Mark Latham Commodity Equity Intelligence Service

Monday 30th March 2015
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    Macro    Oil and Gas    Agriculture    Precious Metals    Base Metals    Steel, Iron Ore and Coal


The Internet and Electricity Consumption

Image titleIEA published this am a tome on the 'internet of things' and its energy implications.

Image titleGrowth rate of data over the net has simply been phenomenal. We've never seen anything like this in recorded history that matches the power of this surge in demand fro data, nor the longevity of its sustained growth rate.
Image titleIts actually having a measurable impact on electricity consumption.
Image titleThe IEA is on the case, and 'standby' power is a big culprit on potential savings.

What does it mean in resourceland? Copper, tin and energy. But the intensity of usage relative to GNP on our read of this document this am was utterly unexciting to resource investors. There are real investment implications,  and the main one, for us,  is that the current global GNP mix is inimical to resource consumption.


US Labour tight says Bullard.

Image title

MGL: Bullard is a minority voice right now, but this speech in Frankfurt is worthy of attention:


Miner Vedanta to file notice of claim in Cairn India tax dispute

Vedanta Resources Plc said it would file a notice of claim related to a tax demand of about 205 billion Indian rupees ($3.29 billion) its unit Cairn India Ltd received from the Indian government this month.

The notice is the first step required before seeking international arbitration under the UK-India bilateral investment treaty, Vedanta said on Friday.

London-listed Vedanta has most of its operations in India.

Cairn Energy Plc, which sold its stake in Cairn India to Vedanta in 2011, also filed a notice of dispute under the treaty this week after receiving a tax demand of more than $1.6 billion.

Cairn India received the retrospective tax demand in relation to its 2007 listing in India.

The tax demands come at a time the Indian government, led by Prime Minister Narendra Modi, is seeking to reduce tax-related litigation and boost much-needed foreign investment.

MGL: This has been rumbling in the newflow for some weeks. The $3.2bn Indian tax claim is based on CGT on the original transfer of assets by Cairn into Cairn India, and subsequent flotation. The letter of the law may be punctilious in this assessment, but its a real potential set back for Indian capital markets unless clarified and, hopefully, withdrawn. The $3.2bn figure is more than Cairn India's cash balances, and 86% of the EV.

Oil and Gas

Blackstone CEO Sees ‘Remarkable’ Opportunities in Slumping Oil

Blackstone Group LP’s Chairman Stephen Schwarzman is seeing “remarkable” opportunities in debt and equity that are emerging out of the slump in crude oil.

Most of the New York-based private equity firm’s energy investments aren’t in oil, meaning its exposure to lower oil prices is limited, Schwarzman said in an interview on the sidelines of the Boao Forum for Asia with Bloomberg Television on Saturday. Schwarzman, who is also chief executive officer of Blackstone, didn’t elaborate on specific energy investments.

Crude prices tumbled more than 50 percent after the U.S. shale boom boosted output to a three-decade high and as OPEC, led by Saudi Arabia, the world’s largest oil exporter, relinquished its traditional role adjusting production to moderate price swings in an effort to maintain market share.

Brent crude, the global benchmark, fell from last year’s high of $115.71 a barrel to a six-year low of $45.19 on Jan. 13.

MGL: We suspect ARAMCO opened the faucet wide open last week as the Saudi military intervened in the Yemen. Oil expectations are still around $83 long term. Too high. Nevertheless US based investors in particular persist in believing that Middle East tension is bullish for Oil. The evidence in our eyes suggests the Muslim civil wars provoke Saudi to cut Oil prices drastically in order to bankrupt the armies. For Saudi, Muslim stability is more important that their budgetary balance.

Cnooc Surprises With 6.6% Gain in Profit as Peers Slump

Cnooc Ltd., China’s biggest offshore explorer, reported a 6.6 percent increase in full-year profit, beating the plunge in crude prices that has hit explorers across the world.

Net income rose to 60.2 billion yuan ($9.7 billion), or 1.35 yuan a share, from 56.5 billion yuan, or 1.26 yuan, a year earlier, according to a statement to the Hong Kong stock exchange. The mean profit of 24 analyst estimates compiled by Bloomberg was 52.3 billion yuan. Sales dropped 4 percent to 275 billion yuan.

Beijing-based Cnooc’s cost control “measures laid a solid foundation for the company to cope with the low oil price environment,” Chief Executive Li Fanrong said in the statement.

