Morning View

Gold – central bank purchases may exceed 2011 - IMF 

• We view gold prices as well supported in the current, uncertain, economic environment 

• IMF figures released yesterday on central bank gold purchases suggest that nations are boosting their gold holdings to lend extra support to their trade and economic standing.  Major purchases were seen by the Philippines (32t bought in March), Sri Lanka (2t since January), Turkey (29t in April), Mexico (3t), Kazakhstan (2t), Ukraine (1.4t) 

Liquidity – institutions have been concerned at a potential lack of market liquidity this week

• Investors have been reluctant to buy as the Greek crisis pulled markets down

• Revisions to DGP growth in China, Europe and the UK on the back of the Greek crisis are not helping 

• BUT, investors are seen to be actively looking for ideas and opportunities and while there is a lack of trade, there is definitely no lack of interest in the mining sector (see Medusa comment below) 

Medusa Mining – presented to a packed room of private investors at the Chesterfield Hotel last night 

• The ‘Evening with Medusa Mining’ demonstrated the very considerable interest in the stock with over 100 investors in the room

• Management seem to have taken on near ‘rock star’ status with this hugely appreciative audience

• Mention of potential for a special dividend in future years might have helped

• Production growth from 65,000oz to 120,000oz for FY 2013 and 200,000oz in 2014 also looks like good news

Australia – Resource investment rises to $261bn in 98 projects with 39 mineral projects and 38 energy projects and 19 infrastructure projects

• Iron ore projects account for just 10% of the figure with new gas projects making up 60% of the investment spend

• Inflation is sure to continue to rise in Australia with so much inward investment 

• Australian dollar is also likely to remain relatively firm on this news although concerns over iron ore shipments and prices may add downward pressure

The Argentine – nationalisation of YPF stake held by Repsol of Spain is causing miners to re-examine investment projects in the region

• Xstrata reassessing plans for $5.5bn expansions at El Pachon and Agua Rica.

• Vale looking to dump its $6bn Rio Colorado potash project in Argentian

Eurovision – the most horrendous television song contest the world has ever known is on tomorrow night in Azerbaijan

• Thankfully better things do happen in Azerbaijan such as gold, copper and oil production.

• We have learnt that the Azerbaijan energy operator is fully ready for the ‘peak demand’ expected from the event

• Hopefully Anglo Asian Mining have stand-by generators in case Eurovision proves too much for the grid system

• It is traditional for the winning nation to host the Eurovision contest the next year and we wonder if Greece might back out as we are not sure they can afford to host the event next year.

• Whatever happens in Azerbaijan it looks better organised than ESKOM the South African power utility which is paying heavy energy users to not take energy so it can maintain supply to households and other industry.

Economic News

Europe – Figures released today by GFK indicate that German consumer confidence increased in May and is expected to improve again in June. 

• The German consumer has been robust of late with record low unemployment helping brush aside concerns over the fate of the Euro. 

• Expectations continue to mount that the ECB will have to deploy the so called Emergency Liquidity Assistance in greater force in the coming months. 

• Speculation continues to mount as to how many banks have now been moved onto the ELA program. 

• Under the ELA domestic central banks provide emergency liquidity to banks that are not in a position to provide “acceptable” collateral to the ECB. The result is that risk is held by the domestic central bank ring fencing the bank in question without sharing the liabilities with other euro members. 

• French consumer confidence unexpectedly rose for a third month as President Hollande was elected. The sentiment index rose to 90 from a revised 89 in April. 

US – Michigan confidence index for May will be announced today. Forecasts indicate that the level remained unchanged at 77.8 in May. 

• Initial jobless claims figures released yesterday were in line with expectations. 

• Continuing claims increased highlighting the headwinds still facing the labour market 

• Durable goods orders increased by 0.2% in line with expectations. 

China – Bank officials have warned that some of the country’s largest banks may fall short of loan targets this year. 

• If accurate, it will be the first time in seven years that lenders have failed to hit targets. 

• The decline in loan demand indicates the extent of the slowdown in China. 

• Interest rates will likely be dropped in the near term in an attempt to sustain demand. 

Japan – Consumer prices rose 0.2% in April indicating the third monthly increase. 

• The government could implement further monetary easing in the near term in an effort to sustain the price increases as it pushes for it 0.7% target by the end of the year. 

Australia – The average yield on 10 year bonds this week fell to 3.15% - the lowest level in 30 years. 

• Demand for Australian assets has continued to increase as the debt crisis in Europe prompts investors to seek safe haven assets. 

• The Aussie dollar has weakened further this morning as concerns continue to mount over China and the prospects a slowdown holds for Aussie exports. 

India –The country’s central bank chief has said that officials are committed to reducing the volatility of the rupee as the slump in the currency threatens to increase inflation. 

Singapore – Figures released today show that industrial production unexpectedly fell for the third time in 4 months in April as output of electronics and pharmaceuticals declined. 

• Electronics production decreased by 12.5% yoy in April. 

Thailand – Exports from the country unexpectedly fell last month – the 5th decline in 6 months. 

• Overseas sales dropped 3.67% from a year earlier as demand from western economies started to dry up. 

• Manufacturing has not returned to full capacity since the devastating flooding, but officials remain optimistic that their target of 15% export growth is achievable. 

Philippines – The Mines and Geosciences Bureau has forecast that mineral output this year may drop about 9% on the back of gold sales to central banks declining. 

Currency – The dollar is off today against its most traded counterparts. 

• The pound has strengthened marginally today against the dollar. 

• The yen is marginally weaker this morning against the dollar as the prospect of further stimulus from Japan increases. 

US$1.2556/eur vs 1.2590/eur yesterday. Yen 79.64/$ vs 79.50/$. SAr 8.340/$ vs 8.380/$. $1.566/gbp vs 1.569/gbp

Commodity News

Precious:

Gold US$1,562/oz vs US$1,561/oz yesterday – Prices are up this morning as dollar fell from nearly a 20-month high.

• CME Group, the world’s biggest exchange, lowered trading margins for gold, crude oil, unleaded gasoline and lean hog contracts, effective after May 29.

• Margins for gold have been cut by around 21% since the start of the year.

• SPDR gold trust holdings increased to 1,270t (40.840moz) value US$64.039bn from 1,268t (40.772moz). 

Platinum US$1,427/oz vs US$1,424/oz yesterday

Palladium US$591/oz vs US$592/oz yesterday

Silver US$28.29/oz vs US$27.94/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz last week

Diamond sales - Tiffany report disappointing sales sending stock down 8%.

• The company reported an increase in net worldwide sales of 8% to $819m .

• Sales in the Americas rose 3% to $386m but their NY flagship store reported a sales drop of 4%.

• Sales in Asia Pacific increased by 17% to $195m and in Japan sales rose by 15% to $88m.

• The company have downgraded their sales expectations to 7-8% in worldwide sales from 10% growth.

• The company continue to pursue store expansions with 24 new stores being added - 9 in the Americas, 8 in Asia Pacific and 2 in Europe.

• Conclusion: Tiffany still has a big exposure to US consumer spending where the disappointment and downgrade in sales has come from. Asia Pacific sales and expansion remain intact.

Base metals:

Copper US$ 7,635/t vs US$7,609/t yesterday – Copper set to record a fourth weekly decline on slowing demand in China and concerns Greece will exit the Euro zone. 

• Diego Hernandez, a CEO of the world’s biggest copper producer Codelco, resigned this week after two years in the job for personal reasons. CFO Thomas Keller will replace Hernandez.

• Japanese copper and copper-alloy fabricated goods production, including sheets and tubes, fell 8.1% yoy to 67,900t in Apr, dropping for an eleventh month, on slowing exports, the national Copper & Brass Association said.

• Copper market was in 100,000t deficit in Feb, the International Copper Study Group said.

• A launch of copper ETFs by JPMorgan might lead to a temporary shortage of the readily available metal in exchange inventories and increase metal price volatility.

• It is expected JPMorgan will be seeking to remove 61,800t of copper from LME-monitored warehouses to back the ETF marketed to retail investors.

• The product is currently reviewed by the Securities and Exchange Commission.

Aluminium US$ 2,021/t vs US$2,016/t yesterday

Nickel US$ 17,050/t vs US$16,872/t yesterday

• Norilsk will bid for Asian Mineral Resources that owns a nickel-copper project in Vietnam.

Zinc US$ 1,888/t vs US$1,881/t yesterday

Lead US$ 1,949/t vs US$1,943/t yesterday

Tin US$ 19,750/t vs US$19,425/t yesterday

Energy:

Brent crude US$106.54/bbl vs US$105.55/bbl yesterday- Near term outlook for oil prices off of weak manufacturing figures from Europe and China coupled with high stockpiles suggest further declines. 

• Iran talks have failed to reach any agreement other than to hold further talks to be held in Moscow on June 18-19th. 

• Military action against Iran to destroy nuclear facilities has not been ruled out by the U.S or Israel and the threat of sanctions is yet to have any desired effect. 

• When the sanctions do come into force, its likely that markets will feel more nervous fuelled by uncertainty of either sides action. 

• Meanwhile- Japan seeks more realistic options to ensure imports of Iranian crude are not disrupted 

WTI: US$90.59bbl vs US$90.16bbl yesterday 

US Crude: US$90.67/bbl vs US$ 90.50/bbl yesterday 

Natural Gas US$2.713/btu vs US$2.793btu yesterday

• Uncertainty over the division of royalties between states and municipalities which has required new legislation has held up Brazil’s 11th round of bidding which was due to take place in June. 

• The situation is causing frustration amongst small and mid-sized explorers with Brazil’s National Energy Policy Council still yet to publish official approval for the round which will open a six month bidding process. 

• Perception is that most of Brazil’s hydrocarbon wealth is locked in deepwater basins. 

• Around 45% of all discoveries in Brazil are less than 100/mmbbls and so of no interest to super-majors. 

Uranium US$51.50/lbs vs US$51.50/lbs yesterday- 

• UX consulting weekly spot as of 21st May 2012 was at US$52.00/lb (Unch) 

Coal- 

Richards Bay $88.90/t vs 88.55/t yesterday, 

Newcastle $91.60/t vs $91.90/t yesterday

Rotterdam $88.45/t vs $87.25 yesterday

Other:

Steel – Baoshan Group received an approval to build US$11bn steel plant in the southern port city of Zhanjiang.

• The plant will have an annual capacity of 9.2mt of iron, 10mt of steel and 9.38mt of steel products.

• The government delayed the approval of steel projects by Baosteel and Wuhan Iron & Steel Group in 2009 due to an overcapacity in the industry.

• The Zhanjiang plant will raise Baosteel’s capacity by 2.3% to 53mt, making it the second largest steel producer in the country.

Company News

Anglo American (LON:AAL) Coldelco resignation seen as positive for Anglo negotiations over Anglo Sur

• The resignation by the CEO of Codelco this week could be seen as a positive in negotiations over Anglo Sur.

• Codelco's previous stance taken very publically by their CEO was not particularly helpful given the scale of investment being made by Anglo into Los Bronces.

• Codelco need to grow their copper production but so do Anglo and there should be some middle ground in discussions.

• Coldeco is a Chilean state company with sales supporting the Chilean military.  Rumours are that Codelco may list in London at some stage.

Kryso Resources (LON:KYS) Debt Financing with China NonFerrous Metals International

• Kryso Resources has announced the arrangement of a loan facility with CNMIM, the company's largest shareholder.

• The loan which is in two parts amounting to US$83.5m will be for a US$10m and a RMB 520m loan.

• The loan has an interest rate of 9% and matures in May 2012 with equal payments due from November 2014.

• CNMIM is also planning to exercise its warrants in the company for 73.3m shares at a price of 21 pence giving them 40.7% of the company with gross proceeds of £15.4m.

• The company believe that the company is no longer subject to UK takeover rules as the company's central place of management and control is located outside the UK.

Conclusion: Minority shareholders should be aware that by placing the company outside the UK takeover code, majority shareholders such as CNMIM no longer have to make a mandatory offer for the company once their shareholding goes above 30%.

Vane Minerals (LON:VML) Copper Drilling Update

• Drilling programme at the Peg Leg target has produced negative results.

• Drilling at this target at 1,800 ft and 858 ft have returned weak sulphide mineralisation from both holes with field analysis showing weak to no copper at this target.

• The company has started RC drilling at their next target Railroad and their are planning a DC drilling programme at McGhee Peak on receipt of permits.

Mining this week:

Caledonia Mining (LON:CMCL) Transfer of 20% of Blanket Mine to Indigenous Parties

Uranium Resources (LON:URA) Update on Mtonya Uranium Exploration Programme

Bellzone (LON:BZM) Receives authorisation at Forecariah Mine in Guinea

Gemfields (LON:GEM) Quarterly Update 

Anglo Asian Mining* (LON:AAZ) Profits show strong growth on low cost production 

Solomon Gold* (LON:SOLG) Gold resource update for Rannes project in Australia

Alecto Minerals* (LON:ALO) £1.47m raised in a private placement

African Copper Plc (LON:ACU) Ball mill fails at Mowana Mine

Highland Gold (LON:HGM) Unkurtash project JORC resource rises to 3moz

Noricum Gold Ltd (LON:NMG) Exploration Update at Rotgulden Project

North River Resources (LON:NRRP)* Final Results highlight Namib lead/zinc mine activity

Ariana Resources (LON:AAU) Bonanza grades from drilling at the Red Rabbit Project

DiamondCorp (LON:DCP) Signs Term Sheet for Development Funding for Lace Mine

We have issued a report on DiamondCorp (LON:DCP) on 21.05.12

Vatukoula Gold Mines (LON:VGM) Interim Results to 29 Feb 2012

Morning View

Gold and base metals prices holding well considering the financial and economic turmoil seen in the Eurozone

• Oil prices continue to pull back as the US reduces its reliance on imports

• Reports of the Iranian navy helping a US cargo ship in Gulf may also allay some fears 

• US durable orders figures are forecast to increase today off a depressed base

Medusa Mining are presenting at an Evening with Medusa Mining at the Chesterfield Hotel, Charles Street, Mayfair tonight - The event starts at 5:40 – there is no charge

Economic News

Europe – At the “informal” European summit yesterday, officials indicated their desire that Greece remain in the shared currency, but that current austerity plans are adhered to. 

• The European Council President, Van Rompuy, repeatedly stated Greece must “respect its commitments” 

• As expected nothing concrete emerged from the discussion yesterday. 

• The idea of Eurobonds was reportedly aired and unsurprisingly rejected by German officials. 

• The past few years have taught us one thing that remains abundantly clear – European officials are not likely to  take any steps or make any decisions until the market forces them into action. 

• They have failed repeatedly to get ahead of the crisis. Any belief that this will change is erroneous. 

• National priorities and maintaining domestic political capital appear to be top of the agenda for much of the European community – This is the inherent flaw of the Eurozone. 

• This leads us to conclude that the Greek elections and the subsequent official European summit at the end of June will provide nothing to deal with the structural imbalances that remain. 

• Talk of “extra steps to support the regions banks” is frankly a sideshow and a weak attempt to divert attention away from the fact that Europe must integrate further or break up. 

• Liquidity concerns and bank runs are a short term socio-economic issue. Protecting against them does not cure the ills of the region.     

• Region wide Manufacturing figures for May showed further contraction. The figure declined to 45.0 from 45.9 in April. 

• Additionally PMI services figures declined more than forecast. 

Germany – Figures released this morning emphasis the gulf that remains between Germany and the rest of the Eurozone. 

• Export in Q1 rose more than forecast according to official figures. 

• GDP quarter on quarter increased by 0.5% in line with expectations. 

• Similarly year on year growth came in at 1.2% in Q1 – in line with initial forecasts. 

• That having been said – IFO figures on sentiment and the business outlook all failed to hit forecasts, indicating that Germans are worried about the current economic situation. 

France – Preliminary figures released today show that manufacturing in the country declined in May, 

• PMI services however increased more than forecast. 

China – The preliminary HSBC PMI index for May indicates that manufacturing could well decline further this month. 

• If accurate the reading will indicate the longest period of contracting data since the start of the financial crisis. 

• The contraction is prompting further debate of stimulus in the country. 

• Chinese stocks declined today on the back of the announcement on manufacturing. 

• The Chinese Securities Journal has stated that the Central Bank should reduce the interest rate it pays on excess reserves. 

US – Positive housing figures released yesterday helped the market improve marginally.

• New home sales increased more than forecast in April to 343,000 

• The figure is undoubtedly a positive but coming from such a depressed base it is hardly surprising. 

• Forecasts ahead of report due for release later today indicate that orders for durable goods probably increased in April. 

• It worth noting that the forecast increase is only estimated to be 0.2% and would come on the back of a 4.2% decline in March. 

• Initial jobless claims figures will also be released later today. The forecast suggests that claims remained flat from last month at 370K. 

• At present we are not overly optimistic for the jobs market in the US and feel that there could still be some pull back over the summer. 

UK – GDP revision compounds the pressure on the Government. 

• Q1 GDP figures today were revised down. Not Good. GDP in Q1 contracted by 0.3% not the 0.2% contraction expected. 

• Government spending increased by 1.6% qoq as the headwinds facing the global economy increased. 

• Private consumption increased by less than expected. 

• Exports in Q1 beat forecasts increasing by 0.1% 

• Imports increased by 0.4% 

• On the positive side of the coin - Figures on Total Business Investment indicated growth increasing by 3.6% 

• Year on year business investment increased by 14.2% against forecasts of 9.2% 

• The Index of services improved month on month rising by 0.5% in March after contracting by 0.4% in February. 

• Retail sales figures released yesterday fell the most in more than two years – highlighting the problems facing the consumer in the UK as real incomes continue to stagnate. 

New Zealand – The country’s trade surplus grew in April as imports fell. 

• Exports exceeded imports by NZ$355m 

• Exports make up 30% of the country’s economy. 

Vietnam – Figures released today show that inflation fell below 10% for the first time in 19 months in May.

• Consumer prices increased by 8.34% on the back of declining bank earning and moderating food prices. 

Baltic Dry Index – From January through to the end of April the Baltic Dry Index increased by 69%. However of late the index has flat lined and since the start of May has declined by 4.5%. 

• Chinese demand for coal remains buoyant and has supported the index in general since the start of the year. 

• The National Bureau of Statistics shows that China imported 23.9 million tons of coal in April. This is 12% more than was imported in March and 115% more than was imported in April 2011. 

• China’s iron ore imports in Q1 totalled 187 million metric tons an increase of 6% yoy. 

• Looking at the specifics, the Capesize market has traded marginally down of late, with the Handysize market rising slightly and the Panamax market down. 

• The market remains in a tight position though with oversupply likely to remain for the rest of the year despite high scrapping rates. 

US$1.2590/eur vs 1.2676/eur yesterday. Yen 79.50/$ vs 79.60/$. SAr 8.380/$ vs 8.362/$. $1.569/gBP vs 1.574/gBP

Commodity News

Precious:

Gold US$1,561/oz vs US$1,559/oz yesterday – Gold declined for a third day non rising US dollar as European leaders clashed over the idea of issuing Euro bonds.

• Newmont Mining will cut its spending on the Conga project, Peru, by 2/3s to S$440m maid delays caused by state and environmental reviews.

• Turkey increased its gold holdings by 29.7t in Apr, Ukraine bought 1.4t, Mexico added 2.9t and Kazakhstan purchased 2t, according to the International Monetary Fund data.

• SPDR gold trust holdings dropped the most in nine months to 1,268t (40.772moz) value US$63.138bn on Tuesday amid falling prices.

• SPDR are up 1% since the start of 2012, while gold prices are off 2.8%.

