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Morning View

Expect more news and announcements from miners over the next few weeks 

· Miners tend to release news at the Indaba conference in February and at the Canadian PDAC conference in March

· The newsflow should help to lift shares for explorers and mine developers with news of new production offering potential for value generation 

Economic News;

Europe – German business confidence advanced for a 3rd straight month in Jan to a 5-month high. The business climate index increased to 108.3 from 107.3 in Dec.

· The IMF forecasts a 0.3% growth in Germany this year compared to to a 0.5% decline in the euro region.

UK – Government debt passed the £1tn level in Dec for the first time since records began in 1993. Net debt stood at £1,003.9bn, 64.2% of GDP.

· UK bank sector borrowing, excluding interventions in the financial sector, dropped by £2.2bn to £13.7bn in Dec compared to analyst estimates of £15bn.

· Mervyn King yesterday said the Bank of England is likely to increase monetary stimulus if needed amid slowing growth of the economy.

· Preliminary Q4 GDP dropped 0.2% qoq on weaker manufacturing and services sectors. Analysts forecasted a 0.1% drop.

China – Per capita GDP totalled almost $7,600 in purchasing power terms in 2010, a level which most countries move from autocracy to democracy.

· But with elections later this year to elect a leader to rule for the next decade, China’s top leaders are bound to be having skirmishes and backroom battles. 

· This has the potential to bring positive major political reform as a way of appealing to a population that is demanding more from their leaders in the wake of the social media explosion and phenomenal growth rate. 

Australia – Inflation held steady in Q4 compared to a 0.2% qoq increase estimated by analysts. Year on year inflation measure stood at 3.1% which is higher than the central bank’s 2-3% annual target rate.

· Imports of mining machinery have experienced their biggest decline since the global financial crisis.

· Skelton Sherborn, one of Australia’s largest freight forwarders of mining and construction equipment, said that the shipping index figures contradicted reports that the resource boom was unaffected by global economic turmoil. 

· In the last two months of 2011, total imported machinery fell by almost 62.5% from 4,000 to 1,500 machines. 

Singapore – Inflation rose 5.5% yoy in Dec in line with expectations. The Monetary Authority of Singapore and the trade ministry said prices will likely remain elevated in coming months on higher home rentals and rising costs of transportation.

South Africa – SA’s mining industry becomes less attractive to investors on uncertainty over nationalisation, land claims and frequent work disruptions according to the South African Institute of Race Relations.

· In 2006 South Africa ranked 37th out of 64 countries in regards of primary destinations for mining investments.

· In 2010 it was 67th out of 64.

· The IMF cut its forecasts for the UK growth in 2012 to 0.6% from 1.6% previously estimated.

· Last year’s budget was sold as a poverty reduction budget, but it wasn’t anything near that, chief strategist of Investment Solutions, Chris Hart said.

· Both Moody’s and Fitch ratings agencies recently downgraded South Africa’s economic outlook. Last years official unemployment rate was still around 25%

· Finance Minister Pravin Gordhan will deliver his next budget to parliament of 23rd February.

Currency – The yen dropped to the lowest level in 4 weeks against the US dollar as Japan reported the first annual trade deficit in 31 years.

Precious:

Gold US$1,669/oz vs US$1,676/oz yesterday – Gold steady before the US Fed releases interest rate forecast for the first time in history.

· India’s gold imports surged by 64% in US$ terms and by 25% to 554t in H1 of fiscal 2011 running from Mar.

· Should the growth rate of imports persist, full year imports may top US$65bn compared to record US$40bn worth of gold in 2010-11.

· SPDR gold trust holdings remained at 1,251t (40.206moz) value US$66.942bn.

Platinum US$1,553/oz vs US$1,563/oz yesterday

· Impala Platinum is firing workers that did not report for duty yesterday following a  strike at its Rustenburg project, South Africa.

· 5,000 workers downed their tools in a labour action that started on Friday.

· Impala signed a 2-year wage deal with the National Union of Mineworkers in Oct.

· Eastern Platinum said labour strikes and a mine fatality adversely affected its Crocodile River Mine (CRM), South Africa.

· CRm produced 19,854oz in Q4 2011 from 32,752oz in Q4 2010.

