Archive for the ‘mining’ Category

China in “Scramble for Africa”

Guinea

Guinea

Chinese interest in acquiring “strategic assets” continues unabated, with recent acquisitions & investments in a number of companies in Australia & South America.

As we saw in last weeks bullish approach regarding Nigerian oil, China is looking a little further afield & it’s all seeing eye has settled upon Africa. The latest country to be courted is the Republic of Guinea as China seeks to gain access to the West African nation’s large mineral deposits.

The impoverished nation possesses more than 25 billion tonnes of bauxite ore, with more than 150 mineable deposits having been prospected to date. Additionally, Guinea’s mineral wealth includes more than 4 billion tonnes of high-grade iron ore, significant diamond and gold deposits & as yet undetermined quantities of uranium. Bauxite exports account for more than 75% of GDP, according to Wiki sources.

Guinea’s Minister for mines was quoted in the Financial Times as saying that the Guinean government is in talks with the China International Fund (CIF) regards a $7Bn investment into a number of projects including infrastructure, minerals & oil.

“Instead of just giving natural resources… in exchange for promises of developing our infrastructure, we decided to take the joint venture approach and co-own not only the infrastructure development companies and projects, but also whatever natural resource companies or projects are developed jointly.” said Mohamed Thiam “All the government’s stakes in various mining projects will be put in that mining company. Future mining permits or concessions that the government decided to develop on its own will be put in that company,”

China still doesn’t seem to be too picky regarding who it does business with, as the present Guinean government is a military dictatorship that has recently put down a bloody coup last month. 150 people were killed on September 28, when troops opened fire on a crowd  gathered in  the capital Conakry, in order to protest at ongoing corruption in Captain Moussa Dadis Camara‘s rule.

Sidya Toure, who leads the only effective opposition & is a former prime minister was quoted “I do not understand how you can believe that we can inject this kind of money into the economy of Guinea where the total gross domestic product is only three billion dollars.”

CIF is also planning to form a consortium with the Guinean government & near neighbour Angola’s state oil company Sonangol to look at prospecting for oil off Guinea’s coast. As we reported previously, West Africa has become a hotbed of speculation & investment, as new oil fields are coming under development in Ghana, Angola, & Senegal. It is considered likely that offshore Guinea will also provide new hydrocarbon deposits that can be exploited.

What is interesting is that CIF on the face of things, does not seem to be an officially backed government company, whereas all the recent deals have been undertaken either by the Chinese Development Bank or via large state owned enterprises such as CNOOC or Chalco. CIF is registered in Hong Kong & an inspection of the website gives very little information on the structure of the entity.

Last November, as it became clear that the global economy was heading into a recessionary period, central government in Beijing implemented a 4 Trillion yuan/$586 Bn stimulus package, aimed at cushioning the blow of decreasing exports on the economy whilst also improving industrial efficiency at all levels, with energy receiving a special focus.

Adopting various measures such as tax reductions, rebates, fiscal subsidies, improved access to credit & direct government expenditure, central government has been encouraging state owned oil companies such as Petrochina & CNOOC to expand foreign investment in upstream opportunities, whilst increasing domestic refining capacity & oil product stockpiles.

We have seen a number of examples of this with Russia signing a 20 year $25Bn oil supply contract in February, which will see Rosneft supplying up to 300,000 bpd of oil via it’s East Siberia-Pacific Ocean (ESPO) oil pipeline to China. This was closely followed by the China Development Bank extending a $10Bn loan to Brazil’s state owned company Petrobras in return for securing strategic oil supply contracts & this month CNOOC has made a bid to acquire more than 16% of Nigeria‘s stated oil reserves.

It would appear that sentiment is currently running against Western based IOC’s & countries in emerging markets that have currently untapped or underdeveloped  hydrocarbon deposits are enjoying the ability to play interested parties off against one another. What is interesting to me is the fact that China seems to be playing Guinea at arms length via what is in effecr a shell company, allowing them to hold up a clean pair of hands on an international basis.

This desire to secure resources at what would seem “any cost” should, in our opinion, receive close attention from both a geo-political & investment point of view. IOCs will not be able to compete in areas where there are no rules, particularly in Africa, whilst it looks like China will circumvent accepted norms using any available route to acheive their aims.

