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Today's Market View Including African Consolidated Resources, Afferro Mining, Gemfields, Medusa Mining and others

January 30 2013, 11:07am

Afferro Mining (LON:AFF)– Results from Akonolinga and Further Purchase of shares by IMIC (Cameroon)

Antofagasta (LON:ANTO)– 2012 production exceeds expectations but 2013 should see flat growth (Chile)

African Consolidated Resources (LON:AFCR) – Operational Update (Zimbabwe)

Gemfields (LON:GEM) – Quarterly Update shows good production from Kagem Emerald Mine (Zambia)

Highland Gold (LON:HGM) – Trading Update exceeds good production in H2 2012.

Medusa Mining (LON:MML)– Quarterly revises production for this year with FY 2014 on target (Philippines)

South Africa declares coal to be a strategic resource

The move is invariably designed to maintain domestic supplies of coal for Eskom, the state power utility.

Domestic coal sales effectively subsidise power costs for Eskom at very low price levels.

South Africa is suffering from years of underinvestment effectively caused by artificially low domestic coal prices and restrictions on export allocations through Richard’s Bay

South Africa has more than enough coal resource but a decline in coal quality in both domestic and export production is causing Eskom to look to secure further coal locally.

The problem is that this will further disrupt coal producers as many only really survive on the profit from export production

Strategically if Eskom can not produce sufficient power then the whole nation suffers and this is potentially politically disastrous for the ANC

Eskom need to build new production capacity and to replace ageing power stations 

Consumers and Coal producers are caught between a rock and a hard place in this one 

Zimbabwe has just $217 in its national bank account 

Ordinarily this would look bad for a country

The upside is that Zimbabwe does not carry national debt of any real value

Public debt 219.7% of GDP in 2011 according to the CIA factbook, though this is a realtively small absolute ammount

So in some ways Zimbabwe looks less indebted than the US, UK and many other more developed nations

Economic View

US - Consumer confidence fell more than forecast to 58.6 in Jan, the weakest since Nov 2011, on rising payroll taxes cutting disposable income. Estimates were for a decline to 64.0, down from a revised 66.7 in Dec.

The outlook for employment prospects and incomes deteriorated this month.

A separate report showed yesterday house prices grew in Nov by  the most since August 2006 as the S&P/Case-Shiller index in 20 US cities climbed 5.5%yoy.

Q4 GDP data is due after lunch. Forecasts are for a 1.1%qoq (annualised) increase, down from 3.1% recorded in Q3.

Eurozone - Spanish Q4 GDP contracted 0.7%qoq (-1.8%yoy) compared with a 0.3%qoq decline in Q3 and a 0.6%qoq fall forecast. 

China - Rural citizens incomes increased faster than ones of urban dwellers in 2012 for a third consecutive year as employers increased pay and the government strengthened the social safety net including for health care.

Rural per-capita net income, which includes migrant workers’ pay, grew 10.7%yoy, compared to 9.6% for urban citizens.

Wages gained as peasants migrated to work in cities.

Retail sales growth in rural regions outpaced the one for urban areas last year (14.5% vs. 14.3%).

Data reflects government’s intentions to rebalance local demand. Although, there is a long way ahead. Currently, rural spending was still less than one-fifth of the what urban households spend.

Japan - Retail sales gained 0.1%mom in Dec compared to a 0.1%mom decline in the previous month and a 0.4%mom increase forecast.

Worse than expected numbers indicate consumer demand remains fragile in the world’s third biggest economy.

South Korea - Industrial production advanced 1%mom in Dec as local demand oriented production gains offset weakness in exports.

Estimates were for a 1.5%mom decline .

The current account surplus narrowed to US$2.3bn in Dec on weaker shipments of steel, electronics and autos, down from a record surplus of US$6.9bn in Nov.

Canada - Announced Canadian M&A deals climbed 10.5%yoy to a record US$210bn in value terms in 2012. Total number of deals was 9.6%yoy at 2,811. (PwC)

Deals of over US$1bn accounted for more than 50% of the total.

The energy (29% of total value of deals) and the real estate (15%) industries dominated the activity in 2012.

The metals and mining sector (11%) cam third. The announced takeover by First Quantum of Inmet Mining was a key reason behind the increase in the value of Q4 M&A activity.

M&A deals are expected to grow moving forwards on the back of low interest rates, a surplus cash on investors’ and companies’ accounts and plenty of liquidity in the debt market.

Foreign acquisitions of Canadian targets accounted for 27% of total transactions with the top buyer being China (39%).

Other - US$50bn of write downs by the world’s largest mining and steel producers have been recorded in 2012, according to Bloomberg estimates.

Anglo American, Vale and Rio Tinto led the writedowns on the back of falling metal prices, rising costs and weakening demand.

