Mark Latham Commodity Equity Intelligence Service

Monday 11th May 2015
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News and Views:


Saudi king declines to attend Obama’s Persian Gulf summit

Saudi Arabia said its new king won’t attend this week’s long-planned summit for Persian Gulf countries at the U.S. presidential retreat, in what may be a sign of frustration with Washington over its Iran policy.

Saudi King Salman Bin Abdul Aziz had been expected to attend the summit at Camp David in Maryland and meet with President Barack Obama on Wednesday for wide-ranging talks, White House spokesman Eric Schultz said at a press conference Friday.

Saudi Foreign Minister Adel bin Ahmed Al-Jubeir instead issued a statement Sunday saying the king won’t visit “due to the timing of the summit, the scheduled humanitarian cease-fire in Yemen and the opening of the King Salman Center for Humanitarian Aid.”

Salman’s absence could be seen as a snub to Obama’s administration, said Jon Alterman, director of the Middle East program at the Center for Strategic and International Studies in Washington. “The king’s decision suggests that, despite all of this, he thinks he has better things to do with his time,” Alterman said in an e-mail.

Salman instead will send Crown Prince Mohammed bin Naif, the deputy prime minister and interior minister, and with Deputy Crown Prince Mohammed bin Salman, the defense minister, according to the statement.

The White House learned of the decision Friday night and confirmed it on Saturday, said an administration official who offered a statement on condition of anonymity to discuss private conversations. The official denied the move was the result of any substantive issue.
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Russia and China deepen ties with new economic deals

Russia and China signed a $25 billion deal to boost Chinese lending to Russian firms and a host of other accords deepening economic cooperation on Friday as Moscow's ties with the West fray over the Ukraine crisis.

Russian President Vladimir Putin and Chinese leader Xi Jinping hailed their countries' improving relationship after Kremlin talks and a signing ceremony on the eve of a military parade marking the end of World War Two in Europe.

Xi is among about 30 foreign dignitaries attending the anniversary events in Moscow but the Red Square parade is being shunned by Western leaders in a show of displeasure over Moscow's role in the conflict in Ukraine.

In a further sign of Moscow's eastward shift, China and Russia are due to hold joint naval exercises next week in the eastern Mediterranean and Chinese soldiers will take part in Saturday's military parade.

"Today China is our strategic and key partner," Putin said after he and Xi presided over a signing ceremony in front of rows of Chinese and Russian officials in the Kremlin.

Xi, who like Putin looked relaxed, invited the Russian leader to attend war commemorations in China on Sept. 3. Putin accepted, saying their countries had suffered most in the war.

The Chinese president said the talks had shown Beijing and Moscow shared the same views on many global problems.
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Saxo Bank CEO reacts to the Conservative landslide victory in the UK.

The election result in Great Britain is amazing in many ways.
Labour has been appropriately punished, even humiliated for the lack of a coherent economic policy and the wipe out in Scotland is plain embarrassing. But again, the SNP sends a message that prime minister David Cameron will also have to listen to.

The reaction in financial markets have been understandably positive with a strong rally in the pound, as it would appear the UK is in for a period of stable and responsible economic policy.
It is great to see that some voters in Europe recognize leadership that addresses economic prudence and I believe that Mr Cameron deserves his victory.  His containment strategy towards UKIP has worked very well, but he now needs to heed to the message that the British public expects an in/out referendum on Europe.

When you, like me, are used to a proportional representation system, it feels bizarre that the third largest party hardly gains a seat, but still, Nigel Farage has had a lot of beneficial influence on Britain's EU policy.
Hopefully, Brussels also gets the message but I doubt it. The EU never rolls anything back. It continues to amass more and more control in all areas.
The bureaucracy in Brussels has no self-criticism. No regrets. No matter how much and how often it fails. It just continues the roll out of its powers, and it will continue unabated, until someone says enough is enough. Until someone says stop.
The election outcome in Britain is our one chance to say stop!
Last year, we celebrated the 25 year anniversary of the fall of the Berlin Wall. Back then, in 1989, who could have imagined that just 25 years later, we would have forgotten about capitalism’s victory, about the dangers and failure of supranational government and control, forgotten socialism's absolute bankruptcy and the importance of competition, efficient capital allocation and specialisation. Yet, here we are, with the EU repeating the failed experiments of the past.
Enough is enough.
I hope that Mr. Cameron, with this astonishing victory on his hands, keeps the promise he gave in his inspiring Bloomberg speech in January 2013, calling for deep reform of EU institutions.
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Oil and Gas

Gazprom Neft drills first tight oil Achinsk field well in Russia

The first exploratory well has been drilled at the Achinsk field (Tomsk Oblast, under development by Gazprom Neft subsidiary Gazpromneft-Vostok), part of a federal project to establish a regional testing ground to identify effective technologies for the development of hard-to-recover (tight) reserves

Analysis of the material obtained will allow further clarification of the structure of the Bazhenov formation, as well as delivering insights into the long-term prospects for production from these deposits, and the identification of optimum strategies for their development

Operations, financed by Gazprom Neft, are also aimed at conducting a study of the unconventional hydrocarbon reserves of the Bazhenov formation.