Original article published at MyStockVoice

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Olympic Dam upgrades & expansion crucial to BHPs future operations


bhp logo

Mining giant BHP Billiton has announced revised figures that significantly upgrade the reclaimable reserves for its flagship Olympic Dam operation in southern Australia.

New figures released by BHP (NYSE:BHP) point to a 22% increase from 284 thousand tonnes to 347.5 thousand tonnes of of U3O8, due to mineral re-classification as operational drilling taps into larger sources. BHP has correspondingly upgraded the operational lifetime of Olympic Dam from 43 to 54 years.

Olympic Dam is arguably BHP’s most valuable asset, as it is a multi-mineral source combining the world’s 4th largest copper deposit, 5th largest gold deposit & significant amounts of silver. It is also currently the world’s largest single uranium ore deposit.

With a production level of 3344tU last year, Olypic Dam is placed 4th in extraction levels for uranium, BHP are now looking to expand the size of their operations on this site. At present, all mining activities are conducted underground, however, BHP has submitted an expansion plan to local government that would see open pit miningf being introduced to the site. With government expected to make a preliminary decion on the expansion project next year, this is a critical time for BHP, as the following chart illustrates.

Olypic_Dam

In an earlier post, we discussed the impact of Sino energy requirements on Australian miners, as the Chinese are heavily commited to reducing pollution & are searching for cleaner energy sources to power their expanding economic requirements. In April this year, Chinese officials announced they would start building five extra power plants this year on top of the 24 already under construction & 11 already in operation.

“There are not enough uranium resources in China to support the aggressive nuclear power development plan for the next 20-30 years,” said Professor Liu Deshun, of China’s Institute of Nuclear and New Energy Technology. “Australia has the uranium resources that could be exported and in China we have the demand”

Earlier this year, BHP managed to successfully expand into the Yeelirrie deposit in Western Australia, which is estimated to  have a 10 to 12-year lifespan and a resource of 35,000 tonnes of uranium,  as a result of the Western Australian government lifting a six year old ban on uranium extraction in the state. With this prescedent & also the ability to secure long term supply contracts to China, Australian Minister for Resources, Martin Ferguson, has indicated the Federal Government was unlikely to stand in the way, subject to environmental and investment tests.

In the short term, this could also have a large knock on effect on the share price of some of it’s key competitors, namely Freeport McMoRan & Rio Tinto. Rio is also a top producer of uranium ore, with it’s Ranger Mine in Kakadu, which currently supplies 10% of global requirements, any uplift in BHP’s production capacity is sure to impact that figure.

More interestingly for me, there has been much speculation that BHP could be looking to acquire Freeport McMoRan (NYSE:FCX)  in order to bolster their gold & copper production, however, referring to the anticipated production uplift in both of these commodities if the expansion plan is successful, why would BHP Billiton look at dishing out more than $27 Bn, when they could integrate on an existing site?

The Australian government is also more likely to sponsor the expansion project in my point of view, as it will keep the majority of that cash pile invested in the country & help to secure more than 15,000 jobs directly & indirectly for the lifetime of Olypic Dam. Perhaps readers of the WSJ should think a little more on geo-political terms when voting on nonsensical polls.

Original editorial at MyStockVoice.com

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MyStockVoice.com is now alive & kicking

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It’s taken a while & it’s been an interesting experience, but am pleased to say that we released MyStockVoice.com into public beta. For me personally, there have been a few challenges, “assisted” along the way by re-locating with my family from Switzerland to Slovakia.

The team at Connection Services who have designed & support the MSV platform have been excellent, especially when responding to an ever changing set of requirements. MyStockVoice started as this WordPress blog, where I could muse on my views on Emerging Markets & BRIC economies. A conversation with a friend who works in the City (London) encouraged me to look at doing something a little more. The original format, was a forum, then a newswire service & now it’s a fully fledged blog publication platform. So you can imagine how happy my colleagues at CSL were, when I tripped back every few months & said “right, this is what we are doing now”

Our aim at MSV is to provide an ever widening audience with value insights into what is rapidly becoming a major topic for hedge funds, investment managers & retail investors alike : BRIC & Emerging Markets. International stocks traded on US exchanges are becoming ever more popular, especially via Depositary Receipts (ADR,ADS,ADN) , for the more cautious or long minded, a number of ETF (Exchange Traded Funds) have sprung up to service the appetite to take part in these growing economies.

