Monsters of Rock: Skyrocketing commodity prices are trimming more than a few hedges
Yesterday, commodity prices made their largest collective gains since the Russia-Ukraine conflict began. Case in point: nickel’s incredible 75% run to over US$50,000/t, which at one point threatened a 90% one day gain to US$55,000/t.
It came as the US considered banning Russian oil imports, raising the prospects of more expansive sanctions against Vladimir Putin and his circle in response to the invasion of its neighbour.
Not all good news for equities though, which have struggled to keep pace with prices, with nickel miners actually trading down today despite nickel trading at a level not seen since 2007.
In some cases margin calls have hit miners who hedged production back in the bad old days when commodities like coal were barter material.
US listed coal producer Peabody Energy, Australia’s fifth largest miner, locked in hedges for 1.9Mt of coal in 2022 through mid-2023 from its Wambo underground mine in New South Wales at anticipated average prices of US$84/t.
Prices for Newcastle index thermal coal have gone from US$169.17/t to a record US$419.50/t between the end of 2021 and Friday, exploding the value of derivative contracts as part of the hedge arrangement.
As a result Peabody has had to post an additional US$534m in capital to satisfy its margin requirements, supported by a US$150m unsecured multiple draw credit facility from Goldman Sachs.
Peabody says however, it expects to generate significant operating cash flows from unpriced volumes, which it says makes up the bulk of its thermal coal production, giving the bulk of its mines access to super high seaborne prices.
Peabody says in 2021 it exported 8.7Mt worth $762m at an average realised price of US$87.51/t. That will almost certainly be higher in 2022 thanks to the recent squeeze in coal prices.
Similar issues are arising in nickel markets, where Bloomberg reported recently Tsingshan boss and trader Xiang Guangda, an entrepreneur colloquially known as Big Shot, could be holding a big short position on a recent bet nickel prices would come down from recent highs.
Instead they have more than doubled. The world works in mysterious ways.
Rough diamond prices have been rising fast post-pandemic though, with Argyle’s closure pushing the natural market towards a deficit.
Lucapa has picked up major Aussie investment fund Tribeca as an institutional backer, cornerstoning a $12.5m raising to support exploration at its mothballed Merlin mine in the Northern Territory, its Lulo mine in Angola and the Brooking tenements in the Kimberley, near the shuttered Argyle.
Tribeca Head of Global Resources Ben Cleary is particularly bullish about Merlin’s potential to become “Australia’s finest producer of diamonds”.
Tribeca has increased its exposure to diamonds in recent years through the Kimberley Syndicate, formed with Australian jeweller Margot McKinney, including the purchase of some of the fancy Argyle pinks Rio’s famous mine was renowned for.
As part of the placement Lucapa boss Stephen Wetherall says Lucapa will be looking at opportunities to venture with the Kimberley Syndicate to move further downstream.
“We are delighted our vision and track record to become the (pre-eminent) mid-tier global diamond company has attracted Tribeca to Lucapa,” he said.
“Our recent and collaborative interaction has identified several opportunities, including venturing with the Kimberley Syndicate to develop a unique provenance offering as Lucapa continues its strategy of moving downstream to capture significant retail margins.
“We look forward to furthering this opportunity under a memorandum of understanding.”
Wetherall said the funding along with a $14m loan repayment will help settle interest bearing debt early and improve Lucapa’s balance sheet.
“This puts Lucapa in a solid financial position where we can realise near-term value catalysts quickly by speeding
up the Lulo kimberlite exploration with the dedicated bulk sampling plant, complete the drilling program at the
Brooking Project and accelerate revenue and margin growth initiatives,” he said.
Lucapa picked up the 4.4Mct Merlin project from liquidators of the previous operator last year for $8.5 million.