Brent, a benchmark for half of the world’s crude trading, dropped 48 percent last year, forcing explorers worldwide to pare investment and fire workers. State-owned peer China Petroleum & Chemical Corp. posted a 30 percent slide in 2014 profit on Sunday, while Chevron Corp., the second-largest U.S. energy producer, reported a 10 percent drop and Royal Dutch Shell Plc posted a 9.1 percent decline.

The company plans to increase production by as much as 15 percent this year, while cutting capital expenditure by as much as 35 percent to 70 billion yuan.

Cnooc’s Canadian unit, Nexen Energy, said earlier this month that it’s cutting 13 percent of its workforce and getting out of the oil-trading business.

MGL: Realised prices per boe looked high. Here's what they said in q3: Realized oil price of US$ 98.98/bbl, down 6.8% YoY Now in Q4, when prices crashed, full year average is down a mere 8.6%. It looks suspiciously like CNOOC benefitted from term contracts with the Chinese gov't. China has managed to invert the normal scheme of results, loading Sinopec and Petrochina with heavy inventory losses, whilst sustaining enfeebled CNOOC.

Asian giants want majority stakes in Australian LNG projects

Asian companies will seek to take majority stakes in Australian liquefied natural gas projects within five years, KPMG Asia Pacific energy head Mina Sekiguchi says.

Ms Sekiguchi, KPMG's Tokyo-based head of energy and natural resources in Asia Pacific, said Asian utilities, trading houses and national oil companies, particularly from Japan, were enthusiastic about using their minority positions as platforms for further investment and potential acquisitions.

"Some are looking to be operators or take bigger stakes and they think taking these minority stakes is a good way to learn," she said. "In probably five years time once construction ends and we start shipping I think it could trigger the next phase where Japan will get more involved in these projects.

"Some of the projects might be sold because they might not be profitable enough around these prices for current shareholders but that means they will be picked up by somebody else, a new entrant maybe from Japan, China, Indonesia, Malaysia or Korea, for example. That has started happening and there will be a lot more transactions."

Japanese investment has been important in the rapid expansion of Australia's LNG capacity. Japanese utilities have taken minority positions in the majority of Australian LNG projects in operation or under construction. The $34 billion Ichthys project near Darwin, headed by Japan's INPEX and scheduled to start production in late-2016, will be the first Japanese-operated LNG project anywhere in the world.

MGL: Icthys, as we have often noted, has terrible economics. The Japanese likely smell blood on the street as the LNG cycle collapses to all time lows. Strategically, they will always be buyers of natural gas, and buying distressed assets makes sense for these utilities. We would note that whereas Big Oil seeks high teenage returns on assets, Japanese utilities will feel spoilt at high single digit returns on investment.

India said to lower natural gas price 10 percent as energy costs plunge

India will probably cut the price of locally produced natural gas starting next month as global energy costs slump, a government official said.

Prices will probably be lowered to $5.02 per million Btu, the official told reporters Thursday in New Delhi, asking not to be identified because of rules. The price is based on the net heat value of gas and will be lower at a gross value, he said, declining to give a specific figure.

Domestic prices, due for review April 1, were boosted by one-third to $5.6 per million Btu on Nov. 1.

The government continues to work on a plan to allow a premium for gas produced from deep-water fields, the official said. The premium will be applicable only to gas discovered and produced after November 2014 and will be a percentage, rather than a specific number. The percentage may vary for different depths of fields, according to the official.

The cost of overseas liquefied natural gas for India has dropped to about $9 per million British thermal units, curbing the government’s scope to increase rates for local producers, Oil Minister Dharmendra Pradhan said in an interview last month.

LNG is about $7 per million Btu and it costs about $2 per unit more to ship it to India, Pradhan said. The difference between the price of LNG — gas chilled to a liquid for ease of transport by ships — and local prices is too small, he said.

While Prime Minister Narendra Modi has made boosting energy supplies a priority to curb blackouts, explorers such as Reliance Industries Ltd. and BP Plc argue higher domestic gas prices are needed to spur investment and raise output. BP last year wrote off $770 million from an undersea Indian gas block, while Canada’s Niko Resources Ltd. is seeking to sell its stake in the project because of uncertainty about the long-term pricing outlook in India.

MGL: If this turns out to be true, it's a nasty surprise, particularly for the big domestic quoted Oil and Gas companies: Reliance, ONGC. Obviously its an unexpected boon to the fertilizer stocks.