Covering all the major regions, MSV provides focussed channels into a variety of sectors & also specific categories for Macro Econmics, ADR & ETF investing. We are pleased to be working with some well established names from the investment community, along with faculties such as Knowledge at Wharton, the Economics Faculty at Beijing University, Skolkovo Business School in Moscow & Cranfiedl University in the UK.

Our strapline is “your community … your voice”  & to reflect this, we will be bringing our readers plenty of new unique content. Much of my time in the last two to three months has been spent contacting individual bloggers & also online media services that are based in the regions covered. In this way, we can present a “blend of thought”, that will allow our subscribers to formulate informed opinions on their own particular areas of interest.

So, enough jawing from me, but to close, Alex, Chris & myself would like to thank the team at CS & all the people that have had input into the project. We sincerely hope that you enjoy the MSV experience & are always open to new ideas, partnership opportunities & most of all feedback.

Many thanks

Paul

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More pressure on copper as commodities start to fade

FCXFollowing on from my post last week “What goes up  must come down” , where I looked at the two largest producers of copper, Chile‘s Codelco & also the American firm Freeport McMoRan, I have spent some time over the weekend researching the copper market & looking to see if I could find anymore signals that would show market direction.

Re-capping on the trade, FCX so some very significant selling volumes from the open on Friday &  the trade triggered as FCX fell through the 65 mark, where I commited to 50% of my planned exposure, the remaning 50% was then entered at 64.25 & I rode this down to 63.06.  I am looking to repeat this trade as a swing this week & here are some of the reasons why.

As previously stated on Freeport McMoRan, the company has scaled back copper production & has increased gold production to an all time high. Freeport is making some serious cutbacks & cost management is a major theme, as with many other major stocks, so I am still bearish on FCX as a whole from a fundamental standpoint.

Whats more interesting, is looking at some other factors that help bear out (nice pun) my thesis that we are looking at short term oversupply of copper. First let’s have a look at the copper Exchange Traded Fund : JJC, it has seen a strong uptrend  since early this year, returning a tad over 100% year to date, however looking at this technical chart, it would seem to be overbought & is signalling this.

JJC

Turning to a shorter term chart & looking at volumes on JJC, we can see that it hit & refused it’s upper Bollinger on Thursday 13th & saw some very aggressive selling in high volumes on Friday. If we then look closer at the history of the ticker, it has a habit of withdrawing back to it’s 20 Day Moving Average, which would give a reasonable bottom at 36.90 on any significant breakdown. So, I am looking to take another short position in JJC (if I can, it’s pretty illiquid) & see if I can’t double up on my FCX trade.

JJC 3 month

Another indicator that all may not be well is the performance of the Base Metals ETF : DBB, which holds an equal 33.33% in copper, aluminium & zinc. DBB has also had quite a years so far, with a return rate of 53%, on Friday this started to look fragile & there was fairly spikey activity in the ticker all through the day, finally closing 3.8% down, so not a bright day for metals at all. Again looking at a 3 month chart, we can see that DBB has been hitting it’s head against the upper Bollinger since mid July & at the latter end of last week also refused. Needless to say that Friday saw some volumes selling off, although not as heavily as FCX & JJC. The reasoning behind this is that DBB is held by select financial institutions & they are unable to un-reel their positions very quickly.

DBB

So to summarise, FCX still looks weak, JJC in my opinion is looking to implode & the major ETF in this sector is on the retreat. Again, I’ll be looking at shorting Freeport down, as per the tactics from my last post & if I can get in on JJC, I’ll be tapping into a short there too, looking for an exit at around 38.50. If the sell off continues, next stop for me is the 34.20 mark, so I’ll look to drop the short at 34.50. Add to all this the negative sentiment on China  & commodities right now, I think these swings could be real earners for this week.

Author has no current holdings in any stock mentioned

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What goes up must come down, is copper running out of steam ?

gravityCopper prices are at an all time high, coming off of deep lows in December 2008 of $1.25 lb, 3 month delivery is currently trading in Shanghai at $2.90 lb / $7,431 per tonne, extending the metals five week winning run. Shanghai copper looks to end the week almost 8.5% up, its strongest 5 day performance in more than two months. But are there stormy times ahead? Chilean mining giant Codelco, which is the worlds largest producer of the red metal, has just announced results for H1 2009.

