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Morning View:

Markets 

· We feel that markets should benefit from carry trade funds and from corporate profits in the mining space.

· News reports talk of crisis in the Eurozone and of recession in Europe.

· ECB action to avert banking system collapse before Christmas probably averted European depression but the result is still less bank lending, a loss of confidence and lower economic activity similar to that seen in the UK and US following the Lehman collapse.

· Southern Europe has been in recession for some time but news that the German economy shrank in Q4 is chilling from a financial perspective.  

· A hard landing in China is possible but looks unlikely on recent Copper import figures if they are anything to go by.  Growth is said to be muted but off a good base and locals believe there will be a managed soft landing.

· Reports of the number of cranes in evidence in Guangzhou, Shenzen and Shanghai suggests that the hard landing is not yet here and our personal perspective is that construction may not grind to a halt.

· Inflation figures in China are recently lower enabling policymakers to better support economic recovery

· China is due to change its political leadership this year with a new, younger, group of leaders expected to come through the ranks.  While changing the leadership could cause some disruption to growth it seems unlikely to cause China to veer off its path of progression but could perhaps see new momentum in economic development.

Balham Massif strike again – Fairfax salesman looses catalytic converter to thieves in leafy suburb of Balham.

· Moral – don’t be short of metals this year, not if you want your car to run!

· Please feel free to call Jody Downes to remind him of the cost of an ounce of Platinum, palladium and rhodium

Economic News

China – Inflation in the country cooled to a 15 month low in December. 

· Consumer prices rose 4.1% from a year earlier, slightly higher than estimates of 4%. 

· The news that prices continue to cool should allow officials some breathing space to increase support for the economy. 

· The market reacted indifferently to the news as investors weighed up the prospects of loosening monetary policy against declining growth. 

· NB – China auto sales slowed last year trailing growth in the US for the first time in 14 years on the back of expiring stimulus programs and slowing economic growth. 

· Total vehicle sales rose 2.5% to 18.5m. The country remains the world’s largest vehicle market. 

· Fresh concerns continue to emerge about overcapacity in China’s auto making industry. 

US – Retail sales figures will be released later today. Expectations are that December retail sales rose 0.3% in December following a 0.2% increase in November. 

· Initial jobless claims rose 375,000 last week from 372,000 the previous week. 

· The latest four week average of claims is the lowest in more than 3 years. 

· New housing figures suggest that banks may seize more than 1 million US homes this year. 

Europe – ECB announce interest rate decision today. Expectations are that the ECB will maintain rates at 1%. 

· Inflation in Germany cooled Europe’s largest economy slowed more than initially forecast in December. The inflation rate fell to 2.3% against expectations of 2.4% 

· Euro wide industrial production figures today showed that yoy in November industrial production in the Eurozone fell 0.3% compared to estimates of a 0.2% gain. 

· On a monthly basis industrial production fell 0.1% in November less than estimates of a 0.3% decline. 

· Industrial production in Italy continues to fall. In November production fell 4.1% against estimates of a 2.9% decline. 

UK – Forecasts suggest that the Monetary policy Committee meeting today will maintain its £275bn bond purchase target. 

· Industrial production figures this morning for November disappointed this morning, falling 3.1% yoy and 0.6% mom. 

· Forecasts had suggested a decline of 2.2% and 0.1% respectively. 

· Similarly Manufacturing production figures showed that decline of 0.6% yoy in November against a decline of 0.5% estimated. 

· Tesco announced that trading over Christmas disappointed. UK sales at stores open at least a year fell 2.3%. 

Scotland – Alex Salmond, head of the Scottish nationalists rules out sharing of exposure to RBS (FT)

· The Scottish Nationalists won 31% of the last vote ahead of Labour at 29% in Scotland and are a party to be taken seriously.

· Will Scotland vote to enter the Euro or will it develop a Scottish peso?

· We wonder which parts of the Royal Bank of Scotland is not Scottish?

· Will we have to hand back some Scottish traditions, Auld Lang Syne, Burns night, Bag Pipes, Haggis and Alex Fergusson?

Japan – The Finance Ministry announced today that the country’s current account surplus narrowed 86% from a year earlier to 138.5bn yen. 

· Figures released this morning showed that in December machine tool orders rose 17.4% yoy improving on 15.8% the year before. 

· According to Bloomberg, Traders are cutting their bets on Japan’s deflation to the least in six months as speculation mounts that the Government will double the sales tax. The five year breakeven rate rose 0.02 percentage points to minus 0.18 yesterday. 