US$1.3506/eur vs 1.3444/eur yesterday. Yen 91.22/$ vs 90.68/$. SAr 9.034/$ vs 9.097/$. $1.575/gbp vs 1.571/gbp

Commodity News


Gold US$1,667/oz vs US$1,663/oz yesterday - Prices are little changed this morning ahead of the US Q4 GDP data released later today.

Harmony Gold is still in discussions with labour unions regarding the possible retrenchment of employees at the closed Kusasalethu mine, South Africa.

The company started talks in mid-Jan after issuing Section 189 proceedings for over 5,000 miners.

SPDR gold holdings remained at 1,328t (42,670koz) valued at US$71.0bn yesterday. 

Platinum US$1,688/oz vs US$1,679/oz yesterday

Palladium US$757/oz vs US$746/oz yesterday

Silver US$31.42/oz vs US$31.12/oz yesterday

Base metals:

Copper US$ 8,168/t vs US$8,109/t yesterday - Copper gained after a government think tank (the Chinese Academy of Social Sciences) raised its economic growth forecasts to 8.4% for 2013, up from 8.2%.

Japanese copper shipments gained 27%yoy to 512,277t, the highest in three years, in 2012 amid weak domestic consumption as manufacturers moved production overseas after the yen reached a post-WWII high in Oct 2011 and costs of production accelerated.

Copper production increased 14%yoy in 2012 while demand slumped 12%yoy, according to Pan Pacific Copper, the largest domestic producer.

Copper inventories monitored by the LME gained to the highest level in more than 13 months.

Aluminium US$ 2,079/t vs US$2,060/t yesterday

Nickel US$ 18,080/t vs US$17,700/t yesterday

Zinc US$ 2,124/t vs US$2,097/t yesterday

Lead US$ 2,423/t vs US$2,398/t yesterday

Tin US$ 25,026/t vs US$24,600/t yesterday


Oil US$114.3/bbl vs US$113.4/bbl yesterday

Natural Gas US$3.293/mmbtu vs US$3.262/mmbtu yesterday

Uranium US$43.75 (close 29/01/13) vs US$43.90 (close 28/01/13)


Iron ore - Prices might fall to US$140/t level through Mar on lower Chinese imports as the nation celebrates Lunar New Year and mills start to source more material from domestic suppliers, ANZ Banking Group estimates. Prices traded at US$148.4/t yesterday.

Company News

Afferro Mining (LON:AFF) – Results from Akonolinga and Further Purchase of shares by IMIC

Akonolinga Early Exploration Work: Interpretation of airborne geophysics has identified potential anomalies of oxidised BIF.

Twenty five pit trials up to 11m deep were excavated with two pits returning grades in excess of 50% Fe.

Assays from surface samples from 194 rock and soil samples were taken at 200m spacing and grades of up to 58.5% were found close to the topographic high of one of the anomalies identified AKFE-23.

Four drill targets have been selected for follow up drilling.

IMIC acquires further shares: IMIC acquires an additional 1.11m shares at a price of 90 per share for a consideration of £1m in cash.

IMIC now holds 6.8% of Afferro’s voting rights with their option to acquire a further 1,864,300 shares at 90 pence.

Conclusion: Work at Akonolinga is at an early stage but is located in a prospective region 85 km NW of Nkout.

Antofagasta (LON:ANTO) – 2012 production exceeds expectations but 2013 should see flat growth

Copper production was 193,800 t in Q4 up 7.8% over the previous quarter giving a total copper production of 709,600 t for 2012 up 10.8% from 2011.

Gold production was up to 86.4 koz up 11.6% from the previous quarter giving a total gold production for 2012 of 299.9 koz up 52% from 2011.

Weighted average cash costs without by product credits were 162.8 cents/lb for the full year and 163 cents/lb for Q4 up 4.9% year on year and 3.4% q on q.

Cash costs including by product credits stood at 103 cents/lb up marginally year on year.

Los Pelambres increased throughput by 5.7% as well as had higher grade ore.

Esperanza increased plant throughput by 4.8% to 89,200 t per day in Q4 this is an improvement for the fully year of 45.8% in plant throughput from the prior year.

El Tesoro which produced 26,800 t of copper for Q4 and 105,000 t for 2012 due to higher grade ore and higher throughput.

There should be a positive adjustment on provisional pricing of US$81.7m for the full year.

Development at Antucoya has been suspended till a full review of the costs of the project are undertaken and termination notices have been served on principal construction contracts.

Guidance for next year is flat at 700 kt.

Conclusion: These 2012 numbers show how well the existing operations are doing with increased throughput and better grades – cash costs continue to rise. Next year should still production being sustained and any uplift dependent on price. With the suspension of the development of Antucoya the medium term growth options for the group remain limited. The stock still offers good quality exposure to the copper price with low quartile cash costs. Should Antucoya not come on stream, investors may look for an increase in dividends given the cash flows being generated.

African Consolidated Resources (LON:AFCR) – Operational Update 

The company have started trial mining at their Pickstone-Peerless gold project.