Sampled at a depth of around 2,600 metres, approximately 30 metres of core samples have been extracted from the Bazhenov formation and subsequently transferred to the All-Russian Research Geological Oil Institute (VNIGNI, the primary institute of the Federal Subsoil Resources Management Agency).

Analysis of the material obtained will allow further clarification of the structure of the Bazhenov formation, as well as delivering insights into the long-term prospects for production from these deposits, and the identification of optimum strategies for their development. Drill samples will also be studied by specialists from the Gazprom Neft Scientific and Research Centre.

The Bazhenov formation is a key source of unconventional hydrocarbon reserves. A specific geological stratum identified in the centre of Western Siberia, this rock formation runs to depths of 2,000–3,000 metres. While the stratum covers an area of approximately one million square kilometres, it is comparatively thin, with a thickness of only 10–40 metres. Optimistic estimates suggest that oil reserves of the Bazhenov formation could amount to as much as 100–170 billion tonnes. The development of these reserves in Russia is currently awaiting the selection of appropriate technologies for full-scale commercial production.
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BP wins right to appeal some Gulf spill damages claims

A U.S. federal appeals court said on Friday BP Plc deserves the right to appellate review of some damage claims awarded to people and businesses in connection with the 2010 Gulf of Mexico oil spill.

The decision by the 5th U.S. Circuit Court of Appeals in New Orleans could help BP limit its payout to victims of the explosion of the Deepwater Horizon drilling rig, which killed 11 workers and caused the largest U.S. offshore oil spill.

BP originally expected to pay $7.8 billion to resolve claims under a 2012 settlement, but by late April it had boosted its estimate to $10.3 billion, according to a regulatory filing.

About $5.13 billion has been paid out so far to 63,597 claimants, according to a website maintained by claims administrator Patrick Juneau.

In its appeal, BP complained that rules adopted by U.S. District Judge Carl Barbier compromised its right to appeal awards he approved and which the company did not like to the 5th Circuit.

Writing for the appeals court, Judge Fortunato Benavides said BP deserved that right to appeal because it did not expressly waive it.

"Where a settlement agreement does not resolve claims itself but instead establishes a mechanism pursuant to which the district court will resolve claims, parties must expressly waive what is otherwise a right to appeal from claim determination decisions by a district court," the judge wrote.

"The point at which a party seeks the district court's discretionary review is the point at which further review by this court becomes a possibility."

The 5th Circuit separately rejected BP's appeal of awards to three non-profit groups. Lawyers for spill victims accused BP of appealing the awards as a means to relitigate the entire settlement.

BP spokesman Geoff Morrell said the company is pleased with the ruling on appeals of individual claims determinations.

BP is awaiting a decision from Barbier assessing penalties under the federal Clean Water Act over the spill.
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Parex Resources - Resilient and leveraged to the upside

Despite macro headwinds, Parex's operational strength is evident from material production growth in 2015 and a 114% increase in 2P reserves. Production guidance of 26.5mb/d (representing 18% growth y-o-y) has room for upside if exploration is successful, while the $145-155m should be fully funded at around $50-60/bbl oil prices. Our remodelled valuation indicates a RENAV of C$9.5/share, indicating upside to the shares even without exploitation of 3P reserves, which we see as likely in time and would take valuation to $10.2/share. Importantly, we see this value increasing in the coming years as production increases, supported by recovering oil prices.

2015 production has started well

Q115 saw exploration success, with the Tilo-1 commencing long-term testing at the end of March. This should add to the Q115 production of 26.7kbd and bodes well for the company's ability to hit guidance, even with a reduced investment programme. Further exploration is ongoing, with Rumba-1 currently drilling as one of the 11 wells planned in 2015, many of which are in blocks with production and well-understood geology.

Remaining cash flow neutral

We have adjusted our modelling to reflect the recent macro environment. The company took proactive steps to adapt to lower prices with a reduced investment programme to keep within cash flow. We now reflect higher 2P reserves and more robustly model exploration value. We assume Brent $58.5/bbl in 2015, which should provide enough cash flow to largely cover the $145-155m capex bill. Should prices sustain at these levels or higher, Parex has a significant drilling inventory of 62 well locations to develop 2P reserves and can react to exploration success. The company can therefore be flexible in adjusting as the environment develops.

Production growth should increase value over time

We have adjusted our modelling, which results in a reduced core NAV of $8.8/share. We also add exploration value to reach a RENAV of $9.5/share. Importantly, we have also looked into the value of the portfolio, which reveals a rise over time, assuming some exploration success or exploitation of 3P upside. Given the company's success in exploration and progressing 3P to 2P/1P, we think this is likely. The company is leveraged to oil prices and higher oil prices would both increase value of near-term production and allow acceleration of development.
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Afren admits it will miss interest payment

Afren will miss an interest payment on its debts as the company looks to preserve its cash during restructuring negotiations.

