Diamonds and precious stones
With the delisting of my favourite emerald and ruby miner, the listed gemstone space has lost a lot of its colour – See what I did there?
But when looking at the diamond market, it seems to me that there are again some commentators only looking at one source of information and trying to paint a rather negative outlook which I think misses quite a few relevant points.
Admittedly, the US is a little more uncertain given the wider economic uncertainties, primarily extrapolated from the inability of Mr Trump to pass any significant legislative changes, but it is worth noting that the US jewellery segment itself has seen a noticeable reduction in the rate of contraction over the last 12 months and margins at many retailers are improving.
On rough pricing, DB’s sight saw less enthusiasm for goods with premiums paid reducing, but this often happens ahead of the holiday season in Belgium, India and Israel, so we can refer back to the DB price index and the market in general, and assume we remain in the trend of a gentle uptick in average prices. De Beers index (+4%, year on year). Seems awfully similar to historical averages, no?
It would be remiss of me to not mention these five little beauties;
Part of Rio’s upcoming coloured diamond sale of just 58 diamonds with a combined weight of 49.39cts, but consider it includes four fancy-red diamonds, four purplish-red diamonds, two violet stones and one blue diamond, it is a collection to make diamond lovers weak at the knee especially the 2.11-carat, fancy-red, VS2-clarity polished diamond named the Argyle Everglow.
Not too much going on in the precious space, if I am honest. This week looked as though it was going to end on more of a high, especially given the less hawkish language from the Fed midweek that saw a $1,265/oz back in the frame.
On the equity side (ex ACA) things have calmed down significantly, but the general relative underperformance vs. bullion itself probably has more to do with a more conservative view on the miners, the appreciation of commodity currencies and the ability to actually repatriate/distribute the considerable cashflows currently being generated.
A couple of charts to consider…
Selected miners relative to Gold (in $) and then the implied volatility of one year at the money options – Where are the trading opportunities?
Still remain positive in the main and given the 9.3% uptick in gold this year to date, I still think we could end the year in the $1,300’s but even if that doesn’t happen, a major collapse seems unlikely at this time.
Daily company commentary is now covered in our Boom Ore Bust publication, but I am just going to reiterate some of the more pertinent points from some of our updates or aspects that I feel may have been missed/underappreciated.
Naturally, if you wish to discuss any of these names in more detail, do get in touch.
Companies covered this week: PDL, HGM, LOM, ACA, GEMD, PDL (Again), POLY, SOLG, ANTO, SRB, GLEN, RRS, AAL, KAZ.
– Is this a joke? (LON:ACA, Mkt cap: $985m) – Negative
Just before the close last night Acacia announced they had received the anticipated tax bill generated from the controversial mineral reports recently published by the Tanzanian government. In total, Acacia is deemed to owe the government $190bn made up of $40bn in unpaid taxes at Bulyanhulu and Buzwagi from 2000-2017 derived from under-declared exports. For good measure there is another $150bn in fines and interest payments.
The situation with the Tanzania government is totally farcical and shareholders really have no reason to believe anything other than the government is attempting to expropriate these assets for itself.
We are increasingly of the view that Barrick may end up stepping in, assuming the outstanding ownership of Acacia and then cut a deal with the government for Buly and Buzwagi, whilst keeping what is now considerable upside at North Mara for themselves. One for further consideration maybe.
*Stock jumped 13% on Thursday after Barrick announced discussions had started… Well done, I was under the impression they were going to start months ago, but hey ho – does not change my view here…
– Management swagger returns with the dividend, but are investors ready for acquisitions? (LON:AAL, Mkt cap: $20.3bn) – Positive
– Underlying EBITDA of $4.1 billion, a 68% increase (H1 2016: $2.5 billion)
– Underlying EBITDA margin increased by additional five percentage points vs. FY 2016
– Profit attributable to equity shareholders of $1.4 billion (H1 2016: $0.8 billion loss)
– Delivered cost and volume improvements of $0.6 billion – on track to meet $1 billion target for full year
– Production volumes increased by 9% (Cu eq.)
