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Morning View:

Mining sector gaining strength as investors take new positions in large cap

Gold US$1,647/oz - Copper US$ 8,032/t

· We expect the new positive mood to feed through into the smaller cap companies as investors shake off the bear market mentality left over from last year

· New gains in key commodities should help equity prices from as investors look for new positions for the year

· The FTSE Gold mines index has risen by 8% since 28 December and we expect further recovery in the gold sector as companies advance towards production and new discoveries for explorers.

· We expect further narrowing of the valuation gap between gold and gold producers

· Also expect to see gains in Copper, tungsten producers but other industrial metals may fare less well 

· This is definitely a stock pickers market and significant gains are to be made

· Takeover offer for African Iron gives a good start to the year and further takeovers are expected in this space

Economic News:

US – Forecasts ahead of a report due for release later today suggest that the Trade deficit widened in November for the first time in 5 months. 

China - Foreign exchange reserves dropped for the first time in more than a decade according to official figures as foreign investment moderated and the trade surplus narrowed. 

· Holdings fell to £3.18trillion at the end of December from 3.2trillion at the end of September. 

· The decline may well encourage officials to take a firmer stance with regard to appreciation of the yuan. 

· At the same time it may also allow the central bank to cut reserve ratio for banks. 

· Last month the bank cut the ratio for the first time since 2008. 

· Stocks fell today on the back of the news. 

· Apple store in Beijing, that hyped the launch of the Iphone 4S so much that it had potential customers camping overnight (in -90 c), actually failed to open – has reportedly been bombarded with eggs. Don’t keep the Chinese waiting. 

Europe – German lawmaker are stepping up pressure up on Greece to meet its targets. Senior members of the Chancellor’s party have stated that a Greek exit from the euro region would be manageable. 

· Is this a purely a threat or are we seeing a change in the attitude of Germany towards maintaining the status quo of the Euro region?   

· The ECB President Draghi has announced that they have successfully avoided a credit crunch in the region and that the situation is stabilising. 

· Yesterday both the Italian and the Spanish government have successfully held auctions. 

· Italy debt slid from 7% to 6.55%. 

· Spain 10 year yield slipped to 5.17% 

· Yesterday the ECB held rates at 1% inline with expectations. 

· Smoke and mirrors – The euro crisis is alive and will not go away. 

· Sentiment may be temporarily buoyed but the structural issues that are the causes of the Euro crisis remain and have not been addressed. 

UK – The conflicting information surrounding the UK housing market continues to emerge.

· According to new estimates from Acadametrics Ltd. and LSL Property Services Plc UK house prices rose to an 8 month high in December as homebuilders pushed to complete their purchases before the end of the year. 

· Balham crime – was a quiet night in Balham last night following yesterday’s heinous crime of stealing a catalytic converter from Jody Downes’ car.  

Scottish devolution proposals

· Toll roads to Scotland to be paid by Scots in Euros

· Scots to print own currency, this would be an oil-based currency, so most Scottish manufacturing will go bust relatively quickly or move to the new-slimmed down UK.

· Labour hold 41 of 59 Scottish seats in Parliament, so devolving Scotland means that the conservative party is far more likely to win UK elections going forward, this will not be a popular with the Labour party.

Australia – JP Morgan has announced that Australia has little fiscal room to cushion a downturn should the global economy fall back further in 2012.

· The main crux of the argument is based on the country’s reliance on Chinese demand. 

Tanzania – According to the country’s regulator Tanzanian officials plan to raise electricity prices by an average of 40% this month. 

Peru – Peruvian officials have kept borrowing costs unchanged yesterday for the 8th straight month as inflation increased at the fastest rate since 2009. 

Singapore – Retail sales rose for a 9th month in a row as consumers bought more gasoline and telecommunications products. 

· Retail sales rose 6.4% yoy in December. 

Philippines – The country is hoping for a credit upgrade in the next two to three months on the back of S&P ratings service raising its outlook. 

South Korea – The Bank of Korea has maintained borrowing costs at a constant level for the seventh straight month. 

Currency – The euro is up today as Italian bonds advanced on comments from the ECB President stating that they had avoided a credit crunch in the region. 

Commodity News:

Precious:

Gold US$1,647/oz vs US$1,646/oz yesterday – Gold is trading sideways this morning after reaching a 1-month yesterday of US$1,662.20 and is about to post a 1.7% gain this week.

