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Fairfax Market Report including Caledonia Mining, Hummingbird Resources,Serabi Gold and IFM,
Morning View
Gold US$1,676/oz - Copper US$ 8,380/t - metals prices remain stable
Commodity markets look likely to trade quietly through the Chinese new year
• LME launches swap contracts for all non-ferrous metals.
• Swap activity should better enable hedging and improve liquidity on a longer dated basis particularly for lesser traded metals like Nickel, Zinc, Lead and Tin.
• Eurozone concerns combined with slowing activity in China should dampen metals although prices are higher on technical trading
• Eurozone QE, in all but name is leading to a marked recovery in some key Eurozone stocks
• French banks are a follow on casualty of S&Ps downgrade of France
Economic News
Europe – European finance ministers called for bondholders to bear costs of debt restructuring and accept a lower interest rate on exchangeable bonds.
• Chairman of a meeting of finance ministers in Brussels, Jean-Claude Juncker, said coupons on new bonds should be below 3.5% for debt to be serviced until 2020.
• Yesterday Christine Lagarde called for a bigger Eurozone firewall to prevent Italy and Spain defaulting.
• In a speech in Berlin the IMF managing Director stated that if things were to worsen and default was to occur in either country it would have “disastrous implications for the systemic stability” of the Eurozone.
• Additionally she stated that the Eurozone Financial Stability Facility needed a credible timetable to fold into the European Stability Mechanism. Let the debate begin as to what this should be…
• Yesterday Germany stated that it could be open to boosting the combined aid limit from the 500bn when a permanent fund runs alongside the temporary one in July.
• Italian and Spanish bonds gained on speculation European Union Finance Ministers meeting today in Brussels will make progress.
• Officials have agreed to ban oil imports from Iran starting on July 1st as part of the measures to increase pressure on the nuclear program.
• Societe Generale and Credit Agricole were downgraded to A from A+, with a stable outlook, S&P said yesterday.
• European services and manufacturing PMI surged to 50.4 in Jan, a 5-month high, beating market expectations of 48.5.
• German manufacturing increased in Jan for the first month in 4. The index stood at 51.7 from 48.4 in Dec. Services index surged to a 7-month high of 54.5 from 52.4 in Dec.
• The Bundesbank said yesterday a “slightly negative growth (in Germany) can’t be ruled out” in the final quarte 2011.
• French manufacturing declined at a higher rate in Jan. The index dropped to 48.5 from 48.9 in Dec. Services index increased to a 5-month high of 51.7 from 50.3.
• French economy is forecasted to report a 0.2% decline in Q4 2011 and a further 0.1% drop in Q1 2012 according to Insee forecast as of Dec 16.
Japan – The government announced it mill most likely miss target of balancing the budget by 2020 despite a planned doubling of the sales tax.
• The Cabinet office assumed a GDP growth of 1%per annum until 2020 fiscal year.
• Central bank kept its asset-buying fund at 20tn yen, credit-lending programme at 35tn yen and the benchmark interest rate in a range of 0-0.1% today.
India – Central Bank cut the cash reserve ratio to 5.5% from 6% and signalled cuts to come.
South Africa - An industry lobby group comprising a number of large mining group’s and mineral processing companies is warning against the implications of a proposed carbon tax in South Africa.
• Anglo American, AngloGold Ashanti, BHP Billiton, Exxaro, PPC, Rio Tinto and Xstrata are reportedly part of the lobby group.
Mali – Reports have emerged that Mali is seeking to raise the state share in mining projects to 25% from 20% in a proposed revision to the West African nation’s mining law.
• The law would also change – trimming taxes on mining income to 25% from 35%.
• The revision must be passed by parliament.
US$1.3013/eur vs 1.2893/eur yesterday. Yen 77.00/$ vs 77.04/$. SAr 7.963/$ vs 7.943/$. $1.556/gBP vs 1.554/gBP
Commodity News
Precious:
Gold US$1,676/oz vs US$1,668/oz yesterday – Gold is trading in a US$1,680-1,670/oz range. Prices reached US$1,681/oz, the strongest reading since mid-December, before dropping by US$10 on investors’ booking profits.
• Central bank gold purchases may have hit record levels in 2011 with holdings in gold-backed ETPs dropping to less than half of that reported in 2010, World Gold Council said.
• Tanzania focused gold explorers Brightstar Resources and Rift Valley Resources yesterday announced a merger. 2 companies combined hold around 760koz of gold at 2 projects, Kitongo and Miyabi. Cash on hand of around A$12.6m is planned to finance the next part of exploration and resource definition works.
