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Morning View:

2012 should be an interesting year of opportunity

We see the mining sector as offering good value and commodities as relatively well supported

The mining sector struggled to perform in a general bear market last year but should post new gains through 2012 on:

1. US economic recovery

2. Ongoing Chinese growth

3. Resolution of the Eurozone crisis

The majors are now trading at historic low PE multiples and also give meaningful dividend yields

· Global growth should see metals demand continue to rise 

· Metals supply should continue to see restriction in many areas

· Metals prices should therefore trade relatively well over the course of the year

Ford - the first automaker to break the 2m vehicle sales for first time since 2007

NASA video captures what looks like an alien spaceship (see link below) – Fox News 

http://video.foxnews.com/v/1316735285001/alien-spaceship-caught-on-nasa-tape/?intcmp=sem_outloud

Russians outspend Chinese spending at Selfridges department store in London over Christmas

· Russian spending rose by 20% to record levels for the seven days to January 4th 2012 from last year.  

· Russians are important buyers of ‘staple’ everyday products such as vodka and caviar in Selfridges.

· Other Russian staples are ‘Jimmy Choos’, Pucci clothes, Van Cleef diamonds etc…  

· The data comes from VAT reclaims

· Moscow price for caviar = £70 per 100 grams, Selfridges = £418 to £720 per 100 grams

We are not sure how reclaiming the 20% vat makes this trade work?

Economic News:

IMF - Speaking to reporters in the South Africa, Christine Lagarde has stated that 2012 will not be the year that the euro currency collapses. 

· Unsurprisingly Lagarde also stated that the IMF is likely to revise downward its forecast for global economic growth.                

US – Non farm payroll figures will be released later today. 

· Expectations are that payrolls increased by 155,000 in December, after a 120,000 increase in November. 

· Employers added 1.45m workers last year through November a small dent in the 8,75m lost since 2007 

· Reports continue to emerge that Federal Reserve officials are nearing agreement on adopting an inflation goal. 

Europe – QE or no QE? The European Central Bank Governing Council Member Klass Knot has announced that Germany should support raising the European emergency fund to help end the region’s debt crisis. 

· The comments are timely. There are not many options left on the table for the Eurozone. If the euro is to survive Germany will have to be convinced that printing money, in a substantial quantity, is an necessary evil. 

· On the other side of the coin, reports are emerging that a number of close allies to Merkel have insisted that German lawmakers will resist increasing funds for European bailouts to ease the debt crisis. 

China – Stocks rose for the first time this year as speculation increased that the central bank will cut reserve requirement ratio’s in the coming days. 

· In a further sign that policy makers are acting to support the economy, the Commerce Ministry stated that it will roll out measures to boost consumption and encourage spending. 

· Additionally the Ministry announced that it will strive to promote steady export growth and expand trade with emerging markets. 

· The PBOC has announced that it will suspend debt sales ahead of the lunar New Year holiday and will conduct reverse repurchase operations based on demand. 

India – The head of the Society of Indian Automobile Manufacturers has made the following predictions for the year ahead.

· Interest rates will decline on the back of slowing food price inflation 

· Car sales in the country will expand by 5-10% in the second half of 2012. 

UK – Figure released by the Halifax show that UK house prices declined for a second month in December with the outlook for 2012 remaining “uncertain. 

Australia – Despite our natural instincts we must applaud Michael Clarke who made the 25th triple century in Test cricket yesterday as Australia destroyed India in Sydney. 

Egypt – The US and Egypt are reportedly looking for ways to expand their economic relationship as the country comes to terms with the unrest that has plagued it over the last 12 months. Estimates suggest that the unrest has lead to 50% of the country’s foreign reserves being drained and economic growth falling to 1.8% from 5.1% 

Currency – The euro is moving towards another weekly loss against the dollar before the consumer confidence report due for release at 10am. 

· The yen is marginally up against its most traded counterparts today. 

Commodity News:

Precious:

Gold US$1,624/oz vs US$1,624/oz yesterday – Gold is trading sideways this morning and is on the way to record a 3.8% increase this week, the largest 5-day gain since Oct. European sovereign debt crisis and geopolitical nervousness around in the Middle East provide support for prices.