The Africa-based oil firm, which has endured a 98 per cent collapse in its share price during a torrid year, will miss a $12.8m (£8.3m) interest payment resulting in a formal default on bonds due for repayment in 2019.

However, the embattled company insisted the default will not result in an "immediate obligation" to repay the bonds and that it had received assurances from a committee of bondholders that it has "no current intention to take enforcement action" to make the payment of interest due.

Shares have endured a rocky morning, dropping by more than five per cent before recovering, causing more pain for shareholders in the company, which has in recent months been rocked by falling oil prices, funding crises and boardroom scandals. In March it fell out of the FTSE 250 as part of the indexes' quarterly review.

The company appointed Alan Linn of Australian-listed Roc Oil as its new chief executive last month following a six-month search.
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Permian basin sees first rig increase since oil rout -Baker Hughes

After weeks of idling rigs on slumping crude prices, U.S. oil drillers added rigs to the Permian Basin for the first time this year, industry data showed on Friday.

Energy companies increased by one each the number of oil rigs in the Permian basin of West Texas and eastern New Mexico - the biggest and fastest growing U.S. shale oil field - and in the Barnett in Texas.

That was the first increase in the Permian since December and the first in the Barnett since March, oil services company Baker Hughes Inc said on Friday.

Overall, the number of active oil rigs declined for the 22nd week in a row, but the rate of that decline has slowed in recent weeks, suggesting the collapse in drilling may be coming to an end as prices recover after falling 60 percent from June to March.

The number of rigs drilling for oil fell by 11 this week to 668 - the smallest drop since early April - after declining 24 and 31 in the prior two weeks, Baker Hughes said.

With the oil rig decline this week, the number of active rigs has fallen to the fewest since September 2010, according to Baker Hughes data going back to 1987.

Since the number of oil rigs peaked at 1,609 in October, producers have reacted quickly to the steep drop in prices since the summer by cutting spending, eliminating jobs and idling more than half of the country's rigs.

The U.S. oil rig count is nearing a pivotal level experts say is helping to bolster prices and trim production, and will eventually coax oil companies back to the well pad in coming months.

U.S. crude futures rose to over $62 a barrel this week, the highest this year, helped by a weaker dollar and bets a supply glut would ease as the falling rig count reduces oil output. That is a 48 percent rebound from the $42 six-year low set in March on oversupply concerns and lackluster demand.

Texas, the state with the most rigs, lost one to 378, the least since 2009, but that was the smallest rig decline since November.
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AAA predicts strong start to U.S. summer driving season

More U.S. drivers will hit the roads this Memorial Day holiday than in the past decade, fueled by a growing economy and low gasoline prices, the nation's largest motorists' advocacy group said in a forecast released on Friday.

AAA projected 37.2 million people would journey 50 miles (80 km) or more from home during the May 21-25 period, a 4.7 percent jump from the 35.5 million who traveled for the holiday weekend last year and the most Memorial Day-related traffic since 2005.

The projected growth rate is the highest for any of the holidays tracked by AAA since the July 4 holiday in 2012.

"A strong employment market and low gas prices have driven consumer optimism to new highs and boosted Americans' disposable income. This is welcome news for the travel industry," AAA President Marshall L. Doney said in a press release.

The current national average price of gas is $2.66 a gallon, $1 less than the average price on Memorial Day last year.

AAA's forecast was released the same day as the U.S. Labor Department's employment report for April, which showed an unexpectedly strong gain of 223,000 jobs and a drop in the unemployment rate to 5.4 percent.

The growing economy coupled with the sharp drop in gasoline prices led to a surge in U.S. motor travel at the end of last year and into 2015, AAA said.
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Range drills more monsters

Officials from Range Resources Corp.(NYSE:RRC) say that two recently drilled natural gas wells in Washington County help demonstrate that the company is sitting atop of the best part of southwestern Pennsylvania's shale fields.

The wells, one tapping the Marcellus and the other tapping the Utica, each posted what the company believes are record initial production rates.

The company announced at the end of 2014 that the Utica well, the Claysville Sportsman's Club No. 1, posted a 24-hour initial production rate of 59 million cubic feet. The well has since yielded 1.2 billion cubic feet of gas.

"Albeit early, the well is meeting all our original expectations," said Range COORay Walker.

On Tuesday, the company revealed that it had sunk another monster well into the Marcellus. That well has posted a record initial production rate 43.4 million cubic feet of gas, according to Range.

"We believe we've captured a large position with stacked pay potential in the best rock in the basin," said Walker.

As for the Utica well, Range is planning to bring another on the same pad into sales this summer. It also has plans to drill a third there.