• Global Holdings in ETPs backed by gold are set to decline for a third straight month and stood at 2,367.5t.

Platinum US$1,424/oz vs US$1,426/oz yesterday

• Miners at the Rustenburg mine, South Africa, operated by Impala Platinum have returned to work today following a 2-day stoppage on the back of a clash between two different labour unions.

• Production may have lost at least 6,000oz as result of an unplanned shutdown.

• Aquarius Platinum said it may lose 75,000t of ore at the Mimosa mine, Zimbabwe, due to a fire eruption on a conveyor belt in the main decline. The loss will be compensated with stockpiles. 

Palladium US$592/oz vs US$604/oz yesterday

• Prices may grow 24% to US$750/oz by the end of 2012 should concerns with regards to Greece leaving the Euro zone and economic growth in the US subside, according to Stillwater Mining, the sole US producer of PGMs.

• The US economy is doing “far better” than many observers suggest, while Chinese government “made an adjustment they needed” to cool the economy and reign in inflation, Stillwater said.

Silver US$27.94/oz vs US$27.85/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz last week

Base metals:

Copper US$ 7,609/t vs US$7,640/t yesterday – Prices increased form a 4-month low as Chinese officials pledged to support growth amid high uncertainty over European crisis.

• Codelco, the world’s largest copper producer, recorded a 10% yoy decline to 373,000t in Q1 amid “considerably lower” ore grades.

• Drop at the Chuquicamata, Salvador, El Teniente and Radomiro Tomic mines surpassed an increase at Gabriela Mistral operations.

• The company forecasts production to reach 1.7mt in 2012.

• Prices should not decline “too much” as Europe is struggles with the ongoing sovereign debt crisis and economic growth slows down in China.

• Codelco and Anglo American announced yesterday that both companies agreed to seek out-of-court settlement of the dispute with regards to the copper assets in Chile including the valuable Los Bronces mine. Legal proceedings are decided to be suspended until Jun 22.

Aluminium US$ 2,016/t vs US$2,024/t yesterday

Nickel US$ 16,872/t vs US$16,796/t yesterday

Zinc US$ 1,881/t vs US$1,880/t yesterday

Lead US$ 1,943/t vs US$1,934/t yesterday

Tin US$ 19,425/t vs US$19,430/t yesterday

Energy:

Brent crude US$105.55/bbl vs US$107.80/bbl yesterday

WTI: US$90.16bbl vs US$91.17bbl yesterday 

US Crude: US$90.50/bbl vs US$ 91.02/bbl yesterday 

• Brent was over a $15 premium to U.S. benchmark for July settlement as WTI dipped below US$90/bbl on Wednesday its lowest in seven months 

• The U.S. weekly report showed stockpiles remain at 22-year highs signalling flagging demand. 

• A groundbreaking case has been settled forcing BP to spend upward of US$400m to reduce noxious air pollution from its Whiting refinery in Northwest Indiana. 

• The result could set a precedent for other oil companies nationwide to reduce their air pollution 

• The consent decree requires BP to significantly reduce flaring by capturing pressurized gases and to operate flares more efficiently when they are needed. 

• The new cap on emissions is seen as the toughest yet expecting Whiting to reduce flaring by 90% 

• Whiting processes heavy-crude oil pulled from tar-soaked clay and sand in Northern Canada. 

Natural Gas US$2.793/btu vs US$2.759btu yesterday

• Cove Energy received a hostile bid of 240p per share from Thai oil firm PTT Exploration and Production Public Co. yesterday 

• The offer is a 9% premium to Shell Bidco’s 220p offer which is still the only bidder with Mozambique government approval. 

• Shell’s offer will remain open for an extended period to 13th June which buy’s them more time to consider their position. 

• An offer of 240p per share values each barrel of oil equivalent on the high side of US$3.4. 

• Between US$2.5/boe US$3.00/boe would be more a more realistic valuation figure on these assets. 

• U.S. and China credit agencies and other banks have joined to offer US8.5bn for an Australian JV LNGto liquefy unconventional gas for Asia export. 

Uranium US$51.50/lbs vs US$51.60/lbs yesterday- 

• UX consulting weekly spot as of 21st May 2012 was at US$52.00/lb (Unch) 

Coal- China’s government are urging companies to explore for greater foreign recourses as it expects to consume 5.5bn/mt of standard coal by 2020, officials at the National Energy Administration said on Thursday. 

Richards Bay $88.55/t vs 89.55/t yesterday, 

Newcastle $91.90/t vs $93.55/t yesterday

Rotterdam $87.25/t vs $87.65 yesterday

Other:

Steel – Chinese stainless steel demand may slow down to 3-5% growth, the lowest pace since 2001, and total 10m, Baosteel Stainless Steel said. Production is forecast to grow 3-5% as well to 12-12.5mt.

• Severstal, the second biggest producer in Russia, announced a 18% yoy (-7.8% qoq) drop earnings in Q1 to US$427m on the back of declining prices.

Iron Ore – Rio Tinto comment that they do not see signs of slowdown in the Chinese iron ore market

• We have been concerned about iron ore prices in the short term but information today from Beijing suggests that the Chinese should stimulate demand for steel to maintain price levels.

• There is some softening of iron ore prices but there is also a realisation that when the price softened last October, it only reached the level of marginal suppliers (i.e. 120/t).

• This could keep prices at around this level for some years with limited periods at lower prices when the Chinese shake the price tree.

• Xstrata produced a chart below which points to a marginal cost heading upwards although it is demand which is normally more of a price driver.

• In the medium term the Chinese may increase spending on internal projects to resolve over capacity in steel production and other industries.  Am told this may be vital to peace and tranquillity ahead of the upcoming elections in Q3 2012.  

• Further a withdrawal of funding into many new projects and expansions should also help to maintain a tighter supply demand balance in future years with many projects likely to be delayed and higher cost projects canned.

Company News

Mali (coup update)- President Dioncounda Traore was attacked on Monday as the presidential palace was stormed by hundreds of angry protestors.

• The Interim President was taken to hospital while his close-protection guards killed three of the protesters. 

• ECOWAS mediators left Mali hours before a deal was struck with coup leader Capt Amadou Sanogo to accept a Traore-led twelve month transition back to a democratic rule. 

• The deal he accepted included all the benefits a former president would get, including housing, transport, security and an allowance… a cynic might say that appears more like a bribe! 

• A 3,000-strong military force from the West African region is on stand-by to deploy if Mali the interim government requests it. 

Caledonia Mining (LON:CMCL) Transfer of 20% of Blanket Mine to Indigenous Parties

• The company is fulfilling its obligation under the Zimbabwean indigenisation policy by transferring 20% of the Blanket Mine to two indigenous Zimbabwean Trusts. 

• This is part of the agreement to transfer 51% of the mine for US$30.09m. 

• 10% has been sold for US$7.339m to the Blanket Mine Employee Trust that has been established for the employees. 

• 10% has been donated to the Gwanda Community Share Ownership Trust for the benefit of the local community. 

• 15% was already sold to a consortium of indigenous Zimbabweans for a consideration of US$11m. 

• The company will facilitate the vendor funding for all sale transactions which will be repaid by way of future dividends from Blanket with loans attracting a rate of 10% over the 12 month LIBOR. 

• Repayments will be dependent on the future performance of the mine 

• The Blanket gold mine is an underground gold mine with a production capacity of 40,000 oz a year with total proven and probable reserves as at 31 Dec 2010 of 3.8Mt at 3.78 g/t giving 467,200 oz. 

• The cash cost for the $581/oz with high recoveries of around 93% making this an extremely profitable mine generating operating profits of around $34m after deducting 7% for royalties. 

Conclusion: The payment for the mine of $30m implies an EV/oz of $125/oz assuming no cash at the mine level.  Based on an assumption of FCF of around $23m a year for the mine post tax and expenses, the NPV for a 9 year mine at 12% is around $114m. The current value being paid for the mine would provide returns of close to 30%.

Uranium Resources (LON:URA) Update on Mtonya Uranium Exploration Programme

• The company reported results from a 20,000 m drilling programme at the Mtonya project in southwest Tanzania. 

• 18 DC holes have been completed for a total of 5,400m. 

• 3 holes have intercepted previously unknown roll fronts in Tier 1 at depths of 150 to 220m. 

• Significant intercepts include: 

o 397 ppm U308 over 1 m at 170.4 m 

o 460 ppm eU308 over 4m at 170.4m 

o 329 ppm eU308 over 3.8m at 73.7m 

• The drilling is targeted to both deep mineralisation to in-situ recovery and near-surface mineralisation which would lend itself to more conventional mining. 

• Three drill rigs are currently operating at the project and a fourth rig will be used by the end of June. 

Morning View

Miners sold off as market moves to ‘risk-off’ selling

• Commodities fall on ‘risk-off’ trade

• QE prospects rise in the US and UK

• US dollar bought as safe haven asset and is outweighing prospect of US QE for now

• China – contradictory reports worry investors 

• No significant Eurozone solution is expected till after Greek election on 17 June

• Japanese seen buying commodities, mainly LNG and oil replacing shut nuclear power, widening trade deficit.  This is inflationary and should be good for gold demand 

Economic News

Europe – Eurozone leaders will hold an informal summit today. 

• Amid all the rampant speculation of the push towards Eurobonds (by the French) German officials last night flatly eradicated any chance that these would be created in the short term. 

• Officials highlighted the fact that current treaties forbid the creation of Eurobonds. 

• The Germans have in effect reversed Monsieur Hollande’s Exocet missile and reprogrammed it to target those counties who believe fiscal discipline can be negotiated. 

• Former Greek PM Lucas Papademos stated yesterday that the risks of Greece leaving the single currency were “real”. 

• Spanish yields rose again this morning. 

• Predicting the direction of the crisis at this stage is almost impossible. 

• Past experience has taught us a lot. Politicians will not take the required action to address the structural issues that plague the single currency. If they wanted to, they would have already. 

• Desire to resolve the crisis is self serving. Political will is driven by national issues not co-ordinated reason and we believe this will prove to be the ultimate undoing. 

• Rumours are circulating that Germany is planning to sell up to €5bn to two year treasury notes with a 0% coupon. 

• The announcement indicates the lengths that investors will go find the safest place for their money in the Eurozone.   

China – Stocks declined today for the first time in 3 days on concerns that economic activity in the country is slowing more than initially estimated. 

• The uncertainty on economic growth is not unsurprising given the volume of contradictory information that is emerging. 

• Today China International Capital Corp announced that China’s economic growth, could drop to 6.4% if the Eurozone suffers a Greek exit as it expects growth to drop by half in the region should this happen. 

• CICC estimated that officials need to add close to 600bn yuan in terms of investment to stimulate the economy. 

• In an attempt to increase the options for financing for smaller companies, officials have indicated that China will allow small and medium sized companies to sell bonds through private placements, as soon as next month. 

US – Manufacturing figures released yesterday failed to hit expectations. 

• The Richmond fed manufacturing index fell to a reading of 4 in May against forecasts of 11. 

• Existing home sales in April improved beyond estimates – rising 3.4% month on month. 

• We suspect that the positive figure has been distorted by record low prices. 

UK – Is it Plan A revised or Plan B?

• The Coalition Government has indicated that it will move towards “massive” infrastructure plans in an effort to spur growth. 

• The state backed investment will likely focus on housing and infrastructure in an effort to boost jobs and inward investment. 

• Yesterday the IMF suggested that further stimulus in the economy was required along with a cut in interest rates. 

• Further QE would provide a boost to markets but it is imperative that long term growth be driven by increasing domestic consumption. 

• Expanding the fiscal deficit is not a long term solution. 

• Retail sales figures declined more than expected today further highlighting the problems facing the economy. 

Japan – The Finance Ministry reported a £2.1bn trade deficit in April biggest than a 478bn yen deficit in the same month if 2011. 

• The deficit comes on the back of a huge rise in imports of energy commodities. 

• Yesterday Fitch downgraded Japan by two steps to A+ 

• Japanese stocks fell today and the yen rose as the bank of Japan refrained from adding further stimulus. 

• The yen was additionally helped by the continued uncertainty in the Eurozone and threat that Greece will decide to leave. 

Australia – The Organisation for Economic Cooperation and Development has forecasts that unemployment will rise to the highest level since 2009 as industries, other than mining struggle to deal with the implications of an elevated currency. 

• Unemployment will climb to 5.7% in 2013. 

• Over the past six months the Central Bank has cut benchmark interest rates by 1 percentage point to 3.75%. 

Singapore – Rising wages have lead officials to predict that inflation will remain high over the next couple of months after accelerating in April. 

• The Consumer price index rose 5.4% from a year earlier after climbing 5.2% in March. 

Brazil – Figures released yesterday showed that Consumer prices rose less than economists expected in the first half of this month. 

• Annual inflation slowed to 5.05% in Mid May. 

US$1.2676/eur vs 1.2786/eur yesterday. Yen 79.60/$ vs 79.47/$. SAr 8.362/$ vs 8.236/$. $1.574/gbp vs 1.583/gbp

Commodity News

Precious:

Gold US$1,559/oz vs US$1,588/oz yesterday – Gold is off US$16/oz this morning as the US dollar climbed to a 20-month high against a six-currency basket.

• India’s gold demand may drop for a third consecutive quarter on a weak rupee boosting prices denominated in local currency, according to the All India Gems & Jeweller Trade Federation.

• Consumption fell 19% in Q1 2012 and 44% in Q4 2011, according to the World Gold Council.

• Jewellery sales may decline 30-40% in the three months ending Jun.

• Rupee is down 9.1% this quarter and bullion futures in rupees trade within 1.7% of an all-time high.

• Jewellery consumption is not expected to recover before Sep or Oct in the absence of weddings and major festivals, that usually prompt buying.  

• SPDR gold trust holdings remained at 1,283t (41.248moz) value US$65.670bn. 

Platinum US$1,426/oz vs US$1,473/oz yesterday

Palladium US$604/oz vs US$615/oz yesterday

Silver US$27.85/oz vs US$28.41/oz yesterday

Rhodium US$1,480/oz vs US$1,510/oz yesterday

Base metals:

Copper US$ 7,640/t vs US$7,786/t yesterday – Prices lost US$140/t on strong US dollar and Greece Euro zone exit worries.

Aluminium US$ 2,024/t vs US$2,045/t yesterday

• Norsk Hydro, the third biggest aluminum producer, is planning to halt operations at its Kurri Kurri smelter in New South Wales, Australia, after curtailing output by 60kt (1/3 of the total) in Jan.

• “The plant will not be profitable in the short term with current market prices, while long-term viability will be negatively affected by a number of factors including increasing energy costs and carbon tax,” Hydro said.

Nickel US$ 16,796/t vs US$17,187/t yesterday

• Prices have little upside as supply is forecast to grow 5.4% in 2012 and consumption to add 3.6% amid a balanced market in 2011, mining consultants CRU said.

• Export ban on nickel ores from Indonesia had little effect on the market so far on the back of faltering demand.

• Chinese nickel production may grow 10% annually in the next five years to 642,000t in 2015, according to the National Development and Reform Commission estimates. Demand annual growth may slow to 8% and total 851,000t by 2015. 

• Stainless steel demand is expected to surge to 16mt in 2015 from 9.4mt in 2010.

Zinc US$ 1,880/t vs US$1,907/t yesterday

Lead US$ 1,934/t vs US$1,950/t yesterday

Tin US$ 19,430/t vs US$19,500/t yesterday

Energy:

IRAN- IAEA chief Yukiya Amano believes deal is not far off as six World powers: the U.S., Russia, China, France the UK and Germany- all meet with Iran in Baghdad today around noon.

• A deal has to be agreed or Iran faces sanctions that will come into force on 1st July. 

• Nations have been stockpiling pre-empting supply issues as the US has urged buyers of Iranian crude to seek alternative sources leading up to today in a bid to add pressure. 

• Saudi Arabia has pumped additional reserves to record levels as a buffer and says that there is more than enough oil to meet global demand.  

Brent crude  US$107.80/bbl vs US$109/bbl yesterday- Prices fell this morning as investors await the outcome of today’s meeting in Baghdad and concern over Greece’s possible exit from the Euro.

• Indonesia’s state-owned Pertamina is seeking one-year-term contracts to buy crude oil and petroleum products directly from producers as opposed to the spot market to ensure and secure supply. 

WTI: US$91.17bbl vs US$92.05bbl yesterday 

US Crude: US$91.02/bbl vs US$ 91.92/bbl yesterday 

Natural Gas US$2.759/btu vs US$2.72btu yesterday- PetroChina Co. will begin building the third phase of the West-East natural gas pipeline this year which runs from Zinjiang autonomous region to Fujian Province.

• They hope to complete the project before 2015. 

• A JV between PetroChina and Shell have discovered high levels of shale gas output in the Sichuan Bay, said PetroChina  Vice chairman Zhou Jiping 

• Japan to heavily invest this year in LNG projects for longer term energy security. 

Uranium US$51.60/lbs vs US$51.85/lbs yesterday- 

• UX consulting weekly spot as of 21st May 2012 was at US$52.00/lb (Unch) 

Coal- Stockpiles at major china power plants are at a record high of over 88m/t according to a statement released by the NDRC website today.

• Barclays Plc cuts forecasts for European coal in 2012-2013 amid growing supply from the US, Russia and South Africa continues to outpace demand. 

Richards Bay $89.55/t vs 92.15/t yesterday, 

Newcastle $93.55/t vs $95.45/t yesterday

Rotterdam $87.65/t vs $89.40 yesterday

Other:

Diamonds – To be sold as an investment to wealthy investors in parcels of at least $250,000

• A Group led by Alain Vandenborre, co-founder of Singapore FreePort in conjunction with Antwerp Diamond Bank are setting Singapore Diamond Exchange -  SDX 

• Investments of 1 carat and up will be offered from July 23rd with a minimum price of $250,000. 

• Global demand for rough diamonds could climb at 6% per annum over the next 10 years exceeding supply according to Bain & Co. 

• Few diamond mines are expected to come into supply – miners such as DiamondCorp with financing close to being in place are well positioned to benefit as they restart the Lace Diamond Mine. 

Mining industry has seen US$91bn of M&A deals announced in the year to date, up from US$71.2bn in the same period last year, according to Bloomberg estimates.

• Falling metal prices made targets cheaper, while rising costs and slower-than-expected world economic growth shift the balance in favour of acquisitions as opposed to internal growth.

Company News

Bellzone (LON:BZM) Receives authorisation at Forecariah Mine in Guinea

• Bellzone received is long awaited authorisation for the commercial production of iron ore at Forecariah. 

• This fast tracked project is expected to produce 2mt of 58% Fe ramping up to 4 mtpa by year end. 

• This will be produced from a 55% Fe iron oxide cap which will need to be upgraded through a crushing and screening process to achieve a 58% Fe product for sale. 

• Further test work, development and costing is underway for the gravity beneficiation process to produce 58% Fe from 19.1 mt of lower grade surface oxide resource at Yomboyeli Central. 

• In return for granting the authorisation, the Guinean govt has stipulated requirements on the infrastructure front including a completion of a public haul road in 3 months and a study for rail transport to be completed by the end of June with construction to begin before the end of 2013. 

• A bridge to be designed and constructed at the point where the haul road intersects the National Road. 

• In addition the government has asked the company to relinquish areas of land not included in the mining area within 30 days and to submit a plant to recruit and train local staff within 30 days. 

Conclusion: The Guinean government have sought tighter requirements to fulfil obligations tied to the licence and infrastructure as part of the authorisation – this is no bad thing as it sets out more clearly expectations on the licence to operate. The key thing is that Bellzone now have the authorisation having put into place all aspects to start to produce and ship from this project.