· Total production came in at 92,724oz in 2011.

Palladium US$681/oz vs US$688/oz yesterday

Silver US$32.27/oz vs US$32.45/oz yesterday

Rhodium US$1,338/oz vs US$1,348/oz yesterday

Base metals:

Copper US$ 8,421/t vs US$8,380/t yesterday – Copper is little changed this morning and is trading close to a 4-month high on weaker dollar and falling inventories that declined for a 15th session to 342,250t, the lowest reading since Sep 25 2009.

· Orders to collect copper from warehouses, or cancelled warrants increased by 5.3% to 75,625t yesterday, the strongest reading since May 2009.

· Rio Tinro brought its stake up to 51% majority in Ivanhoe Mines that ownes 66% of Oyu Tolgoi, one of the largest untapped deposits of copper and gold.

· Oyu Tolgoi proect is valued at US$6bn. Construction is 70% complete and commercial operations are scheduled to start in H1 2013, Rio Tinto said.

Aluminium US$ 2,257/t vs US$2,247/t yesterday

Nickel US$ 20,753/t vs US$20,450/t yesterday

Zinc US$ 2,161/t vs US$2,076/t yesterday

Lead US$ 2,268/t vs US$2,252/t yesterday

Tin US$ 22,275/t vs US$22,222/t yesterday

Energy:

Oil US$110.27/bbl vs US$110.83/bbl yesterday

· Yesterday we wrote that the UK’s Coryton refinery plant would not be affected by Petroplus’s looking to sell some of its other European plants. 

· Today  we eat some of those words as the Swiss-owned parent company went into administration causing supplies to halt at the palnt. 

· Charles Hendry, Oil Minister has asked motorists to carry on their normal lives without rushing to fuels stations to fill up over concerns that some pumps may run dry. 

· There is completely enough fuel available and that BP and Shell have increased supply to ensure demand is met, he said. 

· U.S. crude futures decline this morning at $98.99 on the New York Mercantile exchange and WTI the same at $98.99 on the London-based ICE futures exchange. 

· Apache Corp. the U.S. oil and gas company will acquire Cordillera Energy Partners III LLC for $2.85 billion 

· Cordillera has c.254, 000 of net acres in Cleveland, Western Oklahoma and Texas, net production of 18,000boe/d, proved reserves of 71.5m boe and a further 14,000 potential drilling sites. 

· A deal has been struck where Statoil will share the cost of Cairn Energy’s exploration off the coast of Greenland. 

· Statoil has acquired a 30.6% stake in Cairns Energy’s exploration licence of the specific area. 

· Cairn has spent $1.2bn over the last two years in the Arctic, but so far not been able to deliver any commercially viable quantities of oil. 

Natural Gas US$2.649/mmbtu vs US$2.621/mmbtu yesterday – Prices gained slightly this morning with Henry Hub trading at $2.601 as U.S. President Barack Obama gave a final State of the Union address before heading into the election race. 

· Obama spoke favourably for drilling for gas in shale rock and support for clean energy sources to boost the economy. He spoke of how the industry will create hundreds of thousands of new jobs. It’s all about the…..timing! 

Uranium US$53.45/lbs vs US$53.45/lbs yesterday – Thomas Drolet, a nuclear expert gave a stark warning how “2016: We have to have supply in the market or the lights will gradually go out in the nuclear system”, he said during a presentation at the Vancouver Resource Investment conference on Monday.

· Drolet is the President of Drolet and Associates Energy Services. 

· He said that although Japan has idled most of its 50 nuclear reactors that in his opinion they would have little choice in brining online at least 30 of them or suffer severe economic consequences with industry starting to fail. 

Coal – BHP are negotiating with labour unions in hope that it can avoid strike action at a number of its metallurgical coal operations across eastern Australia.

· The issue is over wages where BHP offered a 4.3% rise against demands for a 4.5% raise. 

· Bob Timbs, district vice president of Construction, Forestry , Mining and Energy Union stated that if an agreement could not be reached at conciliation talks to held on Friday then up to 100 workers at Port Kembla will begin a one-week strike next Wednesday. 

