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Morning View

Economic News

US – Data yesterday showed that personal income for July was slightly weaker than expected in comparison to consumption data that rose slightly. Personal incomes rose just 0.2% compared with the projected 0.3%. The poor data led stocks lower with the S&P 500 closing down 1.5% and the DOW industrial average lost 1.4%
•    US Labor Department data shows that some 61,000 construction jobs were lost between May and July, with another 56,000 positions shed in ancillary areas, such as furniture, building products and financial services related to property
•    Auto sales are expected to hit two and a half decade low as widespread discounts and deals failed to entice worried consumers. Industry wide data to be released tomorrow is expected to show deliveries across the country have reached an annualised rate of 11.6 million vehicles, suggesting the slowest August since 1982.  The rate would be 18% below last year’s 14.2 million.

Japan –  The Bank of Japan has expanded a bank loan program in what is widely considered to be an effort to restrain the Yen in order to protect the country’s economic recovery.
•    The BOJ will increase the amount of funds in its lending facility by 10 trillion yen (US$118bn). The announcement has generally been greeted with skepticism and the suggestion that the efforts will prove to be futile. 

Russia – Plans have been announced to increase import tariffs on cars in an effort to encourage foreign motor companies to invest in the country. Russia’s domestic auto industry accounts for over a million jobs throughout the country.
•    Prime Minister Vladimir Putin on Sunday opened a new pipeline to export Siberian oil to China.

Australia – Rising exports of coal and Iron ore have helped shrink the country’s current account deficit.
•    The shortfall on goods, services and investment moved to A$5.64 billion ($5.05 billion) from a revised A$16.5 billion in the first quarter. Net exports added 0.4% last month.
•    Retail sales for July rose 0.7%. The figures suggest that households are weathering the increase in interest rates as a mining boom drives down unemployment.

UK - Consumer confidence unexpectedly rose in August for the first time in six months. The index of sentiment rose 4 points to minus 18 after forecasters suggested the number could drop to -24.
•    In contrast housing data suggested that maybe confidence in the economy was falling as home prices recorded the largest fall in 18 months. Data released later today is expected to show a considerable fall in mortgage approvals last month.

South Africa – In an effort to end the 14 day strike the government offered to increase public workers’ pay by 7.5% The state also proposed raising the housing allowance to 800 rand (US$109) The strike has been marred by violent clashes between protesters and police.
•    A strike at Richards Bay Minerals ltd, a joint venture between BHP and Rio Tinto is now damaging production and hurting profits the company has announced.
Singapore – The Singapore Exchange ltd is in the process of investigating the prospect of introducing non ferrous metal futures contracts for trading on the derivates market.
US$1.260/eur vs $1.272/eur last week. Yen84.74/$ vs 84.31/$  SAr7.36/$ vs 7.31/$  $1.540GBP vs 1.554/GBP

Commodity News
Precious Metals:
Gold US$1,235/oz vs US$1,236/oz yesterday – Prices are off slightly in early trading as investors lock in last weeks gains.
•    Gold imports by India this year may total 600 tons to 625 tons, compared with an estimated 480 tons to 485 tons last year, according to Anjani Sinha, chief executive officer of the National Spot Exchange Ltd., the country’s biggest company for trading physical gold.
•    SPDR gold holdings rise to 1,298.56t (41.749moz) from 1,297.95t (41.730moz). Current value US$51,541bn.
Platinum US$1,512/oz vs US$1,534/oz yesterday –
Silver US$18.93/oz vs US$18.86/oz yesterday –
Palladium US$489/oz vs US$501/oz yesterday –
Rhodium US$2,125/oz vs US$2,125/oz yesterday

