⛏How do iron ore producers look at spot
 
💰Among top four iron ore producers Brazil’s VALE looks the most attractive, trading at 2.4x 1-y fwd EV/EBITDA on spot (below its peers) and generating 21% 1-y fwd FCF yield. VALE benefits from robust nickel prices (nickel segment – 8% of Vale’s 2021 revenue) and other business segments
 
💰BHP trades above VALE, however, slightly below FMG and RIO at 3.5x EV/EBITDA, benefiting from other business directions(copper - 23% of revenue, coal - 13% and nickel - 2%). BHP offers 14% FCF yield and 10% dividend yield
 
💰FMG is the only producer among top four with the full exposure to iron ore. FMG and RIO trade slightly above 4x EV/EBITDA, exceeding peer multiples

#iron_ore $VALE $BHP $RIO $FMG

⛏IRC – the big winner from the bridge over the Amur
 
🎢As we noted earlier, construction work on the bridge over the Amur river to China is finally over. One of the main beneficiaries of the bridge is IRC (1029 HK) -- a small-scale iron ore mining company with operations in the Jewish Autonomous Region of Russia
 
🚢Prior to the bridge's construction, transport of iron ore concentrate to China was complicated, with volumes going to Vladivostok, whence there were subsequent shipments to China. Now this process can be simplified
 
💰This might result in a USD 15/t transportation cost reduction, which, given the scale of IRC's sales, is equal to some USD 30mn from 2023 onward, or 17% of spot EBITDA. IRC now trades at 1.1х 1-y fwd EV/EBITDA at spot, a с.50% FCF yield. The likely reduction in its transportation costs, coupled with its attractive valuation, makes IRC an interesting story, in our view

#iron_ore $1029

📌China’s nickel pig iron (NPI) output fell 1% YoY in March, with the rate of decline decelerating from February’s 6% YoY

· In 1Q22, the country’s NPI production was down 5% YoY

· According to the CRU, the NPI output curtailments might have continued in April due to disruptions in nickel ore deliveries amid COVID-19 lockdowns

· China’s stainless steel output was down 1% YoY in March (vs. 10% YoY decline in February). The CRU expects the country’s stainless steel production to decrease in April due to weak domestic industrial activity

#China #nickel

📌Global manufacturing PMIs continued to decline in April

• US ISM manufacturing PMI dropped to 55.4 in April from 57.1 in March. This was below the Bloomberg consensus estimate of 57.6

• Eurozone Markit Manufacturing PMI fell to 55.5 in April (vs. 56.5 in March), slightly above the Bloomberg survey median of 55.3

• In April, the China's official PMI was down to 47.4 from 49.5 in March (in line with the Bloomberg consensus expectations). China's Caixin manufacturing PMI decreased to 46.0 (vs. 48.1 in March), below the Bloomberg consensus forecast of 47.0

❗️China PMIs below 50 suggest weakening manufacturing sector activity in the country amid COVID-19 lockdowns. Meanwhile, EU and US PMI’s remained above 50, which might imply continuing momentum in manufacturing there

#PMIs

📌 Chile’s copper output decreased 6% YoY in March

• The decline might have been caused by reduced ore processing due to water availability issues

❗️Given Chile accounts for 28% of global copper supply, this might slightly support copper prices

• In addition, Chile’s authorities rejected an environmental permit application for Anglo American’s Los Bronces expansion project (c.0.6% of global copper supply). If the decision remains negative after the appeal, this might slightly constrain long-term copper supply

#copper #Chile

💎Petra Diamonds has reported sales of USD 86mn for Tender 5 of FY22 (ending June) vs. USD 141mn for Tender 4

• At Tender 5, the company sold 636kct (vs. 735kct at Tender 4)

• Tender 5 LfL rough diamond prices decreased 23.7% relative to Tender 4 (March 2022) but were 3.2% above the Tender 3 level (December 2021), with the balance of price movement attributable to the product mix. However, we note that the prices received by small miners are relatively more volatile than those of large ones. Therefore, such price dynamics were not observed for Alrosa and De Beers

• According to Petra CEO Richard Duffy, the price decrease was attributable to seasonal factors and geopolitical uncertainty

• Nevertheless, the company noted strong demand across all size and quality categories