As this project has been fast tracked, there is still work to be done on the quality of the resource and product from the mine but getting product to market is key to lock in good margins against the backdrop of a softening iron ore price.

Gemfields (LON:GEM) Quarterly Update 

• The company reported an 26% increase in quarterly production to 4.9 m carats from the previous quarter with an improvement of grades to 236 versus 222 carats per tonne. 

• The company continues its waste moving programme to open future areas of production with and has signed a debt financing facility of US$9.3m to part finance this programme. 

• The waste rock programme has impacted production but this impact is easing. 

• At the end of the quarter the company had cash and receivables of US$46.6m with full receipt of US$21.4m from sales at the Singapore Auction in March. 

• The next auction for gemstones will be held in Jaipur in June 2012 and the company expect demand to be strong. 

Anglo Asian Mining* (LON:AAZ) Profits show strong growth on low cost production 

• Anglo Asian today reports strong profit growth in its annual results for last year. 

• Sales rose 16% to US$83.8m versus our US$83.5m forecast on higher realised gold prices.  The average realised gold price rose 27% to US$$1,573/oz. 

• Gross profit grew 37% to US$43.0m (vs. US$40.2m estimated). 

• Operating cash costs increased 25% but remain relatively low by industry standards to US$448/oz.  If we strip out the government’s share of gold without cost then cash operating costs rise to US$513/oz eg accounting for the state’s 12.75% share of production. This is broadly in line with our estimates of US$430/oz and US$493/oz, respectively. 

• PBT surged by 60% to US$31.6m (vs. US$30.1m estimated) taking EPS up by 22% to 16.9c/share (vs. 16.0c/share estimated). 

• Gold production of 57,068oz compared with 67,267oz in 2010. Silver output was 39,086oz versus 43,356oz in 2010 as previously announced. 

• Anglo Asian plans to pour 54,000oz of gold in 2012. 

• Gold production was lower than seen in 2010 due to a lower grade of processed ore – 3.29g/t (2011) vs 4.33g/t (2010) – as Anglo Asian worked through the transitional ore, in line with the mine plan. 

• In addition, channelling at one of the cells – eg where solution channels into streams within the heap leach without picking up much gold – extreme winter temperatures this year also slowed the leaching process reducing production towards the year end. 

• In response the team increased waste removal to mine more oxide ore and reduced the size of crushed material to improve its leaching. 

• Average recoveries for the year stood at 64.3%, up from 59.4% in 2010, reaching 77.4% in Q4. 

• Anglo Asian is ready to start construction of the new US$52m agitation leach plant with the first round of financing of US$7.5m secured with the International Bank of Azerbaijan last week.  Total capex is estimated at US$52m. Agitation leaching should lift recovery rates to 85% for oxide ore and 69% for sulphide material, while the Company is carrying additional tests to see if recoveries can be further improved. The plant commissioning is expected in H2 2013. 

• The SART plant, which recovers copper in high grade concentrate form, gained pace through the year producing some 1,037t of copper concentrate, up from 316t in 2010, containing 611t of copper, 134koz of silver and 0.2koz of gold. Production beat the team’s internal target of 525t of copper in concentrate. 

• Anglo Asian sold US$5m worth of copper concentrate in FY2011 and currently holds a stockpile of concentrate containing 743t of copper, 162koz of silver and 200oz of gold, equivalent to more than US$11m at 2011 market prices and assuming 90% payability. 

• In 2012 SART is forecast to produce 833t of concentrate containing 500t of copper, 102koz of silver and 0.1koz of gold. A decline is attributed to a lower grade solution flowing into the system. Construction of the agitated leach plant and its integration into the processing route should significantly lift the SART throughput and the grade of the solution starting from 2014. 

• Exploration:  Gedabek measured & indicated JORC resources rose 49.7% to 1.05moz of gold in April 

• The team started a 24,567m drilling programme at Gedabek in Q1 and is planning to announce the JORC compliant reserve in Q2. 

• Gosha: Anglo Asian has received government approval for a Development and Production Programme at Gosha and is currently preparing a plan of works and should update the market on its progress in due course. Gosha is set to become the first underground mine in Azerbaijan producing 10,000-15,000oz of gold per annum with a mine life of 5 years. 

• Further exploration programme is planned at the Ordubad license area after the Notice of Discovery submission with the government in April 2012. 

• Cash:  The company holds US$9.9m of cash and total debt was US$13.0m as of Dec 2011. 

• Target price:  We marginally reduce our valuation to 70p/s from 72p/s due to our lower average gold forecast for 2012.  Our gold price forecast is reduced to US$1,600/oz from US$1,800/oz for this year. 

Conclusion:  Anglo Asian has produced solid results with significant earnings growth and relatively low operating costs of US$450-500/oz for the FSU.  Steady cash flow from operations should allow the Company to repay outstanding debt ahead of schedule and to finance an extensive exploration programme across the Gedabek, Gosha and Ordubad license areas.  

The Gedabek gold resource now looks far larger than had been forecast and the mine is sure to extend well beyond its original six year mine life.

The construction of agitation leach plant is a major step forward and should raise gold production to 75-80kozpa through better recovery rates and effectively raising capacity.  The effect should also reduce unit production costs when the plant is complete next year.

*Fairfax acts as Nomad and broker to Anglo Asian Mining

** Fairfax analysts visited the Gedabek goldmine last year in Azerbaijan. 

Morning view

Metals and miners recover as market shrugs off negative news

Eurozone financial officials – meeting tomorrow

Investors looking for Austerity and growth in same program – but reality may fail to meet expectations

• Pressure on Germany for the issue of new Eurobonds driven by France

• China – leading index rises at same pace as April suggesting slowdown may not be as severe as thought

• China to speed up approval of infrastructure projects 

Copper market to improve in H2 according to Xstrata

• Xstrata are looking to raise copper production by 60% over the next three years on a $7bn of new capital

• Other copper producers have recently cut back capital expansion plans fearing a slowdown in China

Iron ore miners seen scaling back production plans 

• Usiminas, the Brazalian, iron ore miner is scaling back its iron ore target for 2015 to 25mt from 29mt 

• We expect other iron ore miners to follow as confidence falls and as the reality of moving such vast tonnages forces miners to revise plans.  The company reports the revision is due to a new shareholder entering the controlling block.

Steel production slows on weaker outlook

• World crude steel production growth slowed to 1.2% in April to 128mt (World Steel Association)

• Chinese steel production is seen slowing 

• ArcelorMittal suspends $1.5bn expansion in Brazil on poor outlook for demand due to Eurozone issues

Economic News

Europe – Will Greece stay or will Greece leave? – With no concrete plans announced, markets appear encouraged rhetoric alone this week. 

• Germany will consider all ideas on boosting growth according to the country’s Finance Minister. 

• Today the French will reportedly up their push for the creation of so called “euro bonds” ahead of the summit of European leaders tomorrow. 

• Germany at present, remains against the concept of Eurobonds, stating that it would remove any incentive for peripheral nations to adjust their economic models. 

• Despite the differences of opinion, both German and French officials have of late reiterated their determination to work together to ensure that Europe as a whole can progress. 

• More speculation is circulating as to the Greek banking system today, specifically how it is still able to operate. 

• The FT is reporting that the Greek banking system has been supported over the last couple of weeks by a “secret €100bn” line from the ELA, that remains shrouded in secrecy with few details available as to exactly how much has been provided and what in terms of collateral has been put up. 

• Sticking with the banking system. Spain has denied that its banks need European aid. 

• The European commission is sending inspectors to Spain this week to look into the process behind Spain revising its budget deficit higher for a second time in under half a year. 

China – A leading index for China rose at the same pace in April as the prior month. 

• The gauge rose by 0.8% from March to 232.4 

• The reading is being viewed as a positive and is prompting speculation that a major slowdown in the economy is going to be avoided. 

• So many contradictory arguments have been emerging of late about Chinese growth and hard landings that it is increasingly hard to take an objective view.   

• The fundamentals however are clear: China is slowing and at the same time attempting to rebalance growth towards domestic consumption. 

• Whether authorities can cushion the economy against the negative side effects of this transition without exacerbating excess capacity is the crucial adjustment. 

• If this can be done than the global economy will still be able to look towards China to satisfy export demand although maybe to a lesser extent than many economies would have originally thought. 

• Chinese stocks rose this morning on the back of speculation that officials will look to increase infrastructure spending to counter the economic slowdown. 

US – Sales of existing US homes probably rose in April for the first time in 3 months.

• Forecasts before a report due for release later today suggest that purchases climbed 2.9%. 

• The figure appears to suggest that the market could have turned a corner however it is safe to say that falling prices and record low mortgage rates probably contributed to flattering the figures. 

• Real incomes in the US remain the greatest threat to increasing home sales. Wage growth is non existent. 

• US officials will meet with Iranian counterparts in Iraq today for talks over the country’s nuclear program. 

• Sanctions will not be relieved until there is concrete evidence that demands over the program are being met. 

• The Federal Reserve has announced that asset purchases reduced yields on securities beyond initial targets. 

• 10 year Treasury yields fell by 1%, an investment grade corporate bond yield declined by 0.89 and yield on 30 year mortgage backed securities fell by 0.93 percentage points. 

• The Richmond Fed will publish their manufacturing index this afternoon. 

• Forecasts indicate a slowdown in May to 11, from 14 in April. 

Japan – An increasing number of bets that investors have driven the gap between short and long dated bonds to the least in almost 2 years. 

• The extra yield demanded to hold 30 year bonds instead of 2 year notes fell 9 basis points to 164 last week on the back of the ongoing crisis in Europe and demand for a safe haven. 

• The BOJ will likely add further stimulus in the coming months. 

• Japanese stocks rose today on the back of the growing speculation of imminent easing. 

• Figures released this morning showed that Japan’s foreign investments and assets grew to the second highest level on record as companies used the high yen to make overseas purchases. 

• Investment abroad increased 3.3% to 582 trillion yen in 2011. 

UK – CPI figures this morning indicate that year on year consumer prices slowed more than estimated. 

• The April figure indicates that prices rose 3% against forecast of 3.1% 

• Core CPI rose year on year by 2.1% from 2.0% 

• The decline in the annual figure will no doubt increase pressure on the back of England to revisit their asset purchase program. 

Brazil – Forecasts indicated that the country’s interest rate will decline again by the end of the year. 

India – Figures today indicate that international bond sales by Indian companies have dropped by 59% this year. 

• According to Bloomberg, treasuries sold $2.5bn of debt compared with $6.1bn a year earlier. 

• The decline in dollar funding is reducing funds for companies, impacting their ability to grow and expand. 

US$1.2786/eur vs 1.2776/eur yesterday. Yen 79.47/$ vs 79.30/$. SAr 8.236/$ vs 8.299/$. $1.583/gbp vs 1.581/gbp

Commodity News

Precious:

Gold US$1,588/oz vs US$1,596/oz yesterday – Prices failed to break the US$1,600/oz level and dropped this morning as markets await a European Union summit on Wednesday when politicians will be trying to agree on measures to combat the region’s debt crisis.

• SPDR gold trust holdings remained at 1,283t (41.248moz) value US$65.670bn. 

Platinum US$1,473/oz vs US$1,463/oz yesterday

Palladium US$615/oz vs US$611/oz yesterday

Silver US$28.41/oz vs US$28.61/oz yesterday

Rhodium US$1,390/oz vs 1,390 last week

Base metals:

Copper US$ 7,786/t vs US$7,734/t yesterday – Copper prices increased to the highest level in a week on the news China will fasten the approval of infrastructure projects spurring demand for base metals and Germany confirmed markets European leaders will do “everything necessary” to keep Greece in the Euro zone.

• Copper demand in China will recover in H2 2012 as the government plans to stimulate economic growth, Xstrata said.

• Consumption of household appliances, one of the major uses of copper, and power generation sector in China are likely to benefit from nation’s fiscal stimulus.

• Copper production in 2012 is estimated to be similar to last year’s 889,000t. Mine supply should expand by more than 60% to 1.5mt.

Aluminium US$ 2,045/t vs US$2,064/t yesterday

Nickel US$ 17,187/t vs US$16,960/t yesterday

Zinc US$ 1,907/t vs US$1,913/t yesterday

Lead US$ 1,950/t vs US$1,977/t yesterday

• Shortage of supply of scrap auto lead batteries in the US pushed prices of the recycled material above the benchmark LME price.

• A warm winter in the US meant there were less replacements of failing vehicle batteries, hence, translating into less battery scrap available.

Tin US$ 19,500/t vs US$19,500/t yesterday

• Prices are forecast to pick up in H2 this year to US$25,000/t as demand will outpace demand for a third consecutive year, BNP Paribas said.

• Stockpiles are currently below 2010 and 2011 average and are expected to drop on production losses in Peru and the DRC.

• World production was around 9% below its 2005 peak, while the average price surged 255% in 6 years.

Energy:

The British government today is to propose the overhaul of the electricity market. 

• The UK is seeking to secure commitments from power companies to fund new reactors and clean-power projects after EON, RWE and SSE Plc (SSE) withdrew U.K. nuclear plans over the past year. 

• If passed, the legislation should go into effect in 2013. 

Oil US$109.00/bbl vs US$107.74bbl yesterday- Brent lifts a second day on positive U.S. economic data, ahead of tomorrow’s talks with Iran in Baghdad. 

• The Seaway Crude Pipeline began accepting crude oil yesterday. 

• Cushing holds 5-10% of total U.S Crude inventory and struggles to cope huge volumes creating bottlenecking affecting prices. 

• The reversal of the pipeline is a significant step for future flows transported to the refinery complex along the Gulf Coast. 

• Capacity is expected to reach approximately 400,000bpd after modifications hoped to be completed by 2013, assuming a mix of light and heavy grades, with an initial capacity of around 150,000bpd. 

• Cove Energy operating in the Rovuma Basin offshore Mozambique is poised to accept an offer of 220p per Cove share from Shell Bidco. 

• Cove’s board have already recommended the offer and continues to believe that it is in the best interests of its shareholders. 

• The closing date for the offer is Wednesday 23rd; to date Shell’s is the only firm bidder that has secured consent for the takeover from the Mozambique government. 

• WTI crude was at US$92.05bbl this morning with US Crude at US$91.92/bbl. 

Natural Gas US$2.72/btu vs US$2.806btu yesterday- Prices fall off of moderate temperatures in the U.S.  

• Moderate temperatures are delaying the demand normally seen at this time of year when businesses and other consumers increase their use of air conditioning. 

Uranium US$51.85/lbs vs US$51.85/lbs yesterday- only three transactions on the uranium spot market were conducted lat week totalling 350,000lbs.

• The market is on tenterhooks as it awaits news of winners from contract buyers in supply deals over the next two to three years. 

• The U.S Department of Energy announced that it will extend its programme for selling stockpiled UF6 tailings fro enrichment into commercial uranium to be used in reactors by another year. 

• The news is good for environmentalists but bad for small uranium mining companies whose operations are at risk with some projects shelved in the midst of weak prices. 

• UX consulting weekly spot as of 14th May 2012 was at US$52.00/lb (Unch) 

Coal $92.15/t Richards Bay, Newcastle $95.45/t, Rotterdam $89.40/t

• JSW Steel ltd. turns to Rio Tinto’s Mozambique mine for fuel as weather and labour trouble in Australia threaten disruption and put expansion plans at risk 

Other:

Steel – World crude steel production fell 2.8% (+1.2% yoy) to 128.4mt in Apr from 132mt in Mar amid weaker demand in the European region and slowing growth in Asia, according to the WSA.

Manganese – BHP Billiton will resume operations at all four furnaces at its TEMCO manganese alloy plant in Australia by the end of Aug.

• The company closed the plant on Feb 23 amid rising costs, strong Australian dollar and low prices.

• Among steps to improve the profitability of operations, BHP suggested to halt new hiring, use flexible power supply, optimize freight usage and find new source of mined ore apart from the its GEMCO mine in Northern Territory of Australia.

Ferro-chrome – Chinese imports dropped 31.3% mom (-43.6% yoy) to 115,689t in Apr on the back of rising prices, according to customs data.

• Imported high-carbon ferro-chrome are in the range of US$0.96-1/lb shipped to China, equivalent to CNY 8,000-8,350/t excluding delivery, which is higher than local CNY 7,800-7,900/t including delivery.

• “The current prices are unworkable; we have not imported any cargoes since April when the European second quarter’s contract prices increased,” a steel producer in Shandong province said.  

Shipping- China’s shipping industry has curbed its declining trend and basically hit bottom, said vice president of China Classification Society today.

Company News

Alecto Minerals* (LON:ALO)

• Alecto Minerals raised £1,472,500 by selling some 95,000,000 shares at 1.55p to Mr. Fahad Al-Tamini, a businessman based in Saudi Arabia.

• The placing represents around 29% of the outstanding share capital post the issue.

• Mr Al-Tamini has been further issued 38,000,000 warrants with an exercise price of 3.1p and a 2-year term. 

• The funds are planned to support exploration programme at the 615km2 Wad Amour license in Mauritania and two Alecto’s gold licenses in Ethiopia – 945km2 Wayu Boda project and 1,953km2 Aysid-Metekel prospect.

• In addition, the money will allow Alecto to complete its due diligence with regards to an acquisition of the Guinean Bauxite License 223 that was announced on 23 Feb.

• Mr Al-Tamini is the owner of a diversified business group headquartered in Saudi Arabia and has been engaged in major state infrastructure projects in various sectors such as energy, mining and transportation.

*Fairfax act as broker to Alecto Minerals 

African Copper Plc (LON:ACU) Ball mill fails at Mowana Mine

• African Copper Plc has announced the failure of the Ball Mill pinion shaft at the Mowana plant in Botswana 

• This unusual failure and resulting damage means that it will take some time for the plant to reopen 

• The mill was running at its normal capacity of 135tph according to the statement

• A new pinion shaft was ordered some time ago but is only due for delivery on 5 June 2012.

• The team reckon the ball mill will be shutdown for a minimum of 12 days.

• Mining and ore crushing can continue to build stockpiles ahead of the mill and higher grade ore from Thakadu can be added to these stocks

• Some catch-up should be possible once the mill is recovered and the shutdown should allow contractors to catch up on their maintenance.

Conclusion:  African Copper has been beset with problems since it started due to poor design and construction and insufficient capital at start-up.  

Highland Gold (LON:HGM) Unkurtash project JORC resource rises to 3moz

• Highland Gold have increased the JORC gold resource at the Unkurtash project to 3moz from 1.1moz.

• Unkurtash is located in Kyrgyzstan which has had a few issues with UK miners in the past.  

• Highland Gold’s total resource base now amounts to over 12moz.

• Unkurtash is a key project for Highland Gold and the uplift in the JORC resource is a major step forward for the company.

• Barrick Gold recently divested its 20.4% stake in April at 120 pence per share.  Barrick have taken a sizeable loss as they bought the stock at 230p/s.

Conclusion:  While the country has its issues but we suspect that Highland Gold may have sufficient scale and political support to enable the development and construction of this new gold mine.  Highland Gold is a key Russian / FSU gold miner with a solid gold production base.  We see the shares as oversold following the Barrick divestment and view the current market as a good opportunity to enter into these shares although the market may well take some time to digest the April stock issue.

Noricum Gold Ltd (LON:NMG) Exploration Update at Rotgulden Project

• Noricum Gold have commenced an aerial geophysical programme on its Rotgulden gold project. 

• The survey is undertaking approximately 599 line kilometre of VTEM and magnetics covering approximately 27 km and is expected to provide to a data to a depth of more than 200 m. 

• This survey is expected to form the basis of their 2012 exploration programme. 

