Commodities Week in a Minute: The changing face of company presentations and some gold thoughts
Date
8/15/2016 8:10:58 AM
(MENAFN- ProactiveInvestors - UK) Kieron Hodgson, Follow !function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0];if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); 11:48
Commodities
Diamonds and precious stones
Trade is still very quiet, as expected given the time of the year.
The Trans Hex situation does look very intriguing and I would imagine this is not the last we hear of Mr Wiese's activity in the sector. Elsewhere, it was good to see Petra recover a biggie at Cullinan, a sign of more positive things to come from the new mining blocks?
Keep an eye on Diamond data from Hong Kong, whilst the US is doing well, HK saw polished imports fall 9% to $8.5bn in the first six months of 2016.
Precious metals
Not quite the finish to the week many had been hoping for last Friday. Whilst hinting at it, the decline in bullion into the close certainly had me whistling inwards over my evening beverages.
49% chance of a rise at the end of the year from 37% last week
Despite it all, right on cue I received my daily gold is going to >$2,000/oz emails with helpful headlines such as 'How to Profit from the Current Gold Bull Market'? Always educational.
More seriously though. The main headlines this week, other than the proposed new trading platform for bullion in London (attempting to break with hundreds of years of closed door, behind the hand conversations), was the release of the World Gold Council's Q2 demand report. The WGC confirmed many theories we have discussed, but also reminded me of a few factors often overlooked.
I will summarise:
Total gold demand +15% in Q2, +18% in 2016
Total gold supplied +10% in Q2, +8% in 2016 (probably a surprise this one)
Unsurprisingly, as the gold price rose 25%, the main driver has been investment demand, H1 set a new record and was 16% higher than in H1 2009 as US and European investors sought gold bars, coins and registered the highest increase in ETF's holdings on record. Investments accounted for almost 43% of total demand.
But on the flip side, price conscious consumers are shunning jewellery and in this important segment (accounting for 42% of all demand), total demand fell 14% with India, China, the Middle East and Europe all declining with only the US increasing.
Also potentially very interesting, Central Bank demand fell 40%. Could CB's be considering sales? Not sure but the 5-year average purchase volume is around 140t and volumes fell to 'just' 76.9t in Q2.
Elsewhere, recycling rates are up 23% year on year
Let's hope the consumer returns should that investment demand fade!
Bulk commodities:
Investment idea:
Buy a coal exploration licence in Australia knowing quite clearly it would impact essential food and water sources.
Wait a few years
Sell to government for roughly twice the cost of acquisition.
#Winner
Company announcements/news/meetings:
I managed to keep the print room very busy this week, with still more company/model updates coming next week.
Centamin, (Hold from Buy): Taking profits from a great performer.
'Along with its peers, Centamin has enjoyed very strong returns so far this year, driven both by the company's own efforts and through the increased appetite for gold exposure from generalist funds. Despite the >170% return in 2016, outperforming the Mining Index and the wider All-Share Index by >100% and >160% respectively, we believe there remains a solid case for Centamin to retain a core position in investors' portfolios. However, this outperformance cannot be ignored, thus we switch to profit taking mode with a move to Hold. To soften the blow, we increase our price target to 168p (145p) based upon a blended average of NAV/EPS and cash flow per share'.
DiamondCorp, (Buy): Operations ahoy
From Tuesday Morning;
'DiamondCorp has today provided an operational update that confirms initial production rates in August are in line with expectations. The company anticipates holding the next diamond sale at the end of August with subsequent sales every month thereafter. We reiterate our Buy recommendation and 11.5p target price, based upon a blended average of NAV and EPS'.
Gemfields, (Buy): PT raised.
Following on from last week's commentary;
'We update our model for the Market update, announced 01 August 2016. Production at Kagem was in line with our forecasts; however, costs beat our estimates. Montepuez production exceeded our forecasts. We therefore reiterate our Buy recommendation and increase our target price to 61p from 57p based upon a blended average of NAV and EPS.'
Gem Diamonds, (Buy): Snowy in the mountains.
From Wednesday morning;
'Gem Diamonds has today confirmed that extreme weather conditions have disrupted operations at the Letseng Diamond Mine in Lesotho. We note though that given the fact the company was run rating ahead of full year guidance at the interim stage, full year production guidance can still be achieved, albeit at a higher cost. The company announces Interim results next week and we expect further clarity then'.
Griffin Mining, (Under review from Buy): Time to reappraise.
Update yesterday;
'Griffin has today announced interim results that lay bare the impact of a tough first quarter. In spite of this, the second quarter saw the company return to profitability, both through increasing production rates and a significant recovery in commodity prices. Following the >50% increase in the shares since we moved to Buy in April, we move to reassess our model forecasts given the improvement in fortunes'.
Randgold Resources, (Hold): Valuation argument supports downgrade.
Following on from last week's downgrade I published a more detailed note providing far more valuation analysis.
'Randgold has long been London's go-to stock for investors seeking exposure to gold through a relatively low risk operator. As such, the company has consistently enjoyed a premium rating to peers. However, following the >100% return in 2016, outperforming the Mining Index and the wider All-Share Index by >40% and >95% respectively, we believe the current market premium has become stretched and is no longer justified. The latest quarterly results confirmed our thesis that Randgold continues to be priced for perfection and the risks to achieving production guidance set at the start of the year cannot be ignored. We appreciate the need for gold exposure but following the exceptional re-rating that has taken place this year, we now struggle to see significant upside ahead from the current market valuation. As such, we reiterate our recently reduced Hold recommendation'.
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