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Fairfax Marketing Report including Firestone Diamonds, Xstrata, Discovery Metals plus others

Published: 10:41 06 Dec 2011 GMT

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Morning View:

Economic News:

Europe – Reports continue to emerge that leaders are taking steps to solidify plans ahead of the summit on the 9th.

· France and Germany have reportedly strengthened their push for new rule to tighten euro area economic cooperation. 

· Will further noise, from France and Germany on greater integration be enough to prompt the ECB to step up its response? 

· Expectations are that Germany and France will call for fast track plans to develop the permanent rescue fund before the initial deadline. 

· S&P has announced that it has put a number of European nations including the six AAA rated counties on watch for potential downgrades. 

· Germany and the 5 other AAA rated companies face having their top notch ratings downgrade. 

· Belgium’s first full time government in over 18 months will take office today. 

China – Stocks fell this morning on concerns that the property slowdown will hamper growth. 

· Additionally the markets were impacted further by the comments by S&P. 

· A move by the central bank to lower required reserves for banks for the first time in 2008 has so far failed to boost stocks since the end of last month. 

· Inflation figures for November are expected to be released on the 9th of December. 

· Reports have emerged today that the China- African Development fund has found investing in Africa more difficult than initially expected. It has not been able to exit any of the investments as of yet to realise a profit. 

· Nomura Holdings has cut its growth forecast for China next year to 7.9% from 8.6% initially forecast. 

Japan – Stocks declined today on the back of the news that S&P may strip Europe’s biggest economies of their AAA ratings as the region’s debt crisis spreads. 

· Demand for the Bank of Japan’s one week dollar loans has surged 25times after the central bank cut borrowing costs for the US currency last week. 

UK – Retail sales fell the most in six months in November as the weaker economic outlook prompted Britons to curtail spending. 

· Sales at stores open at least 12 months fell the most in six months in November as the weaker economic outlook prompted consumers to curb spending. 

· Lloyds of London has stated that falling demand rather than a shortage of credit is the biggest challenge facing global businesses. 

Australia – The country’s central bank has reduced its benchmark interest rate today on the back of Europe’s ongoing crisis and the knock on effect it will have on demand for the countries exports. The rate now stands at 4.25%

· The number of properties listed for sale country wide reportedly increased by 17% in November from a year earlier. 

· The country’s current account deficit reportedly narrowed in the Q3 as exports of coal, metal ore and other commodities gained. The shortfall decreased to A$5.64bn from a revised A$6.66bn in Q2 

Brazil – New estimates suggest that growth may have stalled in Q3 a sign that the world’s second largest emerging economy last momentum even before the government acted to contain the spill over. 

· GDP failed to grow from the previous 3 months for the first time since 2008. 

· The economy grew 2.4% from the same period last year. 

Asian Development Bank – The group has announced that Asian economies are facing much greater downside risks now because of the threat of recession in the US and Europe and the threat of destabilising capital flows. 

Currency – The yen and the dollar strengthened today against most of their major counterparts after S&P announced their review. 

· Asian currencies in general weakened today led by the Indonesian rupiah. 

Commodity News:

Precious:

Gold US$1,718/oz vs US$1,745/oz yesterday – Gold is off and dollar is up this morning after S&P rating agency put credit scores of 15 European nations under review for a potential downgrade.

· Lower prices may encourage Indian and Chinese buyers to increase physical purchases as India’s wedding season runs in Nov-Dec and then in Mar-May, while demand for gold picks up before Christmas in China and runs through Jan.

· Guinea government may gain control of as much as 30% of Crew Gold, a subsidiary of Severstal’s Nord Gold, under new mining code approved in Sep this year.

· Gold holdings in ETPs dropped for a 3rd day to 2,354t yesterday after reaching a record 2,356t on Nov 30.

· SPDR gold trust holdings remained at 1,298t (41.730moz) value US$72.748bn.