India looking at lowering LNG imports from Qatar

In an interesting development, India is weighing the option of cutting natural gas import volumes from Qatar under its long-term contract.

Multiple sources said that with gas prices in the spot market being lower by almost $6 a unit (gas is measured in million British thermal units) than the prevailing long-term price it has with Qatar’s RasGas, India is looking at cutting the contracted volumes by about 10 per cent.

Petronet LNG imports 7.5 million tonnes annually from the global energy supplier, RasGas, under the long-term agreement.

The two had signed the first sales and purchase agreement (SPA) in 1999. Sources said the contract provides for flexibility of reducing the volumes on acceptable terms.

At present, this gas is priced at $13 a unit, while the spot delivers at India’s shores are at around $7 a unit. To this landed cost are added re-gasification costs, transmission tariffs, marketing margins, and local taxes/levies, before the end-user receives it.

High level talks are on between India and Qatar, though New Delhi allows companies to procure liquefied natural gas (LNG) under open general licence.

Under the open general licence, the marketer is free to purchase and sell based on commercial consideration. “The ties, which the two countries have had, make it a sensitive issue. Since this will not be a commercial decision, lot will depend on the political powers,” another official said.

“With new gas markets opening up for India, including the US, the country will have to re-align its gas import strategy and look at best deals in pure commercial terms,” the official said adding that even Qatar would like to maintain its strong position.

MGL: Typically there are two kinds of escape clauses in these fixed index linked contracts: 1> Volume modifiers: +/- 10% is typical of most we've covered. 2> Contract exit IF spot volume adequate. Now the Indian could easily opt for 1>, and reduce volumes 10% without needing to go to Qatar. We find the newsflow here that the Indians are talking face to face with the Qataris very instructive, it strongly implies that India is presenting data to the Qataris that suggests option 2> may be on the table, either now or later. It is plausible the Indian's would prefer the contract to be renegotiated down to spot, and keep the firm volumes. We're pretty sure this line of thinking won't make the Qataris happy. This is definitely worth watching. If we are right, a major shoe is about to drop in LNG.

Chevron pulls out of Australian gas project with Beach Energy

Chevron Corp. withdrew from a natural gas exploration venture in central Australia, as the second-biggest U.S. energy producer curtails spending.

Chevron decided that “the opportunity does not align strategically” with its global exploration and development portfolio, its partner Adelaide-based Beach Energy Ltd. said Friday in a statement.

The move follows San Ramon, California-based Chevron’s announcement earlier Friday that it’s selling its 50% stake in Caltex Australia Ltd. to institutional investors.

In 2013, Chevron had agreed to pay as much as $349 million to join Beach in its first shale investment in Australia.

Beach will now look at opportunities to bring in another partner after Chevron said it won’t go ahead with the second stage of the Nappamerri Trough gas project, according to the statement. Beach will carry out further studies through the year ending in June 2016, with minimal spending, it said.

The project is still “potentially significant on a global scale,” Beach said in an emailed response to questions. “Beach remains committed to this resource” that has potential to supply gas to the east coast and export markets.

MGL: Chevron, as we've pointed out is overcommitted to large capex heavy projects like Wheatstone, and Gorgon, and we suspect a handful of other similar projects. So everything that's not 'fixed to the deck' must go, and this Beach JV has shown too little commercial progress. It does leave Beach with 100% of an interesting project, but there's going to few obvious takers in this environment.

Gulf Keystone gives lender until end of working week to accept offer

Gulf Keystone Petroleum has given its lenders until the end of the shortened working week to accept an incentivised offer for the amendment of terms for US$250mln of loan notes.

A prior offer, which would see lenders receive $5 for every $5,000 of the GKP they hold, was due to expire on Wednesday April 1.

Now the deadline has been extended by 24 hours and will expire on Thursday April 2, at 5pm.

The incentivised offer comes ahead of a meeting of loan holders scheduled for April 7, after the Easter bank holiday weekend.

Earlier this month the Kurdistan based oil firm disclosed it was set to breach a technical covenant of the debt, and it was seeking to amend the loan terms with its lenders.

The loan notes carry 13% interest and are due in 2017; however, the anticipated covenant breach could trigger early repayment. These notes are just one portion of GKP’s outstanding debt.

MGL: Accept or we go bankrupt???

Shell delays Australian drilling plans as crude oil prices dive

Royal Dutch Shell’s delay of the drilling of a $100 million-plus exploration well off Australia’s north-west coast is the latest example of modified plans in the wake of the plunge in crude oil prices, which sources say have driven some companies to renege on work commitments.