North River Resources (LON:NRRP)* Final Results highlight Namib lead/zinc mine activity

The company highlighted in their results the main activities undertaken in their exploration programme

Namib Lead/Zinc Mine: North River Resources has a number of interesting exploration assets of which the Namib lead/zinc mine is most advanced and where the company has started a scoping study.

The company decided to undertake the dewatering of the mine is an important step following the drilling of high grade mineralisation from the lowest accessible point below the base of the historic mining.

The geological mapping of the mine is now underway as are structural geology studies both of which are expected to generate targets at the mine.

Results of the scoping study are expected in two to three months and the company are likely to commence mining operations at the Namib mine in 2012 to conduct exploration openings for the underground diamond drilling.

Witvlei and Dordabis Copper Projects 

• The company announced a maiden resource at Malachite Pan deposit at the Witvlei Copper Project in Namibia. 

• The indicated JORC resource is for 2.6 mt at 1.36% copper for 35,699 contained copper and inferred of 2.4 Mt at 1.11% copper for 26,402 contained copper. 

• Resource at Koperberg: The JORC resource at Koperberg has been upgraded with an indicated resource of 762.6 kt at 1.14% copper giving 8,718 t of contained copper and inferred resource of 617.6 kt at 0.95% copper for 5,863 t of contained copper. 

• Both deposits are open down-dip and mineralisation at Malachite Pan is open to the south-east. 

• Metallurgical test work has shown good copper and silver recoveries at Malachite Pan with recoveries of 82.4% for copper and 77.7% for silver from oxides and 92.8% copper and 83.5% silver from the sulphides.

• Work is continuing to extend the Malachite Pan deposit with drilling re-commencing in April 2012 with the aim to deliver a resource model to support a feasibility study to commence in Q4 2012.

Brandberg Energy - JV with Extract Resources 

• North River Resources has completed the 1,500 m drill program on its Brandberg Energy joint venture to test two uranium targets as identified by remote survey. 

• The program is looking for uranium in palaeochannels, similar to the style of uranium rich mineralisation discovered at Rossing and Rossing South. 

• The drilling has confirmed the existence of significant paleochannel but not to the depth modelled by the geophysics.

• While uranium bearing calcrete was intersected in the channel the extent of the calcretisation was less than anticipated.

• The company is awaiting drill results but results obtained in the field are not encouraging and the company does not regard the drilled targets as having significant future potential.

• Monte Muande joint venture project highlights: 

• The results are based on a 2,000m diamond drilling campaign and results are from nine drill holes of the 10 hole drilling programme. 

• The intercepts show average head grades of 21% Fe with DTR magnetic concentrate potential of 69% Fe with mass recovery of 26%. 

• Deleterious elements are said to be low with the exception of Sulphur and Titanium and the company are conducting further test work. 

• The JV are targeting 200 Mt to 250 Mt of iron ore at the Monte Muande deposit which is located 25 km northwest to the provincial capital of Tete in Mozambique. 

• The joint venture partner is earning into the project at Monte Muande and has completed Stage 1 of the earn in with a 60% interest in the project.

• As the end of 31 Dec 2011 the company had £3.76m. 

Conclusion: The company is forging ahead on its key project at the Namib Lead/Zinc mine.  The mine is now  dewatered and we expect positive results from the mine scoping study in the next couple of months.  Good progress at the Malachite Pan copper deposit and at other copper targets should also add value to the portfolio. These two projects remain the focus of the company in the near term.

North River, are reported to be in discussions with Taurus on the long term strategy for the company.  The new owners of Kalahari Minerals appear to have elected to retain their stake for now.

* Fairfax analysts visited the North River licenses last summer 

* Fairfax acts as joint broker to North River Resources

Morning View

Train Crash in iron ore as sales hit the buffers on deferrals and defaults with Chinese buyers

• The iron ore market is due for some form of further correction as Chinese buyers are reported have defaulted and also to have asked producers to defer shipments of iron ore into China in recent days.

• Iron ore prices have weekend in recent weeks as overproduction of steel in China is causing some concern.  

• We expect to see further restructuring of less efficient Chinese steel production to prevent a flood of iron ore exports out of China

Mozambique locomotives derailed in major accident in Tete Province.

• No fatalities but a major blow to the Tete rail line and to miners looking to utilise this route. 

• The locomotives are leased to Shelton Holdings, a transportation company, by PME Locomotives Limited.   

China growth forecasts being downgraded by major institutions 

• China slowdown raises the prospect for more supportive projects to increase Chinese domestic spending 

• Eg.  Consumption incentives, tax breaks, incentives to encourage more foreign direct investment. 

• Prospects of further QE from ECB and US Fed rise as inflation rates fall and as China presents new threat to global recovery

Gold likely to benefit from any new stimulus in the West

Economic News

Europe – G8 Leaders on Saturday vowed to strengthen and reinvigorate their economies as the European debt crisis rumbles on. 

• The German and the French leaders will meet this week in an effort to revise the plan for the Euro. 

• Pressure is building on Germany to change their approach to the crisis. 

• New proposals will likely focus on the role of the ECB and whether mutually issued Euro bonds could be an option to help fight the crisis. 

• Leaders put on a united front at the Camp David summit as Greece moves towards fresh elections. 

• Recent opinion polls on the upcoming election in Greece suggest that the vote could well be split 50/50 between those in favour of sticking to the current program of austerity and those against it. 

US – Expectations for inflation are falling, providing the Fed Chairman with room for additional stimulus.

• 6 weeks remain on the Fed’s current $400bn operation twist. 

• Speculation has increased that the Central Bank may need to add further stimulus towards the end of the summer in an effort to sustain the recovery that appears to have slowed in recent weeks. 

• According to the National Association for Business Economics, unemployment will average 8% in Q4. 

• Payrolls are forecast to average an increase of 188,000 a month this year. 

China – Premier Wen has called for “putting stabilizing growth in a more important position”

• The comments are today boosting speculation that officials will add stimulus in the short term. 

• The People’s Bank of China has today raised the daily reference rate by 0.15%. 

• Additionally, officials will work to speed the process of approval for foreign direct Investment in an effort to encourage more investment in domestic business. 

• The yuan advanced the most in a month today on the back of the rate rise. 

Japan – The yen declined today against all of its major counterparts as expectations that further stimulus will be added to support growth. 

• Bond yields have today fallen to a level that has historically indicated a routs in the past. 

• 10 year yields fell to as low as 0.815% 

UK – Figures released over the weekend show that asking prices for UK homes were unchanged in May. 

• Property prices have come under pressure of late as a tax exemption for first time buyers of homes costing less than £250k expired. 

South Africa – The rand has strengthened today against the dollar. Since the start of the year the country’s currency has weakened against the dollar by 2.5%. 

Brazil – Officials indicated that Growth in the world’s 6th largest economy is starting to pick up and that expansion in Q3 and Q4 could be better than expected. 

• The economy has been benefitting of late from the weakness in the real.   

Chile – The country’s Central Bank has announced that interest rates will be held for a 4th consecutive month on the back of increased levels of domestic demand. 

• Inflation in the country now sits at 3.8% - towards the upper limit of the Government’s 2-4% target. 

Thailand – Figures released today showed that Thailand’s economy unexpectedly expanded in Q1. 

• The boost came on the back of an increase in factory production and increased domestic consumption after last year’s floods. 

• GDP increased 0.3% in the three months through March. 

US$1.2661/eur vs 1.2696/eur last week. Yen 79.26/$ vs 80.38/$. SAr 8.412/$ vs 8.364/$. $1.577/gbp vs 1.596/gbp

Commodity News

Precious:

Gold US$1,573/oz vs US$1,551/oz last week – Gold is up for a third day, gaining together with equities and other commodities. 

• SPDR gold trust holdings increased to 1,283t (41.248moz) value US$654.549bn from 1,279t (41.112moz). 

Platinum US$1,453/oz vs US$1,446/oz last week

• Chinese Platinum imports declined 6.8% mom (-15.5% yoy) to 6.9t in Apr.

• India is reported to have increased its Platinum ore reserves to 19.08mt across the country including provinces of Orissa, Tamil Nadu and Karnataka.

• Exploration works were conducted by the Geological Survey of India during field season 2006/07 to 2010/12.

Palladium US$600/oz vs US$600/oz last week

• Chinese palladium imports increased 54.4% mom (+25.1% yoy) to 2.2t in Apr.

Silver US$28.06/oz vs US$27.65/oz last week

• Chinese silver imports were down 7.3% mom (-30.2% yoy) and totalled 236.9t in Apr.

Rhodium US$1,390/oz vs US$1,390/oz last week

Base metals:

Copper US$ 7,668/t vs US$7,755/t last week – Copper prices increased for a second day on Chinese Premier comments that the government should give more priority to maintaining growth.

• Chinese refined copper imports dropped 21% mom  (+70% yoy) to 272,903t in Apr, the official customs data showed.

• Japanese copper wire and cable shipments (domestic + export) gained 0.4% yoy to 56,400t in Apr, up for a third month in a row, driven by strong demand in automobile and electric-machinery industries.

• Auto sector in Japan was boosted since the start of 2012 as the government offered subsidy to buyers of fuel-efficient vehicles.

Aluminium US$ 2,049/t vs US$2,043/t last week

• Chinese refined aluminum imports dropped 36.6% mom (+216% yoy) to 40,347t in Apr.

Nickel US$ 17,050/t vs US$17,065/t last week

• Chinese refined nickel imports dropped 37.5% mom (-47.6% yoy) to 9,010t in Apr.

• Nickel ore imports increased 30.7% mom (+94.6%) yoy to 4.8mt in Apr.

Zinc US$ 1,897/t vs US$1,915/t last week

• Chinese refined zinc imports declined 35.7% mom (-1.9% yoy) to 29,106t in Apr.

Lead US$ 1,941/t vs US$1,973/t last week

• Chinese refined lead imports increased 41.3% mo  (-18.2% yoy) to 739t in Apr.

Tin US$ 19,150/t vs US$19,625/t last week

• Chinese refined tin imports dropped 32.8% mom (+140% yoy) to 1,728t in Apr.

Energy:

Iran meets on Wednesday 23rd May to resume talks in Baghdad with the five permanent members of the United Nations Security Council plus Germany over their uranium enrichment programme.

Oil US$107.74/bbl vs US$106.76bbl last week- Brent crude gains as speculators see supply and demand gap as tightening and recent record increased stockpiling as short term protection against possible embargo on Iran in July.

• Concerns heighten over Nigeria’s President Goodluck Jonathon’s attempts to reform oil sector. 

• Nigeria court documents have been released and show government transferred Shell and Eni payment for deepwater concession OPL245, over $1bn, to Malabu Oil and Gas a local company. 

• Malabu is reported to be owned by former Nigerian oil minister Dan Etete who was convicted of money laundering in France back in 1007. 

• The $1.1bn sum payable by the government to Malabu was apparently in “full and final settlement” of any claims it had to the block. 

• Libya’s crude oil has risen to almost pre conflict levels to almost 1.6mpd. 

• WTI crude was down 0.02% at US$92.05bbl this morning  with US Crude at US$91.92/bbl. 

Natural Gas US$2.806/btu vs US$2.715btu last week- Gas prices are flat this morning following recent increases rising to highest levels in four months.

• Hedge funds raised bullish bets off of increased demand from power plants reducing supply surplus. 

Uranium US$51.85/lbs vs US$51.70/lbs last week- 

• UX consulting weekly spot as of 14th May 2012 was at US$52.00/lb (Unch) 

Coal $92.40/t Richards Bay, Newcastle $95.40/t, Rotterdam $89.10/t

• Australia’s plans to expand Abbot Point Coal port have been scaled back. 

• The proposal for the six further terminals has been abandoned and were seen as unrealistic the state’s deputy premier announced today. 

• A new proposal is to construct a second and third terminal. 

• The current terminal is operated by a subsidiary of India's Adani, which is exploring an expansion of the existing unit to 85 million tonnes from 50 million tonnes. 

• The second and third terminals would be developed by BHP Billiton and Hancock Prospecting and have a capacity of around 30m/t each per year. 

Other:

Iron ore and thermal coal buyers in China are seeking to defer delivery cargoes and in some cases defaulting on their contracts with suppliers amid lower local demand.

• Chinese steel mills cut crude steel production to 60.57mt in Apr, down 1.6% from a record 61.58mt in Mar, on the back of falling prices and weak demand.

• Steel prices dropped for a fifth consecutive week to CNY 4,090/t for the most-active rebar contract for Oct delivery.

• Iron ore prices declined for a ninth day in a row on Friday and posted a 4.6% loss last week. Prices closed at US$131.3/t on Friday , a level last seen in Dec 2011.

Steel – Tata Steel, India’s biggest producer, recorded a worse-than-expected 90% yoy fall in the Jan-Mar quarter profit on the back of slowing demand in Europe.

• Net earnings declined to 4.33bn rupees during the quarter compared to 41.8bn rupees in 2011 and analyst estimates of 8.81bn rupees.

Company News

Ariana Resources (LON:AAU) Bonanza grades from drilling at the Red Rabbit Project

• Red Rabbit:  Drilling at the Kiziltepe deposit at the Red Rabbit project has found some of the highest grades and widths for the mineralisation at the deposit. 

• The results show bonanza type grades relatively near surface 

• The best intercept is from 65m to 77m depth and sits within a structural jog along the mineralised fault.  

• The ore shoot has a moderate plunge which would be helpful for open cast mining. 

Grades and widths found include some spectacular intersections: 

- 12.1m at 13.1 g/t gold and 18.7 g/t silver giving gold equivalent of 16.5 g/t

- 3.2m at 38.7 g/t gold and 511 g/t silver giving gold equivalent of 48 g/t 

- 1m at 65.9 g/t gold and 760 g/t silver giving 79.7 g/t gold equivalent

Higher grades in this area should raise the grade of the mineable reserve at Kiziltepe and add significant value to the company’s first gold mine through simple extension to the pit.  

The new drilling is within the mine JV license area and costs will be repaid on funding of the mine construction.   This will start when the final permits are obtained.

The trial mine at Arzu South (Kiziltepe) is easily accessed due to its proximity to the road.  

Arzu North: 

Drilling has also shown that the Arzu North vein system extends south west rather than being truncated E-W and drilling intercepts include: 

- 3.4m at 1.0 g/t gold equivalent

- 7.6m at 7.6 g/t gold equivalent

- 5.8m at 5.71 g/t gold equivalent

• Drilling at a newly identified vein Emel shows that there may be continuity to the northern end of the Arzu South vein system. 

• A total of 1,955m of diamond drilling has been completed at the Kiziltepe deposit since October 2011 and the company are targeting further drilling to test mineralisation in the “gap zone” once forestry permits are received. 

• Drill hole 19 shows that mineralisation continues beyond expectations with moderate grade seen in hole 19.

Conclusion:  This is good news for Ariana who are proving up further mineralisation at the Kiziltepe deposit. These high grade drilling results underscore the resource potential at the Red Rabbit project with scope for the JORC resource to expand from the current 448,000 oz. The company will now be focussing on identifying optimal drilling positions before forestry permits are obtained for a deeper drilling programme in the area.

*Fairfax acts as broker to Ariana Resources. *Fairfax analysts have visited the Ariana trial mine and other licenses 

DiamondCorp (LON:DCP) Signs Term Sheet for Development Funding for Lace Mine

• The company has signed a term sheet with the Industrial Development Corporation (IDC) for a loan of R280m (US$33.5m). 

• The loan will be subject to a satisfactory conclusion of due diligence by the IDC and meeting certain conditions which include representations and warranties by the company. 

• The loan is for 7 years at a rate of 2% over South African Prime Rate which is currently at 9% giving a borrowing cost of 11%. 

• Interest for the first two years from draw down will be capitalised. 

• The company anticipates that the loan financing agreement will be in place by the end of July 2012. 

• The loan is being taken for the purpose of underground development and purchase of mining equipment for the development of the Lace Diamond Mine. 

• The latest assessment of the development cost of the Lace Mine is expected to be R384m ($46m) but as revenues and cash flows are forecast from development ore, the peak funding requirement is expected to be less at R285m ($34m). 

Valuation:  We estimate a US$95m (£59m) NPV for the Lace Diamond Mining project to shareholders. 

Key assumptions:  

• We use a discount rate of 12%. 

• The mine life is 26 years and development can begin in the third quarter of 2012. 

• We project mining and processing of 1,200 ktpa producing 380,000 carats in earlier years at a grade of 34 carats per hundred tonnes (cpht) (average of 260,000 carats/yr). 

• The carat value remains constant at US$160/carat. 

• Operating costs per tonne are estimated at US$14.8/ton based on company guidance with revenues at US$61/ton net of royalties and marketing costs. 

• Mining Development costs are projected at US$30.7m with US$10.7 on decline development (35% of capex) over the first year of development. 

Conclusion:  We view the funding as the last key step in moving the Lace Mine into development.

Strong project economics at Lace based on the new mine plan has placed the company close to securing development funding.

The key is that the development funding being raised is mainly in debt giving shareholders considerable upside.

The mine plan shows a deeper level of mining and longer development time – this is positively offset by block cave economics with longer block cave life and higher grades providing for better project cash flows.

The technical mining and processing plant have been subject to an in-depth review by SRK and the plan has been endorsed with a few manageable changes.

* Fairfax acts as Nomad and joint broker to DiamondCorp PLC 

* Fairfax analysts recently visited the Lace Diamond Site.  

Vatukoula Gold Mines (LON:VGM) Interim Results to 29 Feb 2012

• The company reported an operating profit of £1.2m with revenues up 21% from the same period in 2011. 

• Production was flat at 29,999 oz and cash cost up 26% to $1420/oz – against an average realised price of $1678/oz the company still managed to achieve an operating profit. 

• The company continues to develop the mine to sustain and produce cost effectively 100,000 oz a year. 

• The company expenses all operating development expenditure used to access stopes within the orebody eg development rises, cross-cuts and gullies – this type of development is expensed because once the stope is mines out the development has no further use.  Mines normally capitalise mine development where the development is utilised on a longer term basis.

• Operating development decreased by 11% to 8,628 m compared to the same period last year. 

• Capital development that comprises inclines, declines and footwall drives increases by 105% to 1,978 metres – there was a 31% increase in capex to £6.85m. 

Conclusion: The company expenses its operating development cost which increases the overall cash cost – since last year though the operating development expense is down 11% so the increase in cash costs was not a function of the ongoing development. Further development needs to take place before the cash cost can be at a sustainable level.

Mining last week:

Condor Resources (LON:CNR) Results from Metallurgical Test work for La India Project

Mwana Africa (LON:MWA) Disposal of 15% interest in Freda Rebecca Gold Mine

Medusa Mining (LON:MML) Target raised on low cost, gold production growth profile

Alrosa (ALRS) net income doubles on higher diamond prices for rough

Antofagasta (LON:ANTO) Third Quarter Results to 31 March 2012

Bellzone Mining (LON:BZM) Full Year Results ended 31 Dec 2011

Hambledon Mining* (LON:HMB) Drilling and underground mining update at Sekisovskoye

Rio Tinto (LON:RIO) to ask shareholders to approve a name change for Ivanhoe Mines 

Ferrex Plc (LON:FRX) Scoping Study at Malelane Iron Ore Project

Namakwa Diamonds (LON:NAD) Trading Update

Anglo Pacific (LON:APF) Interim Results for 3 months ended March 31 2012

Northern Iron Ltd (ASX:NFE) Rejects A$477m offer from Aditya Birla Group

Johnson Matthey – Platinum 2012 – market review

Platinum - Platinum supply / demand moved to a 430koz surplus in 2011 versus a deficit of 25koz in 2010.