Platinum US$1,518/oz vs US$1,548/oz yesterday

Palladium US$635/oz vs US$649/oz yesterday

Silver US$32.08/oz vs US$32.81/oz yesterday

Rhodium US$1,575/oz vs US$1,600/oz yesterday

Base metals:

Copper US$ 7,805/t vs US$7,880/t yesterday – Copper prices are down today as positive news of an agreement reached by France and Germany over new Euro zone fiscal rules were overshadowed by S&P decision to put 15 European countries on credit watch.

· Falling world Copper stockpiles is a sign of China’s demand robustness amid the Euro zone debt woes and anaemic US recovery, Macquarie said.

· Global Copper inventories declined by 19% since the end of Sep to the lowest level since Oct 09. Asian Copper stockpiles monitored by the LME dropped 68% since Jun with the largest withdrawals in Singapore and South Korea, the closest storage facilities to feed Chinese consumption.

· Copper demand in China is forecasted to expand 6-8% this year according to Macquarie.

· China Copper imports in Nov reached the highest level in 1.5 years.

Aluminium US$ 2,105/t vs US$2,109/t yesterday

· Japanese buyers negotiated a 5% cut in premiums over the LME cash price to US$112/t charged by suppliers, the largest drop in 2 years.

· Japanese smelters point to a slower demand for aluminum finished products as Europe’s sovereign-debt crisis, appreciating yen and Thai worst flooding in nearly 70 years threaten a recovery of the nation’s automobile sector.

· “The situation surrounding our industry is deteriorating,” the Japan Aluminium Association said.

· Japan’s shipments of rolled-aluminum products decreased by 2.8% in October, the 5th consecutive monthly drop, led by lower exports to China and Southeast Asia.

· Aluminum inventories at ports of Yokohama, Nagoya and Osaka increased 1.9% to 236kt in Oct, the highest reading since Aug.

· World market surplus may widen to 1Mt in 2012 from 0.8Mt in 2011 according to Market Risk Advisory, a research company in Tokyo.

Nickel US$ 18,072/t vs US$17,629/t yesterday

Zinc US$ 2,009/t vs US$2,026/t yesterday

Lead US$ 2,090/t vs US$2,100/t yesterday

Tin US$ 19,950/t vs US$19,900/t yesterday

· ITRI, a tin industry association, forecasts tin prices to average US$27,000/t in 2012 and trade in the “mid thirties” in the next 3-4 years.

· “The main story in tin is supply constraints, which will continue,” ITRI said. Furthermore, prices will be supported by higher fuel costs and lower ore grades.

· A trend towards lead-free solders may increase tin consumption by 20kt per annum according to ITRI. Nearly 2/3 of solders currently are lead-free.

· LME inventories of tin dropped 25% so far this year and reached the lowest level nearly 14 months as of Dec 1.

· Tin export halt by Indonesian tin producers broke down last week as the Indonesia Tin Association announced around 7kt of tin ingots will be shipped overseas in a week ended 4 Dec.

Energy: 

Oil US$108.96/bbl vs US$110.80/bbl yesterday – Brent drops off the back of news from standard and poor’s warning of more possible downgrades as EU leaders struggle to convince markets they can contain the debt crisis.

· Senior executives that include BP’s Chief Executive predict Brent trading between $90 and $100bbl in 2012. 

· US Crude oil is still trading above the US$100bbl on the New York Mercantile exchange. 

· Libya believes it can restore to pre-conflict levels of production by the second half of 2012. 

Natural Gas US$3.447$/mmbtu vs US$3.584/mmbtu last week – Global research firm HIS Global Insight, have reported that shale gas production in the U.S. could produce up to 900,000 jobs by 2015 boosting a reported $1,000 to annual household budgets.

· Lawmakers are critical of multipliers used to predict add-on-jobs as IHS defend figures as being conservative. 

· Shale gas remains a hot topic with environmentalists and producers in debate about the potential catastrophic hazards of drilling shale rock. 

Uranium – US$52.25/lbs vs US$52.00/lbs yesterday – Cameco Corp’s bonds have recovered following the aftermath of the Fukushima Earthquake and Tsunami disaster which saw its shares plunge in its wake.