Shell’s Cronus-1 well was due to start drilling this quarter in the Browse Basin, targeting a large gas discovery, but the well has been put back until later in 2015. Wells by Japan’s Inpex Corporation and Santos planned off Western Australia’s coast have also been deferred recently, while several others have sought modifications to permit terms to allow them to cancel or delay work.

However, a Shell spokesman rejected the suggestion the company had put off drilling Cronus because of the drop in prices, although he couldn’t give a reason for the delay.

MGL: Capex cancellations/postponements are very much par for the course in this environment. Why should Shell's spokesmen be so reticent in admitting the obvious? Unfortunately the likely truth is that internally this verity is simply not obvious, nor thinkable, simply because of the repercussions to long held plans, projects, and -most important- job security.

Vale CEO Murilo Ferreira to lead Petrobras

Brazil has chosen Murilo Ferreira, the chief executive officer of Vale to head the board of embattled state-run Petroleo Brasileiro SA or Petrobras, according to a filing from the oil company on Friday.

Ferreira’s nomination will be voted on April 29 at the next shareholders meeting of Petrobras, a company struggling to deal with the fallout from a vast corruption scandal in which four former executives are accused of participating in a bribery scheme.

Ferreira has led Vale, the world’s biggest iron-ore producer, since 2011, and has spent his entire career at the company.

It is still unclear whether the executive can hold both top posts without facing accusations of conflict of interest

It is still unclear whether the executive can hold both top posts without facing accusations of conflict of interest, as Vale is one of Petrobras top customers and business allies.

Vale’s CEO has been under the government’s radar for a while. Last year it was rumoured that Brazilian President Dilma Rousseff was planning to appoint him as her new finance minister.

Ferreira’s nomination is considered a last-ditch attempt to restore credibility to the state-controlled oil producer.

MGL: Brazil's elite circles the wagons with this appointment. It smacks of fear and desperation by the President, and the market was, rightly, hoping for better. We have to ask whether Vale's large and local capex program on iron mines was also impacted by the corruption and fraud detected at Petrobras.


Highfield Resources delivers high profit margin DFS for Muga Mine

Potash developer Highfield Resources has released a Definitive Feasibility Study for its Muga Potash Project in Spain which has revealed a long mine life and rank as the most profitable potash operation when in production.

Muga is located in northern Spain with close proximity to the Atlantic coastline of Northern Spain and Southern France.

Under the DFS, Muga would have an initial mine life of 24 years, based only on Proven and Probable Ore Reserves.

The DFS assumes 50% of product produced is sold in granular form into Brazil and 50% is sold in granular form into North West Europe.

The study, based on production of 1.123 million tonnes of granular K60 potash, delivered an after tax unlevered Project net present value of US$1.42 billion and a very handsome internal rate of return of 51.9%.

This would produce EBITDA in first full year of production of US$296 million with a cracking margin of 66%.

MGL: Highfield Resources is in a major bull market! $336m mcap, capex required $256, yielding $296m in year 1 for a project ev/ebitda of 2! Only wrinkle we can see: its in Spain. More frefful wrinkle: we can find too many Potash deposits heading for market, and demand is weak, that implies long term expectations are simply too high for price. Nevertheless, this is worth a speculative buy rating.

Allana Potash sold to Israel Chemicals for $137 million

Canadian junior miner Allana Potash Corp. has agreed to be acquired by fertilizer giant Israel Chemicals Ltd.  after it failed to raise the capital it needed to remain as a standalone company.

The market reacted positively to the news as the stock was trading almost 44% higher at 47.5 Canadian cents in Toronto at 11:18 am

The $109.50 million takeover(or Cdn$137M), aims to speed up development of Allana’s promising Danakil project in northeast Ethiopia.

“Considering the generally challenging financial environment for junior mining companies, we would expect the short and long-term financing needs of Allana to include potentially significant dilution to Allana’s current shareholders,” Allana chief executive, Farhad Abasov, said in the statement.

ICL already owns 16.4% of Allana’s shares and the deal is expected to close by August 17.

MGL: Isreal takes the big Allana deposit for 25% of Allana's peak valuation in 2011.

Precious Metals

Hecla grabs Montana silver-copper deposit through $20 million merger

Hecla grabs Montana silver-copper deposit through $20 million merger

Hecla Mining has expanded its operations in the western United States with the purchase on Friday of Revett Minerals  in an all-stock deal worth $20 million.