Palladium - market was in 1.26moz surplus in 2011 versus a 0.53moz deficit in 2010.

Rhodium - market saw a surplus of 139koz in 2011 compared with 88koz in 2010.

Morning View 

We expect gold producing stocks to outperform Facebook which is listing in New York today

• We see gold mining as outlasting data mining and gold stocks as a more tangible form of investment 

• Maybe that makes us sound like 19th century Luddites but we think are on firm ground with this one

Economic News 

Europe – Fitch Ratings has showed an unparallel level of insight cutting Greece’s credit rating by one level to CCC from B-. Quelle Surprise!

• Where would the world be without the ratings agencies? 

• Campaigning has begun in Greece ahead of the new elections. 

• New forecasts predict from JP Morgan forecast that bank losses from a Greek exit could reach 400bn euros. 

• Moody’s have downgraded 16 Spanish banks today citing mounting loan losses.   

US – Figures released yesterday showed that jobless claims remained unchanged last week. 

• Forecasts had predicted that claims would fall. 

• Manufacturing in the Philadelphia Region unexpectedly contracted in May. 

• The decline was the first contraction in 8 months. The reading fell to -5.8 against forecasts of 10. 

• Worryingly the new orders measures declined to -1.2 touching the lowest level since September. 

• The unemployment gauge dropped to -1.3 the lowest level since June 2010. 

Conclusion: Recent domestic economic data appears to have hit a soft patch after a solid run over the last 12 months. Consumers account for almost 2/3 of the US economy. In our opinion falling real incomes are the gravest concern and we are struggling to see a catalyst of change on the horizon. 

China – Home prices fell in a record number of cities in April 

• Prices for new homes fell in 46 out of 70 cities. 

• Additionally car dealers saw inventories rise – suggesting that deeper price cuts may hit the domestic auto industry. 

• A number of banks have lowered their growth estimates for China in the second quarter. 

• Car dealers in the country are reportedly carrying more than 45 days of inventory as of the end of April – this according to Bloomberg indicates that price cuts are imminent. 

• China total vehicle sales have declined 1.3% since January. 

Japan – The Topix index dropped 3% today as investor pessimisms increases.  

• Officials though are seeing potential -  “The Japanese economy is on the way to recovery at a moderate pace, reflecting emerging demand for reconstruction, while difficulties continue to prevail,” 

• The Government has raised its assessment of consumer spending, exports, corporate profits and employment. 

India – Consumer price inflation accelerated in April. 

• The consumer price index climbed 10.36% from a year earlier compared to a 9.4% increase in March. 

• Last month the reserve bank of India Governor cut the benchmark repurchase rate by half a percentage point. 

• The rupee has fallen to a record low this week. 

Thailand – Figures released this morning showed that the economic contraction probably eased in the first quarter as factories resumed production. 

• GDP shrank 0.9% in the 3 months through March compared with a 9% drop in Q4 2011. 

Mali – The country’s interim Government has raised the combined sales tax on gold by 2% points to 8% - in an effort to bring taxes in the county in line with other nations in the region. 

• As the political future of the country remains uncertain trade sanctions imposed after the March coup remain in place. 

Currency – The Aussie dollar has touched more than a 5 month low. 

• The rupee has weakened to a record level today – as the government struggles to maintain credibility as inflation and FDI outflows impact the currency. 

US$1.2661/eur vs 1.2696/eur yesterday. Yen 79.26/$ vs 80.38/$. SAr 8.412/$ vs 8.364/$. $1.577/gbp vs 1.596/gbp

Commodity News 

Precious:

Gold US$1,573/oz vs US$1,551/oz yesterday – Prices increased today as this week’s decline to a 10-month low was seen as excessive.

• Gold should trade above US$1,500/oz to cover all-in costs of production that are currently estimated at US$1,400/oz, Gold Fields CEO said.

• Production stoppages, rationalisation and consolidation will follow should gold prices fail to grow above at least US$1,700/oz level.

• World gold Council forecasts an increase in gold prices once Geece exits the Euro zone and reintroduces national currency, while gold will regain its appeal as a hedge against inflation, currency depreciation and market volatility.

• SPDR gold trust holdings increased to 1,279t (41.112moz) value US$63.874bn from 1,277t (41.044moz). 

Platinum US$1,453/oz vs US$1,446/oz yesterday

• Impala Platinum reports a clash between 2 labour unions – the established National Union of Mineworkers (NUM) and the emerging Association of Mineworkers and Construction Union (AMCU) – at the Rustenburg mine in South Africa.

• The fight required the participation of the South African Police Services (SAPS).

Palladium US$600/oz vs US$600/oz yesterday

Silver US$28.06/oz vs US$27.65/oz yesterday

• Prices may decline further this year on weaker demand from investors and industrial sector, increasing mine supply and fears world economic growth may stall, CPM Group said.

• Prices are currently down 42% from a 31-year high in April 2011 and up 1% since the start of the year.

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 7,668/t vs US$7,755/t yesterday – Copper prices are up this morning following a 3.5% drop this week.

Aluminium US$ 2,049/t vs US$2,043/t yesterday

• Aluminum premiums for shipments in Japan may rise 57% starting in Jul on a recovery in the auto and construction industries, a drop in world smelters’ production and a growth in Chinese purchases.

• Producers offer US$200/t above the LME benchmark cash price for the next quarter delivery compared to US$127/t premium this quarter.

• Alcoa will expand its Lafayette (US) operations to ramp up production of aluminum-lithium alloys for aerospace sector.

• A US$90m expansion will take output to more than 20ktpa.

Nickel US$ 17,050/t vs US$17,065/t yesterday

Zinc US$ 1,897/t vs US$1,915/t yesterday

• Glencore, that controls 60% of the world’s zinc trade, is reported to have built up zinc inventories in New Orleans, a destination located out of reach of industrial hubs, tightening the market and forcing buyers to pay high physical premium for a metal that is currently in surplus.

• More than 80% of the 196kt increase in zinc inventories since late last year has arrived in New Orleans, with around 30kt being shipped in the last two weeks.

• Zinc premiums over LMME prices currently stand at US$130-135/t in Rotterdam compared to a surcharge of US$70-80/t for copper, a metal in deficit.

Lead US$ 1,941/t vs US$1,973/t yesterday

Tin US$ 19,150/t vs US$19,625/t yesterday

Energy:

Oil US$106.76/bbl vs US$109.31bbl yesterday- Brent crude is at its lowest since December with further declines likely.

• China’s power consumption declining and economy slowing, purged off global macroeconomic events, coupled with rising stockpiles has forced oil prices down. 

• Asian Refineries have been carrying out seasonal maintenance with OPEC cutting shipments by 1.8% this month. 

• The reversal of the Seaway Pipeline was completed yesterday with Cushing supplies ready to be shipped this weekend in hopes that it will ease the record supply glut at Cushing. 

• Vale SA set to sell its oil and gas assets in Brazil that could be valued at as much as $1bn as it looks to focus on its metals production. 

• WTI crude was down 0.02% at US$92.27bbl this morning  with US Crude at US$91.90/bbl 

Natural Gas US$2.715/btu vs US$2.719btu yesterday- Prices remain flat this morning while China announced that foreign firms will be excluded from bidding in a second round of shale gas blocks.

• LNG prices are reaching highs not seen in three years as Middle East and Africa supplies recover to meet Japan’s increased demand. 

• Japan has imported unprecedented levels of gas after shutting down all its nuclear reactors for testing following the Fukushima Disaster.

Uranium US$51.70/lbs vs US$51.70/lbs yesterday- The Japanese Prime Minister said today that the government is close to deciding whether to bring two reactors back on line at Kansai Electric Power’s Ohi nuclear plant.

• UX consulting weekly spot as of 7th May 2012 was at US$52.00/lb (+0.25) 

Coal $93.65/t Richards Bay, Newcastle $96.85/t, Rotterdam $90.25/t

• Workers at BHP Billiton’s Bowen Basin will strike for a full seven days starting later next week.

• This is the latest in an ongoing battle between miners and BHP over works schedules, hours and wages.

• Earlier this year BHP declared Force Majeure at the Bowen Basin citing impact of heavy rains and strike action. 

Other:

Bauxite- Former employees at Guinean state bauxite company CBG have blockaded the railway starving off circa 50k tonnes or five shuttles a day of bauxite deliveries to port as a result since Monday.

• The strike action is over a failure to pay quarterly into pension funds around $120. 

• The government has not commented on the situation but is expected to send a delegation to resolve the issue soon. 

• The situation could have deeper issues when a national protest campaign began earlier this month over the incumbent Alpha Conde’s decision to delay elections for the second time citing “technical problems”. 

• Guinea is the world's largest exporter of bauxite which is the ingredient for producing aluminium. CBG has an annual production of 13.5m/t. 

• Alecto Minerals announced yesterday that it had been granted a 30 day extension to its due diligence exclusivity period. 

• The extension relates to its staged acquisition of Forward Africa Resources which holds 711sq km bauxite licence 223. 

Company News 

Condor Resources (LON:CNR)– Results from Metallurgical Test work for La India Project

• Test work on two different bulk samples showed that the gold mineralisation at La India is amenable to gravity concentration.

• Test work using different methodologies showed that gravity cyanide concentration showed the best recoveries at 90-95% with gravity floatation showing lower recoveries of 61-75%.

• Both 25 kg samples were taken from artisanal miners stockpiles – one from the northern part of La India structure and the second from the Cristalito-Tatescame Vein.

Conclusion:  La India is particularly interesting as it shows multiple vein sets from exploration drilling and tunnelling.  While the metallurgical work is interesting and critical to the success of the project the potential for a larger gold resource is the key driver for the company valuation in this case.

Mwana Africa (LON:MWA)– Disposal of 15% interest in Freda Rebecca Gold Mine

• The company has announced the disposal of 15% of Freda Rebecca to Mr Kenneth Musanhi for US$405,000.

• This disposal fulfils an obligation made by Mwana at the time of the purchase of the mine in 2005.

• The disposal is subject to receiving approval from the IDC, the main debt provider to Mwana and the company expect to complete the disposal over the next few weeks.

• Based on the current annualised rate of production of 50,000 oz the mine made a profit before tax for the 6 months to 30 Sept 2011 of $11.5m.

• Mr Musanhi is a long standing member of the board at the Freda Rebecca Gold Mine.

Conclusion:  Mr Musanhi has done well with his pre-agreed price for the 15% of Freda Rebecca.  The mine continues to perform and gives the company an important production base within Zimbabwe.  When the political situation finally improves it is the production companies which will be well placed to take advantage of new opportunities in the local mining sector.

Medusa Mining (LON:MML)– Target raised on low cost, gold production growth profile

Summary from lunch presentation to Investors at Fairfax

www.medusamining.com.au –  (June financial year end)

• We are raising our valuation and target price for Medusa Mining following an investor lunch at Fairfax yesterday

• The Medusa team are in London to update investors on progress at the Co-O gold mine, the new Bananghilig gold project and the copper porphyry exploration in the Philippines. 

• Our target price rises on reduced our cash cost expectations.  We now assume a cash cost of $210/oz for FY ’13 from $230/oz previously for the Co-O gold mine.  

• We have also raised our gold production forecast for FY to end June 2012 to 65,000oz from 60,000oz.

• We expect gold production to rise to 120,000oz for FY ‘13 and 200,000oz thereafter on the ongoing expansion.

• Gold price assumption:  $1600 for FY 2012, $1700/oz for FY 2013, $1250/oz thereafter.

• Production expectations were downgraded through the past year due to weather related disruption.

• Production was hit by a typhoon in December last year affected the haul road between the mine and mill and an earthquake which impacted four old leach tanks which were in the process of being replaced by a new leach tank. 

• These issues are within our forecast for the next quarter but production should normalise from July/September.

• The company should achieve their revised guidance for FY 2012 of 60-65,000 oz and for FY 2013 have assured investors that they will be back on track to achieve 120,000 oz next year. 

• The completion of the fitting of the new Saga shaft by the year end should add significant additional capacity and operational flexibility to the mine.

• Permits:  Construction is underway but the expansion can not fully utilised till permits have been received to expand the tailings dam.  Many permit applications in the Phillipines are currently being held up by the government’s mining review.

• Reserve replacement:  exploration work at Co-O continues to progress and the JORC resource should continue to expand to replace ounces mined and to extend the overall resource from 1.96moz to something over 2moz.  Eleven drill rigs are working at the Co-O mine as part of a $30m exploration program.  Deeper drilling has extended the depth of the known mineralisation to below 1,000m and to a strike length of over 1,700m.  The deeper drilling is not reflected in any resource calculation. 

• The recent Bananghilig gold discovery should also extend to over 1moz although mine planning will be for a potential 200,000ozpa operation for a five year mine life at a $550/oz cash cost.  We have not incorporated this potential new mine into our modelling as yet.

• Copper exploration:  the team are working to prove up a significant body of copper mineralisation on its licenses with a view to selling the copper portfolio and distributing the majority of proceeds to investors. 

• Valuation:  We are increasing our valuation on Medusa Mining following a review of our model on the company.  Our 610p valuation comes from a relatively high 10% discount rate and an increased 4% royalty

• Gold stocks have been hammered in the recent downturn being hit by a double whammy of falling equity markets and downward gold prices.  Medusa is a relatively safe gold stock with a strong cash and gold balance and relatively well set gold production growth from here.

Conclusion:  Medusa is consistently mining and processing high grade gold material from the Co-O gold mine.  The mine is highly cash generative and its expansion to 200,000ozpa is largely compete.  We view the current market as a ‘golden’ opportunity to buy into Medusa Mining stock as gold production rates improve.

Morning View 

Greece – risk of staying in the Euro outweighs the risk of Euro exit

• Germany has a moral right to pull strings in Greece due to the loans made by German banks to the Greek government but Germany’s financial occupation of Greece needs to end soon for the benefit of the rest of the Eurozone.

• The prospect of a highly devalued Drachma and exchange controls is not good for Greece but we are all waiting for this event before booking our holidays out there.

• The ECB has halted lending to some Greek banks possible following the massive withdrawal of savings.  

• The ECB withdrawal of support comes at a time when ECB support is most needed by these banks – just goes to show that you can’t trust a banker when your back is against the wall! Though we do agree that some of these banks may now be seen as a lost cause.

• The FT report a consensus view that consumer confidence will fall within the Eurozone if Greece exits the Eurozone.  We disagree, we think the market and consumers will be delighted to see a Greek Euro exit.  Greece is blamed for its own problems and the market will be happy to see the back of it.

• Robert Horrocks of Asia Focus fund managers, says “if Greece exits the Euro, its equivalent to the entire workforce of China taking a long lunch break”.

Gold - Funds flow into the US dollar on safe haven move

Japanese pension fund reports it is buying gold as a hedge against sovereign risk 

• We expect funds to flow from the US dollar into gold once the market bottoms out

• The deeper the crisis gets the strong the upward move into gold should be

• Calls of $3,000/oz gold seem far fetched but so did the high levels seen last year

• Gold remains an effective, liquid, international currency and is likely to be bought by investors to safeguard savings as the crisis deepens.

• Gold, like other investments, is being sold as the crisis forces liquidation but will be bought again as investors rebalance their portfolios towards asset preservation.

Copper - $7,740/t – Much copper is held as collateral and as a store of value, particularly in China 

While the recent price fall looks as if copper is behaving more like an industrial metal we note that gold has also fallen as traders liquidate funds to meet margin calls.  We expect copper to behave similarly to gold as markets bottom out

Diamonds – did well post the Lehman Bros collapse – evidence suggests that this trend is continuing through the current Greek debacle. 

ICAP looking to buy Plus Markets 

• ICAP are looking to maintain a regulated market to help manage OTC investments

Economic News 

Europe – Are ECB officials starting to feel Greethargic? 

• Yesterday officials indicated that they had halted lending to some Greek Banks – moving the responsibility to the country’s central bank in an effort to protect its balance sheet. 

• A number of the country’s largest banks are drastically under capitalised as a result of the debt restructuring earlier in the year. 

• Currently they need approval from the EU to get access to bonds from the EFSF in order to recapitalise. Once they have received this then the ECB should, in theory open up doors again to the banks for short term lending support. 

• ECB officials stated that a Greek exit could be “technically managed and may not necessarily be fatal but is not attractive” – Is the alternative of kicking the can down the road attractive anymore?

• Have we reached a point where the risk of Greece remaining in the Euro poses more of a threat to markets than an exit at this point?

• The country faces fresh election now on June 17th. 

• Spain is looking to sell a minimum of $1.5bn today in an auction that will indicate demand for the country’s debt as concerns continue to mount and yields climb. 

US – Yesterday the Federal Reserve indicated that further monetary easy could well be on the cards should the US economy require protection from the European / Hellas catastrophe.

• According to minutes released from the FOMC several members were pushing for more action. 

• Concerns continue to mount regarding the so called “fiscal cliff” that is now on the horizon. 

• At the end of the year, tax cuts put in place under Bush, a payroll tax holiday coupled with unemployment benefits - along with the budget ceiling are set to expire. 

• Some positive news emerged yesterday – US home construction increased by 2.6% in April. 

• Year on year housing starts increased in April by 30%

• More encouragingly – industrial production jumped 1.1% last month – the largest gain since December 2010. 

• The positive news was not strong enough to overcome growing concerns about the break up of the Euro. US markets declined yesterday. 

Japan – GDP figures surprised on the upside today beating estimates. 

• Q1 GDP rose 4.1% year on year, better than the 3.5% expected. 

• Although very positive this level of growth is not expected to be sustained throughout the year as concerns grow regarding the Eurozone. 

• Forecasts suggest growth of 2.2% in the next couple of quarters. 

China – New forecasts are predicting that Q3 growth will rebound to 8.3% as a result of the efforts officials have gone to in order to boost bank lending capabilities. 

• In the face of growth concerns many commentators are predicting industrial production growth to pick up in the coming quarters. 

UK – Yesterday the BOE revised down their growth forecasts and indicated that inflation will remain above their target in the near term. 

• The output growth forecasts was revised down to 0.6% from 1.3% originally. 

• 2013 growth is forecast at 2%.

• In a speech in the North East today the PM is expected to amp up his rhetoric with regard to the Euro crisis and no doubt further ingratiate himself to his peers in Europe ahead of the G8. 

Singapore – Officials have joined the list of those warning of the implications of a Euro break up. 

• GDP rose an annualised 10% in Q1.

Chile – Forecasts indicate that Chile’s central bank will leave its benchmark interest rate unchanged for a 4th straight month. 

• The rate is currently sat at 5%

Mongolia – The country is poised to pass a law that will stopforeign state owned companies from owning controlling interests in key assets. 

• Recent moves by Chinese state controlled entities to gain strategic acquisitions was accelerated the move on the back of provoked local anger. 

• The country is walking a tight rope with regard to the legislation as moves to control the assets could well hamper foreign investment in the country. 

• Officials want investment to protect their assets by encouraging companies from multiple nations to make investments together. 

• Currently strategic industries include mining, media, communications, weaponry and air traffic. 

Currency – The dollar weakened today against the Euro as expectations of further QE in the US increased. 

• Similarly Stirling has weakened today against the euro as the prospects of further asset purchases in the UK increases despite the BOE statements yesterday. 

US$1.2733/eur vs 1.2696/eur yesterday. Yen 80.31/$ vs 80.38/$. SAr 8.274/$ vs 8.364/$. $1.590/gbp vs 1.596/gbp

Commodity News 

Precious:

Gold US$1,551/oz vs US$1,532/oz yesterday – Buying spurred by low prices as gold trades near a 5-month low.

