What has happened with copper production costs over the past 10 years?
📈In our previous post, we concluded that, due to grade depletion, copper production costs should have outpaced the inflation rate by 2% per year over the past 10 years
💰In fact, the 90th percentile cash costs have fallen ~1% since the beginning of 2010
📊We identify the following factors that contributed to the cost variation: grade depletion (+20% contribution), USD inflation (+7% contribution), oil deflation (-1%), local inflation (+29%), depreciation of local currencies to USD (-48%) and other factors, such as efficiency gains (-9%)
❗️The costs lagged far behind the inflation of 40-50% in African countries, where marginal producers are mostly located, since the effect of inflation (local and USD) was offset by the effect of the depreciation in local currencies
#copper
📈In our previous post, we concluded that, due to grade depletion, copper production costs should have outpaced the inflation rate by 2% per year over the past 10 years
💰In fact, the 90th percentile cash costs have fallen ~1% since the beginning of 2010
📊We identify the following factors that contributed to the cost variation: grade depletion (+20% contribution), USD inflation (+7% contribution), oil deflation (-1%), local inflation (+29%), depreciation of local currencies to USD (-48%) and other factors, such as efficiency gains (-9%)
❗️The costs lagged far behind the inflation of 40-50% in African countries, where marginal producers are mostly located, since the effect of inflation (local and USD) was offset by the effect of the depreciation in local currencies
#copper
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How have copper margins behaved over the past 10 years?
📌As we noted in the previous post, through the period, the 90th percentile cash costs have changed little, since marginal producers are mostly located in African countries, in which the depreciation of national currencies to USD has considerably exceeded inflation. The variation in margins was mainly driven by copper price dynamics. The margins reached a local maximum of 48% in 3Q21, when copper prices jumped to USD 9,500/t
📌History shows that, during the market downturn, the 90th percentile margin was ~5%. This implies that, assuming current costs at USD 5,652/t, there is still a 22% downside to the current spot copper price of USD 7,670/t
📌In our next post, we look at the valuation of major copper producers under this scenario
#copper
📌As we noted in the previous post, through the period, the 90th percentile cash costs have changed little, since marginal producers are mostly located in African countries, in which the depreciation of national currencies to USD has considerably exceeded inflation. The variation in margins was mainly driven by copper price dynamics. The margins reached a local maximum of 48% in 3Q21, when copper prices jumped to USD 9,500/t
📌History shows that, during the market downturn, the 90th percentile margin was ~5%. This implies that, assuming current costs at USD 5,652/t, there is still a 22% downside to the current spot copper price of USD 7,670/t
📌In our next post, we look at the valuation of major copper producers under this scenario
#copper
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How do copper producers look under different scenarios?
💰Generally, pure-play copper producers (such as Freeport, First Quantum and Antofagasta) look quite expensive on spot, and become even less attractive assuming the 22% downside to the current spot copper price (discussed in the previous post)
💰Glencore and Teck appear much more attractive than the pure-play firms. First of all, they are much cheaper. Secondly, their multiples do not rise that much in the stress-case scenario for copper (with other commodities on spot), since the 2 firms derive only 23% and 36% of their revenues from copper, respectively, and 40-43% - from coal
#copper
💰Generally, pure-play copper producers (such as Freeport, First Quantum and Antofagasta) look quite expensive on spot, and become even less attractive assuming the 22% downside to the current spot copper price (discussed in the previous post)
💰Glencore and Teck appear much more attractive than the pure-play firms. First of all, they are much cheaper. Secondly, their multiples do not rise that much in the stress-case scenario for copper (with other commodities on spot), since the 2 firms derive only 23% and 36% of their revenues from copper, respectively, and 40-43% - from coal
#copper
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Morning Bites (part 1)
📉Gold-backed ETFs reduced their holdings through August, with net outflows at 57t (after outflows of 84t in July and 31t in June). August was the fourth consecutive month of net outflows; however, the YTD cumulative net inflow remained positive, at 79t. According to the World Gold Council (WGC), the outflows were partially caused by hawkish US Fed monetary policy. ETF outflows were a negative factor for gold prices in August