• Newcrest Mining is unlikely pursuing any M&A deal in Africa at the moment, CEO of the company said today as market speculates Kinross Gold might attract buyers following a sharp decline in share price.
• Newcrest production dropped 20% yoy to 579,073oz in the 3 months ended Dec 31 due to “extreme” rainfall at its Lihir mine in PNG and a temporary production stoppage following a landslide at Cadia Hill in New South Wales, Australia.
• Alacer Gold, the 2nd largest gold producer in the US, forecasts gold prices to reach US$2,300/oz in 2012 and top U$3,500/oz in 3 years on sovereign debt woes and demand in emerging markets. The company produced around 400koz in 2011 and plans to ramp up supply to 800koz by 2015.
• SPDR gold trust holdings declined to 1,251t (40.206moz) value US$67.345bn from 1,256t (40.371moz).
Platinum US$1,563/oz vs US$1,526/oz yesterday
• Impala Platinum said workers at its Rustenberg operations< South Africa, went on strike on Jan 20 demanding a better pay deal. A court order has declared the strike illegal and the company prepares to take legal action against miners who do not come to work today.
Palladium US$688/oz vs US$678/oz yesterday
Silver US$32.45/oz vs US$32.17/oz yesterday
• Pan American Silver, a gold producer in Latin America, announced an acquisition of Minefinders Corp for US$1.49bn to expand operations in Mexico.
• Minefinders operate the Dolores gold and silver mine and La Bolsa project in Mexico.
• Pan America owns 7 silver mines in Peru, Mexico, Argentian and Bolivia.
• Two companies produced around 26moz of silver in 2011 and expect to take annual supply to 50moz by 2015.
Rhodium US$1,348/oz vs US$1,325/oz yesterday
Base metals:
Copper US$ 8,380/t vs US$8,185/t yesterday – Copper is little changed today and is trading near a 4-month high on strong Chinese copper imports and expectations the US economy growth gained pace in the final quarter of 2011.
• The market was 296kt in deficit in the first 10 months of 2011 according the International Copper Study Group.
• Copper stockpiles monitored by the LME declined for a 14th session to 345,775t, the lowest reading since Oct 5 2009.
• Orders to collect metal from inventories, or cancelled warrants, increase by 4.7% to 71,850t, the strongest level since May 2009,on bookings in Chicago.
Aluminium US$ 2,247/t vs US$2,205/t yesterday
Nickel US$ 20,450/t vs US$20,415/t yesterday
Zinc US$ 2,076/t vs US$2,006/t yesterday
Lead US$ 2,252/t vs US$2,172/t yesterday
Tin US$ 22,222/t vs US$21,850/t yesterday
Energy:
Oil US$110.83/bbl vs US$109.84/bbl last week – Oil gains as this morning; EU foreign Ministers agree to ban Iranian crude supplies with a starting date of July 1st 2012.
• U.S. crude stockpiles gained last week causing the price to dip below $100bbl.
• U.S. crude futures are up this morning at $99.81 on the New York Mercantile exchange with WTI up at $99.83 on the London-based ICE futures exchange.
• Continued development of tight oil, coupled with offshore resource development in the Gulf of Mexico will push Domestic U.S. crude production to 6.7mbls/d in 2020 according to U.S. Energy Information Agency’s (EIA) early release energy outlook overview.
• West Texas Intermediate (WTI) prices were lower than Brent crude due to capacity constraints, preventing arbitrage between the two in 2011.
• The outlook for oil refining is “dire” according to BP Plc’s chief economist Christof Ruehl. Other refineries are being forced to close because overcapacity is making it unprofitable to turn crude oil into petrol and other fuels, he said.
• The comments were made as Petroplus stops oil refining deliveries and its shares suspended after lenders halted circa $1bn in credit lines last month.
• Petroplus may look to sell refineries based in France, Belgium and Switzerland. Its UK Coryton plant on the Thames estuary is capable of processing 220,000bbls/d according to Bloomberg data.
• If the Coryton plant comes into the firing line its closure could cost up to 1,000 jobs.
Natural Gas US$2.621/mmbtu vs US$2.324/mmbtu last week – EIA energy outlook for natural gas reports shale gas production increases from 5 trillion cf in 2010 (23% of total U.S. dry gas production) to 13.6 trillion cf in 2035 (49% of total dry gas production)
• EIA expects natural gas to become a net exporter of LNG by 2016, a net pipeline exporter in 2025 and an overall net exporter by 2021.
