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Morning View:

Copper US$ 7,576/t - recovers as Chinese import data highlights ongoing demand for the metal

– The European debt crisis has already pulled back base metals and bulk commodity prices and has shaken confidence in Asia for European demand.  The contagion has spread to other 'supply' markets which feed into the major producing nations to dampen confidence and sentiment.  

– But this time the fall is arrested by supply side issues and by action by the ECB in allowing effective ‘unlimited’ liquidity and allowing a wider range of collateral.

– Thankfully, the US is showing surprisingly robust recovery despite the ongoing debt crisis and some recovery in the US dollar is adding to confidence here while reducing input prices for US manufacturers.  

– We see Copper tracking sideways before rising on demand recovery to $8,500/ t later this year

– The rest of the traded metals complex should follow this form of recovery so long as ECB action works in restoring confidence within the European banking system.

– Oil is the wild card with Iranian action in the Straights of Hormuz raising the risk of higher energy price levels damaging the West's faltering recovery.  If oil rises sharply then we can knock points off base metals and add gains to gold.  Japanese buying to compensate for nuclear closures raises demand as does growth in the sales of new cars in China and in other emerging economies.

– We forecast gold to average around $1,700/oz for the year but for the price to spike to $1,900/oz or even $2,000/oz albeit briefly later this year.  

– Gold is quiet for now with the market selling long positions and index funds rebalancing around 1.5moz of gold positions this month.  Indian demand is price sensitive and has fallen away on Rupee weakness and on US dollar strength. Concerns within India over it's own internal growth rate may also hold back fresh buying here although reports of Chinese commercial bank buying of gold may serve to soak up any surplus metal at a time when European trading looks quiet.

Economic News:

China – New figures show that import growth fell to a two year low in December, with China’s overall trade surplus down to $155bn – the lowest level since 2005. ($181.51bn 2010)

· Exports advanced 20.3% compared to an increase of 31% last year. 

· The figures may well give Treasury Secretary Tim Geithner extra ammunition to increase pressure on Beijing when he visits this week. 

· More details are emerging of the scathing UBS report on the Chinese property market. 

· The report indicates that property curbs will likely be relaxed as early as next year to prevent a collapse of the housing market. 

· Copper imports by China surged to a record in December according to Bloomberg. Imports gained 13% in December mom. On an annual basis yoy imports are down.

· Figures released yesterday show that GM reported record car sales in China last year. 

US - Withdrawal of Federal Land to mining in Arizona relates to land in the vicinity of the Grand Canyon national park

· US Federal decision in Arizona does not stop existing operations or affect existing license holders but works to prevent new licence applications.  This should give protection to existing license holders and rights holders to avoid Constitutional issues.

US – Fresh speculation has emerged over QE3 in the US. 

· A report released yesterday showed that US consumer borrowing rose by more than estimated in November. 

· Consumer credit surged by $20.4bn to $2.48trillion as consumers increased purchases of cars and other large ticket items as the jobs market improved. 

Europe – Chancellor Merkel will meet with the IMF today as sentiment appears to be holding up with regard to Eurozone leader’s ability to forge closer fiscal links by March. 

· Yesterday the dynamic duo – Merkel and Sarkozy stated that they wanted Greece to remain in the Eurozone along with indicating that there was a “good chance” officials will reach an agreement by the end of the month. 

· Yet differences reportedly still remain over the role of the European commission and the European court of justice – and probably still the ECB. 

· At the same time the two leaders called for a push to revive growth and create more jobs. 

· The Greek PM Papademos has announced that he expects to have an outline for a €100bn debt restructuring plan next week.   

· Positively French industrial production rose 1.1% mom and 0.9% yoy beating estimates. 

· Similarly French manufacturing production rose by 1.3% mom and 2.2% yoy again beating estimates. Could industry in the Eurozone be better in better shape than initially thought? 

UK – More BOE stimulus may not be enough to revive economic growth according to the British Chamber of Commerce. 

· The BCC forecasts that policy makers will increase their target for bond purchases by £50bn to £325bn in Q1 2011. 

