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Today's Market View Including Afferro Mining, IMIC plc, DiamondCorp, Polo Resources and others

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HKNG Group plans to build New $40bn Panama Canal, this time in Nicaragua!

HKND Group based in Hong Kong have signed a $40bn deal to build a new canal across Nicaragua to connect the Pacific with the Atlantic

Panama officials may not be so pleased to see their monopoly on the shipping short cut

The group and presumably Chinese officials are betting that global trade could double by 2030 and are forecasting an energy renaissance according to China Daily Mail.

Part of HKND’s reasoning is to enable new oil and gas supplies from the US shale gas revolution to flow from the US West coast to Asia

Note that Shale oil refining is likely to lead to oversupply in some speciality chemical markets

The new canal could theoretically be built at sea level, making a more simple, quicker and potentially less costly canal to operate, but creating other engineering challenges.  Eg tidal weirs.  Tidal differences can mean a 20 foot difference between the Pacific and Atlantic sea levels.  The project could also have significant environmental impact on lake Nicaragua, Central America’s largest fresh water reserve.

Despite this the main risk appears to be the potential for future nationalisation

Industry experts reckon the project will require substantial financial backing from China in the form of low cost loans and the ability to charge shipping rates comparable to those charged for the Panama Canal.

Panama is currently expanding its own canal in a $5.25bn project.

We wonder how many political prisoners, sorry, persons from correctional facilities may be used to build the canal.

Indonesia to build $11bn bridge to link Sumatra to Java

China Railway Construction Corp have signed a deal to build a bridge from Sumatra to Java.

The 30km bridge should take 10 years to build and will link 80% of Indonesia’s population of 238m (2010) with Java 135m population (2012)

Engineering challenges remain and the bridge will need to be able to withstand an earthquake of magnitude 9.

The bridge will also need to withstand eruption from a nearby volcano just 50km away which was formed in 1883 after the explosion of Krakatoa.

The consortium bring together the governments of Lampung in Sumatra and Banten in Java as well as a subsidiary of Artha Graha.

The project still needs a legal guarantee from the Indonesian government to press ahead.

Lets hope they maintain quality control on the composition of the structural steel and concrete. 

We would expect the project to keep a few steel mills going for the next decade.

Economic View

Germany - Business confidence climbed to 105.9 in Jun, up from 105.7 in May and in line with analysts’ estimates.

UK - The Treasury will announce a list of infrastructure projects this week after ceiling the deal for £11.5bn of budget cuts in “unprotected” departments in 2015-16.

Priority projects for some £250bn of capital spending will be earmarked this Thursday. Projects are expected to include the widening of the A14, the Mersey Gateway bridge in the north west, first stage funding for the HS2 rail line, broadband roll out and green energy programmes.

South Africa - The Association of Mineworkers and Construction Union accounting for a fifth of gold miners in South Africa, may not participate in this year’s wage negotiations, according to the Chamber of Mines.

The government is expected to host mining wage talks in early Jul.

The National Union of Mineworkers representing around 64% of the gold sector’s workforce file their demands for a 60% increase in a labour pay.

Mozambique - Coal India will spend US$42m on social projects in Mozambique to overcome socio-political barriers in developing coal licenses in the country.

Previously the government criticized the Company regarding delays in launching the project up in the Tete region.

Coal India has been awarded two coal blocks at Moatize in the Tete province in 2009. Exploration programme is expected to be complete by Dec 2013, and mining operations are set to start by 2017. 

Philippines - The government is negotiating a new mining royalty. The levy may go up to as much as 8-10% of grow revenue, Environment Secretary Ramon Paje said on Friday.

The government may also consider changing the timing of payments with different options available - paying upfront, partially or at the end of a business cycle.

The new bill should be ready before late Jul.

Other - Edward Snowden who leaked US surveillance of telephone calls and Internet traffic arrived to Moscow from Hong Kong as Russian and Chinese government s rejected US calls for his extradition.

It is reported Snowden might seek a permanent refuge in Ecuador.

US$1.3114/eur vs 1.3216/eur last week. Yen 98.33/$ vs 97.97/$. SAr 10.245/$ vs 10.240/$. $1.537/gbp vs 1.548/gbp

Commodity News

Precious:

Gold US$1,282/oz vs US$1,296/oz last week - Prices are off this morning as investors continue to cut their holdings in gold ETFs and the US dollar index gains. 

India ask local jewellers to suspend sales of coins and bullion bars to retail buyers until the current account deficit stabilizes.