We expect the Utica will be different from the early years of our Marcellus play in that it can be drilled in a true development mode right from the beginning," Walker said.

He said they'll drill from existing Marcellus Shale pads and make use of existing infrastructure.

"Essentially we can drill the wells like a very efficient manufacturing process," he said.

Executives said they'll look to incorporate the Utica into a drilling program as early as next year, if market conditions and well economics support it.

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Costs are dropping in the Eagle Ford, producer says

When Houston’s Swift Energy Co. reported first-quarter results Thursday, it offered a glimpse at the level of cost-cutting oil and gas companies are making in the Eagle Ford Shale.

“We are seeing cost concessions in some cases greater than we originally budgeted,” said Terry Swift, president and CEO, said in a call with analysts.

Swift’s average drilling cost this year is $2.6 million per well, down from $3.2 million last year. And its most recent Eagle Ford well was drilled for $2.2 million.

Its lease operating costs dropped 16 percent from the previous quarter.

Swift on Thursday reported its first-quarter results. Its Eagle Ford production increased 19 percent over the previous year.

Swift gave an insightful breakdown of what it costs the company to produce oil and get it to market, as well as the level of cost-cutting companies have been making:

The company said it cost $8.48 per barrel of oil to operate its leases in the first quarter of last year. In the first quarter of this year, that dropped to $6.21 per barrel as the company cut costs — “primarily field head count, corporate overhead allocations, and repair and maintenance costs, along with compression and produced water disposal costs.”

Transportation and processing: $1.74 per barrel of oil, down from $1.80.
General and administrative expenses of $4.10 per barrel during the first quarter of 2015. That was up $3.57 per barrel from the same months the year before due to “expenses related to a corporate reduction in force” – in other words, layoffs at headquarters.

Interest expense of $5.95 per barrel in the first quarter, down from $6.27 per barrel for the same period in 2014, because of production increases.
Severance and ad valorem taxes were 7.6 percent of oil and gas revenues in the first quarter of 2015, compared to 6.2 percent the year before, due to lower commodity prices.

“We have aggressively sought to reduce our drilling and completion costs for 2015,” said Bob Banks, executive vice president and chief operating officer at Swift, in a call with analysts. “We have negotiated lower prices for goods and services, including chemicals, trucking, labor rates, saltwater disposal costs, and some of the examples of the cost reductions on our lease operating expenses include both labor and repairs and maintenance costs, each by over $200,000 a month from 2014 levels. Additionally, compression costs are down over $150,000 a month compared to 2014 levels.”

Swift officials said they think this lower-cost environment could be here for some time.

In all, Swift realized an average price of $21.99 per barrel of oil equivalent during the quarter, down from $50.62 in the first quarter of 2014.

The company has one drilling rig in South Texas now. It drilled four wells in Webb County in the first quarter and one in McMullen County.

Seemingly, the industry is adapting well to the change in the commodity price environment. However, a word of caution is in order.

The breakeven price is highly sensitive to the discount rate and "cost overburdens" included in the calculation.

A case can be made that a higher discount rate should be used in the current environment as capital is scarce and more expensive. Cost overburdens per well have also increased as activity contracted.

  • To illustrate, consider a company that in 2014 ran 20 rigs and spent $1.6 billion in capex, with G&A expenses of $160 million.
  • Let's assume that the same company is now running 5 rigs, with a capex run-rate of $300 million, G&A expense of $140 million and restructuring charges of $60 million.
  • The math shows that the company's direct cost per well has dropped by 25%.
  • However, if one were to include the G&A overburden in the calculation, the well cost would be unchanged. If one were to also include the restructuring charges, the calculation would show that the cost per well has gone up by ~14%.
  • In this specific illustration, the improvement in drilling returns, if any, would be from eliminating less promising drilling locations from the drilling plan. Moreover, the improvement would be offset in part by the increase in the cost of capital.

The above example illustrates that while it may appear that well economics have improved dramatically relative to a year ago, the comparison is not always "apples to apples":

  • The wells being compared are not the same;
  • Cost of capital is not the same;
  • Vendor cost reductions are very significant but reflect a different point in the cycle and may not be sustainable; and
  • Cost savings at the well level are diminished by higher non-D&C costs per well.

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New tax could slow Marcellus shale development

"Low oil and gas prices have prompted many US state governments to alter their fiscal and regulatory regimes to better support continued development. In contrast, Pennsylvania has actually proposed a new severance tax to support education investment promised in the recent gubernatorial election. Between 2008 and 2014, the development of shale gas resources in the Marcellus Shale has spurred Pennsylvania to become the second largest state producer of natural gas in the US, with production growing from less than 550 million ft3/d to over 9000 million ft3/d. Although this new tax will provide an immediate boost to state finances, it could exacerbate the slowdown and loss of investment due to low gas prices.