· Additionally the BCC stated that growth will stagnate until the middle of 2012. 

· A house price index released today by RICS shows that the property market continues to face strains from the uncertain economic outlook. 

Panama - Panamanian Environmental Advocacy Centre (CIAM), an NGO, reckons that Inmet’s agreement on Cobre Panama project may violate the Panamanian constitution.

· Panama contains a number of worthy Copper projects but infrastructure issues, capital costs and environmental permits are difficult hurdles to cross.

Chile - Codelco looking to force Anglo American to disclose terms in the sale of 24.5% of its local subsidiary Anglo American Sur, including Los Bronces and El Soldado Copper mines and the Chagres Copper smelter to Mitsubishi Corp.

Brazil – Forecasts for CPI increases in 2012 have reportedly been cut, for the 6th week in a row. 

· Consumer prices will increase 5.31% this year from a forecast of 5.32% last week. 

· Last week the country’s central bank stated that prices have eased significantly. 

India – Speculation that overseas investors will start buying more local assets has pushed the rupee up for a third day, signalling the longest winning streak in more than two months. 

· Figures released this morning show that local car sales rose for a 2nd straight month in December as consumers speculated borrow costs have peaked. 

Indonesia – The country was considerably well covered at the recent bond auction. South Asia’s largest economy sold $1.75bn of 30 year dollar denominated bonds at a 5.25% coupon. 

Malaysia – Industrial production growth increased at the slowest pace in 4 months in November as mining contracted and industrial growth eased in line with the global economy. 

· Production increased by 1.8% yoy after rising 2.95 in October. 

Currency – The euro is off this morning against the dollar. New forecasts from UBS suggest that the dollar will climb to its strongest level since July 2010 versus the euro in 2012. 

Commodity News:

Precious:

Gold US$1,618/oz vs US$1,617/oz yesterday – Gold is up this morning following a 2-day decline and is trading in a range of US$15 above US$1,605/oz.

· Goldcorp produced 687,900oz of gold in Q4.

· Rob McEwen, CEO and Chairman of US Gold, said gold producers may seek acquisitions in 2012 amid ample reserves due to high metal prices.

· SPDR gold trust holdings remained at 1,255t (40.336moz) value US$65.111bn.

Platinum US$1,434/oz vs US$1,411/oz yesterday

Palladium US$624/oz vs US$614/oz yesterday

Silver US$29.16/oz vs US$28.90/oz yesterday

· The US Mint sold 3.96moz worth of American Eagle silver coins surpassing the combined sales in Nov-Dec.

Rhodium US$1,325/oz vs US$1,325/oz yesterday

Base metals:

Copper US$ 7,576/t vs US$7,547/t yesterday – Copper rebounded this morning on strong Chinese Copper imports in Dec.

· Unwrought Copper shipments to China decreased 24% in H1 2011 as arbitrage between London and Shanghai became unprofitable leading to a 29% draw down on local inventories.

· Imports picked up in H2 on lower domestic stockpiles. Arrivals of Copper increased to a record 508,942t (+13% mom) in Dec gaining for the 7th straight month.

· Copper imports declined 5.1% yoy to 4.07mt in 2011, the first annual drop since 2008.

· Beijing Antaike forecasts a 6.4% growth in consumption to 7.85mt in China in 2012 versus 7.38mt (+8.5% yoy) in 2011 and 6.8mt (+11.5% yoy) in 2010.

· Anvil Mining said its 2011 production will slightly fall short of annual target of 30-31kt and will total 29kt due to technical difficulties with the plant’s electrowinning transformers in Democratic Republic of Congo mine.

· Pan Pacific Copper, the largest producer in Japan, temporary stopped operations at its Saganoseki smelter in southern Japan since Jan 7 following a fire accident at its electric power substation.

· Chile Mining Ministry forecasts Copper prices to range between US$6,600-8,800/t (3-4c/lb) with an average of US$7,700/t.

Aluminium US$ 2,126/t vs US$2,063/t yesterday

· Goldman Sachs forecasts a 4% drop in world capacity converting into a 2% decrease in aluminum production in 2012.