· Newmont Mining plans to increase its US$37.7m investment in social projects and review it environmental policy in a move to reopen its stalled US$4.8bn gold mine in Peru.

· Bonds outperform gold investments in India on bets that the central bank will cut interest rates.

· US Mint American Eagle gold coins sales surged in Jan and reached 83.5koz in the first 11 days of the month. Sales can total 235koz this month at that pace, the highest reading since 1999.

· Holdings in gold backed ETPs are heading towards the largest weekly gain since mid-November.

· SPDR gold trust holdings remained at 1,254t (40.322moz) value US$66.964bn. Held steady for more than 2 weeks.

Platinum US$1,492/oz vs US$1,501/oz yesterday

· Lonmin, the largest Platinum miner, lost its appeal over the award of rights to prospect non-PGMs on its land to a third party0, Keysha Investments.

· Keysha linked to Lonmin’s former director was granted permits to explore for chrome, iron, Nickel, lead, zinc and Copper back in May 2009.

· While Lonmin mines Nickel and chrome as co-products of its PGMs, Keysha is the only entity that is entitled to sell the non-PGMs extracted at the property.

Palladium US$632/oz vs US$644/oz yesterday

Silver US$30.12/oz vs US$30.11/oz yesterday

Rhodium US$1,350/oz vs US$1,293/oz yesterday

Base metals:

Copper US$ 8,032/t vs US$7,825/t yesterday – Copper rises in London despite losses in Asian trading as ECB said that there are signs the European economy is stabilizing and borrowing costs of Spain and Italy dropped to the lowest level in more than 3 months.

· Chinese traders are squaring books ahead of the Chinese New Year break

· KGHM Polska Miedz, the only Copper producer in Poland, is planning to raise funds in debt markets for the first time since 2003 as the government considers a new mining tax and acquisition deals reduce company’s cash holdings.

· Talas Copper gold, a JV between Gold Fields and Orsu Metals, signed an agreement with local villagers in Kyrgyzstan to stop “unlawful actions” and attacks on its geologist camp and will resume drilling at the site. 

· Talas Copper Gold spent US$15m on exploration works between 2005-2010, It holds 4 licenses in the northwestern province of Kyrgyzstan.

· Taldybulak is the most prospective license which contains gold, Copper and molybdenum. Together with Barkol, Kentash and Korontash licences expire in the end of 2015.

· 3 months ago the company had to halt drilling activity after the camp was attacked horsemen throwing petrol bombs.

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

Aluminum inventories in Japan climbed by 12% in Dec, the highest reading in nearly 3 years, due to low oreders from overseas, Marubeni said.

China, Zhongwang, the biggest industrial aluminum extrusion products manufacturer, said orders may increase by more than 20% on strong local demand.

Nickel US$ 19,750/t vs US$19,485/t yesterday - Oversupply to drag on Nickel in 2012 (Interfax)

· Nickel supply growth and a slowdown in the stainless steel sector may weigh prices for the base metal this year.

· Beijing's efforts to ensure a  soft-landing for the world's  second largest economy are likely to dent demand for stainless steel, the  main use for Nickel.  Consumption growth in  China is set  to fall to  around five percent from  between eight and  10 percent in  2011 the  Baosteel Institute of Economic Management and Chinese stainless steel producers are seen cutting production 

· Global Nickel supply, meanwhile, is likely to expand steadily  with Nickel ore  output  increasing by  about  140,000 tons  resulting  in  a 65,000-ton surplus (CICC) outlook for 2012. 

Zinc US$ 1,961/t vs US$1,938/t yesterday

Lead US$ 2,038/t vs US$2,007/t yesterday

Tin US$ 21,100/t vs US$20,558/t yesterday

Energy:

Oil US$111.98/bbl vs US$112.86/bbl yesterday – Oil drops this morning- US crude is at US$99.73/bbl on the New York Mercantile exchange with WTI at US$99.98/bbl on London-based ICE.

· Oil and gas investment is set to hit an all time high in the UK this year providing new jobs and billions in tax revenues as high price of oil boosts earnings. 

· The US has hit sanctions on three oil trading companies for selling refined oil products to Iran just two days after US Treasury secretary Tim Geithner visited Beijing to garner support on Iran sanctions. 

· Under the sanctions imposed, all three companies are barred from receiving US export licences, US Export Import Bank financing, and loans over $10m from US financial institutions, the US State Department said. 