Copper production including output from its 49% stake in El Abra, rose 16% to 822,000 tonnes in the first half of 2009, from 715 000 tons in same period in 2008. However, it seems all is not as sunny as the production figures would lead us to believe.  Codelco has seen its profits sink by 82% in the first half from $4.11 Bn to $722 Mn, due to lower copper prices. A worldwide slump in molybdenum prices from $72 to $20 year on year, has also not helped things along either. Although copper has had a good run, the question is, has it run out of steam, with Chinese buyers supposedly easing away from contracts, having fuelled the boom by stockpiling since November last year.

Not the case according to Codelco Chief Executive Jose Pablo Arellano. He is bullish & feels that copper demand is likely to continue due to ongoing requirements from China and stimulus programs in the world’s leading economies.

“The key factor in the rise in prices is China, in the next few quarters, we should see the stimulus programs in the United States, Europe and Japan start to have an effect, something we haven’t seen yet.”

But what of US based Freeport McMoRan (NYSE:FCX), Codelcos main rival & erstwhile partner ? Last month, Freeport beat analysts expectation by a long margin, but again the upbeat news needs to be examined a little more closely. Net earnings for the quarter were $588 million, or $1.38 per share, compared with $947 million, or $2.25 per share in the same quarter of 2008, with revenues dropping to $3.68 billion from  $5.44 billion, or 38%. Revenues were bolstered by gold sales, as the company ramped up production from 265,000 ounces in Q2 2008 to 837,000 ounces this year, but is debatable if this pace can be sustained, never mind improved upon. In In June, Chief Executive Richard Adkerson told Reuters there was no sign of recovery in the developed world that would lead to a restart of its idled U.S. copper operations, despite a pick-up in Chinese buying.

FCX has been riding high of late & I am kicking myself having looked for an entry at the $45 mark back in early June, only to be beaten by the market surge that has occurred. Bears should not be too dismayed however, as it looks as though play is going to start running the other way. Inventories on the London Metal Exchange have been on the decline since March, mainly due to companies like Freeport scaling down operations, whilst feeding the Chinese appetite. March is also when we started this huge bull run, which in my opinion is starting to look a little fatigued & toppy. One of the major indicators that I have been looking at on a weekly basis is the price of copper versus declared inventory on the LME. As you can see, inventory declinbe petered out in early July & we are now seeing that inventory starting to climb.

LME Copper

Now looking at FCX from a technical standpoint, its pretty obvious that it has been performing well in it’s channel (hat tip to anyone that has been long since March ), but it has also significantly not managed to break through the upper Bollinger band. It’s headed there right now, with a closing price yesterday of $66.07, the upper Bollinger is marking time at $66.87 & my expectation is that FCX is going to fail & pull back relatively sharply, with first major support at the $60 mark. If it falls through that level, I can see it triggering off a steady fall to the $52-$54 range, any “bad” news from China or any of the developed economies, will put on added pressure. According to Short Squeeze, short interest in FCX has increased by 8% in the last month, which is always an indicator that something is on the horizon, especially in a stock that is 80% held by institutions.

FCX

So to summarise, China is not buying in the volumes it was, US / Europe / Japan recovery is a long way off, Codelco made huge losses whilst bolstering production & Freeport has only made positive steps due to cost cutting & stepping up gold production, not withstanding its problems at it’s flagship Grasberg mine in Indonesia. That gold production doesn’t have a lot of headroom either. I’ll be keeping a very close eye on this & if significant volumes start selling through to $65, I’ll be riding down the ladder as far as I can.

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Vale to sweep up as Rio “fails” in Chinese espionage fiasco

bulk ore carrierThis post from China News Wrap is significant, as it’s sourced locally from International Financial News, which is a Peoples Party owned newspaper. China informs Australia that proof is irrefutable (sic) Basically the Chinese authorities are not going to back off, having been snubbed over the Chinalco deal. I reckon this will run & be very detrimental for both Rio & BHP Billiton. Anyyone else noted that both firms have been talking up inventories being built up elsewhere ? The real deal is in the 2nd last paragraph of the story :