Other:

ETFs – Net inflows into ETFs in the US grew 6.8% to US$119bn from 2010. Assets under management totalled US$1.05tn.

· 233 new funds were launched in 2011 bringing total number to over 1,100.

Steel – Japanese steel production may drop by 2-3mt in 2012, Japan Iron and Steel Federation said.

· In 2011 production totalled 107.6mt.

· A recent electricity charge increase for corporate customers is estimated to add another US$257m to producers’ costs.

· Russian steel and coal producers signed a use-or-pay agreement to transport their products with state-run Russia Railways (RZD)

· Producers will submit in advance the information on volumes, terms and destinations of cargoes they want to be transported by RZD.

· RZD will assess it and determine what routes are profitable and where to build railways.

· After railways are built, producers will have to either to transport the volumes provided in the agreement or pay up the difference if the volumes are lower.

· Severstal said it was one of the parties to sign the agreement.

Iron ore – Fortescue Metals, Australia’s third largest iron ore miner, plans to receive state approval to build a 5th berth at Port Hedland in Feb. The company is paying US$8.4bn on building export capacity to 155mtpa by 2013.

· Fortescue has already received a permission to construct a 4th berth berth that will be sufficient to ship all of increased capacity.

· “Having a 5th berth simply allows you to have a ship on a lay-by berth waiting while you’re leading another ship”, development director said.

Company news:

Firestone Diamonds (LON:FDI) – Report in The Times on potential merger of Firestone and Stellar Diamonds

· The report appears unfounded according to sources within Firestone.

· Firestone shareholders might not wish to see dilution of their ‘valued’ Liqhobong diamond mine

· No smoke without fire so we wonder where the deal might actually be?

· Maybe a deal between Gem Diamonds and Petra Diamonds might make more sense.

Conclusion:  We feel that consolidation within the diamond mining sector should make good sense for investors and that future forecast shortages of gem quality rough diamonds could enable producers to raise prices on a more consistent basis.

Kenmare Resources (LON:KMR) – Moma Mine Update

· Production: Mining operations during Q4 2011 produced 225,600 tonnes of Heavy Mineral Concentrate (HMC) a rise of 15% over the third quarter. 

· The separation plant produced 166,000 tonnes of ilmenite and 12,500 tonnes of zircon, a rise of 13% and 12% respectively. 

· This gives a full year production of 842,900 t of HMC and final products of 636,800 t of ilmenite and 43,500 t of zircon including 6,200 t of zircon from stockpiles. 

· 730,400 tonnes of finished product was shipped in 2011 compared to 712,900 t in 2010, a rise of 3%. 

· Revenues have increased significantly by 83% from US$91.6m to US$167.5m reflecting the significant appreciation in ilmenite and zircon prices. 

· Operational Issues: Production has been below nameplate capacity as a result of reduction in the mining rate caused by band of clay-rich ore. 

· The company have installed a supplementary drying system to partially mitigate this – the system can feed 500 t ore per hour ramping up to 1000 t ore per hour into a Wet Concentrator Plant enable the production rate to be maintained over a range of ore conditions. 

· The upgraded jetty has been fully commissioned. 

· Phase II Expansion: There has been some delay to the timing of the expansion with scheduled completion not expected till well into the second half of this year. 

· This has been a result of a delay to the start of fabrication as a result of delays by the EPCM contractor – the company have boosted manpower at the project including the appointment of a new Project Manager. 

· In addition to internally generated cash, the company have concluded agreements with lenders for up to US$65m for funding operating cashflow which can be used to fund expansion plans. 

· Phase III PFS is progressing to plan and is due for completion later this year. 

· The company believes that current high prices for their products will be supported – over 2011 ilmenite increased fourfold, zircon doubled and rutile prices increased significantly. 

· For 2012, the company have secured prices of US$300-$400 per tonne for the first half of 2012 for their ilmenite. 

· In addition as fixed price contracts secured as part of Phase 1 funding requirements are now expiring (except for one) which enables them to benefit from increased prices since the contracts were struck. 

Vital Metals (ASX:VML) – Trading halt pending drilling results

· Vital Metals shares have been suspended in Australia pending the release of drilling results.