Uranium US$53.45/lbs vs US$53.45/lbs last week – Western Australia’s Chamber of Minerals and Energy chief executive Reg Howard –Smith said that if proposals to deny any future Uranium mining applications goes ahead, that it would undermined investment certainty.
• “The restrictions are not taking into consideration that the Uranium industry will broaden the state’s resources, create jobs and help reduce global carbon emissions”, Mr. Howard-Smith said
Coal – EIA expects minemouth price of coal increases by 1.4% per year; from $1.76 per mBtu in 2012 to $2.51 per mBtu in 2035.
• Cost savings from technological improvements in mining will be outweighed by increases in production costs associated with moving into reserves that are more costly to mine, according to the report.
Other:
EIA energy outlook early release overview- The report is based on reference case factors that are shaping the U.S. energy markets over the long term.
• Projected U.S. transportation energy demand grows at an annual rate of 0.2% for 2010 to 2035 with electricity demand at 0.8% per year.
• The report assumptions are based on long term U.S. energy markets in the long term assuming current laws and regulations remain generally the unchanged throughout the projection period.
• U.S. dependence on imported petroleum liquids will decline: oil production by more than 1mbls/d by 2020; an increase in biofuels use by over 1mbls/d crude oil equivalent by 2024
Steel – World crude steel production increased by 6.8% in 2011 and reached a new record high of 1.53bn tonnes, the World Steel Association said.
• Asian production accounted for 2/3s of total output.
• China advanced 8.9% yoy to 696mt. India gained 5.7%. South Korea was up 16.2%. Japan production contracted by 1.8%.
• Production in Europe, including the CIS, increased by 4.6% yoy despite reductions in Q4.
• North America production increased by 6.8% to 118.9mt.
Company news:
Caledonia Mining (LON:CMCL) Production Update and 2012 Outlook for Blanket Mine
• The company announced an 8.1% rise in Q4 2011 production over Q3 2011 production to 9,743 oz and a 69% increase from the same period in Q4 2010 of 6,277 oz.
• This will give the company a total gold production of 35,826 oz for 2011 a 102% increase from 2010.
• To support increased underground production, the company has been refurbishing underground haulages at levels 14,18 and 22 throughout Q4 and expect this programme to be completed by Q1 2012.
• Work is also being done on 825 m deep No 4 shaft which when completed will improve the hoisting capacity – this work may have a negative impact initially on production in Q1 2012.
• The company has installed an automatic cyanide measuring and dosing system on the CIL circuit to have better control over cyanide use.
• A belt scale has also been installed to the No 1 conveyor belt to better measure tonnages from various ore sources – this is expected to be commissioned in early February.
• The company are guiding to a 2012 production level of 40,000 oz which is the production capacity of the mine.
• Discussions are continuing regarding the indigenisation of the Blanket Mine.
• This indigenisation policy requires 51% ownership of indigenous Zimbabweans within 5 years from June 2010.
Hummingbird Resources* (LON:HUM) – 3moz required to kick start $40m feasibility study
• Hummingbird, exploring for gold in Liberia with a 1.8 m oz resource at its Dugbe F prospect, aims to reach a deposit of 3 m oz before building a mine.
• The company are targeting a maiden resource of 1 m oz at the Tuzon prospect where there have been promising drill results recently and where the grades are higher than at the Dugbe F prospect.
• The company intend to do a feasibility study once they have reached the 3 m oz deposit target – this would take about 2 years and cost $40m.
• To construct the mine would take another 2 years and Betts estimates that this would cost between $200 to $250 m.
• The company also have a JV over an iron ore licence in Liberia, Mount Ginka.
• Petmin Ltd their JV partner invested US$2m for 50% to cover the cost of early exploration with work expected to commence next month.
• The iron ore licence is not core to Hummingbird’s activities and it is likely that the company will find a buyer once commercial viability has been assessed.
• Cash: $24m as of 1st November
Conclusion: The maiden resource at the Tuzon prospect where grades are better than Dugbe should propel the company to the next stage but with a feasibility projected to take 2 years and mine development a further two years, this may still be too far in the future for investors.
* Fairfax analysts met with the company last week for a full update on the company’s progress
IFM (LON:IFIL) - Quarterly report highlights recovery in sales and ferrochrome production
• International Ferro Metals has announced quarterly production of ferrochrome up 71% to 54,142t.