Base metals:
Copper US$7,394/t vs US$7,323/t yesterday –  Prices are off slightly as the market digests the slowing personal income data coming out of the US and worries about the viability of the country’s economic recovery.
•    First Quantum suspends operations at Frontier as DRC withdraws permits
Aluminium US$2,051/t vs US$2,025/t yesterday –  United Co. Rusal, the world’s largest producer has said demand for the metal will remain strong throughout the rest of the year on the back of sustained demand from China and increasing demand from the US as the economy continues to recover.
•    The company went onto state that sustainable prices can be justified by an increase in import demand from China as more than 25% of domestic producers are unprofitable at current prices because of increased electricity tariffs, raw material costs and wage inflation
•    Aluminum stockpiles are forecast to drop by as much as 5% by the end of 2010 and to decline throughout 2011 as demand recovers
Nickel US$20,793/t vsUS$20,794/t yesterday –
Zinc US$2,071/t vs US$2,056/t yesterday –
Lead US$2,053/t vs US$2,048/t yesterday –
Tin US$21,300/t vs US$21,350/t yesterday – Prices are off today after hitting a two year high on Friday on the back of improving optimism and supply constraints.
•    The raw material used in soldering and food packaging is among the strongest performers in commodity markets in 2010, rising 37.1% for the year to date. That having been said, the tin market which is the smallest market on the LME is prone to severe swings due to a lack of liquidity.

Energy:
Oil US$75.77/bbl vs US$74.76/bbl – Prices have moved sideways slightly compared to the strong gains last week as uncertainty increases over the viability of the economic recovery in the US. Furthermore US oil inventories rose 0.4% in the seven days to Friday.
•    Iran has announced that over the last year it has found 13 new oil and gas fields, over the last year with an estimated total reserve of 14 billion barrels of oil and 45 trillion cubic feet of natural gas.
Gas US$3.840/MMBTU vs US$3.893/MMBTU yesterday –

Other:
Coal – Coal India the world’s largest producer of the fuel has announced that infrastructure shortfalls may force the company to set up power plants to use coal that is stockpiled as a result of a lack of railway wagons to carry supplies throughout the country.

Company News
Mining:
Medusa Mining* (LSE:MML)– Annual results demonstrate strong profits
•    Results:  Medusa’s annual results to the end of June reflect record results as the company has continued to successfully expand mining operations, achieving a production rate of 100,000ozpa.  Revenues for the year stood at US$94.6m up 121% yoy, EBITDA was up 142% yoy at US$73.7m, profits for the year came to US$65.8m up 131% yoy leading to EPS of 37.8c/share, up 102% yoy.  Underlying profits are ahead of these numbers since at the end of June the company had 6,368oz of the year’s production not dispatched which were treated as inventory, factoring these ounces into profits takes the 2010 results to US$71.7m.  The company reached year end with a very robust balance sheet that reflects no debt and adjusted underlying cash and bullion of around US$63.4m.
•    Earnings are in line with our forecasts, or ahead if considering the underlying earnings.  Our forecast cash and bullion position was in at US$62.8m.
•    Co-O Mine:  The mine produced US$89,679oz gold at an average grade of 16.52g/t Au and cash cost of US$184/oz.  Management is budgeting 100,000oz of gold production this year, although there is considerable upside potential from the mine and nearby targets.  Exploration work at Co-O has demonstrated that the strike extends 1.5km with veins identified across 500m width.  The mill continues to be developed and once new leach tanks are in place and the new power line completed by year end, then there will be spare capacity at the mill that could lead to incremental production growth.  We have modeled 120,000oz produced this year at a cash cost of US$200/oz rising to 130,000ozpa thereafter.  Work continues to explore the surrounding that could potentially lead to the delineation of sufficient resources and reserves to support a substantially larger operation.
•    Exploration:  In light of the continued exploration success and extensive portfolio of exploration targets within what the management regards as one of the most prospective mineralised regions in the Philippines the exploration budget has been increased from US$18.9m in the June 2010 financial year to US$21.0m this financial year.  As noted above, Co-O has considerable potential for expansion, and without doubt a long mine life.  A conceptual model previously outlined by the company indicated potential for 3-7moz of resource, and there could be significant upside from here as gold intercepts have been picked up 700m below surface.
•    Bananghilig is the company’s other principal gold project which is currently being explored and currently has a resource of 650,000oz at 1.3g/t Au.  Drilling is underway to establish whether there are sufficient reserves to support a mining operation.  A combination of Bananghilig and Co-O have the potential to support a production base of 300,000-400,000ozpa of gold production which would add major value to the company positioning it as a solid mid tier producer.  In addition to these projects there are other gold targets such as Saugon and Anoling, as well as copper porphyry targets such as Usa and Lingig.
Conclusion:  Following on from the company’s quarterly report, clearly Medusa is achieving its goals and generating significant amounts of cash benefiting both from near record gold prices and a particularly low operating cost.  We look forward to ongoing developments that could outline a production base of 300-400kozpa of gold.  The extensive exploration potential could also see further value from copper porphyry targets within the tenement package.  We recommend the company to investors seeking exposure to gold and organic growth through developments and expansion with substantial exploration potential.