Australia – New estimates suggest that the country is set for a huge infrastructure boom as the nation adds ports and railways to satisfy China and India’s insatiable demand for coal and iron ore. 

· The spend would include building new port terminals, with capacity of almost 1.5bn metric tons a year by 2022. 

Thailand – Consumer confidence appears to be on the rise in Thailand on the back of the appalling flooding that widely impacted the country’s industry and export market. The country’s sentiment index rose to 63.1 from 61 in November. 

· The Cabinet earlier this week approved a plan for $11bn in investment for water management projects. 

· New estimates suggest that the country may have contracted by 5% last quarter. 

Vietnam – Easing inflation may lead officials to cut policy interest rates to more suitable levels after the first quarter as the global economic environment continues to cool – with the country facing a trade deficit and risks to the banking sector. 

Currency – The euro was 0.4% from a 16 month low against the dollar. 

· The dollar is off against its most traded counterpart today. 

Commodity News:

Precious:

Gold US$1,646/oz vs US$1,643/oz yesterday – Gold climbed higher in the morning ahead of Spanish and Italian government debt auctions and a ECB meeting later today.

· The ratio of gold put to call options for the Gold Trust, the biggest ETF backed by gold, dropped to 0.54 on Jan 9, the lowest reading since May 2010, signalling a potential increase in bullion prices. 

· Holdings in gold backed ETPs climbed for a 3rd day to 2,357.5t.

· SPDR gold trust holdings remained at 1,254t (40.322moz) value US$65.896bn. Held steady for more than 2 weeks.

Platinum US$1,501/oz vs US$1,477/oz yesterday

Palladium US$644/oz vs US$645/oz yesterday

Silver US$30.11/oz vs US$30.08/oz yesterday

· Hecla Mining, the biggest US silver producer, dropped the most in 3 years following a drop in its output forecast due to halt of operations at its Lucky Friday mine.

· Hochschild Mining, silver producer in Peru and Argentina, expects its production to rise by 50% in 2014 due to a construction of 2 new mines.

Rhodium US$1,293/oz vs US$1,315/oz yesterday

Base metals:

Copper US$ 7,825/t vs US$7,770/t yesterday – Copper is up this morning after China recorded the lowest inflation rate in 15 months in Dec implying the government might ease monetary policy.

· BNP Paribas cut its 2012 Copper forecast to US$8,400/t (-5.6%) compared to Nov estimates.

Aluminium US$ 2,173/t vs US$2,164/t yesterday

· China may cut aluminum smelting capacity by a third amid high power costs and low metal prices.

· “More than half of Chinese smelters are already making losses,” China Nonferrous Metals Industry  Association said.

· Smelters in Henan Guangxi and Hunan provinces were the worst hit due to the highest power rates in the country.

· The last power price increase in Dec brought total costs of 1t of aluminum production by CNY 500 or 5%, Chalco said.

· Chinese aluminum output capacity may decrease by 1.1mt in 2012, Alcoa CEO said on Jan 9.

Nickel US$ 19,485/t vs US$19,645/t yesterday

Zinc US$ 1,938/t vs US$1,924/t yesterday

Lead US$ 2,007/t vs US$2,014/t yesterday

Tin US$ 20,558/t vs US$20,350/t yesterday

Energy:

Oil US$112.83/bbl vs US$113.46/bbl yesterday – Brent crude falls amid ongoing concerns over the behaviour of Iran.

· Japan’s finance minister Jun Azumi has told U.S. Treasury secretary Tim Geithner that it hopes to reduce its reliance of oil from Iran, but any changes will be done in a “planned way”. 

· Japan has reduced the amount it purchases from Iran by 40% over five years and hopes to reduce the 10% it still imports soon. 

· US crude falls to US$101.40/bbl this morning on the New York Mercantile exchange with WTI at US$101.31/bbl on London-based ICE. 

Natural Gas US$2.798/mmbtu vs US$3.092/mmbtu yesterday – Too much gas! Prices fall 

· Prices for natural gas hahave been cheaper this winter than they have been in a decade, due largely to the extreme mild weather conditions coupled with the slowing economies, weakening demand for goods reducing output from businesses. At a time when we’re all used to cranking up the heating and eating more. 

Uranium US$52.50/lbs vs US$52.80/lbs yesterday – February 2nd is the deadline date set for China Guangdong Nuclear Power Corp. (CGNPC) on its offer for Kalahari Minerals.

· CGNPC wants Kalahari for its 42.7% stake in Extract Resources, developers of the Husab mine in Namibia, the fourth (potentially-second) largest Uranium mine in the world. 