· We expect the results to come from recent RC drilling on the gold prospects at Kollo and Boungou in Burkina Faso. 

· Previous results from Kollo include: 

18m at 2.95g/t from 37m

31m at 3.19g/t from 34m

44m at 6.39g/t from 8m (including 4m at 58g/t from 24m)

· The prospects lie at a junction between two geological structural faults and we are looking for evidence of a potential trap structure where mineralised fluids may have deposited gold in past millennia.  This usually seems to occour in low pressure zones and where the ph changes in the fluids.

· Watershed Tungsten: The BFS, to be completed this year, is being paid for by JOGMEC, the Japan Oil Gas and Metals National Corporation which is earning a 30% stake in the project.  We expect the project to be passed onto a Japanese corporation for financing and project development.  

· Capex for Watershed should be relatively modest at around $70m but could produce more than 19000t of tungsten APT concentrate in its first six years.

· Watershed ranks in the top 10 tungsten undeveloped projects worldwide and is a significant and ‘strategic’ resource for future tungsten production.

Conclusion:  Vital presents investors with significant asset value from its Watershed tungsten project in Australia.  The shares also offer potential for gold discovery in Burkina Faso.  We see substantial unrecognised value in Vital Metals and reckon the shares are significantly oversold at their present level.

.*Fairfax has previously raised funds for Vital Metals.

West African Minerals (LON:WAFM) – Disposal of Ferrum Centrafrique to AXMIN

· West African Minerals has announced the disposal of its wholly owned subsidiary Ferrum Centrafrique to the Canadian based gold exploration company AXMIN.

· AXMIN are a respected gold exploration group with a track record of finding and developing mines in Africa.   

· Background: Ferrum Centrafrique is a company registered in the Central African Republic which had applications for exploration licences over the Topa iron belt. 

· These licences are in the same areas licensed to AXMIN for its Topa Gold Exploration project. 

· Ferrum Centrafrique has been formally denied the Topa Applications although the company believes it has the priority right to be granted exploration permits. 

· Terms of Disposal: The company is selling all the issued and outstanding shares of Ferrum Centrafrique to AXMIN. 

· On successful granting of the Topa Licences to AXMIN, Ferrum Resources will receive US$10m in AXMIN shares provided the shares represent less than 9.9% of AXMIN’s issued share capital. 

· The shares will be issued 30 trading days after the announcement by AXMIN of the granting of the Topa Licences. 

· Shares issued will be valued on a 20 day VWAP for the period starting five days after the announcement. 

· Shares in AXMIN should offer good upside potential for West African Minerals

· In addition, Ferrum Resources will receive US$4m of carry interest plus the balance of US$10m not received in AXMIN shares subject to a maximum free carry interest of US$10m. 

· The Group will receive a 25% interest in Ferrum Centrafrique following grant of the licences. 

· At 30 September, Ferrum attributed a carrying value of £13,000 in its holding in Ferrum Centrafique and has incurred expenses. 

· Ferrum Resources is 100% owned by West African Minerals. 

Conclusion: This appears to be a good transaction for West African Minerals group – retaining a stake in the project which AXMIN can now progress while at the same time getting an upfront payment by way of AXMIN shares if the licences are awarded. The company have a number of interesting iron ore licences in the Cameroon (6 licences) and Sierra Leone (5) which are at an early stage but promising – their energies are much better directed at exploring these licences.

Mining this week: 

Caledonia Mining (LON:CMCL) – Production Update and 2012 Outlook for Blanket Mine

Hummingbird Resources* (ASX:HUM) – 3moz required to kick start $40m feasibility study

IFM (LON:IFIL) 19p, mkt cap £102m - Quarterly report highlights recovery in sales and ferrochrome production 

Serabi Gold* (LON:SRB) – New funding, proposal to restart Palito and drilling update 

Discovery Metals (LON:DME) – Holdings in the company

Frontier Mining (LON:FML) – Completion of Acquisition of South Benkala Copper project

Goldplat (LON:GDP) – Good Progress on Gold Production and Exploration Projects

Sirius Minerals – SM2 Preliminary Coring Result

West African Minerals Corporation (LON:WAFM) – Directorate Change and subsidiary share buy-back