* Fairfax acts as Nomad & Broker to Medusa Mining

Discovery Metals (LSE:DME)– BFS Results Demonstrate robust project

SUMMARY: Discovery Metals has released its Bankable Feasibility Study results for its Boseto copper project in Botswana which demonstrate a robust project.  The Bankable Feasibility Study covers 5 years of open pit mining and has been signed off by a range of tier 1 independent consultants.  In conjunction with the BFS the company has outlined its longer (15 years) Development Plan outlining underground mining and the development of coal fired power.  Key findings out line a capex of US$175m, plus an additional US$70m for a mining fleet, leading to production of 34.4-36.5ktpa of copper in concentrate for a cash cost averaging 123-128c/lb.  Practical completion of the project is estimated for Q4 2011 and full production in Q2 2012.  We have updated our numbers to reflect many of the changes and value the company at 71p/share.
•    BFS key parameters:  The BFS outlines a 5 year mine life open pit processing 3mtpa of ore that at the end of the period leaves 40mt of ore in the pit shells.  Mining grades are expected to run at 1.46% Cu and 18.7g/t Ag with recovery rates averaging 81.1% for Cu and 61% for Ag producing a concentrate product of grading over 40% Cu.  Cash costs over the period are estimated to average 128c/lb.  There are some cost increases versus previous estimates (e.g. cash cost of 104c/lb), however the industry has suffered cost inflation and copper prices are expected to remain sufficiently firm to weather this with ease.  The BFS is based off diesel gensets, which add around US$6.57/t ore milled of cost to the processing cost estimate of US$6.33/t milled.
•    Development Plan key parameters:  The Development Plan outlines a 15 year mine life.  This sees contribution of underground mining from mid 2014 at a rate of 1.5mtpa of ore, with open pit mining fall from 3mtpa of ore to 1.5mtpa.  Copper grades within this plan are likely to slip very slightly to 1.44% Cu although silver rises to 20.2g/t Ag.  Copper recoveries in this plan increase to 83.6%, likely a consequence of reduced oxidised ore due to the contribution from underground ore.  The concentrate product would also be higher grade at 41%.
•    Operating Costs:  The studies completed show a mining cost for the open pit of US$1.35/t mined, and US$6.33/t ore to process mill the ore.  Power costs to add to this include US$6.57/t for diesel gensets.  As previously indicated, management is progressing work on the development of a small coal fired power plant to reduce operating costs.  The estimated capex for this would be US$40m to be paid from cashflows in 2013 that in turn would reduce the power cost to US$2.31/t ore processed.  On top of these key items are other operating costs such as admin, transport, TC/RCs (US$45/t and 4.5c/lb), royalties (3% Cu and 5% Ag) etc that take the total per tonne of ore cost to average US$39.10/t for the BFS and US$38.83/t for the development plan.
•    Capital costs:  Capital costs have been estimated at US$175m to be funded 60% debt and the rest through equity.  Within this figure is US$11.2m of contingency.  In addition to this, the mining fleet is expected to cost US$70m, financing to be sourced either through favourable bank debt or lease hire purchase agreements from companies such as Caterpillar or Komatsu.  The company is keen to self generate power through a small coal fired power station using coal sourced from within Botswana, which as indicated above would dramatically reduced processing costs.  The current cost estimate is US$40m which should be achievable from cashflows, although there is the possibility to secure some debt for this.  We have also factored in a US$10m working capital facility.
•    Financing:  At the end of July the company had A$38m in cash.  With 60% of US$175m to be sourced from debt then this leaves a further US$70m of equity to secure.  To ensure the company retains a healthy balance sheet we have assumed that only A$25m of the current cash reserves are spent on capital development, leaving a further US$48m to be sourced from new equity (using current exchange rates).  We assume this is done at a 10% discount to the current price leading to the issuing of 118m shares at 45p/share (Ac78/share).
