Market Update

General - Sheffield - Breaker - Finders - Kingsgate

Good afternoon

GDP-numbers in the States and in Europe have been positive, Consumer Confidence in the States as well, Caixin PMI in China still looking strong, as well as Manufacturing in the US....and not to forget: Historically, commodities have moved with rising interest rates...which makes sense, and augures well for things to come - even though the market has had a great run and probably could do with a break.

it´s metals week in London, where all halfway significant metal traders and producers of this world meet. Trafigura came out with very bullish statements re nickel consumption for EV´s, and Codelco, the world´s largest copper miner, with bullish supply/demand forecasts for copper, Codelco has been pretty cautious so far on the outlook for copper, and these bullish statements caught the market by surprise. They even see a chance for copper to hit the old high around 10.000$/t some time in the future.

Copper is very strong today, as is nickel, which has put on nearly 10% in two days, and is trading at the highest level since June 2015 , at 5.85 US$/lb or 12800$/t! Zinc and lead are also scratching at recent highs! The world economy is doing well, and China continues to clamp down on mines, which do not comply with safety- and enviromental restrictions - that´s a wonderful mix!!

All of the above, as the A$ has retreated to support levels at around 76-76.50 against the US$, further improving metal prices in Australian $. 

For my little darling PAN, today´s nickel price would equal 7.50 A$/lb ( once in production again! ) - a very nice margin versus 4.50 A$/lb AISC!! My somewhat preemptive forecast of 80 Mill A$ EBITDA and 50 Mill A$ free cash p.a. ( based on 7 US$ for nickel ) looks conservativ versus research from Hartley´s today, which is forecasting just about 92 Mill EBITDA at 6.84 US$ for nickel in 2019/2020. I think the waiting game for better nickel prices might be over sooner than expected, thanks to financial players buying the nickel/EV-story earlier than expected.! Hartley´s value PAN at 68ct, using a very conservative 12% discount rate!

Macquarie published a nice paper on battery metals this week, expecting a deficit in nickel production every year incl the end of the forecast period in 2022 ( and that obviously includes NPI, which is not possible to be used for batteries! ) and prices of 15-20.000$t in the early 2020ties.To that regard, I saw an interesting presentation at the Australian Nickel Conference two weeks ago by Jim Lennon, who is still the world´s best steel/nickel analyst, even though he got prices wrong quite often recently ( he stated himself, that he foresaw 6 of the last 3 bull markets  - I thought this was a very funny statement indeed! ). But I am more convinced now than ever, that Jim is right...we will see substantially higher nickel prices ( that is for "conventional" nickel ) over the next few years!     For Cobalt, Macquarie expects another deficit in 2018, while 2019 and 2010 should see surpluses, before the market will move to substantial deficits again from 2021. This is despite the ongoing substitution of cobalt with nickel.    Last but not least lithium - they see the market well supplied because of strongly rising , Australian hard-rock production, before moving into substantial deficits after 2021. I am still of the opinion, that there is a lot of lithium around - some major projects in the very early stages - so unchanged prices for the next few years will not be a bad outcome!

The big unknown still is copper. At this stage, I would expect big numbers for copper consumption from building infrastructure for EV´s - i.e. loading stations etc., and certainly EV´s themselves, which need 3x more copper than conventionial cars. This will be a huge exercise around the world, and as far as I understand, there is no way around copper currently to build infrastructure as well as cars.

I know, that I am getting very boring here - I would like to point out, that Panoramic produces nickel, copper and cobalt - nice mix!

Breaker - this great little success story is having a little correction in the moment. There had been a few rumours around, that the resource " does not hold together". i.e. that the mineralisation lacks consistency. I do not believe, that these rumours are correct - but yesterdays announcement, that the first resource calculation will now only be completed in the 1st Quarter 2018, instead of before Christmas, does not add to confidence. The consistently, positive intersections which BRB has drilled, still let me to believe, that we will have a nice, maiden resource here. Management was very confident in my last meeting with them 2 weeks ago.