· Market is expected to remain in oversupply this year with production exceeding demand by 800kt.

· Alcoa expects world aluminum demand to grow 7% in 2012 versus 10% in 2011.

Nickel US$ 19,175/t vs US$18,638/t yesterday

Zinc US$ 1,895/t vs US$1,863/t yesterday

Lead US$ 1,985/t vs US$1,968/t yesterday

Tin US$ 20,100/t vs US$19,770/t yesterday

· The Indonesia Commodity & Derivatives Exchange (ICDX) has postponed the introduction of a physical tin contract to Feb 1 from previously planned Jan 12, the Trade Ministry said.

· The ICDX and the government will meet with 23 producers on Jan 12 to discuss details of the new contract.

· The Jakarta Futures Exchange also plans to launch physical and futures trading in tin this year.

Energy:

Oil US$113.00/bbl vs US$113.58/bbl last week – Brent crude is unsettled prior to EU leaders meeting to discuss the European debt crisis today.

· US crude is up at US$102.04/bbl on the New York Mercantile exchange with WTI at US$102.03/bbl on the ICE. 

· A British parliamentary committee is poised to probe the environmental impact of exploiting the Arctic regions for oil and gas. 

· There is growing concern from non-arctic costal regions such as the U.S. and in E.U. that they are being frozen out of developments. 

· The ecological issues surrounding any exploitation, concern the world, with U.S. Secretary of State Hilary Clinton citing “significant international discussions should include all those who have legitimate interests in the region”. 

Natural Gas US$3.047/mmbtu vs US$3.063/mmbtu last week – Overseas investors may have paid over inflated prices for oil and natural gas shale projects. As competition amongst buyers intensifies and as countries look to secure their growing need for oil and gas, investors will continue to pay top dollar.

· China, France and Japanese explorers committed over US$8bn in the past two weeks for projects spanning from Pennsylvania to Texas. 

Uranium US$52.80/lbs vs US$53.05/lbs yesterday – A U.S. Government ban on Uranium mining near the Grand Canyon area has sparked off debates over tourism and mining in a state that relies heavily on both.

· Previously approved mining and new projects on claims or sites with existing rights will be allowed. 

· The move could pave way for as many as 11 Uranium mines over the next 20 years. 

Coal - Richards Bay Coal Terminal shipped a record 8.08mmt in December. Demand surged on lower prices and miners reducing stockpiles towards the end of the 2011

· Chinese power utilities signed up to 1.2bnt of coal under contract for 2012 according to the China Coal Transport and Distribution Association

· A Chinese government cap on prices at Rmb600/t (US$95) applies to some 835mt of this coal but higher spot coal prices (RBM $106/t) mean that miners may only supply a fraction of the tonnage under these contracts.  

· Miners supplied less than half the contracted tonnage last year.

· China added 90GW of power generating capacity last year taking total Chinese power generation capacity to  1,050GW.  

· China added 95mtpa of new coal production capacity taking total capacity to 3.2billion tpa and aims to add a further 200mtpa of coal production capacity in 2012 along with a further 70GW of power capacity.

Other

Iron Ore – Prices for imported iron ore to China are up today as steel producer restock.

· Chinese iron ore imports increased 10.9% yoy to 686.06mt in 2011 while Dec shipments stood at 64.09mt, slightly down from a 10-month high of 64.20mt in Nov.

· Macquarie reports Chinese iron ore inventory currently covers up to 35 days of consumption compared to 45 days at the same time last year.

Steel – US Steel Serbia introduced a 4-day working week in effect from Jan 9 in order to cut expenses amid European economic slow down.

Company News:

Alcoa (NYSE:AA) – 4Q 2011 in line with previously downgraded expectations

· The company announced a loss of $0.03 a share excluding special items in line with downgraded expectations. 

· Revenue of US$6bn down 7% from the previous quarter but up 6% from 4Q 2010. 

· The fall in revenues in the fourth quarter were affected by a 9% fall in realised prices in alumina and 12% fall in aluminium. 