– Attributable free cash flow* of $2.7 billion (H1 2016: $1.1 billion)
– Reduced net debt* by 27% to $6.2 billion (FY 2016: $8.5 billion), ahead of $7 billion year-end target
– Resumed dividend at 48 US cents per share for the first half, equal to 40% of first half underlying earnings
– Dividend policy to target pay-out of 40% of underlying earnings*
– 1H EPS did however miss forecasts coming in at $1.19 vs. consensus of $1.25/share
– No formal process to divest assets in South Africa
In our view, Anglo’s results are in line with our view on the company; that a slimmer but better capitalised Anglo can generate decent returns for shareholders. The return to the dividend list was again expected and is a positive, despite being six months earlier than the street expected.
The one concern we would have is whilst the focus remains on improving operational returns, the fact that management are now seeking to “upgrade its portfolio” whilst carrying on the portfolio refinement work, is not a comment that will sit well with many given the history of the company to bet on assets that are not exactly tier 1 quality – Although I have some interesting thoughts on the outcome of the DB CFO’s comments that they are ready to return to the acquisition trail…
On valuation grounds AAL, I estimate the company is trading roughly on a FCF yield of 18-19% and should the dividend payment be repeated at the FY results, on a yield of c6%. This compares favourably to Rio FCF yield of c10% and Glencore of 11% if you don’t mind a tad more Geographical risk.
– Looking better (LON:GEMD, Mkt cap: $150m) – Positive
Gem Diamonds H1 FY2017 trading update saw an end to the lack of large, high value diamonds at Letšeng. H1 production of 50,478cts is in line with our expectations of 110Kcts for the year, despite the delay from the new split front ends for Plants 1 & 2. Average grades of 1.59cpht are close to our 1.62cpht forecasts but we expect an improvement in H2 with additional higher grade K6 and satellite pit ore, we believe satellite pit contributions will be maintained for the remainder of the year (Satellite ore mix rose from 25% in Q1 to a total of 31% for H1). Gem has now recovered five diamonds >100cts (4 in H1, 1 post period) exceeding the four >100ct diamonds recovered for the whole of 2016 and equal to 2013’s total of five albeit some way short of the record of 11 in 2015.
Average values have significantly improved with a 20% uplift to $1,779/ct in H1 vs. H2 2016 and +5% vs. FY2016. The most recent tender saw the highest value received since early 2016 with an average price of $2,385/ct, including lower value goods. Sales volumes are in line with lower production (down 6% to 49,930cts) but higher prices saw revenues increase 13% to $88.8m vs. H2.
Cash movements remain negative, down $9.2m in Q2, and whilst unlikely to be positive for FY2017, given the weak Q1, current production and sales values are currently cash generative.
Gem’s Q2 results are, in our view, as positive as the company has produced for a long time, but we are not getting too carried away despite what seems like solid improvements. The uptick in large average values in the period, plus the outstanding 126ct higher quality white diamond to be sold would give us confidence that values can remain above $2,000/ct and positive cash generation can return. Should this be the case, this would mean Gem is looking very cheap.
– Q2/H1 Trading update (LON:HGM, Mkt cap: $623m) – Neutral
Highland’s Q2/H1 update this morning whilst in line with wider forecasts, was a bit of a mixed affair. Overall H1 production rose 2.4% to 131,784/oz and leaves the company in good shape to meet original guidance for FY2017 of 255k-265k/oz.
Individually, MNV and Novo saw improvements during the period as throughput rates and higher grades benefitted at Belaya Gora, the opposite was true as some lower grade waste, and having been classified as ore was processed during the period. It is worth noting that the company intends to significantly increase throughput rates at Belaya Gora to offset the impact of processing lower grade ore.
Highland Gold is, in our view, a stable producer with an attractive portfolio of production and exploration assets. Paying a dividend that is again yielding >7% and a relatively low cost of production, the recent share price weakness has provided a value based buying opportunity and given the scope for exceeding market consensus, I would be looking to add at these levels.
– Looking interesting (LON:PDL, Mkt cap: $712m) – Positive
Following on from yesterday’s update, we have undertaken a thorough review of our assumptions for Petra’s portfolio of assets. Our FY2018 and FY2019 production forecasts have declined by 3% and increased 3% respectively, compared to our previous expectations. The main is a change for the Cullinan operation. We have incorporated the company’s new capital expenditure plans, although no significant impact has been seen as we had largely anticipated significantly higher investment levels than market consensus – judging by the call, this will not be the case for many.
Valuation attractive, but delivery required – Our group NAV has been reduced further to 115p (134p) and reflects our longer-term production, price and FX assumptions. Since we downgraded Petra on 02 December 2016, the shares have fallen >40%, on concerns of construction delays at Cullinan and lower value production at Finsch. Petra Diamonds is now trading at the lower end of an average NAV/share range of 0.85-1.0x. Our FY2018 forecasts now assume a P/E multiple of 9.1x falling to <7x in FY2019 despite the erosion of EPS estimates in recent years.
