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World Bank's IFC to pull out from Rio Tinto's Simandou iron ore project

Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


World Bank's IFC to pull out from Rio Tinto's Simandou iron ore project

TOP NEWS

World Bank's IFC to exit Rio Tinto's Simandou iron ore project

The World Bank's International Finance Corp. is exiting Rio Tinto's Simandou iron ore project in Guinea after a decade of being a partner, the latest setback in a string of issues hampering the development of the US$20 billion project, Bloomberg News wrote, citing an email from the company.

Rio Tinto cutting debt by US$1.5B via cash tender offer

Rio Tinto repurchased and canceled about US$1.5 billion of its 2019, 2020, 2021 and 2022 notes under the cash tender offer announced in late September. The global mining giant's offer to redeem about US$1.5 billion of its 2017 and 2018 U.S.-dollar-denominated notes will remain open until Oct. 26.

Noble agrees to US$1.05B sale of US energy business to Calpine

Noble Group Ltd. agreed to sell its Noble Americas Energy Solutions LLC unit to Calpine Corp. for US$800 million plus an estimated US$100 million of net working capital, according to separate statements. The sale also includes the repayment of working capital, estimated at an additional US$248 million. The sale is expected to close in December and will complete Noble Group's US$2 billion capital-raising initiative announced in June.

DIVERSIFIED

* With the Paris climate accord scheduled to come into force on Nov. 4, mining major BHP Billiton Group still expects its copper, oil and gas, iron ore and coal businesses to have strong future margins in a world with lower carbon emissions, Reuters reported. "Under all current plausible scenarios, fossil fuels will continue to be a significant part of the energy mix for decades," the company noted.

BASE METALS

* Vedanta Resources Plc posted a year-over-year drop in second-quarter production for fiscal 2017 for all three commodities — zinc, lead, and silver — from its Indian zinc operations. Refined zinc production fell 29% on a yearly basis to 150,000 tonnes, while refined lead production dropped 24% to 31,000 tonnes. Silver output slid 4% to about 3.5 million ounces.

* Freeport-McMoRan Inc. resumed normal operations at its Grasberg copper-gold mine in Indonesia after resolving a 10-day labor dispute with a worker union at the mine, Reuters reported, citing a company spokesman.

* The BHP Billiton and Glencore Plc majority-owned Antamina mine in Peru is likely to double zinc output to between 340,000 tonnes and 360,000 tonnes in 2017, Reuters reported, citing the mine's General Manager Abraham Chahuan. Annual copper output, meanwhile, is expected to increase to 430,000 tonnes in 2016 and 2017, slightly above the 2015 total of 412,000 tonnes.

* PT Timah (Persero) Tbk recorded lower monthly exploration activity amounting to 88 billion Indonesian rupiah during the January-September period, compared to 109 billion rupiah during the same period in 2015, Bisnis Indonesia reported.

* The environmental permit of Austral-Asia Link Mining Corp.'s nickel mine in the Philippines will be canceled just months after it started operations, Reuters reported, citing the environmental and natural resources secretary Regina Lopez. The suspension was not prompted by the country's mining audit but because it sits between a UNESCO World Heritage Site and a marine protected area.

* PJSC MMC Norilsk Nickel vowed to defend its interests in the sale of its 50% stake in the Nkomati nickel joint venture in South Africa to Botswana-based BCL Ltd. This comes after the government of Botswana applied to the high court to place its copper and nickel producer BCL Mine Ltd., under provisional liquidation due to nonprofitability.

* Independence Group NL has made its Windward Resources Ltd. takeover bid unconditional after Windward announced that Eastern Goldfields Ltd. has withdrawn from the funding agreement. Independence has already acquired a 19.9% interest in Windward.

* Australian Mines Ltd. is acquiring the Flemington scandium-cobalt project in New South Wales, Australia, from Jervois Mining Ltd. and the Sconi scandium-cobalt project in Queensland from Metallica Minerals Ltd.

PRECIOUS METALS

* SolGold Plc rejected a proposal by BHP Billiton, which offered US$30 million for a 10% stake in the company and a director position on its boards. BHP also suggested an earn-in arrangement over the Cascabel copper project in Ecuador, under which it would spend US$275 million to acquire a 70% stake out of SolGold's 85% interest in the company that holds the Cascabel tenements. SolGold's board determined that the BHP proposal is not in the best interests of the company and its shareholders, and still prefers the US$33 million financing deal with Maxit Capital LP and Newcrest Mining Ltd.

* Compañía de Minas Buenaventura SAA's third-quarter gold production totaled 277,556 ounces, down from 366,881 ounces in the year-ago period. Meanwhile, silver production amounted to about 5.75 million ounces, slightly up from 5.63 million ounces reported in the same quarter of 2015.

* Tharisa Plc exceeded its fiscal 2016 output guidance for platinum group metals, producing about 132,600 ounces, a 12.4% year-over-year increase. Chrome production totaled approximately 1.2 million tonnes, up 10.8% despite marginally lower feed grades.

* Metals X Ltd. CEO Peter Cook believes the separation of the ASX-listed miner's gold assets into a new company will likely set it up for a re-rating rather than make it a takeover target. Cook told SNL Metals & Mining on the sidelines of the Precious Metals Investment Symposium in Sydney, Australia, that if the newly demerged Westgold Resources Ltd. did not re-rate, it could go from being "one of the hunters to being the hunted."