Producers announce new cost cutting programme as gold prices move lower. Barrick Gold will fire up to a third of its corporate staff. Newmont will cut its workforce at its home base in Denver, Colorado, by some 33% in the coming 3 months.

Illegal gold mining yields 5x more profits than cocaine growing and dealing in Colombia.

Cocaine normally takes six weeks to grow and requires considerable knowledge, while illegal mining operations in the Colombian jungles can produce 2kg of gold per week.

Police have shut 336 illegal mines this year, up from last year’s total of 330.

SPDR gold holdings fell to 989.9t (31,828koz) valued at US$41.210bn from 995.4t (32,002koz) last week. 

Platinum US$1,361/oz vs US$1,370/oz last week

Palladium US$671/oz vs US$678/oz last week

Silver US$19.64/oz vs US$19.89/oz last week

Base metals:

Copper US$ 6,676/t vs  US$6,825/t last week - Copper is off on the back of concerns over Chinese demand and the news Grasberg complex is set to resume production.

The market recorded a 104kt surplus in Mar, more than double the level seen in Fed (44kt). (the International Copper Study Group)

The Indonesian Ministry of Energy and Mineral Resources issued a permission to restart open pit mining and processing at the Grasberg mine. No permission to resume underground operations has been given.

The Grasberg complex remained shut after a May 14th collapse at the underground training facility which killed 28 miners and injured 10 others.

Aluminium US$ 1,784/t vs US$1,802/t last week

Nickel US$ 13,778/t vs US$13,755/t last week

Zinc US$ 1,830/t vs US$1,839/t last week

Lead US$ 2,000/t vs US$2,024/t last week

Tin US$ 19,490/t vs US$19,431/t last week

Energy:

Oil US$100.2/bbl vs US$102.7/bbl last week

Natural Gas US$3.776/mmbtu vs US$3.876/mmbtu last week

Uranium US$39.75 (close 21/06/13) vs US$39.90 (close 20/06/13) 

Other:

Iron ore 62% Fe spot (cfr Tianjin) US$118.6/t (close 21/06/13) vs US$120.6/t (close 20/06/13)

Company News

Afferro Mining (LON:AFF) – Recommended agreement for IMIC to acquire Afferro

IMIC (LON:IMIC)

The offer for Afferro by IMIC for 120 pence made up of 80 p in cash and a 2 year unsecured convertible note of 40 pence.

The acquisition values Afferro at US$200m on a fully diluted basis.

Conclusion: Following the recent issues of bonds and convertible bond offerings, IMIC now have the cash element of the offer covered. There is no value being assigned to the 40 pence convertible note which is payable in cash or shares. The bid is subject to shareholder approval on both sides. Investors who want to remain involved will need to have faith in IMIC’s ability to progress discussions on the infrastructure front. There remains little transparency from this group and relationships with Chinese entities. The new group may attract a different type of investor base from Afferro which has had good standards of disclosure.

The Cameroon remains a relatively attractive place to invest in but the scale of infrastructure investment remains challenging and will need a consortium approach. What happens with Sundance Resources in its ability to secure funding for the railway using offtakes for its high quality DSO will remain key to development of iron ore projects in the region.

Bellzone Mining (LON:BZM) – Full Year Results

Results highlighted progress with JV at Forecariah with first shipment of ore.

The optimisation programme at Kalia continues based on the 87.5 Mt of 54.1% Fe oxide material.

Cash at hand stands at $20.3m a the end of May and covers planned activities to H2 2014.

Glenn Baldwin new CEO in place.

Conclusion: There was no new news in the results. The cash of $20.3m as at the end of May will take away any short term concerns of a fund raise. The market will now wait to see if the Forecariah JV which has started shipping ore can do this profitably and generate cash for the business. The company expect this business to be self funding to its current production plan to the end of 2015.

Kalia which is the more interesting asset is still some way from development with a significant amount of capital required, $4.5bn for the necessary infrastructure. 

DiamondCorp (LON:DCP) – Lace update shows good progress on development

The update shows that all is going to plan and on budget.

Modifications to the Lace processing plant has been completed and tailings re-treatment will restart.

The company plan to start running a single shift until prices for tailings diamonds are established with the first sale expected in September.

Once the price is established, the company will seek to increase the number of shifts to either 2 or 3 with around 3.5 Mt of tailings available for processing.

Development is going as planned with temporary ventilation now available for continuous blasting to the 470m level.

On a cumulative cost per metre basis the work is 15% under budget.

Excavation of box cut to provide surface entrance to conveyor belt and services declines is 75% complete.