💍Signet has reported an 8.2% YoY decline in same store sales in 2Q22 (May-July). This was the first drop since 2Q20. Same store sales in North America were down 8.7% YoY, while sales in the international segment fell 1.5% YoY. The company anticipates a shift of consumer discretionary spending away from the jewellery category amid the inflationary pressure, which is in line with our view. We note that weakening jewellery sales are negative for diamond demand
#ETF #gold #diamonds
📉Gold-backed ETFs reduced their holdings through August, with net outflows at 57t (after outflows of 84t in July and 31t in June). August was the fourth consecutive month of net outflows; however, the YTD cumulative net inflow remained positive, at 79t. According to the World Gold Council (WGC), the outflows were partially caused by hawkish US Fed monetary policy. ETF outflows were a negative factor for gold prices in August
💍Signet has reported an 8.2% YoY decline in same store sales in 2Q22 (May-July). This was the first drop since 2Q20. Same store sales in North America were down 8.7% YoY, while sales in the international segment fell 1.5% YoY. The company anticipates a shift of consumer discretionary spending away from the jewellery category amid the inflationary pressure, which is in line with our view. We note that weakening jewellery sales are negative for diamond demand
#ETF #gold #diamonds
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Morning Bites (part 2)
⚡️Dunkerque aluminium smelter in France plans to cut output 22% amid high energy costs. The production curtailment might amount to 64kt/a, or ~1% of Europe’s primary aluminium production. As we wrote previously, Europe has already lost 50% of its aluminium smelting capacity within the past year as a result of the energy crisis, while the global aluminium capacity reduction might have reached 8% of the total supply
#aluminium
⚡️Dunkerque aluminium smelter in France plans to cut output 22% amid high energy costs. The production curtailment might amount to 64kt/a, or ~1% of Europe’s primary aluminium production. As we wrote previously, Europe has already lost 50% of its aluminium smelting capacity within the past year as a result of the energy crisis, while the global aluminium capacity reduction might have reached 8% of the total supply
#aluminium
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Morning Bites (part 1)
📉Copper output in Chile and Peru dropped 8% YoY in July (vs. -1% YoY in June)
🇨🇱Chile’s copper production fell 9% YoY in July (vs. -5% YoY in June). The YoY decline continued for the 12th consecutive month. According to industry sources, the output contraction might have been caused by grade depletion and drought issues
🇵🇪Peru’s copper output decreased 7% YoY in July, reversing from the 9% YoY growth in June. Peru’s Ministry of Energy and Mines said that the decline was mainly driven by the weak performance of Antamina (-9% YoY) and Southern Copper’s Toquepala and Cuajone (-15% YoY, combined)
✏️The 2 countries, combined, account for ~37% of global mine copper supply
❗️Despite sluggish production, we see downside to copper prices amid the depressed demand
#copper
📉Copper output in Chile and Peru dropped 8% YoY in July (vs. -1% YoY in June)
🇨🇱Chile’s copper production fell 9% YoY in July (vs. -5% YoY in June). The YoY decline continued for the 12th consecutive month. According to industry sources, the output contraction might have been caused by grade depletion and drought issues
🇵🇪Peru’s copper output decreased 7% YoY in July, reversing from the 9% YoY growth in June. Peru’s Ministry of Energy and Mines said that the decline was mainly driven by the weak performance of Antamina (-9% YoY) and Southern Copper’s Toquepala and Cuajone (-15% YoY, combined)
✏️The 2 countries, combined, account for ~37% of global mine copper supply
❗️Despite sluggish production, we see downside to copper prices amid the depressed demand
#copper
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Morning Bites (part 2)
🔗Turkey’s steel production fell 21% YoY in July, with the decline rate accelerating from 13% YoY in June. Meanwhile, Turkey’s apparent steel consumption dropped 11% YoY after being roughly flat YoY in June. As production fell more significantly than the consumption, steel exports dropped 23% YoY, while imports were down only 2% YoY. According to TCUD, some Turkish producers halted or reduced production due to the increased energy prices and the subdued demand for steel
#steel