"While Pennsylvania is the largest natural-gas-producing state without a severance tax, it has instead used income tax and other fees to gain revenue from gas production. It has an impact fee for drilling new wells, which has brought in over US$630 million since 2011, and the state also has the second-highest income tax rate, at 9.99%.

"This new law would significantly increase the tax burden on gas production. Dubbed the Pennsylvania Education Reinvestment Act, it would set a 5% severance tax on gas production in addition to 4.7 cents per thousand ft3 of gas, increasing the effective state tax rate from 9.9% to 15.9%. Pennsylvania would have the highest taxes of the major gas-producing states in the Lower 48.
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Alternative Energy

Wacker Chemie to list silicon wafer business Siltronic

Germany's Wacker Chemie is planning to list its silicon wafer business Siltronic on the Frankfurt stock exchange to free up capital for its chemicals business.

The initial public offering will, among other factors, depend on the capital market environment, Wacker Chemie said in a statement on Friday, declining to comment further.

Two people familiar with the plans said that a flotation of a stake -- possibly around 30 percent -- is planned for mid to late June with an official intention to float to be published later this month. Siltronic could be valued at more than 1 billion euros ($1.12 billion) based on the multiples applied to rivals.

Wacker Chemie, which makes more than 3,000 chemical products from methanol, ethylene, silicon and rock salt, said in March it was examining options for its Siltronic unit, including an IPO, which would allow it to spend more money on other parts of its capital intensive business.

Siltronic, which supplies the global microchip industry, in 2014 posted sales of 853 million euros, or 18 percent of Wacker's group sales.

Earnings before interest, tax, depreciation and amortisation (EBITDA) reached 118 million euros, contributing to a total of 1.04 billion for the group.

Siltronic's EBITDA margin, which stood at 14 percent in 2014, is expected to rise further this year. It will, however, remain short of its longer term target of 20 percent, a person familiar with the company said.

Market research firms are predicting the market for silicon wafers to grow by 3-6 percent this year with makers of smart phones and tablet computers driving demand.

While the wafer market has proven to be very cyclical in the past, hinging on the arrival of new PC generations, the emergence of new consumer electronic devices has recently smoothened demand curves.

With a global wafer market share of 14 percent, it supplies groups like Samsung, Micron, SK Hynix , TSMC and Toshiba.

Rivals like Japanese groups Shin-Etsu and Sumco , as well as U.S.-based Sunedison Semi trade at an average of 9 times their expected core earnings respectively.

A similar multiple would put Siltronic's value at more than 1 billion euros.

While Siltronic expects to increase its capital expenditure this year, it is not planning to build a new wafer factory as only an increase in wafer prices by 20-30 percent would justify such a move, the person familiar with the company said.
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Soventix and JA Solar to Collaborate on Solar Power Projects in Chile

Soventix Chile SPA and JA Solar today announced the establishment of a joint venture in Santiago de Chile that will develop large scale solar photovoltaic power projects in Chile.

Soventix GmbH is increasingly concentrating its efforts on implementing solar projects outside of Europe, especially in countries which show strong market potential due to high solar radiation and increasing energy costs.

Latin America is of special interest due to its high and growing energy demand. Soventix's local subsidiary Soventix Chile SpA is developing a portfolio of projects, currently in various stages of development and implementation, which includes a pipeline of more than 250 MW. For similar market reasons, JA Solar is also strengthening its position in Latin America.

Soventix and JA Solar see clear advantages to working together, which motivated the formation of this joint venture. For JA Solar collaboration with an established project developing company can lead to a more rapid penetration of this new market. For Soventix a partnership with one of the industry's leading module manufacturers can help in attracting capital from international investors for its projects.

The joint venture will initially cooperate on projects totaling 130 MW, all of which will use JA Solar modules.

"We are pleased to partner with a premium module manufacturer like JA Solar," said Thomas Stetter, Chief Executive Officer of Soventix Chile SpA. "Having a technically and economically strong module supplier enables us to move rapidly into the detailed engineering stage of our projects, as well as progressing in raising capital."

"A central element of our market entry strategy is to participate at the earliest stages of project development. This enables us to secure supply agreements early on, as well as to be influential in the project implementation and not act simply as a vendor," said Jian Xie, President of JA Solar.

"This operation in Chile confirms our commitment to the Latin American market, since it builds on projects we have already started developing in Mexico and Panama," added Giovanni Landi, General Manager for Project Development at JA Solar.

Both companies expect completion of the first collaborative projects in 2015.
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Precious Metals

Recent royalty acquisitions lower Franco-Nevada headline earnings

Precious metals royalty and streaming firm Franco-Nevada has reported lower adjusted profit for the three months ended March 31, as higher depletion and costs of sales related to its recent royalty acquisitions, such as at Candelaria, Sabodala and Fire Creek, were only partially offset by lower income tax expense and higher revenue. 