•    Due to the low political risk in Botswana and low Libor rate (12month libor at 0.86%) we have used 8% interest on the US$105m project finance facility.  Management expects to pay this down over 2.5 years.  Financing of the mining fleet of US$70m we see being done at 4% interest paid down over 5 years.  We have assumed the company secures a US$10m working capital facility at 10%pa interest which it reduces to US$7m after two years.
•    Hedging:  As part of the project debt facility it will be necessary to hedge production over the period of repayment.  We have assumed that 50% of production is hedged in line with the current forward curve which comes to around 45kt of copper hedged at just over US$7,000/t for 2.5 years from start of production.
•    Underground Mining:  Last year the company outlined parameters for underground mining from a scoping study at Zeta, mining 1.5mtpa of ore at 1.5% Cu for US$37/t of ore mined and capital cost of US$10m.  Management expect to phase this development in from mid 2014.  The underground is higher cost mining than the open pit, and since the most recent information is only scoping study level with a higher degree of uncertainty we have pushed back its development to 2015/2016.  The BFS also demonstrates 5 years of open pit mining which would go to 2017.  A feasibility study on the underground development is underway which could lead to enhanced economic parameters and greater certainty on when this could be phased in.  Another alternative that could evolve over the time period would be to maintain 3mtpa from open pit mining and add 1.5mtpa of capacity for underground ore feed significantly adding to output, however, we are some way from being clear on such developments.
•    Valuation:  Since our last valuation, both capital costs and operating costs have increased, however, the signing off of the BFS has lowered the risk profile.  Consequently we’ve reduced our discount rate from 10% to 9%.  Our copper cost curve uses 2.5 years of hedging as mentioned above, with unhedged production starting at US$7,055/t (320c/lb) falling to US$5,500/t (US$250c/lb) by 2017 with silver prices flat at US$17/oz which provides around 7-8% of revenue.  We have also included US$20m for exploration and cash of A$39m.
•    Our cash costs are in line with management guidance for the open pit portion of the mine, although we reflect higher costs in the first 18 months of production through lower recovery rates (70-75%) as the plant ramps up.  Underground mining lifts cash costs to around 160-170c/lb but as mentioned above, ongoing work could lead to changes in these numbers.  Capital costs, debt financing and equity raises are as discussed above.  We have also extended the mine life to 20 years from 15 years, to reflect the high prospectivity in the region.  The current production profile mines 870kt of contained copper from a resource base with 1.4mt of contained copper that is open along strike, at depth and new targets being identified that could show similar mineralisation.
•    Higher costs have had some impact on our valuation previously at 76p/share reducing it to 71p/share, however, we feel that the final BFS significantly reduces the risk profile and that ongoing work will demonstrate significantly more value from underground and the potential addition of new projects.  Copper prices could also exceed our forecasts adding further value.  The NPV of the project in US$ comes to US$404m which is sensitive to copper prices.  See attachment sent out earlier this morning for a sensitivity analysis of copper prices versus discount rates.  Valuation is also sensitive to exchange rates.
Conclusion:  Discovery remains a rare and robust proposition for investors to get exposure to the copper market and the value upside as the company evolves from developer to producer.  Ongoing exploration should provide continued newsflow and we expect will demonstrate additional economic resources to be developed as another standalone operation (potential to for more than one on 1,300km of potential strike), extend mine life or support an expansion.  The company has been exceptionally thorough with its feasibility work using a broad range of high quality consultants examining many aspects of the project exhaustively to minimise development risk.  The management team has also continued to be strengthened to take the project forward.  We look forward to ongoing newsflow on the development of the project as further milestones are achieved such as: debt securing, mining license, start of development etc as well as exploration progress.  We will update the market in due course with more details and analysis following the feasibility study results published today.