• World Gold Council (WGC) published its quarterly gold market review today.

• “The current picture of the gold market is diverse and not withstanding a flight into US dollars and treasuries near term, we believe the fundamental reasons for investing in gold today remain very strong and compelling,” Marcus Grubb, Managing Director of WGC, said.

• Global gold demand dropped 5% yoy to 1,098t in Q1 2012 driven by falling consumption in all sectors apart from investments propped up by increased holdings in ETFs.

• Gold demand in value terms rose 16% to US$60bn as average prices increased 22% in the first quarter.

• Jewellery sector was down 6% to 520t as demand dropped in all but 6 countries with low Indian consumption being the principal reason behind the decline. 

• India’s demand dropped 19% yoy to 152t as the government raised customs duty in Jan and Mar – 4% on standard gold and gold jewellery and 10% on non-standard – and an industry-wide strike among jewellers that lasted for 3 weeks from Mar 16 to 6 of Apr. Volatility in the market as well as near record prices in rupee terms had further dampened sentiment.

• China dominated the jewellery market as demand advanced 8% yoy to 157t  accounting for 30% of world total and exceeded Indian demand for the 3rd consecutive quarter. Increasing income levels and Chinese New Year buying helped the growth in demand in Q1. Consumption is forecast to moderate in the future as demand in Tier 1 and Tier 2 cities will likely to slow down to more sustainable levels.

• Technology sector was down 7% to 108t amid high gold prices and an instability in the Euro zone. Electronics segment declined by 6% on weaker consumer demand, over-stocking and substitution losses. Demand in dental industry dropped 7% due to availability of cheaper substitutes for gold.

• Investment demand advanced 13% to389t as a 17% a rise in ETF holdings to 51t (vs. net outflows of 62t in Q1 2011) outweighed a decline in bar and coin investments of 17% to 338t. The bulk of ETF inflows happened in Jan and Feb with Mar being relatively flat.

• Indian investment demand was down 46% largely driven by a significant destocking of bullion dealers amid market volatility and uncertainty regarding new import tax. Retail investors stayed on the sidelines with some profit-taking present, waiting for dips to resume purchases. Moving forwards, demand is forecast to get back on a growth path as market adjusts to new taxes and more investments flow into local ETFs (ETF #12 was launched in Q1), WGC said.

• Chinese investment demand increased by 13% to a quarterly record of 99t on storng sales of gold bars and coins to mark the Year of Dragon and as a way to preserve wealth amid expectations of rising inflation. Investment demand in the near term is expected to depend on the performance o alternative assets such as real estate and local stock market, WGC reported.

• Central bank cut their purchases of gold by 41% to 80.8t. Buying was driven by the need to diversify reserves. Mexico added 17t to its holdings, the largest single purchase. A significant share of demand was attributed to purchases by Eastern Europe, Russia and Kazakhstan, in particular.

• Supply (incl. mine production, producer hedging and recycling) was up 5% to 1,070t.

• Mine production advanced 3% to 674t as a result of new projects starting operations and a ramp up in existing operations that came online from 2009/10. An increase was reported in most of the countries, with only a small number of regions recording weaker output.

• Net producer hedging was little changed with the outstanding global hedge book of around 160t at the end of Q1.

• Recycling added 392t tot the supply (+11% yoy).

• SPDR gold trust holdings decreased to 1,277t (41.044moz) value US$63.543bn from 1,277t (41.060moz). 

Platinum US$1,446/oz vs US$1,424/oz yesterday          

Palladium US$600/oz vs US$592/oz yesterday  

Silver US$27.65/oz vs US$27.33/oz yesterday   

Rhodium US$1,390/oz vs 1,390/oz yesterday     

Base metals:

Copper US$ 7,755/t vs US$7,643/t yesterday – Copper prices increased following a 4-day decline on speculation the US might consider a new round of monetary easing.

Aluminium US$ 2,043/t vs US$2,014/t yesterday            

Nickel US$ 17,065/t vs US$16,785/t yesterday    

Zinc US$ 1,915/t vs US$1,907/t yesterday           

Lead US$ 1,973/t vs US$1,990/t yesterday         

Tin US$ 19,625/t vs US$19,620/t yesterday         

Energy:

Oil US$109.31/bbl vs US$110.04bbl yesterday- Brent for July settlement slid below US$110bbl yesterday continuing its decline this morning as BOE cut forecasts for this year from 1.2% to 0.8% over Eurozone contagion.

• WTI crude was up 0.02% at US$93.73bbl this morning  with US Crude at US$93.56/bbl 

• EIA reported yesterday that US gasoline fell an average 4c to $3.75 per gallon this week, 21c lower than at the same time last year and a six consecutive week decline 

• Anadarko Petroleum and partner Cover Energy operating in the Mozambique fields also announced new discovery off Mozambique luring majors like shell to the East African area. 

• Shell is in the process of trying to acquire Cove.     

Natural Gas US$2.719/btu vs US$2.578btu yesterday- Shell predicts gas prices will double by 2015 as U.S. demand rises with production and pipe dream estimates on shale reserves.

• British Columbia Ministry of Energy and Mines is adopting new regulation to allow utilities in the province to spend millions of dollars on natural gas vehicles and infrastructure that will boost economic opportunities. 

• Total SA has finally succeeded in plugging the Elgin well at a cost of $3m a day in operation relief costs and net income losses. 

• Tanzania edges closer to becoming a major gas producer with BG Group and Ophir Energy announcing discovery at the Mzia-1 well. 

• The ministry announced in a statement that Greenhouse Gas Reduction Regulation will permit utilities to spend up to C$62 million on vehicle and ferry incentives 

• Up to C$12 million on compressed natural gas fuelling stations 

• Up to C$30.5 million on liquefied natural gas stations, for a total C$104.5 million 

• The regulation enables utility companies to deliver natural gas transportation programs through March 31, 2017. 

Uranium US$51.70/lbs vs US$51.60/lbs yesterday- Workers at Paladin Energy’s Kayelekera mine in  Malawi demanded a 66% wage increase last week following the devalue of its currency.

• Paladin seems confident that strike action will not last long citing “resolution that involves national rather than workplace-related issues.” 

• UX consulting weekly spot as of 7th May 2012 was at US$52.00/lb (+0.25) 

Coal $93.75/t Richards Bay, Newcastle $97.80/t, Rotterdam $89.90/t

• Coal imports by China nearly doubled in April according to China coal Transport and Distribution Association.

• Purchases of steelmaking and power station fuel including lignite or brown coal rose 90% to 25.1mmt in April. 

Other:

Rare Earths – Lynas Corp has filed an injunction to in an attempt to prohibit freedom press in Malaysia to publish what it says are defamatory reports.

• Lynas Corp has been held back in its plans to create a fully integrated source of rare earth from mine through to market. 

• The reports have highlighted the publics concerns over risk of radiation leakage and that the government is ill-equipped to deal with any such incident…. The next High Court hearing is scheduled for next month.

Company News 

Alrosa (ALRS)– net income doubles on higher diamond prices for rough

• Alrosa, Russia’s state-run mining company and the largest producer of rough diamonds saw net income more than double as average prices of rough diamonds achieved rose to $197/carat against $123/carat.

• Rough diamond output grew 1% to 34.6 m carats and EBITDA rose by 87% with margins of 47%.

Antofagasta (LON:ANTO)– Third Quarter Results to 31 March 2012

• Group EBITDA up 35.4% to £1,099.4bn for the quarter from £811.9n in the same quarter in 2011 with Esperanza contributing to most of this rise. 

• Volume was up 25.5% to 162,900 tonnes with copper prices broadly in line with realised prices in Q1 2011. 

• The company benefitted from gold production from Esperanza with 63,500 oz versus 22,100 oz in Q1 2011 – gold prices averaged $1690.9/oz an increase from $1,386.5/oz. 

• Excluding by product credits group cash costs increased from 140.8 c/lb to 151.2c/lb reflecting increased production from Esperanza which has cash costs of 189.4c/lb against Los Pelambres at 125.1 c/lb. 

• Cash costs without by product credits at Los Pelambres is up 13% from 110.5c/lb to 125.1 c/lb. 

Conclusion: These results are in line with market expectations – while Esperanza has had some operational issues recently, the company has been addressing them and Esperanza is bringing significant growth to the company.  Antofagasta is a key stock in the copper market and while the stock is likely to move lower on falling copper prices investors should remember that it should continue to produce good dividends and to retain a premium rating within its market. 

Bellzone Mining (LON:BZM)– Full Year Results ended 31 Dec 2011

• Forecariah: Operationally the company are on track delivering the Forecariah JV on time and on budget. 

• 30,000 t of run of mine material has been stockpiled with barges ready to start trans-shipping operations with discussions ongoing with off-takers. 

• Kalia: DFS has been substantially completed and presented for final approval in Q2 2012. 

• Cash on hand as at 16 May 2012 is $120m. 

Conclusion: Everything is ready to go at Forecariah JV but is being held back by issuing of a mining permit by the Minister of Mines and Geology and the Council of Ministers in Guinea. The share price in Bellzone has been reflecting the uncertainty about the timing of the issue of the permit from Guinea – clearly some back tracking is going on from previous assurances given to the company. Despite delivering operationally the share price is likely to languish till there is clarification on the permit and the intentions of the government of Guinea. Certainly one to watch for others with projects in this country.

The Guinean government continues to drive a hard bargain with miners – that is all well and good for now but may be less helpful to them should commodity prices fall and capital dries up and decides where it should find a home

Hambledon Mining* (LON:HMB)– Drilling and underground mining update at Sekisovskoye

• Hambledon Mining announced its underground mining operations update and results of the latest drilling completed at Sekisovskoye mine, Kazakhstan.

• 16 additional holes over 2,080m were drilled in the underground ore zones since the end February with good results. 

• Major intersections are (grades include dilution):

o Hole 99 – 3m at 6.87g/t Au,

o Hole 100 – 10m at 5.25g/t Au, 

o Hole 103 – 3m at 3.43g/t Au and 3m at 3.79g/t Au,

o Hole 106 – 4m at 6.07g/t Au and 4m at 3.62g/t Au, 1m at 28.76g/t

o Hole 107 – 3m at 6.36g/t Au, 

o Hole 113 –4m at 7.3g/t Au and 3m at 3.14g/t Au,

o Hole 114 – 3m at 8.31g/t Au and 1m at 10.14g/t

• To date a total of 114 holes have been drilled over 13,250m from a planned 25,000m exploration programme.

• All results are in line and many have exceed previous geological estimates for the resource.

• 6,400t of ore with head grade of 3.12g/t was mined underground in Q1 and directed to the processing plant bringing total to 20,904t and lifting an average grade to 2.8g/t (vs. 2.66g/t in Q1).

• Management remain confident the underground mine is on track to supply 100,000t of ore in 2012.

• Stopes at 326m and 316m (above sea level) are being mined underground and preparation works for the 306m stope continue.

• Ventilation system at the 320m level is complete ahead of the start of bulk scale mining.

• Ground conditions and hydro-geology assessment is planned for July 2012 with bulk mining trials to start in Q3 2012.

• The 320m shaft is now fully functional.

• Mine fans and air heating housing are expected to be delivered on schedule in advance of the winter in Kazakhstan which should facilitate operations during freezing temperatures.

• The Company has received additional US$0.42m in bankruptcy proceedings for Ognevka. Total payments received now stand at US$1.62m.

Conclusion: Positive drilling results validate high grade of the resource and provide better understanding of the deposit to plan underground operations accordingly. We are looking forward to the Company completing infrastructure works and preparation for trials of bulk mining at the underground mine.  

* Fairfax acts as Nomad & Broker to Hambledon Mining

Morning View 

Gold prices likely to fall through the crisis but to pick up fast as economies readjust 

• The deeper the crisis the better gold may perform following a market fall

• Funds will flow back into US dollars in the short term 

US is to hit its ‘Fiscal Cliff’ just weeks after the US elections 

• US debt ceiling likely to be raised post the US election 

• Fed may look to issue QE3 potentially before the election to calm markets in anticipation of the ‘fiscal cliff’

Run on Greek banks saw Eur700m withdrawn yesterday 

• Cash withdrawals likely to spread around Europe, particularly in Spain, Italy and Portugal

• Northern Rock may look like a dry run with what might happen in Souther Europe

• Uncontrolled default may cause Eurozone banks to loose 20bp on their Risk Weighted Assets according to SocGen

We believe there is strong potential for equity markets to suffer on a run on Eurozone banks

• Deleveraging of funds and investor portfolios could cause further crisis 

• Miners and commodities are likely to suffer in this scenario

Greek exit from Euro should not be a major problem for Eurozone GDP

• Greece to repay Eur436m bond in full after investors refused to renegotiate 

• 96% of bond holders were recently persuaded to accept a 75% haircut in a bond swap leaving 4% of bond holders who stood their ground to get paid out in full

Solution:  Greece needs a zero coupon perpetual to fund its economic state – not sure who is going to put into it but it seems like the only type of bond the Greeks can service

German growth - German intransigence towards the plight of the Southern European nations is seen as causing unacceptable suffering within these economies

• Europe is not like the US where significant workforce mobility enables workers to follow the fortunes of better states.  Germany may not be so happy to accept the newly unemployed workers of Greece, Spain, Italy and Portugal in their quest for work. (See chart of Eurozone official unemployment rates at end of company section)

Miners are slashing capital budgets 

• The majors had created unfeasible capital budgets for potential expansion

• Majors were competing with each other on their project pipelines but now they are competing to see who can best conserve capital

• What is critical now is how much capital is firmly committed and how much can be held back to weather the forthcoming financial storm.

• CATerpillar is likely to see substantial changes to its orderbook.  Even firm orders will be renegotiated as the company bends to the demands of its major customers.

• Volvo, Komatsu, Bell and others may suffer similarly.

Companies getting desperate 

• We notice that companies are turning up ever earlier for meetings in these hard times

• Several companies have pitched up half an hour early recently in bids to secure funding

• Its as if we have sign saying ‘free cash’ hanging over the office entrance

Investors should focus on companies with sufficient cash to see them through this new phase of the financial crisis.

Some miners and explorers are well funded to see their way through this financial crisis

Economic News 

Europe – Would forcing Greece to leave the Euro encourage politicians/voters in other more important countries to stick to austerity and ingrain fiscal discipline?  As Voltaire wrote in his 1750’s masterpiece Candide “pour l’encouragement des autres”

• Would a Greek exit allow German policy makers to see the way for greater intervention from the ECB or even the printing of Eurobonds? 

• Predicting the direction of the crisis at this stage is impossible. One thing that is certain is that social unrest in Greece will become more entrenched before fresh elections are called. 

• On Monday the FT noted that the US managed to introduce a new currency in Iraq in less than 3 months. It was achieved however a squadron of 27 Boeing 747s and 500 armed guards. 

• Germany – After the positive GDP figures that emerged yesterday the Zew survey of the current situation in Germany reached 44.1 in May up from 40.7 in April. 

• Looking at the longer term Zew reading, sentiment has decreased. The index fell to 10.8 in May from 23.4 in April and below forecasts of 19.0 

• The spread between Spanish and 10 year bonds and similar German bunds widened to a record yesterday. 

US – Manufacturing activity in the Empire state improved yesterday, trouncing estimates. 

• The index climbed to 17.09 from 6.56 in April and comfortably ahead of forecasts for 9.0

• The year on year consumer price index came in inline with expectations at 2.3%. 

• Month on month prices were flat. 

• Advanced retail sales figures came in, inline with expectations at 0.1% in April. The figure declined from 0.8% in March. 

• Retail sales excluding autos in the US failed to hit the 0.2% increase forecast coming in at 0.1%

• Consumer confidence in the US remains depressed. The jobs market has softened of late and the recovery in the housing market that is required to really lift confidence remains a long way off.

• That having been said, figures released yesterday stated that confidence amongst US homebuilders jumped more than forecast in May reaching a 5 year high. 

• The National Association of Homebuilders/Wells Fargo index of builder confidence rose to 29 in May – the highest level since May 2007.  

• Mortgage application figures for early May will be released later today along with housing start figures. 

• The big data release of the day will be industrial production figures for April at 15.00. Forecasts indicate growth of 0.6% in April. 

China – Domestic media outlets broke the story today that China’s four largest banks have reported almost no new lending since the start of May. 

• Additionally, concerns have increased today over growth after figures showed that growth in electricity generation was only marginal last month. 

• Power generation increased by 0.7% in April after a 7.2% increase in March. 

Japan – GDP figures for Q1 will be released tomorrow. 

• Forecasts are predicting an increase of 3.5% compared with a contraction of 0.7% in Q4 2011. 

• The positive figure is expected to be the peak for the year and will likely tail off through out the year. 

• The yen has weakened today, at the market looks for more action from the Bank of Japan in extending accommodative policies. 

• Machine orders fell – year on year by 1.1% in March. 

• Month on month they declined by 2.8%. 

UK – Jobless claims and unemployment figures released this morning surprised – Massively!

• Official estimates had predicted an increase in the number of people seeking unemployment allowance climbing to a 30 month high. 

• The figures released today showed that jobless claims dropped by 13,700. 

• This provided a kick for the unemployment rate pushing it down to 8.2% 

• Pressure continues to build on the Bank of England for more QE as the Euro crisis continues to stumble along. 

South Africa – As a result of the continuing problems in Europe, the country’s trade deficit will continue to widen whereas the trade gap with Asia may narrow - according to Moody’s. 

Africa – Moody’s have forecast that sub-Saharan Africa will probably expand 5% - 6% a year over the next 5 years. Additionally FDI in the region will continue to increase proportionally. 

Commodity News 

Precious:

Gold US$1,532/oz vs US$1,555/oz yesterday – Gold is off for a 4th consecutive day now on the back of Euro zone crisis.

• India set the benchmark price for imported gold at US$507 per 10g (US$1,577/oz), the Finance Ministry said.

• Gold is down 8.7% since Mar and is set to record the biggest quarterly loss since 2004.

• Prices increased 6.7% in Q1 amid speculation the Fed might embark on a new round of quantitative easing.

• Filings to the US Securities and Exchange Commission suggest Soros and Mindich’s Eton Park added to their holdings in the SPDR Gold Trust in Q1 while Paulson kept its investment at 17.3m shares.

• SPDR gold trust holdings remained at 1,277t (41.060moz) value US$63.872bn. 

Platinum US$1,424/oz vs US$1,443/oz yesterday

• Major Japanese trading houses are forecasting surging demand for PGMs as stricter rules on auto pollutants and rising car sales should lead to a rise in autocatlysts production.

• Itochu, the 4th largest trading company in Japan, said Platinum used in catalytic converters in diesel engines will increase 50-90% by 2020 from 3.22moz in 2010.

• Demand for Platinum will exceed supply from 2017 and market will slip into big supply shortage in 2020 on strong demand from automakers.

Palladium US$592/oz vs US$597/oz yesterday

Silver US$27.33/oz vs US$28.20/oz yesterday

Rhodium US$1,335/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 7,643/t vs US$7,835/t yesterday – Prices are driven by the news that Greece failed to form a new government and are set to hold another round of elections exacerbating worries the nation may not stick with austerity plans and quit the Euro zone. 

• Copper held in Chinese bonded warehouses dropped to 550,000-570,000t from 640,000-650,000t at the end of Apr, Goldmand Sachs estimates suggest.

• Codelco expects prices to remain at current levels this year.

Aluminium US$ 2,014/t vs US$2,027/t yesterday

Nickel US$ 16,785/t vs US$16,962/t yesterday

• Japan, the third world’s biggest producer of refined nickel, may seek new sources of supply or cut output after Indonesia banned exports of nickel ore in May with an exception that plan to build local refining facilities and that have to  pay 20% tax of exported ore for now.