#diamonds $PDL

🚘Global EV sales (passenger cars and light-duty vehicles) increased 61% YoY in March, with the growth rate decelerating from 91% YoY in February

• In the US & Canada, and EV sales rose 30% YoY in March (vs. the revised 47% YoY growth in February)

• The share of BEVs in total EV sales increased to 76% in March from 72% in February

❗️Growing EV sales are supportive for the demand for battery metals: nickel, lithium and cobalt

#EV #nickel #lithium #cobalt

💍US jewellery and watch sales were up 8.5% YoY in March, according to US Department of Commerce data

• The growth rate decelerated from the 28.4% YoY increase in February

❗️At the same time, the University of Michigan US consumer sentiment index rose to 65.2 in April from 59.4 in March. While this is a positive cross-read for April sales, we note the downside risk to the downstream demand amid macro uncertainty

#diamonds

🏆What do you know about gold?
 
🧪Gold is a chemical element (Au), and is one of the precious metals. It is a dense, soft, bright, slightly orange-yellow metal in its pure form. It is one of the least reactive chemical elements and is solid under normal conditions

🪨Gold often occurs as nuggets or grains in rocks, veins, and alluvial deposits. It also occurs in a solid solution series with silver (usually 8-10%), and alloys with copper, palladium, and metals 

🏅Gold has been historically used as a monetary unit and formed the basis for the gold standard before the collapse of the Bretton Woods system in 1971, when the gold standard was abandoned for a fiat currency system. However, it is still one of the most popular defensive assets due to its specific characteristics (including limited supply). The total amount of world gold reserves is 54kt vs. mine supply of some 3.5kt/a and physical demand of approximately 4kt/a. At the same time, above-ground gold stocks are 205kt (with 46% in jewellery)

#gold

🥇How is gold mined?
 
📝High-level, there are 2 ways of gold mining: open-pit (O/P) and underground (U/G). U/G mining has several different methods (e.g. block caving, cut-and-fill etc.) A company selects the method of mining depending on the ore body shape and the depths of occurrence

📝Most commonly, the process of U/G gold mining might be divided into the several steps. First, shafts are drilled (with diameters depending on the selected mining method) and then filled with explosives. The blasted ore is loaded on trucks and transported to a U/G processing centre for primary crushing. After that, ground ore is transported to the surface for further processing (we will dig into the processing technologies in the following post)

📝O/P mining implies stripping instead of underground work; the rest of the mining process is generally similar to U/G

🥇How is gold processed?
 
📝After crushing, the rock is reduced further via grinding

📝The gold in the ground ore is then concentrated by one of two methods: gravity separation (mostly used for oxidized ores) or flotation (for sulphidized)

📝After that, the ore undergoes cyanidation. Cyanide is one of the few compounds able to dissolve gold while being unable to dissolve the minerals that bear gold. Refractory ores, prior to cyanidation, need to be processed either in autoclaves (POX/BIOX methods) or roasted

📝For low-graded oxidized ore, instead of grinding, concentrating, cyanidation, companies sometimes use the heap leach method

•Once the hard rock has been turned into pulp and the gold has been dissolved in the cyanide solution, the gold is removed, using Zn powder/activated carbon

•The final step is gold refining: gold precipitate is heated and the molten material split into 2 parts, with liquefied gold at the bottom and the impurities on top. The extracted gold is melted again and poured into bars

🥇Where does gold come from?
 
📝Global annual gold supply is some 4.8kt or 155mnoz. There are 2 major sources of gold – mines and recycling, which account for some 73% and 27% of world production, respectively

📝Gold mine supply is geographically fragmented: the top 5 producing countries account for 43% of total mine supply (and the top 10 for 64%). In terms of regions, most gold mine supply comes from China, Australia, Russia, North America and South America and South Africa

📝Recycling supply constitutes of jewellery recycling as well as the recycling of electronic appliances, which contain small amounts of gold

📌Arcelor Mittal 1Q22 results

📈Arcelor (MT US) has reported strong 1Q22 results, with EBITDA 11% above consensus and 57% higher YoY. This was mostly driven by the strong performance of MT's NAFTA and Europe segments

💵The company's FCF increased 4x YoY in 1Q22, mostly supported by the higher EBITDA and 14% YoY decline in capex. However, the company kept unchanged its capex guidance for FY22, at USD 4.5bn (up 50% YoY)