· Cameco still plans to double Uranium production by 2018 to meet demand for the 93 nuclear reactors planned by utilities around the world.

Coal – Ukraine’s Energy and Coal Ministry reported that it had increased its coal production by over 9.5% in the first 11 months compared with the same period in 2010.

Other: 

Rare Earth- Reports suggest there’s a “buyers-strike” in the rare earth market as consumers such as automakers and oil refiners seek cheaper and more readily available alternatives following China’s export restrictions. 

· Investor’s of Molycorp Inc. bet against the rare-earth producer seeing stocks at their highest since July’s public offering amid speculation prices for the mineral will keep falling. 

· Frontier Rare Earths Ltd. share price rose 29% after the announced an agreed partnership with a group of Korean companies including Korea Resources Corp and Samsung Group. 

Steel – China Steel is in talks with Vale and other iron ore miners to reduce Q1 prices.

· China will expand its overseas iron ore mining projects over the next 5 years according to the National Development and Reform Commission.

Company News:

Aurum Mining (LON:AUR) – Interim Results 

· The company announced its interim results with a review of its activities. 

· The company are progressing the existing gold projects in Spain following the withdrawal from the Kyrgyz Republic. 

· The company’s activities in Spain are through their JV with Ormonde Mining which is working well and they intend to complete on other complementary transactions. 

· Following an initial drilling campaign over the summer, the company reported some good drill results from their JV with Ormonde on the El Facho gold prospect. 

· A new drilling programme is underway at El Facho targeting 2,000 metres of drilling over nine holes with assay results available by the end of the first quarter of 2012. 

· As well as drill programme at El Facho, the JV drilled a hole at “llago” structure on the adjacent permit area where no mineralisation was encountered – drilling will therefore focus at El Facho while further analysis is conducted at the Llago structure. 

· A short hole drill programme (3 holes) is also expected at the Peralonso permit area in the Salamanca Province where previous trenching returned promising results including an interval of 5 metres grading 5.4 g/t gold once approvals are received from the provincial administration. 

· Aurum has now fulfilled the terms of its JV with Ormonde Mining with the transfer of €200,000 for the exploration work in the first nine months. 

· The company will spend a further €300,000 over the period to 14 September 2012 to earn its majority interests in the four permits. 

· For the six months to 30 September, the Group reported an operating loss of $1.1m – losses relate to the ongoing cash burn, $465,000 in expenditure on costs related to the aborted reverse takeover transaction and a one off non-cash charge of $182,000 relating to the employee share option scheme. 

· The company raised £2m in April 2011 and at the end of October gross cash stool at approximately £2m. 

Conclusion: As previously announced the JV with Ormonde Mining is progressing well with promising early results. Further results expected in Q1 2012 should provide further insight into progress at the El Facho JV prospect.

African Eagle (LON:AFE) – Results at Miyabi Gold JV

· Results have been returned from a RAB drilling progamme at the JV with Brightstar on the Miyabi Gold Project. 

· Results are from the area SW of the 130,000 oz Kilimani resource. 

· Drilling has intersected mineralisation in most cases and were from oxidised rock. 

· The company expect these results to add to the existing 520,000 oz JORC resource. 

· New results include: 

- 33m at 4.36g/t gold from 9m to end of hole ("eoh")

- including 21m at 6.7g/t from 15m, with 3m at 22.6g/t from 33m

- 15m at 0.81g/t from 24m to eoh, including 3m at 2.5g/t from 33m

- 24m at 0.52g/t from 15m to eoh, including 6m at 1.61g/t from 24m

Metals Exploration (LON:MTL) – Update on Runruno 

· The company has exercised its right to acquire the outstanding shares in the Runruno Gold Project from Christian Mining Inc taking their holding to 100% from 85%. 

· The acquisition cost was at US$6m which translates to a cost of US$44.44 per reserve oz. 

· Early works on the Runruno project have commenced with earthworks initiated on the processing pad. 

· Detailed design and engineering works for the processing plant has begun by Leightons. 