· Packaging was down 17%, industrial products 15%, building and construction 15%, commercial transportation 8% and automotive 2% compared to third quarter 2011. 

· Revenue for the full year up 19% over 2010 to US$25bn 

· The company reported free cash flow of US$656 million for the quarter and for the full year of US$906 million with a debt to capital ratio of 35%. 

· The company reported a restructuring charge of $159m associated with the closure of high cost smelting production – 60% of the charges were non-cash. 

· The company is projecting global aluminium demand of 7% for 2012 – this is ahead of the 6.5% required to meet the company’s forecast of doubling global aluminium demand between 2010 and 2020. 

· Aluminium demand grew 10% in 2011 on top of the 13% seen in 2010. 

· Alcoa projects global growth in aerospace of 10-11%, automotive of 3-8%, commercial transportation 2-5%, packaging of 2-3% and building and construction of 4-5%. 

· As previously announced the company intend to close down 12% of its smelting capacity or 531,000 metric tons. 

· The company is planning curtailments in smelters in Italy and Spain representing 240,000 tonnes and also two lines in Texas representing 291,000 metric tons of capacity reduction. 

· In addition to closure and curtailments, Alcoa plan to accelerate actions to reduce raw materials cost in their primary product business and adjust capacity in their global refining system. 

· Growing demand for aluminium combined with market related production cutbacks 

Conclusion:  That the numbers for the fourth quarter are in line should not be a surprise as these numbers had been downgraded quite significantly from the end of June this year (the forecast was for 28 cents pre-exceptionals at the beginning of the year) against a backdrop of weak prices and fundamentals in the aluminium market which is a very sensitive to price movements given the high cost base.

The outlook statement by the company on the aluminium market is better than expected which should help sentiment although the rise in costs and squeeze on margins is of concern.

African Iron (ASX:AKI) – Trading Halted Based on Pending Major Transaction

http://www.africanironlimited.com/irm/content/default.aspx

Equatorial Resources (ASX:EQX) 

http://www.equatorialresources.com.au/

See previous comments from 16/12/11 Equitorial Resources and 11/11/11 on African Iron 

· Trading in African Iron has been halted till Jan 12th pending a statement on the potential of a “significant” transaction in the company. 

· Dow Jones report that the company is in advanced talks with Exxaro (EXX SJ) (mkt cap SAR61bn, $7.5bn), the second largest coal producer in South Africa. 

· The rumour is that the deal for African Iron would be at more than A$300m – 50% premium to the price prior to the trading halt. 

· Exxaro own 20% of South Africa’s largest iron ore producer Sishen Iron Ore which is within Kumba Iron Ore (part of Anglo American). 

· A successful takeover would require the support of either Cape Lambert Resources which owns 25.2% of African Iron and Equatorial Resources which owns 19.9%. 

· African Iron’s Mayoka project is a high quality iron ore project in the French Congo – right next door to the resources of Equatorial Resources. 

· The company has a 120 mt high grade hematite resource – 44 mt of DSO with 77 mt of upgradeable DSO. 

· The company were targeting a 5 mtpa operation for a 10 y ear mine life based on 50 Mt DSO hematite resource with the project requiring a capex of US$300m. 

· Potential production was targeted for mid 2013 for mainly fines of 55-60%. 

· The tonnage produced was being constrained by the existing capacity of the railway line and port infrastructure. 

Conclusion: African Iron has a high quality asset and we are not surprised it has attracted the attention of a buyer. The price rumoured of US$300m does not appear high for project cash flows of around US$125m a year assuming a 50% margin, $100 FOB over 10 years for an initial capex of $300m. There are still negotiations on permitting/licensing and transport issues to be addressed and the company could do with a partner in this process.

The interest in African Iron will spur interest in Equatorial which is behind African Iron in terms of development, targeting a maiden resource at its nearby Mayoka project of 50-100 Mt by the end of June 2012. It is likely that this interest in African Iron will result in discussions between Equatorial and African Iron given their overlap in interest and would make strategic sense.