💰MT announced a second share buyback programme of USD 1bn, bringing the total 2022 buybacks announced so far to USD 2bn (7% FY22 yield). On spot, the company trades at 0.6x 1-y fwd EV/EBITDA, generating a 53% 1-y fwd FCF yield and 27% 1-y fwd dividend yield

❗️Despite the overall positive results, we note that the rising PPI (up 11.2% YoY and 36.8% YoY in the US and the EU, respectively, in March) might negatively affect the company's future performance 

#steel $MT

🚘EU and UK EV sales rose 24% YoY in 1Q22, with the growth rate accelerating from 15% YoY in 4Q21

• The growth was driven by BEV sales, which increased 61% YoY in 1Q22, while PHEV sales declined 6% YoY in 1Q22

• The share of BEVs in total EV sales slightly declined, to 58%, in 1Q22 from 61% in 4Q21 (vs. 45% in 1Q21)

❗️Positive for the demand for battery metals: nickel, lithium and cobalt

#EV #nickel #lithium #cobalt

🔋CATL battery production capacity might increase 139% to 670GWh from the current level of 280GWh, as per SMM

• This implies a 24% 2021-2025 CAGR

• The potential increase accounts for 55% of 2021 global battery manufacturing capacity and for 43% of provisional EV battery demand in 2025

❗️Growing battery production capacity is positive for the long-term demand for battery metals: nickel, lithium and cobalt

#EV #nickel #lithium #cobalt

🚗💨Internal combustion engine (ICE) car registrations in the EU fell 26% YoY in 1Q22, with the decline rate decelerating from 39% YoY in 4Q21

• Petrol car sales declined 21% YoY in 1Q22 (vs. the 32% YoY drop in 4Q21)

• Diesel car registrations dropped 35% YoY in 1Q22 (vs. the 52% YoY decrease in 4Q21)

❗️Falling ICE car sales are negative for PGM demand

#cars #PGMs

🏅What is the composition of gold demand?
 
💍Physical gold demand comes from four main sources: jewellery, bars and coins, the industrial and the official sectors. Jewellery is the biggest category, accounting for some 50% of the total, mostly comes from China and India
 
🏦Official sector demand depends on the strategies of various central banks and accounts for 10-15% of the total. According to the WGC, CBs highlighted gold’s performance during periods of crisis as the main reason for holding it. As such, the current geopolitical situation might further support CBs demand for gold – but we will get to that next time
 
💰Along with physical, investment demand is also an important factor, which is usually strong during crises. As such, in 2020, investment demand accounted for about 30% of total, driven by COVID-19-related uncertainty. Moreover, in 1Q22 ETFs purchases almost returned to 2020 levels (269t, 12% below 1Q20), fuelled by geopolitical and inflation concerns

#gold

🥇Gold – marginal cost surging amid exhaustion of SA mines and shortage of new supply
 
💰The marginal AIC of gold miners (which are predominantly located in South Africa) has been increasing – by more than 50% – over the last 5 years. We estimate that in 2021, the average AIC of SA miners reached USD 1,650/oz and, given current mining inflation, that it might reach USD 1,900/oz in 2022

• The main drivers of this dramatic increase of marginal costs has been the exhaustion of the existing gold mines in South Africa – which has led to a grade decline, and the share of more expensive underground mining increasing by several times – and the absence of new projects

📝At the moment there is a shortage of expansion and new big projects in the global pipeline, which could potentially support gold production in the short-to-medium term. There are several big greenfields – mainly in Russia and Canada – but with first production only in the 6+ years

#gold

🥇Gold – historically a good play against S&P 500
 
📝Gold used to be perceived as a hedge against economic slowdowns. When the situation on global markets is worsening, investors strive to find a safe heaven; historically, gold has offered such shelter

📌Based on our regression analysis, the gold price has the strongest meaningful negative correlation to S&P 500 1-y fwd P/E multiple

💰The S&P 500 1-y fwd P/E has already declined 6% YTD in 2022 (and is down some 40% from its high around the end of 2020 beginning of 2021). We believe that amid hawkish Fed rhetoric there is further room for a slump in S&P multiples. As such, investment demand for gold might intensify in the coming months, supporting the gold price