· Rio Tinto has held talks with Extract about combining the Husab project with its Rossing mine. 

· Rio and Japan’s Itochu Corp together own one-third of Extract through stakes in Extract and Kalahari. 

· Extract Directors are reviewing all the options to maximise shareholder value. 

Coal – The go-ahead has been given for a 146km rail-line between Lothair, in South Africa and Sidvokodvo, in Swaziland.

· South African freight and logistics group Transnet and Swazi Rail confirmed the plans today. 

· The line will increase the coal channel from Mpumalanga to the Richards Bay terminal to a capacity close to100mt, an increase of 28%. 

· Brazil’s Vale has also signed an agreement for the construction of a rail line with the Malawian government in a reported deal to be worth $1 billion. 

· The new 138.5km line from Chikhwawa in Southern Malawi will employ 4,500 workers, 70% of which will be Malawians. 

· The capacity to transport 18mt of coal will be linked to Mozambique. 

Other

Iron Ore – Tito Mboweni, former Reserve Bank Governor and Labour Minister, and his brother purchased a 20% stake in the Tivani iron-ore project developed by Ferrox in Limpopo province, South Africa.

· Tivani is 24 months away from production with a run-of-mine output of 10mtpa of iron ore.

· Full production will be reached in the next 36-48 months. 2.5mtpa of iron concentrate will produced.

· The project may produce 0.5-0.8mtpa of ilmenite.

· Iron ore loadings will resume in the North of Australia as Heidi cyclone moves away from ports.

· Dampier port is set to fully recover operations today. Riot Tinto uses the port for its iron ore shipments.

· Port Hedland that handles loadings of BHP Billiton and Fortescue Metals material is still closed .

· Fortescue said no significant effect of Heidi on mines has been recorded.

Vale announced force majeure on iron-ore shipments and said its production will drop by 2mt due to heavy rains in 3 Brazilian provinces.

· 2mt equals around 0.6% of Vale’s annual target in 2011 or 1.5% of its total sales to China.

· Floods and landslides in southeastern states of the country in Jan left at least 30 people dead and more than 5,000 homeless.

The Shanghai Futures Exchange will increase margin requirements for aluminum and gold to 10% from current 7% from Jan 20. Daily limits will rise to 6% from 5%.

· Margins on Copper, zinc and lead contracts will rise to 11% from 8%. Daily limits will increase to 7% from 6%.

· Margin requirements will return to previous levels after a week-long Lunar New Year holiday. 

Company News:

Discovery Metals* (LON:DME) – Selene resource 16mt grade 1% Copper

· Discovery Metals has drilled a 16mt Copper resource grading 1.0% Copper, 15.9g/t silver at Selene. 

· A cut-off grade of 0.6% Copper has been applied to ensure some economic criteria is applied. 

· Critically four zones within the resource appear to grade over 1% Copper indicating potential for a second processing plant if further tonnage is confirmed.  The resource remains open and does offer this potential subject to more drilling. 

· The resource is around 20km from the Boseto Copper mine which is due to commission first production shortly. 

· 52 drill holes for 5,343m over a strike length of 7km including 19 drill sections 400 metres apart. 

· Intersections of Copper to 200m depth shown. 

· The resource has been completed by Xstract Mining Consultants according to JORC standards. 

· The ore is gently dipping at 70 degrees and is within a 3m thick zone suggesting potential for conventional mechanised mining. 

Conclusion: Selene is a small but relatively beneficial type of deposit.  If it grows to a larger resource then it could become a stand-alone operation else it could feed higher grades into the Boseto mine in its later years.  Good silver grades are also a bonus adding a potential $15/t to the value of the ore.

Drilling at Zeta (11km) and the Mango prospect (30 km) from the concentrator returned high grade intersections – giving the company further optionality in further development of the resource.

The main Boseto Copper project is on target for commissioning in the first half of 2012 with 7.9kt for 2012 ramping up to production of 34.3 kt of Copper in concentrate in 2013.

*Fairfax acts as a advisor Discovery Metals. 

Cluff Gold (LON:CLF) – Production Update at Kalsaka gold mine in Burkina Faso

· Cluff Gold reported 2011 production of 71,505 oz exceeding guidance of 70,000 oz for the year. 

· Management production guidance is 60-70,000 oz for this year. 

· Ore mined increased by 23% over 2011 with ore processed increasing by 6% to 1.6 mt. 

· Average head grades fell marginally by 7% to 1.46 g/t from 1.56 g/t. 

