan/t at northern ports before the end of 2016.
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    Russian steel firm Evraz's core profits drop 38 pct

    Evraz, one of Russia's largest steel producers, reported a 38 percent fall in first-half core earnings on Thursday, hit by weaker steel prices and missing market forecasts.

    The London-listed shares were down nearly 4 percent at 166.6 pence by 0800 GMT, making them the top midcap loser in the FTSE 250 Index , which was up 0.5 percent.

    Along with its Russian rivals the company, part-owned by Chelsea soccer club owner Roman Abramovich, has been hit by low steel prices and depressed demand which outweighed the benefits of a weaker rouble.

    Evraz said its earnings before interest, taxation, depreciation and amortisation (EBITDA) in the first six months of the year fell to $577 million from $932 million in the same period of 2015. Analysts polled by Reuters had on average expected a result of $593 million.

    Net profit fell to $7 million from $19 million in the same period last year, while revenue fell 28 percent to $3.5 billion.

    Evraz also said in a presentation it expected its capital spending this year would be in a range of $375-400 million, having previously said they would be less than $400 million.

    The company did not provide its financial results for the second quarter but said they were stronger than in the first quarter due to higher steel prices, the trend it expects to continue in the rest of 2016.

    "Global steel producers experienced a positive trend in pricing in the second quarter of 2016 driven by a combination of Chinese government investmentstimulus, low inventory levels and speculative activity on futures markets," it said.

    In the second half of the year, Evraz expects steel prices in the Russian domestic market to gradually increase to the average level of 2015 without, however, any significant improvements in domestic demand.

    In North America, where the Russian company has its own production, it said the market might be negatively affected by delays in approvals of large pipeline projects in the United States and Canada and by weak demand for rail track.

    EVRAZ North America's EBITDA fell by $10 million to $27 million in the first half.
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    China's key steel mills daily output up 4.8pct in early Aug

    Daily crude steel output of China's key steel mills climbed 4.8% from ten days ago to 1.7 million tonnes over August 1-10, according to data released by the China Iron and Steel Association (CISA).

    The increase, reversing three consecutive ten-day drops in July, indicated renewed production enthusiasm from steel mills with the price hike of steel products.

    The average daily crude steel output across the country was estimated at 2.23 million tonnes during the same period, up 3.39% from ten days ago, the CISA said.

    By August 10, stocks of steel products at key steel mills stood at 13.37 million tonnes, up 4.12% from ten days ago, the CISA data showed.

    Prices of China's six major steel products all posted rises in August 1-10, with rebar price up 2.8% from ten days ago to 2,459.2 yuan/t, data from the National Bureau of Statistics showed.

    Warming steel prices had watchdogs on alert for resurgence in production capacity as crude steel output increased 2.6% year on year to 66.81 million tonnes in July. Total crude steel output reached 466.52 million tonnes in January-July, down 0.5% on the year.

    The country's output of steel products rose 1.9% year on year to 657.05 million tonnes over January-July, of which 95.94 million tonnes were produced in July, up 4.9% year on year.

    In the first half of 2016, China reduced steel capacity by 13 million tonnes, about 30% of the planned cuts for the whole year, a figure in line with expectations, according to Feng Fei, vice minister of industry and information technology.

    The campaign apparently gathered momentum in July, when another 17% of the target was finished.

    In the first half this year, work focused on breaking down tasks, so that they could be allocated to provincial-level regions, and the formulation of supportive measures for steel capacity cuts, Feng said.

    In the second half, capacity cuts and supportive measures will gain speed, he said.

    Although four provinces have already met their annual goals, eight reported lukewarm progresses while ten have not taken any substantive measures, according to an inter-ministerial meeting held on August 4.

    The State Council guidelines, issued on February 4, dictated that steel production capacity must be reduced by 100-150 Mtpa over the next five years, with some 45 Mtpa cut in 2016.
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