Hecla, the largest silver producer in the United States with the Greens Creek project in Alaska, the Lucky Friday Mine in Idaho and the Casa Berardi gold mine in Quebec, entered into a merger agreement with Revett, whereby each Revett common share will be exchanged for 0.1622 of a Hecla common share, the companies announced in a press release. The deal represents a 32 percent premium on Revett's 20-day volume-weighted average price up to March 25, 2015.

Revett investors approved of the arrangement, bidding up the stock price 10.91 percent to close at 61 cents a share on the Toronto main board on Friday. The Spokane Valley, WA-based company has a current market capitalization of 21.6 million.

Silver producers are clearly eyeing assets that can be purchased for attractive prices during the present down-cycle in precious metals. Silver on Friday closed at $16.97 an ounce on the spot market while gold ended the day at $1,198.40.

In Hecla's case, the prize is the Rock Creek project in northwestern Montana, which according to the companies, "is considered one of the largest undeveloped silver and copper deposits in North America." The project about 50 miles north of Hecla's Lucky Friday mine in Idaho has 22 million ounces of inferred silver resources and 2 billion pounds of copper.

"We are acquiring Revett with an eye to the future, as Rock Creek is a world-class silvercopper deposit that we see becoming another Greens Creek,” said Phillips S. Baker, Jr., Hecla’s President and CEO. “Our experience of Greens Creek operating in a National Monument in Alaska since 1997 will be invaluable as we take a patient and persistent approach to permitting and then responsibly operating the Rock Creek Mine."

MGL: 320moz of Silver in resource, copper and some prospective acreage. Silver Wheaton holds 13%, so at least one senior credible specialist gives Revett some credence. We really have no clue on capex required, so its difficult to calculate metrics, but presumably Hecla has run the numbers. Again, we would reiterate that there are fair few juniors with decent orebodies out there trading at significant discounts to NPV, and the seniors are more than happy to hoover them up. We fret that we're losing good quoted deposits, and have always found it difficult to recommend buys on potential corporate activity. MAG Silver is the obvious standout value with a serious deposit under development. The sensible way to play this may the vulture stocks like Lundin or Northern Star.

Base Metals

Southern Copper hit by conflicting remarks on Peru mine's future

Conflicting statements about whether Southern Copper Corp would cancel development of its $1.4 billion Tia Maria copper mine in Peru's Arequipa region have battered the company's share price and left investors wondering about the project's future.

Southern Copper's head of institutional relations, Julio Morriberon, told local radio RPP on Friday that the company was "canceling Tia Maria and withdrawing all its investments in Arequipa" due to lack of support from regional authorities and continued local opposition.

But Southern Copper's Chief Executive Officer Oscar Gonzalez later appeared to row back, telling Reuters that the announcement "did not totally reflect the intention of the board."

"Southern Copper will continue with its efforts to move forward with the Tia Maria project and we hope to have the support of the people and the government," he said.

The debacle raises questions of transparency and corporate governance in South America at a time when other resources companies in the region are also struggling with these issues.

MGL: A well organised opposition has,like at Newmont's Minas Conga, ruptured the intent and desire of Southern Peru. We did flag the protests last week, but had not foreseen this radical turn of events! Tia Maria is a good project, its an SX/EW project, low capital intensity, despite a near 40% increase in costs due primarily to delays. If Tia Maria does not proceed, then there are obvious and nasty consequences for a bevy of high profile mine developments in this resource rich country. The gov't is clearly onside, thats the only good news. Southern Peru has issued around $500m of external capital contracts for this project, but its clear that spent capex exceeds that figure.

Rio Tinto CEO says Nov plan to restart Oyu Tolgoi was "best and final offer"

Proposals made to the Mongolian government by global mining giant Rio Tinto last November to restart the long-delayed Oyu Tolgoi copper mine were the firm's "best and final offer" and won't be changed, Rio's chief executive said.

Rio submitted the proposals to resolve some outstanding issues, including a $127 milliontax claim that has already been cut to $30 million as well as the approval of a $4 billion project financing package to pay for phase-two construction.

"This is the best and final offer and we believe this a very reasonable approach to resolving the outstanding issues," said Sam Walsh in an interview with Reuters on Saturday ahead of a visit to the mine.

"Clearly, in terms of reaching a final conclusion there's a lot of detail that needs to be resolved, so negotiations were continuing last week," he said, adding that Rio was "not looking for special treatment" but wanted more certainty and clarity from Mongolia.