“At the same time, although Rio Tinto had made statements last week emphasizing that it would ‘continue its iron-ore operations in China’, the actual situation does not seem to reflect this. The overseas media yesterday reported that shipments of spot market iron-ore from Brazil to China soared to record highs in July, which could be related to the Rio Tinto case. Australia seems to have temporarily suspended its exports of spot market iron-ore to China. Data from the shipping company AXSMarine indicates that orders for shipments to China from Australia’s main iron-ore port fell to 12 this month, while orders for shipments from Brazil reached the record high of 31. This means that China’s demand for iron ore is still strong.”

so basically VALE is picking up the slack & would also seem to be enjoying it too, if this piece from Reuters is anything to go by :

Vale Resists China Price Cut Request on Demand Gain

“Politically Vale has done well with its customers by letting the Australians settle first,” Cliff said. In the first quarter, China took 66.5 percent of Vale’s total iron-ore sales of 52.1 million metric tons, up from 32 percent a year earlier.”

Regular readers of MyStockVoice will know that I’m a big fan of Vale, so, long VALE is a no brainer & I have felt that BHP is a little toppy for a week or so, may instigate a short. RTP I’ll leave for bigger fish to swim with.

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Indonesia : Breaking up Newmont interest not so simple

newmont logoAs we previously reported in Miners to benefit from change to Indonesian Law ,  foreign mining companies operating in the country are required to sell 51% of their local holdings back to the government after 5 years of commercial operation. However, Newmont (NYSE : NEM), will only be asked to relinquish 17% of its subsidiary, PT Newmont Nusa Tenggara (PTNNT), as 20% of this entity is already held by a local partner. An international arbitration panel on March 31 gave Newmont and minority partner Sumitomo Corp. a 180-day deadline in which to divest 17% of PTNNT to local buyers, ruling that the companies were in default of their contract of work for failing to meet divestiture schedules in 2006-2008.

A consortium of three local governments in Indonesia have appointed PT Multicapital to help finance the purchase of a 10 percent stake in a unit of Newmont Mining Corp, a local mining official said on Saturday. The governments of West Nusa Tenggara province, West Sumbawa regency and Sumbawa regency, the three areas where the mine is located, and Multicapital would form a joint venture company to negotiate a price with Newmont, Heryadi Rachmat, the head of West Nusa Tenggara provincial mining office, said.

“Out of six potential investors, we find Multicapital to have the best interest for the local government and a good track record in investment,” Rachmat told Reuters by telephone.

There was an initial agreement for the local governments and Multicapital to split revenue 25 percent and 75 percent respectively, Rachmat said without elaborating.

Local media has reported Multicapital is a subsidiary of PT Bumi Resources, Indonesia’s biggest coal miner. A Bumi spokesman could not immediately be reached for comment. Bumi has previously tried to buy shares in PT Newmont Nusa Tenggara, which operates the Batu Hijau copper and gold mine in Sumbawa island, eastern Indonesia. Last year Bumi, which is linked to the family business of Indonesia’s welfare minister Aburizal Bakrie, entered an initial agreement to buy 31 percent of Newmont’s local unit. Under a memorandum of understanding, the governments of Sumbawa regency, Sumbawa Barat regency and Nusa Tenggara Barat would buy the shares but turn them over to Bumi. The deal did not materialize.

The new investment plans follows a prolonged dispute between foreign shareholders at PT Newmont Nusa Tenggara (NNT) and the government over divestiture obligation.In late March, an arbitration court ordered the foreign owners of PT NNT to sell a 17 percent stake to the Indonesian government within six months, of which a 10 percent stake should go to the local governments. Under the terms of the contract, foreign investors in PT NNT must sell 51 percent of the shares in the unit to local investors.

PT Pukuafu Indah, an Indonesian mining group, previously bought 20 percent of the unit, while Newmont and Japan’s Sumitomo Corp own 45 percent and 35 percent respectively.The foreign owners began offering NNT shares for sale in 2006, initially offering a 3 percent stake for $109 million. The following year they offered a 7 percent stake worth $282 million, and another 7 percent stake worth $426 million in 2008.

A resolution of the case is seen by analysts as crucial for Indonesia’s plans to attract foreign investment into sectors such as mining to drive economic growth and create jobs. But following the arbitration court’s ruling, the two sides have failed to reach an agreement on a valuation for the unit.

Newmont has valued the whole of NNT at $4.9 billion and has started negotiations with the government over the price. The government said it planned to use an independent appraiser to value the unit.

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