* The Malian government's shuttering of the offices controlled by Randgold Resources Ltd. does not affect the operations of the Morila, Loulo and Gounkoto gold mines in the country. "We have continued to engage with the Malian authorities at the highest level to resolve the remaining issues and we trust that the parties will return to the negotiating table in the spirit of constructive partnership..." the company added.

* Separately, Reuters reported that the Malian government demanded that Randgold Resources pay 50% of the US$80 million it says the miner owes the government before starting talks about the repayment schedule for the remaining amount.

* Kinross Gold Corp. is set to start mining two small but high-grade silver and gold deposits in Russia by 2018, according to Lou Naumovski, general manager of Kinross' Russian operations. The Toronto-listed company will begin mining Moroshka, located 4 kilometers east of the Kupol site, by late 2017, and at September Northeast, located 15 kilometers northwest of Dvoinoye, by 2018.

* AngloGold Ashanti Ltd. said in an emailed statement that the company will wait to see if Ghana will enforce a state order to remove the illegal miners from the gold miner's Obuasi operations in the country, adding that similar claims made earlier were ineffective, Bloomberg News wrote.

* Avocet Mining Plc entered into a conditional joint venture agreement covering the Tri-K gold project in Guinea. Under the terms, a unit of Managem SA will acquire up to a 70% stake by completing a work program and meeting certain milestones.

* King River Copper Ltd. signed a heads of agreement with Spectrum Rare Earths Ltd., allowing the latter to earn a 51% stake in the Mount Remarkable gold prospect in Western Australia.

* Primary Gold Ltd. completed the previously announced A$10 million acquisition of the Coolgardie gold project in Western Australia from MacPhersons Resources Ltd.

* Torian Resources Ltd. has launched an off-market takeover offer to acquire all of the shares in Cascade Resources Ltd. for a total of A$8.4 million.

* The Perth Mint and the ASX are working to launch a new gold futures contract. Richard Hayes, CEO of The Perth Mint in Western Australia, told SNL Metals & Mining on the sidelines of the Precious Metals Investment Symposium in Sydney, Australia, that the collaboration will allow customers to take physical delivery of gold.

* Royalties paid by gold producers to the New South Wales government in Australia rose by 12.5% in the 2016 financial year to about A$54 million, state Industry, Resources and Energy Minister Anthony Roberts told delegates on the first day of the Precious Metals Investment Symposium.

BULK COMMODITIES

* Fortescue Metals Group Ltd. agreed to acquire BC Iron Ltd.'s 75% interest in the Nullagine iron ore joint venture in Western Australia for A$1.00, and will now evaluate the feasibility of restarting operations in the current market.

* JSW Steel Ltd. is engaged in "exploratory work" on acquiring an interest in troubled Italian steelmaker Ilva International SpA, Metal Bulletin reported, citing JSW's joint Managing Director Seshagiri Rao. Talks are in the initial stages and JSW representatives have visited Ilva steelmaking sites, Rao added.

* Following a rally in the spot market, a recent deal points to the Q4'16 metallurgical coal benchmark likely doubling versus both the prior quarter and the year-ago period to settle above market expectations, reversing a downcycle that lasted more than five years.

* Tata Steel Ltd. is understood to be in talks with the U.K.'s Pension Protection Fund and the pensions regulator, and is said to be close to a restructuring deal that would pave the way for the proposed merger of Tata Steel's U.K. business with ThyssenKrupp AG, according to The Sunday Times.

* Chinese state-owned Dongbei Special Steel Group Co. Ltd. has been formally placed into a bankruptcy restructuring process following a court filing by one of its creditors, Alashan Jinzhen Smelting Co. Ltd., Reuters reported, citing Xinhua News Agency. Dongbei's subsidiary Fushun Special Steel said that 496.9 million of its shares held by Dongbei had been frozen by the court.

* According to The Australian Financial Review's Street Talk, Moly-Cop's pathfinder prospectus indicates fiscal 2017 EBITDA of US$146.2 million, which is in line with the US$145.8 million posted for the year ended June 30. Gross profit is expected to be US$223.7 million, reflecting a 3% year-over-year increase, while after-tax net profit is estimated at US$59 million.

SPECIALTY

* TNG Ltd. successfully produced, for the first time, high-purity vanadium electrolyte using vanadium pentoxide from its flagship Mount Peake vanadium-titanium-iron project in Australia's Northern Territory.

* Global Geoscience Ltd. estimated a JORC 2012-compliant maiden indicated and inferred mineral resource for South Basin, part of its Rhyolite Ridge lithium-boron project in Nevada, of 393 million tonnes, containing about 3.4 million tonnes of lithium carbonate. At a 0.6% lithium carbonate equivalent cut-off, the resource contains 0.9% lithium carbonate, 2.9% boric acid, and 1.7% potassium sulfate.

INDUSTRY NEWS

* India's Mines Ministry is assessing funding options to support exploration activities of government-owned and -operated mining firms in a bid to increase the sector's contribution to the country's gross domestic product to 2% from 1%, according to Mining Weekly.

The Daily Dose is updated as of 7 a.m. Hong Kong time, and scans news sources published in Chinese, English, Indonesian, Malay, Portuguese, Russian, Spanish, Thai and Ukrainian. Some external links may require a subscription.


Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Highlights

The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:https://eba.europa.eu/documents/10180/2419200/2018-EU-wide-stress-test-Results.pdf

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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