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Fairfax Market Report including: Shanta Gold, Medusa Mining, Ampella Mining and others.
Morning View
Gold prices break $1,250/oz
• We expect gold prices to see a strong run over the next few months towards $1,500/oz as investors look for safe haven asset classes on ongoing economic uncertainty.
• New investment in smaller growth companies combined with rising gold prices may help gold miners go better.
• Positive news on Chinese manufacturing appears to follow ongoing strong inward investment flows into the region. The news may help to alleviate some concerns for global economic growth but may also heighten pressure on western manufacturers which have to compete with Chinese manufacturing.
Economic News
China – Manufacturing activity expanded in August. The purchasing manager’s index rose to 51.7 from 51.2, exceeding forecasts. Stocks and metals are up today as a result of the announcement as demand fears recede and industrial growth prospects improve.
US – Consumer confidence rose more than forecast in August a report yesterday showed. The Conference Board’s index increased to 53.5 from a five-month low of 51 in July. Improving confidence could help ease concerns that consumer spending, which accounts for near 70% of the economy may falter.
• Minutes released from a recent meeting of The Federal Reserve, showed that the central bank is ready to step in and purchase more government debt should the economic outlook worsen. The minutes highlighted that the Fed would prefer to purchase US government bonds, but did not rule out buying further mortgage debt
• The Institute for Supply Management in Chicago announced business activity in the U.S. expanded in August at the slowest rate this year. The group’s business barometer fell to 56.7 this month, the lowest since November, from 62.3 in July.
• Manufacturing activity report due to be released later today is expected to show that the sector increased at the slowest pace in almost a year.
Europe - European inflation slowed this month and unemployment held at the highest in almost 12 years in July as companies continued to cut costs to help shore up earnings. Euro-area consumer prices rose 1.6% from a year earlier after increasing 1.7% in July.
UK – Figures released from the Bank of England showed mortgage approvals changed little last month. Lenders granted 48,722 loans to buy homes, compared with a revised 48,562 in June.
India – Morgan Stanley have announced new estimates that suggest that India will overtake China as the world’s fastest growing major economy as early as 2013 as it adds six times more workers to its Labor force. The company cited improvement in demographics as measured by declining age-dependency, in being the most important factor supporting this acceleration of growth.
Australia – Data released today showed that the economy grew at the fastest pace in 3 years last quarter boosted by demand in china for iron ore, spurring companies such as BHP to up mine production and drive the economy forward. GDP expanded by 1.2% from Q1. Exports advanced 5.6% in the quarter adding 1.1% to the GDP figure.
South Africa – No official end to the national strike as public service trade unions have not yet announced their decision on whether to accept the governments latest wage offer.
• The ministry of mining is set to release a review of the nation’s mining charter this month. The 2004 charter required companies to sell 15% of their South African assets to black investors by the end of 2009 and 26% by 2014 to make amends for apartheid.
Democratic Republic of Congo - Minister of Mines Martin Kabwelulu Labilo said on Tuesday that the government planned to investigate suspected financial misconduct by First Quantum Minerals as the uncertainty surrounding the ongoing dispute builds. First Quantum announced at the weekend that the DRC mining registry withdrew the company’s exploitation permit at the Frontier mine.
Currency – Asian currencies are up today lead by anticipation that improving economic news emerging from China will encourage global funds to add holdings in emerging market currencies.
US$1.270/eur vs $1.260/eur last week. Yen84.09/$ vs 84.71/$ SAr7.38/$ vs 7.36/$ $1.538GBP vs 1.540/GBP
Commodity News
Precious Metals:
Gold US$1,249/oz vs US$1,235/oz yesterday – Prices are up slightly but look likely to be restrained as investors are likely to cash in on recent gains and positive news from China reduces demand for safe haven investments.
• SPDR gold holdings rise to 1,302.51t (41.876moz) from 1,298.56t (41.749moz). Current value US$51,158bn.
Platinum US$1,525/oz vs US$1,512/oz yesterday –
Silver US$19.37/oz vs US$18.93/oz yesterday –
Palladium US$505/oz vs US$489/oz yesterday –
Rhodium US$2,125/oz vs US$2,125/oz yesterday
Base metals:
Copper US$7,524/t vs US$7,394/t yesterday – On the back of the positive manufacturing news coming out of China, prices climbed to the highest level since April.