· AngloGold Ashanti halted operations yesterday at its Savuka mine near Carletonville, South Africa, after the death of an employee on Jan 4 due to a fall of ground. 

· The Platinum to gold ratio dropped to 0.8677, the lowest reading since Bloomberg started compiling data in 1987.

· SPDR gold trust holdings remained at 1,255t (40.336moz) value US$64.468bn.

Platinum US$1,417/oz vs US$1,431/oz yesterday

Palladium US$637/oz vs US$654/oz yesterday

Silver US$29.31/oz vs US$29.50/oz yesterday

Rhodium US$1,355/oz vs US$1,365/oz yesterday

Base metals:

Copper US$ 7,581/t vs US$7,619/t yesterday – Copper is little changed today ahead of Dec US non-farm payrolls report.

· Workers at the Kansashi mine (First Quantum) in Zambia returned to work after a 2-day strike as the labour union continues wage negotiations with the management.

· First Quantum agreed to review its 12-hour working shift policy and will pay a 13th cheque to employees starting this year.

· Nearly 2 people a month killed trying to take Copper power cables, railway scrap metal and lead from church roofs, London Metropolitan Police said.

· Certain market surveys say around 15kt of scrap is stolen each year in the UK.

· Vedanta’s Konkola Copper mine stops to allow switch from open cast to underground mining

· Kazakhmys – signs $1.5bn loan with China Development Bank Corp for the Aktogay Copper project.  Kazakhmys had already received $2.7bn in loans from the Chinese in relation to the development of this project.

· Antofagasta – approves the development of the $1.3bn Antucoya project in Chile.  Marubeni will hold a 30% stake in the project

Aluminium US$ 2,046/t vs US$2,065/t yesterday

· Alcoa will shut 12% or 291kt of its global smelting capacity in H1 2012 with additional 240kt of stoppages “in the near future” amid low prices and ample supplies in the market.

· Alcoa’s current smelting capacity is 4.5mt.

· A reduction in aluminum production is equivalent to around 1% of world supply that totalled 41mt in 2010 according to WBMS estimates.

· Rusal may follow suit. Oleg Deripaska, CEO of Rusal, said in Dec that low prices may lead to a closure of 3mt of global capacity.

· Norsk Hydro, Europe’s 3rd largest producer, said in Oct that it did not expect to restart any time soon the 26% of it capacity that was closed down in 2009.

Nickel US$ 18,580/t vs US$18,671/t yesterday

Zinc US$ 1,848/t vs US$1,873/t yesterday

Lead US$ 2,011/t vs US$2,066/t yesterday

Tin US$ 19,800/t vs US$19,605/t yesterday

Energy: 

Oil US$113.27/bbl vs US$114.36/bbl Yesterday – Brent oil, the European benchmark falls slightly this morning. U.S. crude also drops to US$101.93 with U.S. benchmark WTI at US$102.15

· Britain’s defence secretary has followed other international leads warning Iran that any attempt to block the Strait of Hormuz will not be tolerated. 

· Roughly one sixth of the world’s oil passes through the strait. 

· Prices could temporarily spike over $200/bbl as the dispute over the international sanctions imposed on Iran because of its unwillingness to halt its nuclear programme continue. 

Natural Gas US$3.015/mmbtu vs US$3.138/mmbtu - Alaska’s governor Sean Parnell and top oil executives met yesterday to discuss the best way to commercialise a North Slop natural gas pipeline.

· ConocoPhillips chief executive reportedly said they would like to build a pipeline from the North Slope to a LNG plant in the central part of the state to prepare it for export. 

· A new gas pipeline will create more jobs and give the state’s economy a boost as oil production levels decline. 

· Parnell wants the oil companies to unite behind a project for LNG to be shipped overseas. 

· No firm commitments were made in Thursdays meeting albeit a significant and positive starting point. 

Uranium US$53.05/lbs vs US$53.05/lbs yesterday

Other

Shipping – The largest ships hauling coal and iron ore has fallen the most in three years off the back of falling Chinese demand for cargoes weakening.