Adjusted net income for the first quarter was $22.9-million, or $0.15 a share, down 35% year-on-year compared with $35.4-million, or $0.24 a share, for the same period a year earlier. Wall Street analysts had, on average, expected earnings of $0.18 a share on revenue of $112.6-million.

Net earnings for the period fell 46% to $19.2-million, or $0.12 a share, compared with $35.4-million, or $0.24 a share, for the same period in 2014. Despite missing analyst forecasts, revenues rose 4% year-on-year to $109.2-million, on the back of a 29% in gold-equivalent output to 85 081 oz. 

The improved output was underpinned by the company’s new Candelaria asset, operated and owned by Lundin Mining, having a strong first quarter. Lower average oil prices also impacted the company’s revenue streams. 

Franco-Nevada remained debt free with $671.3-million in working capital at quarter end. After bagging significant royalty rights on diverse prospects during recent months, the company expected to continue to grow its portfolio with further investments. The company had declared a quarterly dividend of $0.21 a share, up 5% from the previous $0.20-a-share dividend, marking the eighth consecutive yearly dividend increase for Franco-Nevada shareholders.
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Silver Wheaton’s Q1 earnings fall Despite 10m silver-equivalent oz,

The world’s largest precious metals streaming firm Silver Wheaton has, for the first time, produced more than ten-million silver-equivalent ounces in a quarter, driven by its recent $900-million acquisition of a further 25% of gold from Vale’s Salobo mine, in Brazil, as well as the first gold/silver contributions from Hudbay Minerals’ Constancia mine, in Peru. 

The silver- and gold-focused finance provider reported record attributable output of 10.4-million ounces, comprising 6.3-million ounces of silver and 55 100 oz of gold, for the quarter ended March 31, a 15% year-on-year increase. However, sales volumes during the three months under review did not reflect the record output, which president and CEO Randy Smallwood ascribed to timing issues. “We fully expect to see increased sales as the year progresses,” he told Mining Weekly Online in a telephone call on Friday. 

“We expect both of these streams to realise further gains over the coming year, as the Salobo mine is currently ramping up production after expanding in the middle of last year and the Constancia mine achieved commercial production on April 30 this year.” During the first quarter, payable silver-equivalent ounces produced but not yet delivered to Silver Wheaton by its partners increased by 1.6-million ounces to about 6.5-million ounces, mainly owing to an increase in the Salobo gold purchase agreement. 

Smallwood explained that payable ounces produced but not yet delivered to Silver Wheaton were expected to average about two to three months of annualised output, but it could vary from quarter to quarter owing to a number of mining operations factors including mine ramp-up and delays in shipments et cetera. He noted that in the third and fourth quarters of 2014, the company had sold about 98% and 96% of production respectively, and that the company would expect a correction. "We normally guide for sales of about 90% of production. Whenever we get high sales in a quarter, it puts pressure on the following quarter," Smallwood said. 

Vancouver-based Silver Wheaton reported net earnings of $49.4-million, or $0.13 a share, down 38% year-over-year when compared with net earnings of $79.8-million, or $0.22 a share, a year earlier. Cash flow from operations totalled $89.1-million, or $0.24 a share, down 22% on the cash flow from operations of $114.8-million, or $0.32 a share, recorded in the first quarter of 2014. Earnings and cash flow continued to be impacted by lower gold and silver prices.

Silver Wheaton reported revenue for the period of $130.5-million, derived from the sale of 7.7-million silver-equivalent ounces, comprising 5.7-million ounces of silver and 28 400 oz of gold. This was 21% lower than the revenue of $165.4-million recorded in the first quarter of 2014, mainly owing to a 17% decrease in the average realised silver-equivalent price at $16.9/oz, compared with $20.38/oz in the same period last year, coupled with a 5% decrease in the number of silver-equivalent ounces sold. Smallwood said the company looked forward to a prolonged period of significant organic growth without requiring any further capital. “Given our fully funded growth profile, this is the first of many production records over the coming years,” he stressed. 

Silver Wheaton expected to produce 43.5-million silver-equivalent ounces this year. The company was expecting to grow its 2019 attributable output by 40% over last year’s 35.3-million silver-equivalent ounces to 51-million ounces. This did not include the 13-million potential ounces from Hudbay’s Rosemont project, in Arizona, and Barrick Gold’s Pascua-Lama project, straddling the Chile–Argentina border, that could come on stream at that time. Smallwood said the biggest challenge for the company this year was to regain higher valuations than compared to its peers.
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Base Metals

Mongolia PM hopeful for Oyu Tolgoi deal

Talks with Rio Tinto Group to approve the stalled $5.4 billion stage two of the Oyu Tolgoi copper mine could wrap up as soon as this week, according to Mongolian Prime Minister Saikhanbileg Chimed.

A Rio delegation is due in the country by this week and “I hope by this time we will finalize all ongoing issues because the principle agreements are already there,” Saikhanbileg said in an interview . “We need to go through small technical issues, some procedural steps.”