Aluminium US$2,073/t vs US$2,051/t yesterday – Chinese exports of certain Aluminum products will face higher US tariffs after the commerce department ruled that they received unfair government subsidies. In a preliminary decision released today, the department said the additional tariff would be as much as 138%
Nickel US$21,120/t vsUS$20,793/t yesterday –
Zinc US$2,113/t vs US$2,071/t yesterday –
Lead US$2,099/t vs US$2,053/t yesterday –
Tin US$21,375/t vs US$21,300/t yesterday
Energy:
Oil US$74.76/bbl vs US$75.77/bbl – Prices are off this morning in anticipation of an energy department report today that will probably show that crude inventories in the US increased last week on the back of falling demand.
Gas US$3.772/MMBTU vs US$3.840/MMBTU yesterday –
Other:
Nickel Pig Iron Smelters – in China’s Shanxi province have been ordered to close for at least a month to save energy and meet strict government emissions targets. Other regions are expected to face a similar ban as the government steps up efforts to improve its pollution record. The shutdowns come amid tightening supply with August production already expected to fall.
Coking Coal – is expected to see a fall in prices as demand from steel maker’s drops. Japanese steelmakers, the world’s second-largest producer of the metal, won a 7% cut in quarterly coking coal prices, the first reduction this year, from BHP Billiton Ltd.
Uranium - Paladin Energy Ltd said it is targeting uranium shipments to China in 2011 after signing a preliminary accord with the nation’s second-biggest builder of nuclear power plants.
• First Uranium has temporarily closed its Ezulwini uranium plant in South Africa after a structural failure on a loading column. The company said the gold plant at Ezulwini has not been affected but that it expects a $1,2-million effect on cash flow, loss in uranium sales and rescheduled capital spending
Company News
Mining:
Shanta Gold* (LSE:SHG) Mining license for Chunya project issued
• Shanta Gold have received the mining license for the Chunya gold project in Tanzania.
• The license follows on from the environmental certification of the project last week. This followed from the completion of the full feasibility study on the Chunya project in July.
• Singida: The consultants are now working on a pre-feasibility study for the Singida project to be followed by a full feasibility study to be completed for Singida early next year.
• The mining license marks a seal of approval for Shanta Gold and its team in Tanzania. The team’s work is now effectively recognised and approved by the Tanzanian ministry of mines and work to develop the mine at Chunya should follow shortly. Negotiations for some larger items may have already begun while contracts for the plant construction and earthworks should be in place shortly.
• Mine finance: The company is in discussions with a number of groups which may effectively result in the financing of the Chunya gold project. Capital costs may vary between $18-23m according to previous reports. The feasibility study estimated $23m for a new plant but this cost may reduce to $18m depending on negotiations to buy some second hand equipment.
• Valuation: We are raising our valuation to 49p from 46p through the lowering of our assumed discount rate on the Chunya gold project. The issuance of the mining license removes an area of significant concern and highlights the work of the management team in assuring the Tanzanian government that the company is fit to mine gold in Tanzania. We see the Chunya gold mine as raising gold production levels beyond the current plan relatively quickly and at little additional capita cost.
Conclusion: We are pleased to see the mining license for Chunya now issued and this indicates to us that the permitting and licensing process in Tanzania is working for Shanta Gold. We hope that the Singida project may also receive its mining license next year following the issuance of the ongoing feasibility work for the project.
* Fairfax acts as Nomad & Broker to Shanta Gold
Medusa Mining*(LSE:MML) Management propose maiden dividend
• Management has given notice to shareholders that it intends to amend the company’s constitution to remove the restriction that dividends can be paid only out of the profits of the company and is planning to pay a maiden unfranked dividend of Ac5/share (2.9p/share).
• The dividend payment implies a yield of around 1.25% and a dividend cover of 8.5 times post tax profits for 2010. The company’s cash and bullion balance of US$63.4m is more than able to meet the payment totaling US$8.3m to be paid out on the 8th November.
• The date for determining those shareholders on the register entitled to the dividend will be 15th October, with the ex-dividend date on 11th October.
• Other amendments being proposed for the meeting include the insertion of pre-emptive rights provisions in respect of new issues of shares for cash. The provisions are aimed to protect shareholders as appropriate for a company seeking admission to the Main Market of the LSE.