The project which has a JORC resource of 3.2 m oz at 2.7 g/t gold announced a PEA which they company view as the first phase of the BFS.

The trial mining will enable them to progress to Phase 2 of their study.

Media reports relating to land seizure in Zimbabwe are according to the company related to land bellowing to Andrew Cranswick the previous CEO of the company who has now resigned from the board.

Conclusion: The Pickstone-Peerless looks exciting but the company look as if they have not resolved the issues in Zimbabwe. A clear process of indigenisation has helped companies such as Caledonia Mining de-risk and this is the path that needs to be followed.

Gemfields (LON:GEM) – Quarterly Update shows good production from Kagem Emerald Mine

Kagem saw quarterly production of 6.6 m up from 3.9m carats achieved at the same time last year.

Grades improved to 288 carat/t from 259 carats/t with increased ore mined in the stope.

Cash costs are up to $333/t up 19% from the previous quarter as strip costs rose with the strip ratio up by 14% to 96 from 84.

The strip costs reflect the larger areas of over burden mined to make more ore available for future mining.

Rock handling unit costs were up 3% to US$3.4/t in the quarter against US$3.3/t in the previous quarter.

The company continues to work with local ministries to resolve illegal mining on the boundaries of the project.

Conclusion: This is a respectable performance in the rainy season – strip costs are up but so are grades with development progressing according to plan.

Highland Gold (LON:HGM) – Trading Update exceeds good production in H2 2012.

The company reported production for FY 2012 was 216,885 oz an 18% improvement and ahead of guidance.

Gold production at MNV was 79,742 oz an 11% improvement in output relative to 2011 with improved plant throughput.

Production for FY 2013 is forecast to be in the range of 225,000 – 240,000 oz of gold and gold equivalents.

Net cash stood at US$52.5m with an interim dividend of 4.8 pence for Q3 2012.

Conclusion: These are impressive numbers from Highland Gold.

Medusa Mining* (LON:MML) – Quarterly revises production for this year with FY 2014 on target

Current production below expectations due to development process:  For the quarter the company produced 18,177 oz at a cash cost of $279/0z at an average gold price of $1,731/oz.

This gives Medusa half year production of 32,580 oz which is below our and market expectations.

Guidance reduced for FY 2013: Production guidance for FY 2013 (June year end) now revised down to 80-90,000 from previous 100-110,000 oz.  We are pulling our forecast for this year back to 80,000oz for this year although this is more than offset by management’s raised production forecast for FY 2014 in our valuation.

Production is still running in development mode impacting short term production:  As the mine prepares for future ramp up, all the development ore is being treated through the mill effectively reducing the productive capacity of the plant through this time.

The Saga shaft with a haulage capacity of 1,500 tpd was commissioned in mid January and is 4 weeks behind schedule. This is not a bad result for shaft commissioning.

Lateral development at the mine has been increased from 800m to 1,000m per month and a high proportion of development ore will continue to be supplied to the current mill as new milling capacity is delayed by three weeks.

The tie-in of the new mill to the existing facility has been rescheduled and will take longer resulting in reduced milling time due to interuptions.

Guidance ahead to achieve 200koz in FY 2014:  The construction of  Phase 3 of new mill at Co-O will cost $70m should be completed by  mid-2013 giving the company 200,000 oz of production in FY 2014.

At Bananghilig the recent resource update with the upgraded indicated resource can be used for feasibility work:  The team are targeting completion of  the feasibility and permitting for this project by mid 2014.

Construction expected to take around 18 months with around US$200m as a guesstimate of capital and infrastructure costs.

Bananghilig could add 200,000 oz to production in FY 2016.

Cash and cash equivalents stand at US$15.7m with US$23.9m used through the quarter for expansion and maintenance capex up from US$6.4m in the previous quarter.

US$8.4m was spent on mine development through the period with US$6.1m on exploration.

Conclusion: The pace of development at the Co-O mine to meet the expansion for the new mill continues to take its toll on short term production. The market may be disappointed in the impact this is having on numbers for FY 2013 but the company is pushing ahead with the development work spending $30m through the quarter in a combination of capex and development. Phase 3 expansion which will cost $70m is being entirely funded with internally generated cash flow. 

200,000 ozpa is targeted from FY 2014 once the expansion work is complete. Even if gold prices come down to $1,250/oz  EBIT will be $160m per annum. There may be some short-term disappointment in the absolute production number for FY 2013 but cash costs are coming down from the highs of $328/oz in the previous quarter and the ground work is in place for the company to achieve their targets for FY 2014.  

Our valuation remains broadly unchanged as the upgrade to FY 2014 to 200,000ozpa from 180,000ozpa offsets our lower FY 2013 figure of 80,000oz from 110,000oz previously.

*SP Angel acts as UK broker to Medusa

*SP Angel analysts have previously visited the Co-O gold mine in the Philippines.


+SP Angel employees may have previously held, or currently hold, shares in the companies mentioned in this note.



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