· Strong production at Kalsaka enabled the company to generate strong positive cash flow leaving the balance sheet debt free with US$28.9m of cash. 

· Total cash and bullion at the end of the quarter of US$32.9m gives a good base for future expansion. 

· The company is focussing on the exploration work to extend the oxide resource at Kalsaka as well as drilling their sulphide targets.

· Gold resources stand at 186,000oz of gold. 

Conclusion:  Avocet is a transformed business and looks set for another good year.  Significant expansion potential at the mine is good and is shown in the extensive exploration report attached to the production update.  We expect the company to show greater value potential on feasibility work relating to the exploration results.

IRC (HKG:1029) – Fourth Quarter Trading Update exceeds targets

· IRC shows that it has exceeded its production targets according to its trading update to 31st Dec 2011. 

· Kuranakh Production:  Actual concentrate production was 800,291t of concentrate and 63,490t of ilmenite up 6.7% and 22.1% on production targets. 

· This improvement reflected the stable mining operations at Kuranakh despite cold weather in December of below minus 500  Celsius. 

· The company mined 40% more ore in the fourth quarter compared to the previous quarter. 

· They crushed and screened 778,862 tonnes of ore at 26.7% Fe and 8.2% TiO2  producing 404,401 tonnes of 46% Fe and 14% TiO2  for the quarter and processed 415,510 tonnes of pre-concentrate resulting in a production of 233,908 tonnes of titanomagnetite concentrate with a grade of 62.5% Fe and 23,371 tonnes of ilmenite at a grade of 48%. 

· The company have guided to a conservative production target of 820,000 tonnes of iron ore concentrate at 62.5% Fe up 2.4% from 2011. 

· Ilmenite production is targeted at 125,000 tonnes for 2012 with second half fully ramped up capacity of 160,000 tonnes per annum. 

· Costs: Cash costs were impacted by a 20% increase in cash cost as a result of fuel shortages – partly compensated by the weakening rouble. 

· Cash costs are expected to stabilise as ilmenite production is ramped up to capacity and ilmenite revenues are netted off for iron ore cash costs. 

· Prices achieved were US$131/t down 12.6% from US$150/t achieved in the 3rd quarter – these prices are for long-term offtake agreements calculated on “delivery at place” basis. 

· The price for ilmenite concentrate continued to be strong at $259/t.

· K&S – initial construction of the processing plant started early in 2011 and is running to schedule. 

· Infrastructure works are also progressing well with the construction of the 220 kV central substation and enabling works for the overpass bridge over the Trans-Siberian railway. 

· Garinskoye and Kostenginskoye – field works have been completed at both deposits with updates expected in mid 2012. 

· Vanadium plant – The company commenced work at the Vanadium plant - the 46% JV with their largest customer. The plant will treat the vanadium slag from the customer’s steel operations. 

· The vanadium plant is expected to make its first commercial sale of vanadium pentoxide in the first quarter of 2012 with an annual production capacity of 5,000 tonnes – current prices are approximately US$12,600/t and the plant is expected to have a life in excess of 30 years. 

· The company has also announced the disposal of mining equipment to Petropavlovsk for US$5.3m. 

An updated selection of photos on the project is available on -

· http://www.ircgroup.com.hk/en/Media/photographs/index.html 

Conclusion: The operations/projects at IRC are performing well with Kuranakh exceeding targets for 2011 – the guidance for 2012 is conservative at 820,000 tones for iron concentrate with ilmenite production reaching its full production target in the second half of 2012.

K&S targeted to come on stream in 2013 will add significantly to the company’s production (targeting 3 mtpa production) and the company has secured US$340m to finance this project at competitive terms.

The current valuation of around US$152m does not reflect the secured cash flows from Kuranakh (generating annualised revenues of around US$132m for the iron (US$106m) and ilmenite concentrate(US$32m)and the potential from K&S (potential revenues of US$375m at 3mt) where project financing is in place. Just based on cash flows from Kuranakh, the valuation should be close to double current values.

Mining this week: 

Angel Mining (LON:ANGM) – gold production rises with 518kg gold pour this week

African Iron (LON:AKI) – Recommended cash over by Exxaro but still room for more

Equatorial Resources (ASX:EQX)

West African Minerals (LON:WAFM)m – Early stage iron ore (DSO, haematite) potential 

Kasbah Resources (ASX:KAS) – Ongoing drilling shows good results from Achmmach tin project in Morocco 

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

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

Equatorial Resources (ASX:EQX)

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

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

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