Miners in May 2018

Similar to the previous month, brewing global geo-political uncertainties (including trade war tensions) seem to have again capped commodity price gains. Although, the global economic outlook remains promising. Below is a pricing summary of the key commodities:

Completing the results season for miners, Rusal and Lonmin reported their quarterly numbers.

1/ Rusal’s Q1 results (unsurprisingly) were a beneficiary of strong aluminium and
alumina prices, and the strong results from Norilsk Nickel; however, material
performance erosion (due to the US sanctions) in the coming quarters should be
unavoidable; while the deadline for investors to reduce stakes in sanctioned companies has been extended to 5 August 2018 (vs. 6 June 2018 decided earlier), undoing the current mess is Rusal’s top-priority – given that dividends from Norilsk Nickel too may be at risk; Rusal has already seen most of its top echelon – CEO, Alexandra Bouriko and eight directors, including Oleg Deripaska – quitting; the new acting CEO, Evgeny Nikitin has been with the company since 1993, and was head of the Aluminium division since January 2014;

2/ despite a pertinent pricing relief, Lonmin’s (Q2) operating performance remained
weak (and the cash burn continued) due to increasing costs (including the impact of a recovering South African rand) and the impact of an unplanned furnace outage;
platinum demand (on account of the waning preference for diesel vehicles) uncertainty remains a key risk; while management is eyeing a material turnaround (in H2 FY18), it acknowledges that the persistence of the current difficulties could challenge the group’s going concern status in the next 12-18 months; Sibanye-Stillwater, which is also facing various operational challenges, could be forced to reconsider the deal with Lonmin – especially if the latter’s cash-burn continues; the only factors supporting the deal (at the moment) are Public Investment Corporation’s (PIC) material stake and sizeable workforce in/at both the entities.

The other key developments were:–

1/ Rio confirmed media reports of its Grasberg (one of the world’s largest copper mines) stake sale talks with Inalum (Indonesia’s state-owned mining company) for $3.5bn; if this deal happens, it would be a huge gain compared with Grasberg’s $1.1bn operating assets’ value (at end 2017) on Rio’s books; while the discussions are ongoing, Rio noted that no agreement has been inked so far and there is no certainty that a binding agreement will be reached; while the Indonesian government plans to complete the acquisition of a majority stake in Grasberg (from Freeport and Rio) in 2018, certain environmental demands (among other things) from the government are creating concerns for Freeport (mine operator);

2/ ongoing unrest at Vedanta’s Tuticorin smelter in Tamil Nadu (India) turned violent resulting in the death of 13 people and now the state of Tamil Nadu has issued orders to shut down the plant permanently and cancel the allotted land for smelter expansion; as a reminder, the financial impact for Vedanta shouldn’t be major as this smelter contributed c.5% to consolidated EBITDA in FY18 and its carrying value of PP&E amounted to just 2% of total assets; however, the smelter fulfils c.35% of India’s refined copper demand and would materially increase the country’s import dependence for a key resource; hence, it remains to be seen as to how long this closure stays into effect;

3/ Glencore-Qatar Investment Authority’s JV, which bought a 19.5% stake in Rosneft, has terminated the agreement to sell a 14.16% stake to CEFC (a privately-owned Chinese conglomerate); moreover, the JV is being dissolved and now Qatar Investment Authority (QIA) will hold an 18.93% direct stake in Rosneft while Glencore’s stake would be just 0.57%; Glencore is clearly a beneficiary as it didn’t commit as much financial capital (€300m) as QIA (€2.5bn) did for a 19.5% stake in Rosneft, and yet it bagged five-year rights to market c.220k barrels per day of Rosneft’s oil. Moreover, no material debt is reflected on its books. Hence, the proceeds from exiting the JV (ideally) shouldn’t have any major financial impact either. Interestingly, with Qatar (Glencore’s largest shareholder) emerging as Rosneft’s third-largest shareholder, it is highly possible that Glencore now has perpetual (and possibly stronger) rights to market Russian oil. Although, the trader-miner’s closer relations with Russia (via Qatar) might be a deterrent in its (speculated) bid to acquire Bunge – the US agri-trading giant.

On the other hand, Glencore’s problems in the Democratic Republic of Congo (DRC) have aggravated. The UK’s Serious Fraud Office (according to media reports) plans to investigate Glencore and its dealings with Dan Gertler (an Israeli businessman) – who has sanctions against him by the US since December 2017 for allegedly amassing wealth by exploiting his friendship with DRC’s President – Joseph Kabila. The miner had distanced itself from the Israeli businessman when it bought out his stakes in the Katanga and Mutanda mines in 2017. Remember, the group is also facing difficulties on several other fronts, including: 1/ Gertler seeking $3bn of royalty payments from Glencore, and 2/ Gecamines, DRC’s state-owned mining company, pressurising the trader-miner to dissolve Komoto Copper Company (KCC, Glencore’s subsidiary with Gecamines as a partner), accusing Glencore of overburdening KCC with debt.

Again outperformed the broader markets

The sector gains (+8%) since early-May 2018 were again broad-based, with BHP Billiton being the top-performer (+14%) – thanks to a potential supply shock-driven uptick in oil prices. It would be interesting to see if the pricing cushion now forces BHP to reconsider plans to dispose the majority of its (so far) underperforming shale assets.

On the other hand, Lonmin plummeted (24%) on account of the potential risk of the deal with Sibanye being called off, apart from yet another performance (primarily cash flow) disappointment.

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