Walsh said the firm would be willing to go to international arbitration to resolve the tax dispute, but said it was not expected to affect current phase-one production at the mine.

Rio Tinto's Turquoise Hill Resources owns 66 percent of the $6.5 billion Oyu Tolgoi, with the Mongolian government holding the remainder. Rio is also in charge of running and developing the project, which is located in the Gobi desert close to Mongolia's border withChina.

The first, open-cut phase of the mine is already in operation. Turquoise Hill reported $1.6 billion in revenue for 2014 from the sale of 733,700 tonnes of concentrate from the mine.

MGL: Rio's Sam Walsh heads for Mongolia in a defiant and combative mood, the Sydney Morning Herald had a fuller interview in which Walsh was more "patient and hopeful", to use his own words. The tax claim is a thorny issue, but the real issue on the table is Mongolia's desire to swap its equity for an NSR. Mongolia simply doesn't have easy access to its share of capex required for phase 2. The 2014 technical reports proposed $4.9bn of capex for a project with an IRR of 29%, Mongolia's share would amount to $1.6bn.

Barrick to keep operating Zambia copper mine, pending royalty change

Barrick Gold, the world's biggest gold producer by output, will continue operating its Lumwana copper mine, in Zambia, while awaiting changes to the country's mineral royalty tax, the company said on Friday.

Barrick had said it would suspend operations after Zambia hiked mineral royalties for open pit mines to 20% from 6% in January. Major staff cuts to Lumwana's 4 000 workers were planned for March, Toronto-based Barrick had said.

"We are encouraged by the president's recent statement and will carry on operating at Lumwana while we await details on the government's proposed solution," Barrick spokesperson Andy Lloyd said in an email in response to a query from Reuters.
The new royalty plan, which has rattled unions and mining companies in Zambia, Africa's second largest copper producer, also increased the royalty tax rate on underground mines to 8% from 6%.

Zambian President Edgar Lungu on Wednesday directed the finance and mining ministers to change royalties on mining firms by April 8, saying the government could consider temporarily reverting to the 2014 tax regime as a new rate is negotiated.
Other options include modifying the 2015 royalty rates, delayed introduction of those rates, or negotiating interim arrangements for the most affected companies.

Barrick booked a $3.8-billion impairment charge to write down Lumwana's value in 2013 due to higher costs and a drop in profit after a pullback in metal prices.

MGL: The President is in China this week reportedly asking the Chinese for more investment. Zambia's populist party is hoisted by its own petard right now, they know raising royalties to 20% is suicide for the economy, but that was the popular mandate, and feeling runs high that the miners have circumvented 'rightful' taxes. Its really not clear what the end game is here, but there's some kind of tax hike for sure.

Guangdong Rising makes new, lower bid for PanAust

China's Guangdong Rising Assets Management launched a fresh $850 million bid to buy copper and gold miner PanAust Ltd, but priced its offer at a quarter less than 10 months ago, underscoring the rout in mineral commodities.

PanAust said on Monday it had received a letter from 22.5 percent shareholder Guangdong saying it plans to offer to buy all remaining shares at A$1.71 each, valuing PanAust at A$1.1 billion ($852 million). The offer would be 26 percent below the A$2.30 a share it offered last May.

PanAust shares, which have fallen in line with weaker copper and gold prices, jumped 40 percent to match the latest offer price, a four-month high for the stock.

State-owned Guangdong first approached PanAust last April and then sweetened its offer in May.

PanAust, which rejected the May bid as too low, said it would consider the fresh approach but noted it was made at a time when PanAust's stock and copper and gold prices are near 5-year lows.

PanAust mines copper in Laos and paid $125 million in late 2013 for the rights to the Frieda River copper project in Papua New Guinea. It cut 5 percent of its workforce in January as copper traded around its lowest level in half a decade.

Guangdong urged shareholders to accept the all-cash offer, warning that PanAust may need to raise additional capital to get the Frieda River project into production, potentially sending its shares lower.

MGL: Its difficult for us to imagine a better offer out there, but then we have a very low opinion of the Frieda River asset.

China's Tsingshan plans nickel pig iron production in Indonesia this year

China's Tsingshan Group expects to start production at its Indonesian nickel pig iron smelter as soon as January, becoming the second plant to ramp up since the country's new mineral processing laws came into force at the start of the year.

"Hopefully by October or November we will have started commissioning," said Slamet Panggabean, finance manger of Tsingshan's local joint venture partner Bintang Delapan Mineral, referring to the firm's pilot smelter project in Morowali on the Indonesian island of Sulawesi.