Should production and sales in Q1 prove to be around company guidance and the covenant issue be resolved, we think Petra could be good value around these levels.
Polymetal Intl – Just doing everything it said it would (LON:POLY, Mkt cap: $4.96bn) – Positive
Polymetal’s Q2/H1 FY2017 production results confirmed the longer term objective of increasing the proportion of gold production from the company. Total gold equivalent production rose 6% vs. Q2 FY2016 to 278Koz and +7% vs. H1 FY2016 to 558koz. Strong growth at Okhotsk, Varvara and Kapan more than offset the planned decline at Dukat and the maintenance at the Amursk POX plant. We recently visited the Amursk POX plant post its shutdown and were happy the plant is again producing to plan.
Total gold production in Q2 increased 12% to 190Koz and silver production, as planned, reduced 6% to 6.6Moz. Provisional revenues, rose 26% to $385m for Q2 and +15% to $683m for H1 as sales volumes increased 29% in Q2 and 19% in H1 as the seasonal impacts unwound. Net debt, as forecasted, increased to $1,583m from $1,506m, following the payment of the dividend and the preannounced seasonal delays in sales receipts, advanced purchases of diesel fuel and Capex at Kyzyl. These factors will unwind and we forecast a net debt balance of $1,287m for FY2017 as Mayskoye and Svetloye ramp up.
As expected, Full year guidance of 1.40Moz of gold equivalent at cash operating costs of $600-$650/GEoz and all-in-sustaining costs (AISC) of $775-$825/GEoz have been reiterated. It is worth remembering though that this is contingent on the $/RUB exchange rate. ($/RUB60 and $60/bbl. oil are currently used by the company for internal budgets). Polymetal, we believe remains a solid cash generative dividend focussed gold producer and given the travails of some in the sector, Russia is looking a far better destination for investors cash than some African countries
– Mali media briefing infers decent performance during Q2 (LON:RRS, Mkt cap: $8.5bn) – Neutral
As is often the case, Mr Bristow addressed a media briefing in Mali yesterday confirming that Randgold Resources’ operations in Mali are continuing to deliver a robust performance whilst committing to further investment through the super pit at Loulo-Gounkoto which would further strengthen the complex’s position as a long-life producer with an annual output of at least 600 000 ounces.
Importantly, exploration success within the Loulo and Gounkoto permits had enabled it to replace all the gold depleted by mining last year and was continuing to deliver additional reserves and resources.
At Morila, meanwhile, all the permitting for the development of the Domba satellite has been completed after two years of community consultation, and mining there is scheduled to start in September this year. Morila has also agreed to acquire portions of ‘s Ntiola and Viper permits which, together with Domba, will extend its life to the end of 2019 and possibly to early 2020.
As far as we can see, Randgold continues to operate at, or even above, plan in Mali and given the importance of the Loulo-Gounkoto operation to the group, that is reassuring. The one niggling concern is the on-going tax dispute seems like it will continue to drag for some time with Mr Bristow using more forceful language is this latest missive as a clear illustration of the company’s frustrations. Results on the 3rd – no fireworks expected
– Strong update, good leverage to rising copper price (LON:KAZ, Mkt cap: $4.2bn) – Positive
– H1 2017 copper production more than doubled to 118 kt (H1 2016: 56 kt), on track for full year guidance of 225-260 kt
– Ramp up of new operations continues to deliver quarterly growth in copper production, Q2 2017: 66 kt (Q1 2017: 52 kt)
– Strong first half gold output of 93 koz (H1 2016: 45 koz)
– Bozshakol on track to achieve 2017 copper guidance and top end of gold guidance
– Aktogay ramp up progressing well, on track to meet FY guidance of 65-85kt
– East Region and Bozymchak on track for Cu to be in line, Au and Ag to be at the upper end of forecasts.
Kaz’s update today will enthuse the bulls, but possibly more interesting is that following the recent run up to 703p (+95% in 2017), only one analyst out of the 24 on Bloomberg actually have a target price above the current spot price (the one is at 710p btw). It seems to us the need to rebase expectations could provide a further short term boost to the share price, although that may well be the time to bank one’s profits…
That’s enough from me today