Iron Ore – Rainfall in southeast Brazil may cut iron ore shipments, Citigroup said. Similar weather in Minas Gerais in Feb 2011 led to a 2%yoy drop in exports and exports did not recover until May.

· Citi expects iron ore prices to increase from current US$138/t to US$165/t in 6-12 months.

Diamonds – BHP Billiton may sell its Ekati diamond mine in Canada.

· The company said its diamond business may no longer be in line with company’s strategy of developing “large, long-life” projects with a possible expansion.

· Investec values BHP’s 80% interest in the mine at US$300-500m due to its limited asset life and declining earnings.

· BHP sold 51% share in the Chidliak diamond exploration project in Canada for US$8.8m in Dec last year.

Investments – Recent survey by the Institute for Private Investors indicated wealthy investors plan to increase holdings in commodities and private companies this year.

· IPI members are families with at least of US$30m in assets. Nearly 90% of IPI members reside in the US. 70 out of 345 families took part in the survey.

Company News:

ENRC (LON:ENRC) – ENRC agrees deal with First Quantum on Congo Copper assets

First Quantum Minerals (LON:FQM) 

· First Quantum announced yesterday that it has reached an agreement to dispose its residual claims and to acquire additional assets in the DRC for $1.25bn to ENRC. 

· The assets acquired and claims involve the Kolwezi Tailings project, the Frontier and Lonshi mines and related exploration interests. 

· The total consideration comprises US$750m payable on the closing on the deal on Feb 29th with a deferred consideration of US$500m in a 3 years promissory note with a coupon of 3%. 

· Closing of the transaction is subject to settling disputes with the DRC government relating to the companies being purchased and the assets and operations of FQM in the DRC. 

· FQM has outstanding international arbitrations in Washington and Paris against the Congo Government and a civil action in the Birtish Virgin Islands against Highwinds which includes a number of direct and indirect subsidies of ENRC – the legal claims total $4bn. 

· The Kolwezi Tailings project consists of a tailings dam with a mineral reserve of 1.7mt of Copper with a grade of 1.49% and 363kt of cobalt grading 0.32%. 

· The processing facility to be acquired and completed as part of the project has production capacity of 70,000t of Copper and 10,000t of cobalt per annum. 

· ENRC expect to start first production from this facility within the next 18 months. 

· Frontier Processing Facility comprises a mill and a concentrator with peak historical production in 2009 of 92,000 tonnes of Copper concentrate at a cash cost of US$1.13/lb. 

· ENRC anticipates that Frontier will return to full production within the next 18 months. 

· Lonshi Mine ceased production in Dec 2007 following an order by the governor of Katanga Province which ordered FQM exporting Copper ore from Lonshi to Zambia. 

· In 2006 the mine produced 520,000 tonnes of ore grading 10.3% Copper and Copper cathode production was 51,058 tonnes – the oxide ore body had been estimated to be exhausted in 2008. 

Conclusion: 

This concludes a longstanding complicated dispute between FQM and ENRC following the purchase of a controlling stake in FQM’s confiscated assets by ENRC from Fortune Ahead for $175m.

It is likely that the price paid would constitute a fair market price for the assets covering all the sunk costs of First Quantum related to the asset.

The acquisition, once complete, gives ENRC a platform to expand their Copper portfolio in the DRC and develop the Kolwezi Tailings project as they take control of the asset including the processing facility which is 75% complete. ENRC will now have significant exposure to Copper enabling them to pursue their diversification strategy. 

The deal should leave First Quantum debt free and enable the company to acquire and invest further in new projects

*Fairfax analysts have visited the Frontier and Lonshi assets 

Mining this week: 

Allied Gold Mining (LON:ALD) – Debt Restructuring with RK Mine Finance

Mwana Africa (LON:MWA) – Appointment of Non Executive Director

Patagonia Gold (LON:PGD) – Acquisition of exploration and mining concession

Bezant Resources (LON:BZT) – Update on Eureka Gold Project

Kefi Minerals (LON:KEFI) – Exploration Licences granted to JV in Saudi Arabia

Paragon Diamonds (LON:PRG) – Results from first micro-diamond sample at Motete Dyke Licence