"The plan is for production (to begin) in January or February."

Stocks of nickel pig iron at China's stainless steel makers are running down, leaving them exposed to a supply gap next year and fuelling the need to build smelters in Indonesia as quickly as possible.

Output at the joint venture, Sulawesi Mining Investment, is expected to ramp up slowly and is unlikely to reach name plate capacity of 300,000 tonnes of nickel pig iron in the first year Panggabean said.

The group is currently preparing foundations for the planned second phase of the project, he added. This would add a further 600,000 tonnes of output capacity to the facility, which was partly funded by a $384 million loan from China's policy lender State Development Bank.

Some production could even start as early as October, two sources told Reuters.

MGL: Lets look at Nickel a minute. Here's consensus:

1> All the Lateritic Nickel projects have largely failed:

Image title
2> Chinese Nickel Pig Iron production is falling because of Indonesia:

Image title
But wait, that Indonesian start up announced by Tsingshan is 300k mt, starting now, gearing up, and with a further 600k mt behind it. This single start up overwhelms the loss of Chinese Nickel Pig iron capacity.

Back to consensus again:

Image titleWell Tsinghsan has one project in startup that is 3x the size required to balance the Nickel market. Analysts are going to receive a frustrating shock.


Steel, Iron Ore and Coal

Russia's NLMK sees flat Q1 after Q4 earnings fall

Russian steelmaker NLMK expects profitability to be flat in the first quarter compared with the fourth quarter of 2014, when its earnings were hit by lower steel prices and an impairment charge related to the weaker rouble.

NLMK has received a boost to exports from the lower rouble, which has fallen about 40 percent against the dollar since mid-2014 due to weaker oil prices and Western sanctions over Moscow's role in the Ukraine crisis.

"We expect an increase in the share of export sales in the first quarter of 2015 on the back of the seasonal slowdown in demand in the domestic market," the company said in a statement, adding its operational performance would remain stable.

However, the company's net profit was hit in the fourth quarter by a $356 million non-cash impairment on financial instruments related to the weaker rouble.

NLMK, controlled by businessman Vladimir Lisin, said its fourth-quarter net profit fell 17 percent, quarter-on-quarter, to $232 million.

Its earnings before interest, taxation, depreciation and amortisation (EBITDA) were down 9 percent, quarter-on-quarter, but up 53 percent year-on-year to $627 million, just ahead of analysts' average estimate of $625 million in a Reuters poll.

Revenue was down 10 percent, quarter-on-quarter, to $2.3 billion on the back of lower steel prices, while the cash cost of slab, the semi-finished steel product which NLMK exports, fell 24 percent to $225 per tonne at its core Lipetsk assets.

Shares in NLMK were up 1 percent in Moscow, outperforming a 0.5 percent rise in the broader market index.

MGL: NMLK makes slab steel. Most of the capex over the past few years has been earmarked for a pellet plant (to avoid high iron ore prices), and a PCI conversion (to avoid high coking coal prices). Prices for their product in dollars just keep dribbling south. ROE pre 2008 was 25%. last year it was 1.7%, and the newly completed investment (to avoid high ingredient prices), comes online when ingredient prices are in a state of utter and complete collapse, so there's no core recovery in profitability beyond the nice tailwind provided by the collapsing rouble. No bull market here, and at 8x eps, 5% yield there's nothing really to look for either.

NMDC sets target sale of 38 MT iron ore in FY16 - Mr Kothari

NMDC sets target sale of 38 MT iron ore in FY16 - Mr Kothari

Times of India reported that state owned iron ore miner NMDC has set a target of 35 million tonnes of iron ore production and 38 million tonnes sales in 2015-16.

Mr Narendra Kothari CMD of NMDC said that "We are also in the process of preparing our vision document that aims at a production of 100 mtpa by 2021-22. The document will be prepared by April and May this year, and will include details like capex, assets required, among others. Currently our production is 30 mtpa and by 2018-19, we are looking at increasing it to 70 mtpa."

Mr Kothari said that NMDC will complete the construction of its 3 million tonnes per annum Nagarnar steel unit in Chhattisgarh by 2016. The plant is in an advanced stage of construction and will be completed by December 2016. The investment in this unit is around INR 15,500 crore.