🔗Turkey’s steel production fell 21% YoY in July, with the decline rate accelerating from 13% YoY in June. Meanwhile, Turkey’s apparent steel consumption dropped 11% YoY after being roughly flat YoY in June. As production fell more significantly than the consumption, steel exports dropped 23% YoY, while imports were down only 2% YoY. According to TCUD, some Turkish producers halted or reduced production due to the increased energy prices and the subdued demand for steel
#steel
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Morning Bites
📉China’s aggregate financing dropped 18% YoY in August, exceeding the consensus estimate by 17%. Traditional bank loans were up 2% YoY, though they underperformed the market forecast by 16%. According to Reuters, despite the partial recovery in bank loans, the overall lending remained poor due to weak consumer and business confidence. Moreover, according to some economists, acceleration in China’s credit growth looks unlikely in the short term, even despite the monetary policy easing. Overall, this might be negative for the demand for industrial metals
🏗China’s domestic excavator sales fell 26% YoY in August (vs. -25% YoY in July). Meanwhile, total excavator sales (domestic + export) were roughly flat YoY in August, after the 3% YoY increase in July. As a leading indicator of construction activity, weak domestic excavator sales might imply that the demand for industrial metals from the property sector might remain subdued in the near term
#China #global
📉China’s aggregate financing dropped 18% YoY in August, exceeding the consensus estimate by 17%. Traditional bank loans were up 2% YoY, though they underperformed the market forecast by 16%. According to Reuters, despite the partial recovery in bank loans, the overall lending remained poor due to weak consumer and business confidence. Moreover, according to some economists, acceleration in China’s credit growth looks unlikely in the short term, even despite the monetary policy easing. Overall, this might be negative for the demand for industrial metals
🏗China’s domestic excavator sales fell 26% YoY in August (vs. -25% YoY in July). Meanwhile, total excavator sales (domestic + export) were roughly flat YoY in August, after the 3% YoY increase in July. As a leading indicator of construction activity, weak domestic excavator sales might imply that the demand for industrial metals from the property sector might remain subdued in the near term
#China #global
Morning Bites
💍US jewellery and watch sales rose 10.2% YoY in July, according to data from the US Department of Commerce. The growth rate accelerated from the revised 5.3% YoY increase in June (previously, a 0.8% YoY growth was reported for June). Even though there has been some revival in US jewellery sales, our outlook on jewellery demand remains negative due to the inflationary pressures
💍Hong Kong jewellery and watch sales jumped 28% YoY in July, after a 2% YoY increase in June. According to Reuters, the increase was mainly caused by government support measures and improved labour market conditions
#diamonds
💍US jewellery and watch sales rose 10.2% YoY in July, according to data from the US Department of Commerce. The growth rate accelerated from the revised 5.3% YoY increase in June (previously, a 0.8% YoY growth was reported for June). Even though there has been some revival in US jewellery sales, our outlook on jewellery demand remains negative due to the inflationary pressures
💍Hong Kong jewellery and watch sales jumped 28% YoY in July, after a 2% YoY increase in June. According to Reuters, the increase was mainly caused by government support measures and improved labour market conditions
#diamonds
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Morning Bites
💎Petra Diamonds has reported sales of USD 103mn for Tender 1 of FY23 (ending June), which was 11% above the Tender 6 FY22 sales but down 10% YoY. At Tender 1 FY23, the company sold 520kct (9% below the Tender 6 volume and down 10% YoY). According to Petra CEO Richard Duffy, the increase in sales relative to Tender 6 was caused by the large proportion of high-value gem-quality stones from the Cullinan mine. As a result, the average realised price was 21% higher, despite the 4.5% decline in LfL rough diamond prices relative to Tender 6 FY22. We note that the decrease in LfL prices might signal a softening in demand. The company expects some volatility in rough prices in the short term due to the unfavourable macroeconomic conditions, which is in line with our view
#diamonds $PDL
💎Petra Diamonds has reported sales of USD 103mn for Tender 1 of FY23 (ending June), which was 11% above the Tender 6 FY22 sales but down 10% YoY. At Tender 1 FY23, the company sold 520kct (9% below the Tender 6 volume and down 10% YoY). According to Petra CEO Richard Duffy, the increase in sales relative to Tender 6 was caused by the large proportion of high-value gem-quality stones from the Cullinan mine. As a result, the average realised price was 21% higher, despite the 4.5% decline in LfL rough diamond prices relative to Tender 6 FY22. We note that the decrease in LfL prices might signal a softening in demand. The company expects some volatility in rough prices in the short term due to the unfavourable macroeconomic conditions, which is in line with our view