* Fairfax acts as Nomad & Broker to Discovery Metals

Pan African (LSE:PAF) results demonstrates considerable earnings growth
•    Pan African’s results for the year to June reflect revenues up 29.25% yoy to £68.5m, EBITDA up 9.17% at £25m leading to attributable profits of £14.3m and an EPS figure of 1.04p/share up 160% yoy.
•    The company has also proposed a final dividend of 0.3723p/share.
•    During the year the company increased production by 2.71% to 97,483oz and head grades also rose from 10.32g/t a year ago to 10.61g/t.  Production costs were up 42.46% yoy to £40.6 impacted by the strong rand since in Rand terms operating costs were up 17.97% yoy to SAr483.8m.  Items such as security and wages have weighed on earnings although we’d expect to see some easing on security costs as the company continues to successfully resolve such issues.  Cash costs for the year averaged US$650/oz which compares favourably with other South African producers.
Conclusion: The company has incremental growth potential around Barbeton Mines that should see it add ounces to its current circa 100,000ozpa production rate.  In addition, management is progressing its Phoenix Platinum project. We look forward to ongoing developments as management continues to improve operations at Barbeton and uses the asset as a base to expand operations at Phoenix and potentially new opportunities.

Iofina (LSE:IOF)  Fourth third party contract signed
•    Iofina has signed its fourth and largest third party iodine collection agreement since March this year that is expected to increase potential brine streams from 41,500bpd to 62,500bpd.  Current production on line stands at 12,000bpd yielding 33-38mt of raw iodine annually.
•    The agreement has the potential to more than double the production base with a staged development process of up to four WET Pod units each capable of handling 6,500bpd delivering iodine of 123-143tonnes.
•    The new site currently disposes of around 21,000bpd of brine water containing 140ppm of iodine, significantly more than Atlantis at circa 65ppm.  Initially a single pod will be deployed follwed up by a second after 30 days and the final two 30 days later.  The first two units could together yield 76-88tonnes and bringing in the other two could add a further 47-54tonnes annually.
Conclusion: This latest deal should boost the company’s production base substantially and could help give it further momentum to broaden its production base and allow it to further evolve and grow.  Significant contracts like this are major successes for the company and should others follow the step change in earnings and revenue can add substantial value.  The company continues to push on a number of fronts to secure more brine stream treatment opportunities that it has identified.
 
Ovoca Gold (LSE:OVG) – Encouraging drilling results
•    Ovoca has published encouraging drilling results from its exploration work at its Olcha gold project in the  Rassonshinskaya license in the Magadan region of Russia.
•    Three targets have been identified and 6,640m of drilling have been completed with the results received for 1,840m.  The results indicate gold mineralisation is open along strike to the Southeast and at depth on the Centralny zone 2 target.
•    Highlighted gold grades show reasonable intercepts at high grades frequently well over 10g/t.
Conclusion:  This is encouraging work from a team well experience in Russia.  We look forward to further updates.

Mining this week:
African Minerals (LSE:AMI)– Parliamentary approval for Tonkolili
Shanta Gold* (LSE:SHG) Chunya Environmental Certificate Granted
BHP Billiton (LSE:BLT) Strong set of financial results
Talvivaara Mining (LSE:TALV) Interim and quarterly update
Antofagasta (LSE:ANTO) half year results
BHP (LSE:BLT) Potash deal could be under threat from other parties
ENRC (LSE:ENRC) Acquisition of 50.5% of Camrose Resources
First Quantum (LSE:FQM)– Continues to push to retain rights to Kolwezi project
Bellzone (LSE:BZM)– Project director for Kalia appointed