Meanwhile, speaking about that International Coal Ventures Private Limited (ICVL), which is a joint venture between SAIL, CIL, RINL, NMDC and NTPC, he said, it had bagged the mining rights of 2.6 billion tonnes of coal in Mozambique in 2014 and this year, the focus will be increasing its capacity. The JV company was floated by the country's top PSUs in 2009 to secure coal supplies from overseas assets.

NMDC has commissioned its new Project Bailadila Iron Ore Deposit 11B having iron ore production capacity of 7 million tonnes per annum with an investment of more than INR 600 crores in Bailadila Region of Dakshin Bastar district in Chhattisgarh on Sunday

MGL: NMDC has still not really adjusted to a market price environment. Years of operating with fixed, but low prices had left the company with an almost utility mindset. They could actually double production into this feeble market, then notice that prices don't justify the investment. It is one of the most singular parastatal miners we've ever looked at! Equity market analysts will likely not notice this expansion, and if they do, they simply wont believe it plausible. Here is the critical statement from the website: "NMDC is under the administrative control of the Ministry of Steel, Government of India." and steelmakers everywhere want cheap inputs.

China to cut 80 mln T of steel capacity over 2015-17 - official

China will aim to cut as much as 80 million tonnes of excess steel capacity in the next three years to tackle a massive supply glut that has plunged much of the sector into crisis, a government official said on Saturday.

Speaking at an industry forum, Luo Tiejun of the raw materials department of the Ministry of Industry and Information Technology (MIIT) said China would publish a new 2015-2017 action plan to restructure its bloated steel sector before June this year.

"The main task is still to strengthen the market position of enterprises and improve the overall competitiveness of the sector," Luo said.

According to the draft plan, China will cut the number of steel enterprises to "around 300", down from more than 500 currently, and would also strive to achieve zero energy growthfrom the sector and a cut in emissions by 2017, Luo said.

Last week, in a separate development plan for the sector, the industry ministry said it would aim to put 60 percent of total steel capacity under the control of its 10 biggest enterprises by 2025, 10 years behind an original schedule.

China has long struggled to resolve a capacity glut now amounting to around 300 million tonnes of annual production, with growth-obsessed local governments encouraging local enterprises to expand as quickly as possible.

Officials now say the industry is facing its worst crisis yet, not only as a result of slowing economic growth and a state vow to tackle pollution, but also amid long-term changes in steel consumption patterns.

Though prices of the key raw material iron ore have halved over the past year, Chinese mills still suffered losses in January and February, and "economic slowdown pressures" have got worse since 2014, said Liu Zhenjiang, vice-chairman of the China Iron and Steel Association.

Zhao Xizi, chairman of the All-China Chamber of Commerce for Small and Medium-Sized Metallurgical Enterprises, said the woes facing the sector were only just beginning.

He said steel intensity - or the amount used per 10,000 yuan of GDP growth - had already fallen from 174 kg in 2007 to 100 kg in 2014, and would drop further to 70 kg in the next few years as the structure of China's economy changes and steel production finally peaks.

MGL: Here's the RBA's analysis of steel intensity in China: Its clear from the above figures that China's steel intensity is 'normalising' rapidly, and at a rate of knots! This is too a large degree cyclical, but to expect steel intensity to rise back to its peak levels is surely hopeful. Please note that the figures mentioned in this press release: "174kg in 2007 to 70 kg in 2014" are steel units per quanta of GNP growth, and the RBA's numbers are steel intensity per $1m of GNP, which is not directly comparable, but surely indicative. To an extent this statement of intent is a reiteration of prior planned commitments, although the specifics are different. So why should we take this seriously? In part, because for Beijing this is a critical component in a larger plan to mitigate pollution, and at every turn Beijing is hammering the polluters. In part, because the big Steels: Baoshan, Wuhan, Hebei and Jiangsu, are now onside, where as in previous years we've noted their actions and words have often been 180 degrees apart. Baoshan, for example, would trumpet the closure of its enormous Shanghai site, then quietly reopen the capacity elsewhere. In part, its a very real fear by Steel execs of going to jail, whether for corruption or pollution. Where does this leave iron ore? Frankly, unexiting for a decade. We would reiterate that China is in the throes of a decade long change of policy and direction, and the new idea are not friendly to steel consumption. China's steel producers must clean up, focus on margins and head for higher margins. The volume game is over. There are many out there hoping for a resumption of the old morphine laced public policies, but Beijing has said NOTHING that supports that concept. If you wish for the old, then you must seriously think about a regime change in Beijing, and that an entire new ball of wax.
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