The boxcut is 3 weeks behind schedule and is 40% under budget.

The EPCM contract has now been awarded and detailed engineering work now being checked.

Conclusion: All is progressing well so far with the Lace development. The sale in September will give a good indication of pricing for the diamonds. The current valuation reflects very little prospective value for the production from Lace and we remain buyers. The rough diamond market has shown good recovery this year with both small and large diamonds performing well. The recent weakness in the Indian rupee may have taken some of the sparkle out of the market but the overall fundamentals remain good.

*SP Angel acts as joint broker to DiamondCorp PLC

*SP Angel analysts have visited the Lace Mine.

EMED Mining (LON:EMED) – Confirms details of recent convertible placing

Following the announcement of the US$15m convertible note the company have set out the details of the subscription from XGC and Red Kite.

XGC will subscribe for £7.0268m which is around $11m of the convertible which if converted will result in 90.101m new shares.

Red Kite will subscribe for £2.55m which is around US$4m of the convertible which would result in the issue of 32.7m new shares if converted.

XGC and Red Kite will hold 17.4% and 7.4% respectively of the company following conversion.

The Notes will hold security interests granted by EMED over the share capital of EMED Holdings and EMED Marketing as well as certain intra-group debt.

EMED have undertaken not to encumber the assets or share capital further except for the proposed senior debt facility in place for the restart of the project.

Following the increase in the offtake the committed allocation on off-take rights will now stand at 32.6% and 17.5% respectively for XGC and Red Kite giving a total of 50.1%.

Should the company draw down on US$35m standby facility from Red Kite this will increase to 63.6% of reported LOM reserves.

The convertible note which has a term of 18 months with a 9% coupon for the first 12 months and 11% thereafter.

The conversion premium is 58% over the 5 day VWAP with a conversion price of 9 pence.

Right to repay the note early one year after issue.

Conclusion: The company has provided the detail of the terms of the convertible terms to their two key shareholders XGC and Red Kite. The offering of security should not be a surprise to the market and both XGC and Red Kite now have a significant interest in making sure this deal progresses in an efficient manner once the Spanish authorities finally approve the requisite permits.

ENRC (LON:ENRC) – £3.04bn ($4.7bn) offer equivalent to 234p/s

The founders of ENRC have confirmed their offer of £3.04bn to take the company private.

The offer is for $2.65bn in cash and 0.23 shares in Kazakhmys which is effectively distributing shares held by ENRC in the Kazak copper miner.

The founders and Kazak government hold just over 54% of ENRC

Kazkahmys is to receive $887m in cash and 77m of its own shares back 

There is no prospect to improve the terms according to the consortium.

The UK Serious Fraud Office has an ongoing investigation.  We suspect the investigation centres on the acquisition of copper mining assets sold to ENRC by Dan Gertler following their seizure from First Quantum Minerals.  We still don’t understand how the company’s lawyers advised on the deal!  Gertler is said to have connections with DRC president Joseph Kabila and to have acquired substantial assets in the DRC at low prices.

First Quantum settled with ENRC for $1.25bn 

Conclusion:   History tells that companies with good corporate governance generally make better investments in the long run.  ENRC’s acquisition spree in Africa seems to have corrupted a business which looked promising as the world’s lowest cost ferrochrome producer when it floated in July 2007.

Polo Resources (LON:POL) – Update on Signet Petroleum

Polo Resources today updates the market on its 47.95% investment in Signet Petroleum.

The company is looking for strategic alternatives for its oil and gas portfolio in Africa.

The company operates licenses in offshore Tanzania, Namibia, Benin, Sierra Leone and an interest in Lake Tanganyika.

The press release tells is that the group are anticipating a wide range of “potential commercial outcomes” at the individual asset level with a broad spectrum of bidders.

Michael Tang’ Polo’s new MD is likely to be looking to realise assets for a Net Asset Value closer to Polo’s NAV of 36p/s (FT) than its market value of just 20p/s.

Conclusion:  It feels as if the company will probably sell and also joint venture assets to realise value from the portfolio.

Rio Tinto (LON:RIO) – Keeps Diamond Business

Rio has decided to keep its diamond business having looked previously to sell it.

The company believe that the fundamentals of the diamond market remain strong and they can deliver value to shareholders by keeping the business within the group.

Conclusion: Rio appear to have had a change of heart on the diamond business and this could be as a result of finding the right buyer and terms to take the business out of their hands. Given their push into iron ore it is hard to see diamonds as a core business for the group. 



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