• Sales rose 39% to 58,389t but were still 22% lower yoy due to lower price levels.
• Completion of the improvement works at the ferrochrome furnace gives significant improvement.
• Costs savings of 12% achieved and are reported to be on track to hit targets.
• Capital costs and poor margins caused net debt to rise to SAr458m from SAr367 at end September. This is close to the company’s SAr500m debt facility with the Chinese. A further debt facility is being negotiated to give more head room.
• Management forecast the operations to become cash generative this quarter.
• Power issues: ESKOM, the South African power utility has warned that consumers may be faced with rolling blackouts again this year. Ferrochrome producers are major power consumers and are the first to suffer when power rationing is planned.
• Demand: ferrochrome demand is expected to remain subdued as stainless steel producers have been seen cutting back on production and are running at relatively low utilisation rates.
• Supply: The ferrochrome industry is likely to respond with production cuts to avert a build up of ferrochrome stocks which might serve to prolong lower price levels.
• Ferrochrome prices: look likely to remain constrained by the supply demand imbalance with Kazak and Turkish producers able to undercut South African producers due to their higher grade ore supply. Power cuts in South Africa could cause ferrochrome prices to rise if much production is caused to shutdown.
Conclusion: IFM has come far in recent years in terms of counteracting cost inflation in South Africa and reorganising its operations to return to positive cash flow. The cost of the improvements has been substantial and this has not been helped by rising power and other costs and a relatively strong local currency.
Power cuts by ESKOM could be difficult for IFM to absorb in the current financial climate. However, if IFM is able to demonstrate that its newly, energy efficient furnaces should be allowed to maintain operation through potential blackouts then this could be good news from the company.
*Fairfax acts as Nomad and broker to Discovery Metals
Serabi Gold* (LON:SRB) – New funding, proposal to restart Palito and drilling update
• Serabi Gold is looking to restart the Palito Gold mine in the Amazon
• The company is raising funds with a view to restarting the mine and plant
• The three press releases give us news on the funding, on updated drilling at the extension of the Palito gold mine and on the Piaui gold prospect.
• Palito exploration: Serabi reported final results from an 8 holes, 937 m drill programme on the shallow extension of the south-eastern strike of the Palito deposit with preliminary results announced in Nov 2011.
Significant assays are tabled below:
• 0.72 m 9.26 g/t
• 0.90 m 20.60 g/t
• 1.36 m 48.07 g/t
• 1.86 m 4.3 g/t
• Palito mine: Investors should note that the Palito gold mine is in an remote location even by mining industry standards. This raises the cost of operation and makes remote management difficult.
• The Palito mine operated well in the upper levels using traditional mining techniques but suffered unfeasibly high costs when management mechanised the mine with a ‘long-hole’ stoping mining method.
• The Palito plant is relatively small, suitable for high grade ores, but would have limited capacity to process larger tonnages of low grade ore from an open pit.
• High grades look promising at Palito but narrow veins make the mine difficult to mechanise and a return to traditional methods may be the answer here.
• Piaui prospect: The company also announced results of further analysis on preliminary results already announced from their Piaui Prospect.
• The preliminary results were from shallow infill and extensional drilling at the prospect at their Jardim do Ouro project in Brazil.
• The final analysis was based on independent lab analysis by ALS Minerals in Vancouver whereas preliminary analysis was done by an onsite lab.
• Final results show a higher reported gold grade on average of 14.9%.
• Preliminary gold grades over a 300 m strike included 1.93 metres @ 22.86g/t Au, 10.7 metres @ 1.17 g/t Au, 9.1 metres @ 2.24 g/t Au, 3.2 metres @ 16.16 g/t Au and 4.5 meters @ 2.75 g/t Au.
• Capital raising: Serabi also announces that it is in an advanced stage of raising £2.7m at 10 pence per share placing 27,050,000 units. A unit comprises one new ordinary share of 5 pence and one sixth of a warrant to subscribe to one new share at 15 pence with a maturity of 2 years.
• The funds are for company working capital and to undertake a preliminary economic assessment on the viability of recommencing operations at Palito.
Conclusion: Substantial funds were previously invested in mechanising the Palito gold mine causing costs to rise beyond the company’s means. The remote location is a challenge and selective mining of the high grade gold is required to make the Palito mine work. Piaui looks interesting but is not in mentioned in the funding budget.
* A Fairfax analyst has previously visited Serabi’s Palito mine in the Amazon