· A letter of intent has been issued to Leightons to enter into an Engineering and Construct and Procurement contract to design and construct the Runruno processing plant. 

· A debt package to fully fund the project is being finalised. 

Conclusion: The company has bought out the outstanding 15% stake in the Runruno project giving them full control of the project – this should be value accretive to the company as they have bought the 15% stake at a reasonable price of US$44.44/reserve oz based on US$6m. The price paid per share is 0.86 cents or 0.55 pence. Based on our estimation, the uplift in NPV to the project is 5 pence per share for moving from 85% to 100% ownership of the project.

Early works are commencing at the project with production targeted for the second half of 2013. First gold production is forecast at 53,000 oz in 2013 rising to 106,000 oz from 2014 with a mine life of 10.3.

Permits are in place and early works are commencing with the debt package the only element awaiting finalisation. It is unlikely that the company will need any additional equity in the project.

The current share price does not fully reflect the value of the Runruno project - we recommend the shares as a buy and raise our target price to 35 pence.

Ncondezi Coal (LON:NCCL) – Results of Phase 1 Power Generation and Gasification Studies

· The company have been looking at whether the middlings and low volatile coals previously treated as waste product could be used for local power generation and coal gasification. 

· Coal deposits in Mozambique require washing to attain export quality resulting in large quantities of middlings coal by products with calorific values ranging between 17-20 mj/kg which are not suitable for export. 

· The DFS on Ncondezi has found significant amount of middlings coal and also quantities of low volatile coals. 

· The studies conducted by Hugh Brown Associates used low volatile coal samples as a reference specification for use in a number of proven power generation and gasification technologies. 

· The results of the studies have demonstrated suitability and potential economic viability of generating power and producing syngas from these coals. 

· The scoping study completed at Ncondezi completed in April 2010 was based solely on looking at the export thermal coal market and therefore did not assign any value to the middlings and low volatile coals. 

· The company expect to upgrade their resource for both high and low volatile coals following the results of the recent DFS in the next two weeks.

Xstrata (LON:XTA) – Copper Mining and project news

Ernest Henry Copper Mine

· Underground mining has commenced at the Ernest Henry Copper mine in NW Queensland. 

· This is a major milestone in transitioning from open pit to underground mining for a A$589m investment and extending operations to at least 2024. 

· The first phase of the underground operations will produce 25,000 tonnes of Copper and 35,000 oz of gold following first commissioning in 2013 and will ramp up to 50,000 tonnes of Copper and 70,000 oz of gold in concentrate. 

· The project creates 330 jobs during the construction phase and 400 full time jobs from 2013. 

Las Bambas and Corrocochuayco Projects in Peru and El Pachon in Argentina

· Xstrata Copper’s total contained Copper mineral resources have increased by 10% by 9 m tonnes to 97 m tonnes across their Copper resources. 

· Las Bambas has increased resource estimate to 1.71bn tonnes at a grade of 0.6% Copper using a 0.2% Copper cut-off grade, an increase of 10% - contained Copper is up 9% to 10.3m tonnes. 

· Corrocohuayco – an earlier stage project mineral resources (pre PFS) have increased by 250% to 324 m tonnes at a grade of 0.93% Copper and a cut off grade of 0.3%. 

· El Pachon’s mineral resource has increased by 53% to 2.74 bn tonnes at a grade of 0.48% Copper using a cut-off grade of 0.2% Copper

· The expanding mineral resource base in South America is the basis of the company’s organic expansion in Copper

· The company expects to increase Copper production by 50% to 1.5 m tonnes Copper per year by the end of 2014. 

Mining this week: 

Discovery Metals (LON:DME) – Discovery of Copper/silver mineralisation at Mango Prospect

EMED Mining (LON:EMED) – Extended Environmental Management to Project Land at Rio Tinto

Firestone Diamonds (LON:FDI) – Fourth Diamond Sale of 2011

DiamondCorp (LON:DCP) – Diamond sales are good news for DiamondCorp

Goldstone Resources (LON:GRL) – Drill Results from Homas/Akrokerri Project 

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