#diamonds $PDL
Petra Diamonds FY22 (ending June) results
📈Petra Diamonds (PDL LN) reported strong FY22 results. In 2H FY22, revenue rose 43% YoY, while the adjusted EBITDA jumped 109% YoY. We note that the revenue for 4Q FY22 had already been disclosed
💰In addition, the company has announced its dividend policy (previously the company did not pay dividends). In accordance with the policy, the company intends to pay 15-35% of its FCF, starting with FY23. On our numbers, given the announced range, the company might generate a 5-11% dividend yield for FY23 (on spot). We also note that, given the reduction of Net Debt to 0.18x of EBITDA in FY22, the company, as it states in its release, might consider paying a special dividend, which could lift the dividend yield to 20-30%
💰On spot, Petra Diamonds trades at 1.3x 1-y fwd EV/EBITDA, generates 30% FCF yield and 7% dividend yield (in NTM)
#diamonds $PDL
📈Petra Diamonds (PDL LN) reported strong FY22 results. In 2H FY22, revenue rose 43% YoY, while the adjusted EBITDA jumped 109% YoY. We note that the revenue for 4Q FY22 had already been disclosed
💰In addition, the company has announced its dividend policy (previously the company did not pay dividends). In accordance with the policy, the company intends to pay 15-35% of its FCF, starting with FY23. On our numbers, given the announced range, the company might generate a 5-11% dividend yield for FY23 (on spot). We also note that, given the reduction of Net Debt to 0.18x of EBITDA in FY22, the company, as it states in its release, might consider paying a special dividend, which could lift the dividend yield to 20-30%
💰On spot, Petra Diamonds trades at 1.3x 1-y fwd EV/EBITDA, generates 30% FCF yield and 7% dividend yield (in NTM)
#diamonds $PDL
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Morning Bites
🇿🇦South Africa’s PGM mining production fell 12% YoY in July (after the -10% YoY in June). At the same time, the country’s gold output fell 20% YoY in July (vs. -29% YoY in June). According to some industry experts, the continuing decline in South Africa’s mining output was mainly driven by intense power outages in July and by logistical issues. Given that South Africa accounts for some 70% and 38% of platinum and palladium supply, respectively, and for 3% of global gold production, the contraction in output might be slightly positive for the prices of PGMs and gold
#PGMs #gold
🇿🇦South Africa’s PGM mining production fell 12% YoY in July (after the -10% YoY in June). At the same time, the country’s gold output fell 20% YoY in July (vs. -29% YoY in June). According to some industry experts, the continuing decline in South Africa’s mining output was mainly driven by intense power outages in July and by logistical issues. Given that South Africa accounts for some 70% and 38% of platinum and palladium supply, respectively, and for 3% of global gold production, the contraction in output might be slightly positive for the prices of PGMs and gold
#PGMs #gold
🗞Today China has published its industrial production data for August (see the table above)
#statistics #China
#statistics #China
Morning Bites (part 1)
📈CISA mills daily crude steel output increased 3.3% in early September from the last ten days of August. Moreover, this constituted a 2.7% YoY increase (vs. the 0.9% YoY decline in late August). According to Metal Expert, China’s steel manufacturers started to increase production, expecting the seasonal recovery in steel demand from the construction sector. However, the production growth was apparently not supported by demand, since the level of steel inventories rose 7% from 31 August to 10 September. As of 10 September, steel inventories were up 28% YoY. We keep our negative outlook on China’s steel output in the short term, given the planned output reduction and the uncertain prospects for China’s construction activity
#steel
📈CISA mills daily crude steel output increased 3.3% in early September from the last ten days of August. Moreover, this constituted a 2.7% YoY increase (vs. the 0.9% YoY decline in late August). According to Metal Expert, China’s steel manufacturers started to increase production, expecting the seasonal recovery in steel demand from the construction sector. However, the production growth was apparently not supported by demand, since the level of steel inventories rose 7% from 31 August to 10 September. As of 10 September, steel inventories were up 28% YoY. We keep our negative outlook on China’s steel output in the short term, given the planned output reduction and the uncertain prospects for China’s construction activity
#steel