Market Update

General - Lynas - Resolute/Oklo - Chalice - West African -

Good afternoon

quite interesting to listen to a round table between a few, leading German fundmanagers on the auto industry today...except for one, tehy were all not worried about EV, and were obviously investing alon their traditional lines. That´s a bit different to the car companies themselves - as we have all read, VW finds it very difficult to secure cobalt, and has started a multi-billion investment in EV´s, and BMW is building it´s own battery lab for 200 mill Euro - there is much more urgency from them behind the theme, than is from mainstram investors. I also listened to interesting comments from the managers of Platinum Asset Mgt in Australia, who are very smart people. They see EV´s as clear winners, especially, as China is driving the theme the hardest, and China is the most profitable and growing market for all large manufactures...Seems sensible to me. In essence: The main stream investor is not really inevsted in EV´s as yet - and certainly not on the resources-side of EV´s!

Metals are seeing a bit of a correction - albeit small so far. Renewed fears about Chinese growth have been prevailing over the last few days. Well, we have have heard it before...Most analysts are  seeing a continued, slow retreat of growth rates - but still growth above 5% for the next two years. While the current winter shut-downs to avoid excessive pollution are probably impacting growth somewhat, this is a temporary story. And the rest of the world is doing very well in the moment, and most probably next year. While LME-stocks are just one indicator, the constant reduction of Copper and especially Zinc from the warehouses is certainly a fact, and supportive for prices. So don´t worry, in my opinion - any further weakness is probably a good buying opportunity. 

While everything is looking so positive, at least in the short term, I have some problems with gold, though. There are a lot of underlying reasons to invest in gold - not least hightened, political uncertainty in the world - in the short term, and while interest rates in the States are rising, gold is not that sexy. Having said this, recent market action in golds feels pretty good...but I do not like it, when things are going higher, without an apparent, fundamental reason. That might be a little different in Australian terms, where some observers see the Australian $ going down further - mainly based on the diminishing interest rates differential vs the US. 

West African - respected, but also agressive Broker Bell Potter yesterday initiated on my favourite, Australian gold developer..They value the stock at 62ct using a NPV10 valuation, and discount that by 40% - implying an ultimate NPV10 valuation of above 85ct. I think that is looking a little bit into the future..., and they are using 1450 US$ long term gold price. At the current gold price, their ultimate valuation would still be an impressive 75ct/share approx..BUT in tendency, I totally agree. The very high grade nature of the underground ore body ( 26g for indicated resource + 16g for inferred ) should see this company either be re-rated, or taken over by some North American player like Iamgold ( have big operation in country already, or B2Gold, who have a resource nearby ). And who knows - I would not completely rule out, that somebody like Northern Star or Evolution eventually do move outside of Australia, if they can get a quality project. My target for teh stock is 60-65ct by the middle of next year. Until then, we will see a new resource/reserve estimate, and a new feasibility study ( June ) - both should give us furtehr value generation. None of this, though, incorporates any upside from exploration in the wider area, which is completely untested so far. In the very short term, i.e. before Christmas, we should get results from a few very deep holes. If tehy can deliver an extension of the current ore body, we might see 60ct much quicker than by the middle of next year. As this is such a high quality proejct, I think the downside risk is very limited, and given the very low, expected operating costs, 50-or 100$ downside in the gold price would not do that much harm to the valuation , either.

Some of you have met the MD at our resources conference 18 month ago - excellent man, very trustworthy...WAF remains a great story, and is my largest gold weighting in my fund.

Lynas - had their AGM today. This is clearly becoming a good company - the CEO has done a very good job over the last few years.  A few things to note here:

1. The price for Nd/Pr is under pressure again - recent highs close to 70$ are gone, and the current price is around 45 US$. 

2. Lynas will increase production from 500t /month to 600t/month from 2019 on, following a relatively small, 35 mill$ investment. That is certainly excellent news - we have seen progressively over the last 12 -18 month, that these guys are doing an excellent job operationally, and production is now consistently above nameplate.

3. Lynas will move away from spot-pricing, which is relying on the highly volatile, Chinese benchmark, to long term contracts. They are very close to signing such a deal with Bosch in Germany, which I guess will be a significant transaction, as Bosch is a massive company. Details to be announced in the very near future. Also, LYC are talking to several long term offtakers, as they want to support the use of Rare Earth in engines. In the moment, it´s ery difficult for any car-company to plan for the future, as the supply of Rare Earth is in doubt due to it´s scarcity, and the origin ( vast majority from China ).

4. Production will be much more custom-made in the future, and LYC are even more moving away from a mining company, to a specialty chemical company, supplying the automotive industry

I do like point 2, 3 and 4 from a longer term perspective - but it also takes some sex appeal from the stock, as volatility of product prices can also be a good thing at times!. Point 1 is not a good thing alltogether, for a stock, which is trading nearly 300% above it´s June-lows. I might sell a few, once the MSCI changes will be implemented on Thursday ( remember, LYC will be included ).

Chalice Gold - had their AGM today. Company is sitting on 48 mill A$, equivalent to today´s market cap. They have done two, signioficant transactions over the last few yars, realizing substantial profits, and paying out 25 mill A$ to shareholders. That´s a pretty good track record - but the market does not like cash boxes.The assets are currently subject to a 7.5 mill4 exploration budget. I do like the Canadian gold asset, being in very prominent neibourghood, on which an extensive drilling program is currently in full swing. 

Resolute - nothing really new from their AGM - both their mines are in a transition year, and teh rewards will only being felt from the end of 2018 on. But nothing wrong with that - they are developing their mines to be in existence for substantially above 10 years,, and probably much longer in teh case of Syama. The presentation does not indicate, whether tehy will develope Bibiana - I think the decision to either develope, or sell, is getting very close. More interesting perhaps were excellent drilling results from Oklo Resources, of which Resolute hold at least 16 mill shares or 5.5% of the company. Some people see OKU as the new Papillon - well, that´s a long way to go, but at least it´s looking promising, and Resolute have a foot in the door there.

Have a nice evening!


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