• More ore is expected to be sourcesd from the Philippines and New Caledonia.

• Japan imported 3.65mt of ore in 2011 with Indonesia supplying 53% of the total, followed by New Caledonia with 27% and the Philippines with 19%.

• Nickel prices are down 9.9% so far this year following a 24% decline in 2011 amid weakening demand in China and uncertainty in the Euro zone.

• While ban and 20% tax on shipped ore from Indonesia may temporarily help prices, large Chinese stockpiles are expected to limit short-term volatility, the China International Capital said.

• Chinese nickel ore imports surged 73% yoy to 3.67mt in Mar ahead of the proposed Indonesian ban.

Zinc US$ 1,907/t vs US$1,925/t yesterday

Lead US$ 1,990/t vs US$2,038/t yesterday

Tin US$ 19,620/t vs US$20,150/t yesterday

Energy:

Oil US$110.04/bbl vs US$110.57bbl yesterday- Oil declines reflecting concerns over the Euro and Greeks possible collapse coupled with U.S. stockpiles rising.

• Brent for June settlement expires today, the more actively trading July contract is at US$109.87 

• WTI crude was  at US$92.16bbl this morning  with US Crude at US$92.51/bbl 

• The reversal of the Seaway pipeline tomorrow should ease partially the glut keeping WTI below brent but is unlikely to make significant ground due to a heavy refinery maintenance.    

• EIA crude oil stock news will be released today, expected to show an increase of 1.8 million barrels. 

• Prices could dip toward US$105bbl next week as we edge closer toward nuclear power talks with Iran scheduled for 23rd May in Baghdad. 

• Iran’s stance is still that it won’t step down its nuclear programme from enriching uranium to 20% 

• A political analyst in Tehran has said that “Insisting on a halt to enrichment is a deal breaker. It’s Iran’s red line.” 

Natural Gas US$2.578/btu vs US$2.596btu yesterday- 

Uranium US$51.60/lbs vs US$51.50/lbs yesterday- 

• UX consulting weekly spot as of 7th May 2012 was at US$52.00/lb (+0.25) 

Coal $94.80/t Richards Bay, Newcastle $98.40/t, Rotterdam $90.65/t

Other:

Iron ore – BHP revised their US$80bn spending programme over the next 5 years amid falling commodity prices.

• The company still forecasts Chinese crude steel production to reach 1.1bn tons per annum by 2025; whereas, seaborne iron-ore demand will fall to 650mtpa from 800mtpa reached in the last 10 years.

• BHP will move forwards with projects that meet the following criteria: low-cost, able to leverage existing development, close and fast to market and located in a competitive and stable fiscal jurisdiction. 

Company News 

Rio Tinto (LON:RIO) to ask shareholders to approve a name change for Ivanhoe Mines 

• Rio Tinto intends to rename the company Turquoise Hill Resources (

• Oyu Tolgoi translates directly into Turquoise Hill

• Rio Tinto never bothered to change its name to Red River so why should the company ask for Oyu Tolgoi to change to equivalent Turquoise Hill

Ferrex Plc (LON:FRX) – Scoping Study at Malelane Iron Ore Project

• Ferrex has reported positive economics with an IRR of 39% and NPV of US$513m from a scoping study on their iron ore project in South Africa. 

• The scoping study projected a 3 Mtpa operation over a 16.6 year life based on a JORC inferred resource of 154 Mt at 35.17% Fe. 

• Capex is projected at US$297m and opex at US$59/t FOB. 

• The scoping study is based on using a third party mining contractor with the bulk of capex 51% to be used for the plant. 

• The project does not require much of a spend on infrastructure as there is a rail siding 6 km away from the process and the iron ore concentrate is expected to be hauled by train to Maputo port in Mozambique 170 km away from the Malelane project. 

• 44% of the operating cost at US$59/t FOB is related to logistics costs with opex/t of $14.46 for mining cost and $25.74/t of processing cost. 

• The operation would produce a magnetic product at the initial stage of processing which would need to be upgraded due to its high silica content. 

• The company have not modelled the DSO potential at the mine which could provide a couple of years of initial production. 

• The company plan to proceed to PFS which is targeted for completion in late 2012. 

Conclusion: While this is a scoping study stage, the parameters of this project are promising. The existing infrastructure enables product to get to market and makes capex to get the project off the ground more affordable. Opex excluding transport at $40/t is realistic with management hoping to get these down as the project progresses. We like the Ferrex management team and this is a project well worth following.

Namakwa Diamonds (LON:NAD)– Trading Update

• Namakwa Diamonds announces sales achieved from the Kao Mine in Lesotho. 

• Prices achieved were 17% above expectation at an average selling price of US$395/ct for 16,388 carats with an average diamond size of 0.36 carats. 

• The larger stones achieved some high prices with the largest diamond 38 carats achieving US$6,668/ct and a 11 carats selling of US$15,020/carat. 

• As at 13 May 2012 the mine had produced 61,977 carats from 600,110 tonnes processed at an average grade of 10.33 cpht. 

• The processing plant is running at 250 tph producing 635 carats per day. 

• The company has changed the plant configuration and removed a 300 tph scrubber from the circuit and has been processing predominantly hardrock kimberlite. 

• Running the plant in this way has reduced process water usage by 40%. 

• Water could act as a constraint to plant production beyond July 2012 as the dam which provides water for the process plant is below capacity. 

• The company is looking at alternative sources of water such as building a pipeline directly from where the Kao and Malibamotso rivers meet. 

• The capital cost of this would be US$1.75m and subject to receiving the necessary water permits construction should be completed by July 2012. 

• Without sufficient water supply the mine will not be able to operate at a rate in excess of 100 tph – 40% of the current rate or may not be able to run at all. 

Conclusion: Diamond prices seem to be still strong with large diamonds particularly attracting good prices. The company is facing some operational challenges in terms of water shortage which could potentially impair operations significantly highlighting the challenges of operating in this terrain.

Morning View 

European GDP figure flat supported by solid demand for German exports from emerging markets

• Strong German export growth of 0.5% qoq and 1.7% yoy has offset weakening demand within Europe.

• European officials may extend the time frame for Greece to make interest payments as Greece struggles to for a new government 

• US retail figures this afternoon are expected to be weak prompting more buying of US dollars as seen in recent weeks on US safe haven.  The figures prompt greater potential for US QE but investors will wait for Fed statements on this

• Foreign Direct Investment into China fell for a sixth month in April

Johnson Matthey released “Platinum 2012” yesterday (see detailed overview in the company section)

Northern Iron reject offer of A$477m from Aditya Birla Group - The bid values the shares at A$1.29/s

• The stock is currently at A$1.05/s 

• The brownfield production aims to reach 2.8 Mt this financial year in Finland 

Economic News 

Europe – Figures released this morning showed that the German economy grew 5x more than forecast in Q1. 

• Export demand from emerging markets offset slower demand in the Euro region. 

• GDP in Europe’s largest economy increased 0.5% from Q4. 

• Year on Year GDP increased 1.7% against forecasts of a 0.9% increase. 

• Germany is once again demonstrating its ability to carry the rest of the Eurozone. 

• French GDP stalled in Q1 this year – remaining at 0.1%. 

• Encouragingly in France, non farm payroll figures increased by 0.1% in Q1 against forecasts of a decline by 0.2% 

• More pain for Italy – GDP figures released this morning showed a larger than expected contraction in Q1. Quarter on quarter GDP fell 0.8% against estimates of a decline of 0.7%. 

• Year on Year the decline came in at 1.3% - against forecasts of a 1.2% drop. 

• Yesterday Moody’s announced that it had cut the ratings on 26 Italian Banks. 

• Eurozone GDP recorded no change in Q1 compared with a 0.2% decline expected.

• Rumours are circulating that European officials will give Greece a bit of extra time to meet budget cut commitments. Kicking the can along the road appears to the chosen route for the political elite of Europe. 

US – Forecasts ahead of a report due for release later today suggest that retail sales in the US probably slowed in April. 

• Forecasts indicate a 0.2% gain after a 0.8% increase in March. 

• Despite part of the slowdown being attributed to seasonal pressures, consumers are facing a number of headwinds as the job market slows. 

China – Foreign direct investment in China fell for a 6th month in April. 

• Inbound investment dropped 0.7% from a year earlier to $8.4bn. 

• The Wall Street Journal is reporting that China may set up a number of new mechanisms for foreign pension funds to invest in the country’s capital markets. 

Japan – Government bonds are the most expensive relative to the nation’s equities in at least six years according to figures compiled by Bloomberg. 

• Ten year note yield 1.74 percentage points less than the estimated yield of companies in the country’s major stock index. 

• Japanese debt has been snapped up as risk aversion in the global economy remains the prevalent force. 

• The Bank of Japan has stated that it could well reach its 1% inflation goal within two years as brighter growth prospects increase prices. 

UK – The Bank of England is expected to try and justify tomorrow why it held back on expanding stimulus. The central Bank’s forecasts for the coming years will be presented tomorrow. 

• Officials are coming under increasing pressure as the £ continues to strengthen putting more pressure on the country’s ability to grow. 

• The Chancellor has weighed in on Europe stating that it is uncertainty in the Eurozone rather than austerity measures that pose the greatest threat to the Economy. 

Singapore – April home sales figures released today show that sales climbed to the highest level in almost 3 years. 

• In a similar vain, retail sale grew more than economists estimated in March as consumers increased spending on food, clothing and telecommunications products. 

• Retail sales increased 9.1% year on year in March. 

Australia – PM Gillard’s ruling labour Party has received a boost in the opinion polls on the back of the recent budget that increased tax breaks for families. 

Currency – The Euro has strengthened today against the dollar and the yen on the back of the positive German GDP figures. 

• The dollar has also strengthened against the pound this morning. 

• Fundamentals for the Euro remain very bearish. 

US$1.2856/eur vs 1.2889/eur yesterday. Yen 79.90/$ vs 80.05/$. SAr 8.160/$ vs 8.173/$. $1.611/gbp vs 1.608/gbp

Commodity News

Precious:

Gold US$1,555/oz vs US$1,577/oz yesterday – Gold is little changed today after prices declined to the lowest this year on stronger dollar and concerns Greece might exit the single currency union.

• Gold prices will need to reach US$3,000/oz in 5 years for the industry to remain profitable amid rising mining costs, tax payments and dividends, World Gold Council said.

• Indian gold demand traditionally increased on lower prices, but recently it has been underperforming due to weak rupee that trades at 53.8 per US$ versus 48.8 in Feb.

• On top of higher rupee-denominated ounce of gold, buyers are dealing with an increase in gold-import tax of 4% compared with 1% last year.

• Gold traded at around 28,315 rupees for 10g Friday, 5% below from an all time high of 29,800 rupees in Dec.

• Local dealers see gold demand growing only marginally in the coming months despite the usually busy wedding season start.

• The Bombay Bullion Association forecasts gold imports to average 750-800t this year, down from 969t 

• SPDR gold trust holdings remained at 1,277t (41.060moz) value US$63.955bn. 

Platinum US$1,443/oz vs US$1,464/oz yesterday

• Holdings in ETPs backed by Platinum dropped 1.1% to 1.34moz yesterday, the largest decline since Dec 2.

Palladium US$597/oz vs US$601/oz yesterday

Silver US$28.20/oz vs US$28.66/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 7,835/t vs US$7,929/t yesterday – Copper is trading at a 4-month low on the back of uncertainties around the Greek future as a member of the Euro zone and as Moody’s Investors Service cut credit ratings of 26 Italian banks.

• Chilean copper production will grow 10% in 2012 as companies complete expansion programmes, Economy Minister Pablo Longueira said.

Aluminium US$ 2,027/t vs US$2,032/t yesterday

Nickel US$ 16,962/t vs US$16,986/t yesterday

Zinc US$ 1,925/t vs US$1,923/t yesterday

Lead US$ 2,038/t vs US$2,054/t yesterday

• Prices are forecast to average US$2,273/t according to Bloomberg estimates.

• Mine supply is likely to grow at the slowest rate in 3 years in 2012, Macquarie estimates suggest. “There is no new primary mine lead supply coming to the market anywhere in the world outside China (in the next 2-3 years),” the bank said.

• LME lead inventories dropped 6.4% in the past 6 weeks to the lowest level since Jan 30.

• Orders to collect metal from warehouses grew to the highest level in at least 15 years.

• Demand from manufacturers of industrial batteries will increase at 10% this year, more than twice the speed of overall demand, BNP Paribas said.

• The market is forecast to swing into deficit next year for the first time since 2007.

• New technology will support demand for lead moving forwards. The introduction of a 4th generation wireless standard in Europe, Middle East, Africa and the US will require 10.5m new batteries containing around 430kt of lead, according to EnerSys, the world’s biggest manufacturer of batteries.

Tin US$ 20,150/t vs US$20,300/t yesterday

Energy:

Oil US$110.57/bbl vs US$111.33bbl yesterday- As predicted Brent dipped below $110bbl yesterday, the lowest in almost five months as speculation mounts over Greece leaving the Euro.

• Data released today is expected to shoe U.S. stockpiles increased last week as refineries boost production. 

• U.S. fuel at the pump has dropped 0.9% averaging $3.754 a gallon from last week 

• WTI crude was  at US$94.31bbl this morning  with US Crude at US$94.36/bbl 

• Cushing stockpiles increased prior to the reverse shipments of 150,000bpd from the Seaway pipeline which will help ease the glut of crude in the Midwest by transporting it to refineries on the U.S. Gulf Coast. 

• Repsol is seeking $10.5 from Argentina over the seizing of its assets. 26 other cases are pending against Argentina. 

• So far Argentina has refused to pay out on any tribunal judgments making it difficult for investors to see a bright future in the most sued country in the world. 

• The Australian government is auctioning exploration acreage in 27 areas across nine basins offshore Western Australia, the Northern Territory, Victoria, South Australia and Tasmania. 

• First round bidding closes November 8th. 

Natural Gas US$2.596/btu vs US$2.431btu yesterday- A deal between Papua New Guinea and InterOil Corp. to build an LNG plant could be reneged upon by the PNG government.

• The dispute is that InterOil Corp. has failed to secure a reputable partner to operate the LNG project and over changes to the project specifications.

• The project has not been cancelled yet but PNG have asked InterOil why they should not.

• Sinopec Group plans to start its first shale–gas project this year. 

• Exxon’s rival project to exploit PNG’s gas reserves is on track to make its first deliveries of LNG in 2014

Uranium US$51.500/lbs vs US$51.00/lbs yesterday- Cameco agrees deal to buy uranium trader Nukem Energy GmbH for $135m so that it can increase its access to supply.

• UX consulting weekly spot as of 7th May 2012 was at US$52.00/lb (+0.25) 

Coal $94.95/t Richards Bay, Newcastle $98.45/t, Rotterdam $90.75/t

• Outlook for metallurgical coal looks set for a recovery as Japan and China steel markets show similar shoots.

• A tight market should be short-lived as consumers drawdown on inventories off of Australia’s weekend supply.

• Australia has suffered from wet conditions and strike action with 2Q exports likely to be dampened.

• Mongolia’s Ovoot Tologi is at risk of suspending operations that provides 4Mtpa of metallurgical to China over national ownership issues which could force China to search elsewhere in the seaborne market.

• Mining is still taking place presently but risk of suspension remains high.

• Brazil's MPX Energia SA confirmed the technical viability of its San Juan coal project in Colombia. 

• Estimates of coal reserves at the mine project are at 671.8 million tonnes. 

Other:

Chrome – Zimbabwe is considering dropping the ban on chrome-ore exports, Mines Minister said yesterday.

Company News 

Anglo Pacific (LON:APF)  - Interim Results for 3 months ended March 31 2012

• The group’s portfolio of royalty income was impacted by coking coal revenues from the Kestrel mine. 

• Production of hard coking coal at Kestrel was 365,000 tonnes for the quarter compared to 968,000 tonnes in the same quarter 2011 and coking coal prices are $210 to $225 per tonne compared to $330 in April 2011. 

• Production volumes were impacted by scheduled longwall changeover and lower productivity during ramp up because of  bad weather. 

• This resulted in royalty revenues from Kestrel of £1.1m versus £5.6m for the comparable period in 2011. 

• Royalty income for the group as a whole was £1.5m versus £9.9m for Q1 2011. 

• On the asset side total assets at March 31 stood at £366m against £380.2m at Dec 2011- the change in asset value was mainly influenced by foreign exchange adjustment related to the weakening of the A$ against sterling – the valuation of the Kestrel royalty was £166.6m (£175.1m at Dec 31 2011)  as a result of the A$ weakening against £. 

• Quoted and unquoted equity investments were valued at £82.5m versus £64.4m at Dec 31 2011. 

• The group had cash of £20.9m compared to £32.2m at Dec 31 2011 and remains debt free. 

• Royalty cash flows will be boosted by Kestrel returning to a normal coking coal output and ramp up of the El Valle-Boinas/Carles gold mine in Spain. 

Northern Iron Ltd (ASX:NFE) – Rejects A$477m offer from Aditya Birla Group

• Northern Iron have rejected a bid valuing the shares at A$1.29 a share as not reflecting full value for the shares. 

• Northern Iron’s assets are in northern Norway and the company currently produce 2.1 Mt of magnetite concentrate a year with a target to reach 2.8 Mt this financial year. 

• The company could double production to 5.6 Mt by 2016 with expansion capex of US$360m. 

• Northern Iron has said that it has received approaches from other parties as alternatives to a full takeover. 

• Northern Iron acquired the brownfield Sydvaranger mine in 2007 as a historic iron ore mine which included a processing plant, rail and associated infrastructure. 

• The product from this mine is thought to be high quality grading 67.5% Fe with lower levels of impurities, in addition, Scandinavian iron ore should carry a freight benefit for European buyers over Brazilian imports. 

• Operating costs for Scandinavian projects are generally higher than forecasts for West African producers but some of this margin impact should in theory be absorbed by higher prices for the premium product. 

• The last raising was at 64c/s in November

Johnson Matthey – Platinum 2012 – market review

Platinum - Platinum supply / demand moved to a 430koz surplus in 2011 versus a deficit of 25koz in 2010.

- Supply climbed 7% to a 4-year high of 6.48moz. 

South Africa (75% of total production) added 5% to sales of 4.86moz although this was down to releases of the metal from above ground stockpiles and in-process pipeline. 

Mine production in SA fell 3% (-120koz) due to safety stoppages and labour disputes.  This does not seem so bad considering the crackdown on fatalities and safety issues but considering the importance of production from this region and the expected rate of demand growth then any further pullback in supply should cause prices to rise.

North American output rose 75% to 350,000oz in 2011 but this only represents 7% of South African production.  The rise was on recovered operations at the Vale’s Sudbury mine in Jul 2010 following a year long strike. 

Russia produced 835,000oz with almost no growth

Zimbabwe rose to 340,000oz from 280,000 and offers the best geological potential for growth but remains hampered by political issues.

- Demand (excluding recycling) grew 2.4% to 8.09moz.

- Autocatalyst sector (38% of total demand) saw mixed performance.  Platinum use in heavy duty diesel engines recorded a solid 27% growth as businesses delayed replacing their fleet during the Great Recession. Despite an increase in the share of diesel vehicles sold in Europe (47% of Platinum demand used in autocatalysts), demand for Platinum declined due to a continuing substitution of Platinum with palladium in emissions systems. Platinum demand in light duty gasoline auto catalysts fell due to severely hit auto industry in Japan following the Tsunami.