· The largest oil union in Nigeria has threatened to stop oil supply on Sunday unless its government brings back the fuel subsidies. 

Natural Gas US$2.728/mmbtu vs US$2.798/mmbtu yesterday – Fracking won’t start “dangerous” earthquakes say’s Mike Stephenson, head of energy at the British Geological Society. 

· Hydraulic fracturing is a process using water, sand and chemicals to open fissures in shale rock formations which can release Natural Gas. 

· Fracking has made the U.S the world’s largest producer. But, serious concerns that the technique pollutes drinking water and causes earthquakes has intensified debates and calls for tougher regulations to be put in place. 

· Chief Executive of Cuadrilla Resources met with an angry 200 residents in West Sussex. 

· Cuadrilla is at exploration stage, with reports that Lancashire alone could hold up to £6bn a year for 30 years in natural gas reserves… the battle continues. 

· Oil India, the second largest of India’s state-owned energy explorers is considering an acquisition to purchase Cove Energy Plc. 

· Bids could be in excess of US$1.2bn. Cove has a market value of US$948m (£620m). Cove is trading at GBP1.30 this morning 

Uranium US$53.70/lbs vs US$52.50/lbs yesterday – Prices for the nuclear fuel could rally to well above $60/lbs in 2012 and potentially as high as $75/lbs in 2013, according to Encompass Fund’s Marshall Berol.

· The Royal Bank of Scotland for 2012 spot prices predicts an average of $54/lbs. 

· Prices fell to $52/lbs in 2011, reversing a 40% gain in 2010 following an international review following the Fukushima disaster. 

· However, there are some 434 operable reactors world over and over 60 under construction according to reports from the World Nuclear Association. 

· China is building 26, with plans to construct a further 51 and have proposals for 120 more the data shows. 

Other

Iron Ore – Iron ore inventories at Chinese 30 major ports climbed by 0.8% this week to 97.38mt on Jan 13.

· Fortescue Metals, the third-largest iron ore producer in Australia, halted operations in Pilbara region due to tropical cyclone Heidi.

Company News:

Lonmin (LON:LMI) – Rejection on Appeal on Granting of Keysha Investments prospecting rights

· The company has been informed that the Director-General of the Department of Mineral Resources has rejected an appeal against granting Keysha Investments 220 prospecting rights. 

· The rights are over part of Lonmin’s mining right area. 

· Lonmin is confident of its legal rights and believe that this decision is procedurally and substantially incorrect and will take necessary future measures to protect its rights including taking the matter to Court for review. 

Conclusion: We concur with Lonmin in its position and believe that the rejection of the granting of these prospecting rights heightens the risk for mining companies operating in South Africa. 

Wolf Minerals (LON:WLFE) – UK Government supports Hemerdon Tungsten Project

· The UK Minister of State and Trade, Lord Green, has written to the company to offer his support for the project. 

· The Minister has acknowledged the importance of the project in terms of wealth creation and also the importance of tungsten as a critical raw material. 

· As previously announced, Wolf is looking to secure £55m of debt funding for the project from UniCredit Bank AG, ING Bank and Caterpillar Finance. 

· The approval of debt funding is subject to project finance documentation and credit approvals being approved and the current timetable for approval is February. 

· The company is also in discussions with a potential off-take partner to provide subordinated debt – this will minimise any equity required to put the project into production. 

· The company has received all planning permissions for the Hermerdon link road – this will remove a long term constriction on the transport network before the mine is developed. 

Conclusion:  Wolf look well positioned to take the Hemerdon Project forward with permissions and permits in place, a largely debt funded package including a potential off-take which will minimise the requirement for equity. The support of the government for projects of this nature is positive and not surprising given the job creation potential.

We remain positive on the outlook for tungsten prices. Tungsten is a ‘critical’ strategic metal as defined by the EU and prices have moved higher in recent years to support its importance in global manufacturing.  While tungsten prices will move with global demand for machine tools and other uses we also see new potential demand from strategic stockpiles giving support to prices.   

Other listed tungsten plays which we support are Vital Metals and Ormonde Mining**. 

* Fairfax analysts recently visited the Hemerdon site in Devon, UK (it really is a mine in the UK!)

** Fairfax acts as UK broker and nomad to Ormonde Mining

Mining this week: 

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

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

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

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) – 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