Rio and the Mongolian government have been locked in talks over a raft of issues related to the copper mine for two years. The focus has been how to fund a $5.4 billion underground expansion of the mine to accompany the open pit operation that went into production in 2013.

Negotiations with the Mongolian government are continuing, Rio Chief Executive Officer Sam Walsh said at the company’s annual general meeting in Perth.

“We are narrowing down on the issues and I am hopeful that at the appropriate time for all involved that we will be able to bring that project into the board,” said Walsh, who visited the mine in March.

“We don’t want to rush anything just for the sake of doing a deal because it has to be sustainable. It has to stand the test of time and that is seriously important,” he added.
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Peru sends in army to control clashes over copper project

Peru's government on Saturday authorized the military to take control of a southern region that has been rocked in recent weeks by protests against a planned copper mine in which three people have died and more than 200 have been injured.

In a resolution signed by President Ollanta Humala, the government ordered the army to "prevent violence" in the province of Islay until June 7 because of the recent clashes between police and locals protesting against Southern Copper Corp's $1.4 billion Tia Maria project.

Tia Maria has the potential to add 120,000 tonnes of copper to Nasdaq-listed Southern Copper's annual output but the protests have prevented construction starting. Opponents say they fear it will pollute surrounding agricultural valleys.

The government on Saturday confirmed the death of a policeman from wounds to the head. Two civilians have also died in the protests, which started nearly seven weeks ago.

Southern Copper, controlled by Grupo Mexico, has said the protests might delay the start of production, planned for 2017, and that progress hinges on talks between the opponents and the government, which supports Tia Maria.
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Hudbay Releases Q1 Results and Declares Commercial Production at Constancia

HudBay Minerals released its first quarter 2015 financial results and announced that its 100%-owned Constancia mine in Peru achieved commercial production on April 30, 2015. Oceanshipments of copper concentrate from Constancia began in April 2015, and the mine and concentrator are currently operating at or above design capacity.

"Reaching commercial production on schedule at the Constancia mine is a major milestone for Hudbay," said David Garofalo , president and chief executive officer. "This achievement strengthens our position as a low cost, high quality copper and zinc producer. Constancia has allowed us to broaden our skills as a mine developer, and given its ongoing ramp up, we continue to expect to meet our corporate production and cost guidance for 2015."

In the first quarter of 2015, operating cash flow before stream deposit and change in non-cash working capital increased to $24.1 million from negative $4.6 million in the first quarter of 2014.

The net loss and loss per share in the first quarter of 2015 were $23.7 million and $0.10, respectively, compared to a net loss and loss per share of $27.2 million and $0.15, respectively

Cash flow from operations and net earnings were positively impacted by increased revenue as a result of significant increases in production of all metals as the Reed and Lalor mines achieved commercial production in 2014. While substantially improved when compared to the prior year, cash flow from operations, net earnings and cash cost per pound of copper were all negatively impacted by unsold copper and gold during the quarter. More specifically, Hudbay continues to have approximately 6,000 tonnes of unsold copper in concentrate as a result of logistical and other issues, as well as approximately 9,000 ounces of unstreamed gold produced in the first quarter of 2015 that was not sold.

Net earnings were also negatively affected by higher depreciation expense resulting from commercial production at Reed and Lalor, as well as higher depreciation expense due to revised mine planning assumptions at 777.
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Steel, Iron Ore and Coal

China Apr coal imports down 26.4pct on yr

China’s coal imports, including lignite, thermal and metallurgical coal, fell 26.41% year on year to 19.95 million tonnes in April, the tenth consecutive year-on-year decline, showed data from the General Administration of Customs (GAC) on May 8.

That was however an increase of 17.15% from the month before, as traders have get used to the new trace elements standard and increased purchase amid falling international coal prices.

The value of the April imports was $1.24 billion, plunging 41.2% on year but up 14.8% on month. That translates to an average price of $61.93/t, $15.57/t lower than a year ago and down $0.73/t from a month ago.

The GAC didn’t give a breakdown of the April imports, which would be available late this month.

Over January-April, the country imported a total 60.92 million tonnes of coal, down 37.8% year on year, the GAC said.

Total value during the same period was $4.47 billion, a drop of 49.64% year on year.

Meanwhile, China exported 290,000 tonnes of coal in April, plunging 3.33% from a year ago and down 9.4% on month. The value of the April exports was $28.2 million, falling 31.4% year on year and down 19.0% from March.

In the first four months of the year, China exported a total 1.26 million tonnes of coal, down 44.4% on year, with total value falling 53.7% from the previous year to $1.38 billion.
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Indonesia's May HBA thermal coal price slides to all-time low of $61.08/mt

Indonesia's Ministry of Energy and Mineral Resources set its May thermal coal reference price, also known as Harga Batubara Acuan, at an all-time low of $61.08/mt FOB.