Any transaction for African Iron will also attract further interest in the sector 

– we would recommend investors to be selective in the iron ore juniors we would buy behind this newsflow and to invest in companies which can realistically get product to market within a reasonable timescale and with good quality ores 

– Bellzone appears to rate well on this basis looks like its projects are likely to get to market

We feel that there is room for another $150m in value to be offered and the offer could go to 90c/s and still leave value for the buyer in this deal.  

African Iron is more valuable to Equatorial Resources but the two companies may be the ultimate target for Exxaro or any other bidder – note that Equatorial resources do not have a JORC resource till June 2012 – target 50-100mt with some high quality DSO likely. 

* A member of the Fairfax Mining Team visited the Equatorial and Zanaga projects during a site visit in December last year. Below is our comment from the trips:

Iron ore projects in the Congo – Zanaga and Equatorial Resources Site visits

Site visit summary from 16/12/11

· Zanaga and Equatorial Resources organised a site visit for analysts to see their projects in the Congo. 

· The well organised visit provided a good insight into both projects as well as the backdrop for mining projects in the Congo. 

· The country is vastly untouched in terms of mining projects – the landmass is mainly untouched forest although certain areas are considered “secondary” forest in environmental terms as they have had logging going for a many years. 

· The government of Congo Brazaville – the good part of the Congo appear to be creating a good environment for mining companies to be working. 

· 90% of GDP has historically come from oil which has brought in revenues but does not employ people in the county. 

· The country has a proactive Minister of Mines who has set out attractive fiscal terms for mining and is showing a willingness to work with companies to come up with infrastructure solutions for the projects coming up in the country. 

· There are three iron ore projects in the Congo – Zanaga, Equatorial Resources and African Iron at various stages of development. 

· The Zanaga and Equatorial projects are very different projects in terms of scale (resource, output and capital) and time line but are interesting in different ways. 

· The projects when they come to fruition will put Congo on the map as an iron ore producing country, put iron ore into Xstrata’s portfolio of commodities and bring potentially a successful and profitable iron ore junior into production within a two year time frame. 

· In the company’s section we set out details on both projects. 

Conclusion: This was a very well organised site visit by both Zanaga and Equatorial giving good insight to the potential of both projects and also the backdrop of the Congo as a place on the map for iron ore projects. The projects are vastly different in terms of the scale, strategy and timeline with Zanaga targeting a 30-45 mtpa 30 year magnetite operation mine with a capex budget ranging from $6 - $7.5 bn with significant capital and commitment from Xstrata with all the trimmings of a large scale operator. Equatorial is a much smaller operation but which is likely to come to market earlier by late 2014 with a smaller scale but profitable 5 mtpa DSO operation. A lot still needs to be done but projects are both on track and well worth watching. It is also encouraging to see the economic benefits that mining projects can bring – the multiplier effect has already started with small enterprises starting around the project.

Horizonte Minerals (LON:HZM) –Araguaia Nickel project resources rises to >100mt 

Horizonte Minerals has reported a new NI43-101 resource for its Araguaia Nickel project of 100.2mt 

The Brazalian project grades 1.29% of Nickel in laterite 

Vane Minerals (LON:VML) – Withdrawal of Federal Uranium Lands in Northern Arizona

· The US Secretary of Interiors announced the implementation of the proposed 20 year withdrawal of federal lands. 

· 1 million acres of federal lands is being withdrawn from mining activities in northern Arizona. 

· Of the affected lands, Vane maintains legal rights on some 680 mining claims covering 14,000 acres. 

· The company states that it has already adjusted its business plan accordingly. 

· Withdrawal of federal lands comes despite strong local and regional support. 

Mining this week: 

Copper Development Corporation (LON:CDC) – Basay Drilling Update

CDC hold 70% of the Basay project

Paragon Diamonds (LON:PRG) – Further Results from micro-diamond sample at Motete-Dyke Licence (Lesotho, Southern Africa)

Rambler Metals and Mining (LON:RMM) – Signs Off-Take Agreement with Transamine for Copper in Concentrate from Ming Mine

Rio Tinto (LON:RIO) - Offer for Hathor Exploration Has 93.76% take up