Finders - have quantified the production loss from the recently reported, small and temporary problems, with about 2.000t, spread across the last and the current Quarter. This is a small and non-recurring problem...production in 2018 will be unaffected, and should return to 27-28.000t of copper at AISC of about 1.40 US$/lb, generating approx 85 mill US$ in EBITDA or even 90 Mill, at current copper prices. FND own 75% of the project. The valuation is very sensitive to an extended mine life, and FND have also reported some new, excellent drilling results from the nearby Lerokis property, containg intersections of 32m with 5,25% copper; 20m with 7.85% and 37m with 8.9%. All intersections include an average of 0,9g gold as well. Lerokis is small, but will get bigger as a results of this - mainly in grade. The ore body is relatively small, and should not contain more than 700.000t of ore. More properties are awaiting drilling approval, incl Meron, which should be much more sizeable and which could easily add 2 years mine life or so.  The management has also referred to some statements of the bidders , which have been factually incorrect.  I see no chance for this bid to succeed, even more so in light of recent bullishness of copper-investors. I think the stock is save buying at current levels!

Kingsgate - the share price saw a recent surge up to 50ct/share, based on some strong buying from an AIM-listed company called Metal Tiger. They are small, and to me, don´t look like being able to table a takeover bid for KCN. The stock has retreated over the last few days to about 43ct. Kingsgate has seen some positive noise from talks to the Thai government, but there has been no breakthrough in talks as yet. My view is, that Kingsgate will want to see 100 Mill $+ in compensation for Chatree, and that they will progress talks with the country risk insurers to a paoint, where they will either receive compensation of 100 mill US$+ in a settlement, or take this issue to the courts. The latter would probably require a few years. With regards to the silver project in Chile, my impression also is, that KCN are seeing strong corporate interest for this asset, and will pursue this. There are many if´s and when´s surrounding Kingsgate in the moment. While the upside ( market cap s currently 96 mill A$ / EV about 89 mill A$ ) is significant and could be up to double today´s price, this uncertainty and the fact, that Ross Smyth-Kirk does not have many friends in Australia, will limit any re-rating of KCN, unless settlement of the above happens. This could also be some time away. I suggets buying below 35ct, and selling above 50ct could be the appropiate strategy here - well, if it gets  there!

Sheffield - have made substantial progress with the development of their mineral sands asset in Western Australia. Firstly, the company has announced a 200 Mill US$ debt deal with Taurus Asset Mgt, which includes a 25 Mill US$ overrun-facility. There is no hedging required, and the 175 Mill US$ is a large chunk of the 350 mill A$ needed. Then, SFX announced another off-take agreement, bringing total offtake now to 44% of planned production. More agreements are to be expected here. Finally, they made a 32 mill A$ placement at 70ct, which was nicely oversubscribed. Analysts value SFX between 1.02 A$ and 1.92 A$, depending on financing for the balance of capex, a potential sell-down to a large partner, and the discount rate used - and obviously depending on zircon/ilmenite prices. The outlook for mineral sands is very interesting, as some mines around the world will close down over the next few years, and SFX´s project comes just at the right time for this. 

The largest issue overhanging the share price is the Native Title Agreement. A small group is opposing the current agreement, and have lost two court cases already - the Federal Court ( and final ) decision should be a formality, and is expected within the next 3-4 month. This is a large project with 42 years of mine life - highly attractive for any aquirer, for example Iluka. One of their mines is running out of reserves, and they could cement their leading world market position by buying this project at a discount. Also have in mind, that a major company would most probably not use a discount rate of 12%, rather 8% - given the very long mine life, this would have major impact and drive any valuation closer to 2$/share. Over the next few month, I am expecting the company to announced the start of some construction ( with a view of going into production late in 2019 ), the fixed-price agreement with their construction company, a Federal Court win, and last but most importantly, the sell-down to a major partner. It´s not hard to see 1$ for the stock within the next 6 month, which is 43% from today - given the major derisking happening here, this is a nice, potential return. A full takeover would need to be at a higher level, to be successfull. Blackrock is the major shareholder - they should make sure, that corporate action would not be successfull at crazily low prices. Another good story with a very high quality asset = limited risk!

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