The price is down 5.3% from April's HBA price of $64.48/mt and 17% lower from the May 2014 price of $73.60/mt.

The HBA is a monthly average price based 25% on the Platts Kalimantan 5,900 kcal/kg gross as received assessment; 25% on the Argus-Indonesia Coal Index 1 (6,500 kcal/kg GAR); 25% on the Newcastle Export Index -- formerly the Barlow-Jonker index (6,322 kcal/kg GAR) of Energy Publishing -- and 25% on the globalCOAL Newcastle (6,000 kcal/kg NAR) index.

In April, the daily FOB Platts Kalimantan 5,900 GAR coal assessment averaged $57.89/mt, while the daily 90-day Platts Newcastle FOB price for coal with a calorific value of 6,300 kcal/kg GAR averaged $57.94/mt.

The HBA for thermal coal is the basis for determining the prices of 73 Indonesian coal products and for calculating the royalties Indonesian producers have to pay for each metric ton of coal they sell locally or overseas.

It is based on 6,322 kcal/kg GAR coal, with 8% total moisture content, 15% ash and 0.8% sulfur.
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China coal exporter Winsway fails to make $13.15 mln interest payment

Chinese coal exporter Winsway Enterprises Holdings Ltd said it failed to make the scheduled interest payment on its US dollar note following the expiration of its 30 day grace period on May 8.

It marked the second default on a dollar bond by a Chinese company after Kaisa Group Holdings in the offshore debt market.

In a stock market filing late on Friday to the Hong Kong Stock Exchange, the company said the missed payment was for interest due on its 8.5 percent senior note issued April 8, 2011, amounting to US$13.15 million. The interest payment was due on April 8 2015.

On Monday, Fitch downgraded its credit rating to RD - which indicates a restricted default - from C after the default notice.
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Baosteel, Aurizon delay Australia iron ore project by 18-24 months

China's Baosteel Resources and its partners have pushed out plans to develop a long-stalled iron ore project in Australia by at least 18 months in light of weak ore prices, rail operator Aurizon Holdings said.

Baosteel, China's no.2 steel maker, and Aurizon took control of the West Pilbara Iron Ore project last year when they bought Aquila Resources for A$1.4 billion ($1.1 billion), launching the bid when iron ore prices were around 75 percent higher than now.

At the time they said they aimed to slash the estimated A$7.4 billion cost of building the mine, rail and port, and would make a final investment decision on the project in early 2016 to start producing ore in 2017 or 2018.

"Aurizon and the mine participants are mindful of the volatility in the iron ore market price since the completion of the takeover of Aquila Resources in 2014," Aurizon said on Monday in a statement to the Australian stock exchange.

The partners, including South Korean steel giant POSCO and commodities investor AMCI, are now targeting a final investment decision in late 2016, as they look to cut project costs further due to poor iron ore prices, Aurizon said.

Production would now start in 2019 or 2020 at the earliest, Aurizon spokesman Mark Hairsine said.

The mine's 30 million tonnes a year of iron ore are not needed right now, based on UBS modeling, and the project's economics would be "troublesome" at current prices, Morgan said.

Aurizon declined to reveal the latest cost estimates for the project, but Hairsine said they were "certainly consistent with" comments the company made last July that it expected to be able to cut the A$4.6 billion port and rail cost by about 40 percent.

While cheap iron ore is good for Baosteel and POSCO, Morgan said it made sense for them to hold on to the West Pilbara project as it could be brought on if any of the major producers opted to hold back new supply to boost prices.
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Fortescue founder asks Australians to fight Rio, BHP iron ore plans

Fortescue founder asks Australians to fight Rio, BHP iron ore plans

Fortescue Metals Group Chairman Andrew "Twiggy" Forrest on Monday called on Australians to urge the government to stop expansion plans by iron ore miners Rio Tinto and BHP Billiton, saying they were jeopardizing the economy.

The plea by the billionaire philanthropist and founder of the world's fourth-biggest iron ore miner was condemned by the national mining lobby, the Minerals Council of Australia, for threatening to set the country on an "interventionist path."

Forrest has accused Rio and BHP of over-producing to drive out competitors from the $60 billion-a-year Chinese import market despite Fortescue quadrupling its own production in the last seven years.

"These big companies say they must flood the market next year and the year after and the year after even though it will crash the price further," Forrest said in an editorial in Sydney's Daily Telegraph. "Every time they say this the price falls again."

Iron ore prices .IO62-CNI=SI are trading off their lows at $60.50, but still 55-percent under last year's peak

For every $1 price fall, the Australian economy lost A$800 million ($632 million) in foreign income, according to Forrest.

"Write, e-mail or ring your local MP (member of parliament)," Forrest said. "Ask government to consider the multinationals' license to operate in Australia if they don't market Australian iron ore responsibly for all Australians."
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