• A separate resolution is to be proposed to seek approval to re-insert proportional takeover provisions in the company’s constitution.
Conclusion: This is a major milestone for Medusa and will raise its profile opening the door for investment by income funds. Although shareholders have yet to vote on the proposal, we would expect many will be keen to start receiving dividends. Such a development could well lead to a further re-rating of the company. Current cash reserves and cash generation of the company are more than enough to meet the cost of the dividend. The company continues to have a strong balance sheet that can continue to grow which could eventually be used towards the capex on Bananghilig or a significant expansion at Co-O, if continued exploration work proves up either or both of these options. Raising cash in equity markets if necessary should also be relatively straight forward for a company with Medusa’s track record and production base.
* Fairfax acts as Nomad & Broker to Medusa Mining
Ampella Mining (ASX:AMX)– Brilliant results at Konkera to drive value forwards
• Ampella Mining continues to report positive and strong progress at its key project, Konkera.
• The presence of a long, 29 meter, intersection grading 7.6g/t gold with a further 44m at 1.9g/t is spectacular in exploration parlance.
• This is one of a number of long and relatively good grade intersections.
• The results come from relatively shallow infill drilling at Konkera which is ongoing over the first 1.3km of the known 3km gold resource at Konkera.
• It is rare to see such consistency over so many drill results at such an early stage.
• Gold grades are reported very close to surface implying relatively low waste stripping will be required to access the gold ores.
• Further results are due from infill drilling along ‘the gap’ at Konkera and at the Kouglaga prospect.
• The results will add to expectations for the next update on the Konkera JORC resource which currently stands at 1.2moz. The market expects the next JORC resource update to take the resource to over 2moz and is valuing the company more highly than this.
• Konkera is part of the Batie West license area and is one of a number of prospects showing economic potential.
• Valuation: the market appears to value Ampella on an approximate valuation of around US$100/oz for a potential 3moz resource.
• It is our view that the per ounce valuation and the potential resource expectation could both increase as the company continues to report strong results from drilling at Konkera and other prospects in its Batie West license area.
Conclusion: These are tremendous results by any standards in gold exploration and the market looks likely to continue to reward Ampella in terms of per ounce value and overall expectation as the drilling program develops. We envisage the company potentially multiplying its market value over the next few years providing gold prices remain firm.
+Some Fairfax employees own shares in Ampella Mining
Carbine Resources+ (ASX:CRB) Maiden drilling gives good indication of gold potential
• Carbine have released data from its maiden ‘RC’ (reverse circulation) drilling program.
• The results tested a 200m strike length with mineralisation open along strike and down dip.
• Our former colleague and genius geologist, Aoife McGrath, is managing the drill program in the barren fields of northern Burkina Faso where she may well start a new gold rush if drilling continues to show good gold grades and intersections.
• The drill results so far show gold values to be spread along the strike length with encouraging grades ranging from 0.5g/t to 9.6g/t. The 0.5g/t cut off determines the lower grade here and is significant as it generally defines the economic grade within an open cast gold mine.
• Mineralised structures are also seen to repeat in the drill results giving further encouragement to the view that the prospect may form part of a potential open cast gold mine in future years.
• This is a good start for a relatively new gold company in its new format and the imaging work done highlights a number of new areas for drilling and further examination.
• Management’s statement refers to the potential for wide, open-pit grade mineralisation at the Dore prospect and this is no-doubt backed up by surface indications and topography.
• The gold is generally associated with quartz and bears similarity with results seen to date at Ampella Mining’s prospects which lie along the same geological structural break some 400km to the south.
• Geologists are essentially hunting for jogs along this structural fault where mineralised fluids have flowed and slowed trapping mineralisation along this geological feature.
Conclusion: Carbine’s drilling shows that gold is present in meaningful quantity and with some consistency. There are no truly outstanding results reported but the results so far show potential for much more to come.
+The author of this comment and some other Fairfax employees own shares in Carbine Resources
Mining this week:
Medusa Mining* (LSE:MML)– Annual results demonstrate strong profits
Ovoca Gold (LSE:OVG)– Encouraging drilling results
Iofina (LSE: IOF)– Fourth third party contract signed
Pan African (LSE:PAF)– Audited results demonstrates considerable earnings growth
Discovery Metals* (LSE:DME)– BFS Results Demonstrate robust project