- Jewellery was up 2.5% to 2.48moz led by growth in Chinese and Indian markets.

- Industrial demand for Platinum climbed 16.8% to 2.05moz amid a capacity-building period mainly in the vertical integration of LCD TV manufacturing plants China and in other developed and emerging economies.

- Investment sector recorded a net inflow of 0.46moz in 2011, 30% down from 0.66moz in 2010. ETF holdings tended to grow together with the price and reached record cumulative levels of 1.63moz in September. In Q4 ETFs followed prices that plunged by more than US$200/oz. Investments in large Platinum bars, a predominantly Japanese market, rose when prices were down and declined, otherwise.

- Recycling brought 2.05moz of the metal back into the market in 2011 (vs. 1.83moz in 2010) as highly-loaded catalysts were collected from end-of-life vehicles and higher prices encouraged more Platinum recycling in the jewellery industry.

- Outlook: In 2012 supply is forecast to fall in South Africa on rising production costs, labour and safety stoppages and lower pipeline stocks compared to last year.  Russian production is expected to remain flat or to fall on falling grades.  North American and Zimbabwean output is unlikely to repeat impressive 2011 results with production now running close to capacity in both regions.  Investment demand is forecast to remain positive and will be central to the market balance in 2012.  Jewellery demand looks likely to remain firm on ongoing Chinese buying.  Autocatalyst demand should rise on forecast new auto production in our view.  Moving forwards, JM said that Platinum consumption in heavy duty vehicles will grow supported by the introduction of Euro VI emissions legislation starting from 2013. Furthermore, an increasing use of emissions control in non-road mobile equipment in Europe, North America and Japan should lead to a growing demand for Platinum. JM expects the market to double in 2012 from current 50koz.

- Price forecast by Johnson Matthey are expected to trade in a range of US$1,450-1,750/oz in the next 6 months, with an average of US$1,600/oz.

Palladium - market was in 1.26moz surplus in 2011 versus a 0.53moz deficit in 2010.

- Supply was little changed at 7.36moz in 2011 as increased North American and Zimbabwean production was offset by a drop in Russian stockpiles’ sales.Russian State Gokhran sales of palladium amounted to 775koz (-22.5%) in 2011, which is the lowest reading in 5 years. JM estimates are for shipments to near depletion in the short term and sharply decline to 250koz in 2012. Russian primary production was slightly off at 2.71moz. South African production was 3% down at 2.56moz as miners stockpiled part of the metal.

- Demand (excluding recycling) was down 13% at 8.45moz primarily on the back of the investment market turning from net-buyer in 2010 (1.09moz) to a net-seller in 2011 (-0.57moz).

- Autocatalyst sector grew 8.1% to an all time high of 6.03moz on higher gasoline cars production, more stringent emission controls in China and rising substitution of Platinum with palladium in light diesel vehicles.

- Industrial application of palladium increased slightly to 2.48moz. Chemical intermediates production rose 20% as new plants, particularly in China, were commissioned and increased purchases of catalysts. In electrical sector, the availability of cheaper substitutes dampened palladium sales.

- Jewellery demand dropped 15% to 0.51moz with sales down in all major markets. Lack of marketing and positioning in Chinese markets as well as higher average prices that led jewellers to offer lower weights all reflected on sales.

- Investment demand turned negative in 2011 led by a sell-off in ETFs, especially in Q4. As such the dynamics of ETF demand directly coincided with price movements.

- Recycling increased by 27% to 2.35moz due to recoveries in autocalysts and jewellery.

- Outlook: The market is forecast to return back into deficit in 2012 on lower Russian stockpiles’ sales and stronger demand in autocatalyst sector. It is estimated that ETFs saw an inflow of 250koz in Q1 as investors grow aware of tight fundamentals in the palladium market. Should the dynamics of investments remain through the year prices should act accordingly.

- Price forecast by Johnson Matthey to range between US$620/oz and US$800/oz with an average of US$715/oz in the next 6 months.

Rhodium - market saw a surplus of 139koz in 2011 compared with 88koz in 2010.

- Supply climbed 7% to 765koz led by a release of the material from the production pipeline in South Africa, ramped up output in North America and new capacity in Zimbabwe.

- Demand (excluding recycling) was up 2% to 906koz driven by growth in the industrial sector and a launch of the first physically-backed ETF.

- Autocatalyst demand was weak and recorded a 2% drop to 712koz after the major market in Japan suffered damages in the wake of the Geat East Japan Earthquake in Mar. Historically, Japanese auto manufacturers use an elevated share of rhodium in emissions control devices due to an availability of the material in Japan providing a secure source of supply.

- Investment demand totalled 17koz as Deutsche Bank launched the first rhodium ETF in May last year. The market is still relatively small and niche.

- Outlook: Demand is forecast to rise, although the market is likely to remain in surplus. Supply may grow in South Africa in 2012 as more material will be shipped from built-up stockpiles. Recycling of end-of-life catalysts should bring higher volumes of rhodium into the market. A recovery in Japanese auto sector together with stronger production in North America and China are forecast to support demand for rhodium in autocatlysts. Low prices stimulate more purchases by industrial and investment sectors.

Platinum sector review summary

• PGM prices may fall in the short term but prices are headed higher over the next few years as auto / truck manufacturers prepare for Euro VI. Legislation and as South African mines struggle to maintain production levels.  

• Rising costs in Platinum mining and falling margins are creating a potential funding gap to tighten the supply of pgm metals causing prices to rise beyond current forecasts.

• The level of South African Platinum mine fatalities is unacceptable and is being tackled by the state with more than 11 fatalities are recorded every month within the industry.

Fatalities in ‘all’ South African Mines - Platinum mines account for a proportion of these totals

o 2000 - 285

o 2009 – 168

o 2010 – 128

o 2011 – 115

• The stats pale into insignificance when compared with Chinese mines.  The China Daily reports that 3,033 miners were killed last year.  1,973 according to official stats vs 2,433 in 2010 and 7,000 in 2010.  We believe true figures may be significantly higher.

• In addition a higher fatality rate is recorded in South Africa from mine related respiratory diseases at 669 fatalities recorded in 2009

• Some commentators refer to the high incidence of AIDS among miners as contributing to the fatality rate 

• The mines work hard to educate workers in health and safety issues and many accidents are due to a failure to comply with the rules and due to other avoidable issues.  

• The closure of working sections can lead to greater ground instability in some instances and to increased rock stress following a fatality 

• It is important for the industry to reduce the fatality rate and this will only come with ongoing investment and control.  Investing in safety has its costs and this will need to be reflected in higher pgm prices going forward

• Pgm miners look like the living dead as rising costs slash margins and the need for ongoing investment reduces the key companies to little more than effective state enterprises to maintain jobs and pgm output.  

• It is our view that Platinum demand should continue to rise ahead of mine supply and that this should cause prices to rise significantly into next year.  

• We are seeing some ETF momentum sales at present and selling of other stocks but this is likely to change once the market tightens.

Morning View 

Metals prices fall as China cuts reserve ratios and focus shifts to Greek exit 

• Oil prices fall to below $110/bbl for Brent crude this morning – prices opened at $110/bbl 

• China cuts bank reserve requirement – this is a sign of quantitative easing and indicates economic problems within China

• – the fall in oil prices is significant as it indicates further GPD slowing in China and elsewhere.

• Lower oil prices reduce inflationary pressures and should enable policy makers to maintain lower interest rates for longer

• Greek Euro exit looks inevitable as ECB considers Greek exit – ECB officials are now commenting on management of a Greek exit.  The reality of a Greek exit should be better than the uncertainty creates by its prospect.

Economic News 

China – Over the weekend the People’s Bank of China reduced the amount of cash that banks must hold as reserves.

• The reduction is estimated to be the equivalent of pumping circa $63bn into the economy. 

• The news comes as trade data last week indicated that China could well be slowing at a more severe pace than initially estimated.    

• Expectations are high that officials will move to further support the economy over the summer. 

• Officials from China, Japan and South Korea have agreed to start a program of talks working towards a free trade accord between the three countries. 

• It is hoped that the trade pact will give a strong boost to the level of economic integration in the region. 

Europe – The Euro is weaker this morning against its most traded counterparts as concerns continue to mount over Greece. 

• The rhetoric has taken a notable turn over the weekend. 

• Officials from the European Central Bank Governing Council have stated a Greek withdrawal “is not necessarily fatal, but it is not attractive” 

• Merkel will meet with the new French President Francois Hollande tomorrow. 

• Finance Ministers meet today to discuss Greece as parties continue to fail to form a coalition government in the country boosting speculation that more elections will be called as early as next month. 

• The situation in Greece is impossible to call. The political impasse appears to be so deep rooted that it will prove almost impossible to achieve a consensus without fresh elections. 

• If new elections do occur, concerns are mounting that the anti bailout party, Syriza will gain more support despite the majorities of Greeks still wanting to keep the Euro. 

• Last night Angela Merkel’s party suffered a humbling defeat in the election of a new parliament in North Rhine-Westphalia losing to the Social Democrats and Greens. 

• Many commentators have been quick to state that the defeat shows a rejection of austerity measures championed by the Chancellor. 

• However on a national level The Christian Democratic Party still appear to be the most popular party – so we are unlikely to see the Chancellor falling victim to the debt crisis monster just yet. 

• Irish officials have conducted a poll that indicates that support for the European treaty is solid ahead of referendum vote on May 31.   

US - Figures released on Friday showed that consumer confidence and sentiment in the US may not be flat lining as many economists had predicted. 

• The University of Michigan survey of Consumer Confidence improved to 77.8 this month beating estimates of 76.0 

• Buoyant optimism is reverberating through the US car market. 

• Car sales are running at the fastest pace in 4 years apparently – exceeding the 14 million annual rate in each month this year indicating the best performance since early 2008. 

• Sentiment is building that should the industry continue to see such strength than a number of sectors could feel the force of a multiplier effect. 

• New forecasts are predicting an annual rate of 14.38m 

Australia – Figures released this morning, indicate that home loans ticked up last month. 

• The Reserve Bank of Australia has stated that it expects the currency to remain high for several years on the back of steady demand from India and China for the nation’s commodities. 

India – Inflation accelerated rather unexpectedly last month according to official figures. 

• The Benchmark wholesale price index rose 7.23% in April, year on year after climbing 6.89% in March. 

Sub Sahara Africa – The IMF has stated that growth in sub-Sahara Africa will remain strong this year as demand for the region’s resources help offset the global economic headwinds. 

• The IMF is forecasting growth of 5.4% this year and 5.3% in 2013 for the region. 

Peru – Miners called off a 48-hour national strike planned to start at midnight on May 14 as the government approved more retirement benefits to workers.

US$1.2889/eur vs 1.2919/eur last week. Yen 80.05/$ vs 79.79/$. SAr 8.173/$ vs 8.091/$. $1.608/gbp vs 1.612/gbp

Commodity News 

Precious:

Gold US$1,577/oz vs US$1,583/oz last week – Gold fell as markets grow wary of the exacerbating situation with the European sovereign debt crisis.

• Mexico, the world’s largest silver producer, is climbing in ranks of major gold miners.

• The nation is currently the 10th biggest gold producer having mined 86.6t of gold in 2011 according to Thomson Reuters GFMS estimates.

• Production is forecast to ramp up to about 100t ver the next 5 years.

• The country is estimated to have one of the lowest cost gold production in the world with an average cost of around US$325/oz compared to US$649/oz in other jurisdictions.

• Mexico is prone to risks associated with drug wars that come together with kidnappings, extortion and corruption.

• Most gold mining happens in the central and southern parts of Mexico; whereas the drug cartel related clashes take place in northern areas.

• The Gold Volatility Index is down 54% from its 2,5-year high recorded in Sep when prices reached all-time high of US$1,900/oz.

• Although the Index increased 13% to 18.5 last week it is still 4.5 points below its 1-year mean of 22.9 implying investors expect less price volatility in the commodity.

• Polymetal, a Russian gold/silver miner, sold of its non-core gold deposit Veduga to Polygon Gold in exchange for US$20m in cash and 82% stake in Polygon. In effect Polymetal will retain control of the asset through keeping a stake of more than 80%.

• SPDR gold trust holdings remained at 1,277t (41.060moz) value US$64.963bn. 

Platinum US$1,464/oz vs US$1,477/oz last week

Palladium US$601/oz vs US$610/oz last week

Silver US$28.66/oz vs US$28.76/oz last week

Rhodium US$1,390/oz vs US$1,390/oz last week

Base metals:

Copper US$ 7,929/t vs US$8,054/t last week – Prices are off this morning and trading at levels last seen in Jan as markets dismissed a cut in Chinese banks’ reserve requirement ratio.

Aluminium US$ 2,032/t vs US$2,039/t last week

• Rusal, the word’s biggest aluminum producer, recorded a 84% yoy drop in Q1 earnings to US$74m on the back of weakening global demand and falling prices.

• EBITDA declined 65% yoy to US$237m versus US$262m expected.

• Rusal’s net debt at the end of the first quarter was US$11.1bn.

• The company is considering mothballing around 300,000-600,000t of smelting capacity in H2 2012, accounting for 4-6% of Rusal’s aggregate capacity.

• Nevertheless the management said there are positive developments in the aluminum market citing stronger auto sales in Germany and rising consumption in the US and Japan.

Nickel US$ 16,986/t vs US$17,123/t last week

Zinc US$ 1,923/t vs US$1,942/t last week

Lead US$ 2,054/t vs US$2,074/t last week

Tin US$ 20,300/t vs US$20,500/t last week

Energy:

Oil US$111.33/bbl vs US$112.84bbl last week- Brent crude should slip below $110bbl this week off of Saudi’s Oil Minister saying that Brent crude should trade around $100bbl on Friday.

• China’s fall on growth, the Eurozone crisis ongoing, coupled with healthy rise in global stockpiles means supply is at much less risk right now. 

• Iran is struggling to find buyers for its crude as it stores reserves on tankers prior to this months resumed talks to be held on 23rd May. 

• The Australian government has offered 27 areas for oil and gas exploration. 

• Separately being considered are tougher laws to make companies pay more for any pollution they cause, said Martin Ferguson Energy Minister. 

• Three Cove Energy Directors back new venture focusing on off-shore Ireland and North and East Africa. 

• The new Co. will be backed into a shell company and listed on the Aim market with the deal expected to be announced today. 

• The new Co. well be renamed Fastnet Oil and Gas 

• WTI crude was  at US$95.42bbl this morning  with US Crude at US$95.41/bbl 

Natural Gas US$2.596/btu vs US$2.431btu last week- Royal Dutch Shell and Chevron have won the rights to develop shale gas fields Yuzivske and Oleskein in the Ukraine, announced the Prime Minister Mykola Azarov.

• The Ukraine hopes to secure up to 10% of its domestic gas consumption by 2020 from the projects. 

• BHP Billiton may write the value of it’s U.S. shale gas assets as prices have halved since their $17bn buying spree of the Fayetteville and Petrohawk assets last year. 

• However, Australia could double the size of its shale gas exploration 

• Australia could become the biggest exporter of LNG with its resource of circa 390tcf of natural gas. 

• The gas leak at Total SA’s Elgin platform in the North Sea should be plugged within a matter of days, said its CEO Chrispohe de Margerie today 

Uranium US$51.00/lbs vs US$51.60/lbs last week- 

 UX consulting weekly spot as of 30th April 2012 was at US$51.75/lb (Unchanged). 

Coal $96.80/t Richards Bay, Newcastle $100.45/t, Rotterdam $92.45/t

State-owned and private mining companies in India have been issued with show-cause notices requesting explanations on lack of development by the Ministry of Coal.

• Without Government support the companies are saying they have been delayed because of land acquisition, environment and forest clearance issues.

Other:

Stainless Steel – The spread for 2mm 304-grade cold-rolled sheets narrowed to €1,130-1,150/t for Jul delivery compared to €1,130-1,200/t for Jun rolling (Metal Bulletin).

• Falling nickel prices, depressed demand in Europe and material buying on a just-in-time basis are reported to have been behind stainless price moves.

Helium – US Senate bill proposed to better manage sales from the Federal Helium reserve

• Helium is difficult to find in economic quantity on earth and new sources of helium are rare to find

• Helium gas tends to leak away through the atmosphere and into space due to its light mass 

• One third of helium supply is cut-off by by current US legislation eg the supply is located in countries with trade sanctions

• Helium supply is used in medical devices and rocket tanks.  Demand is seen growing at 3-5%pa with US demand accounting for some 40% of this demand. 

Company News

RUSAL – Q1 profits fall 84% on lower aluminium prices

Lonmin (LON:LMI) – Q1 profits fall to $18m from $159m yoy

• Lonmin, like other Platinum miners continues to struggle against a rising tide of local inflation, labour stoppages and safety issues which are a major challenge to its operations.

• Profits for Q1 remain positive at $18m but highlight the cost of working in the South African Platinum mining sector.

• Production guidance remains at 750,000oz, but it is early on in the year and much can happen to hamper this target.

• Net debt at $356m but is set to rise sharply over the next few years

Conclusion: Cost inflation is a major issue and, despite management’s good work, may well plunge Lonmin into losses this year.  The impact of rising costs and rising debt levels does not look good for Lonmin.  The company and its peers need significantly higher pgm prices to restore capital returns and confidence within the sector.

Discovery Metals (ASX:DML) – Drill Results show broad zones of mineralisation at Zeta North East

• Infill and extension drilling at Zeta North East which is 7 km from existing Zeta pit, intersected broad zones of mineralisation in all 11 DC holes. 

• Copper-silver mineralisation was intersected at depths of around 210m below surface and remains open at depth with a delineation zone over 3.5 km strike. 

• The company expect to report a maiden resource estimate at Zeta North East in Q3 2012 with a deeper drilling programme to 400m vertical depth to estimate underground potential. 

• Significant intercepts included: 

o 3.4m at 2.2% copper and 66 g/t silver and 4 m at 1.8% copper and 44 g/t silver 

o 5.0m at 2.1% copper and 47 g/t silver. 

o 15m at 1.2% copper and 26 g/t silver. 

o 9.5m at 1.1% copper and 16 g/t silver. 

Conclusion: Discovery Metals is continuing to show resource potential at Boseto. While technical risks rise as commissioning and production start for their main project, there is now increasing value in the other deposits at the project with the prospect of underground mining at the Zeta Deposit as demonstrated with the recent drill results and also potential at the Plutus deposit where the company announced a new mineral resource estimate of 87 Mt of 1.4% copper and 13.2 g/t silver. The share price appears to have run into profit taking after a period of significant outperformance and provides a buying opportunity for a good quality copper play.

Fairfax acts as corporate advisor to Discovery Metals

EMED Mining (LON:EMED) – Quarterly Financial Report in Line with previously reported progress on Rio Tinto Project

• As reported following our site visit to the Rio Tinto project last week, the company is making good progress in getting the project re-started. 

• The company is still expecting to achieve Administrative Standing in Q3 2012 with a 30 day public consultation on environmental documentation starting shortly and discussions with review bodies. 

• Negotiations with landowners is continuing in tandem with the latter more incentivised to come to a realistic agreement given the prospect of Adminstrative Standing now being achieved. 

• There is strong political support for this project against the backdrop of a deteriorating economic outlook in Spain putting pressure on expediting job creating projects such as the Rio Tinto copper project. 

• The capital and operational requirements are undergoing a detailed review and could increase to reflect the changes in requirements for the project – these will not materially affect the value of the project as capital and operational costs assumptions are still at the low end for a project of this size. 

Conclusion: The best case scenario will be for a mine restart in the third quarter of 2013 with Administrative Standing achieved in Q3 2012, landowner issues settled and hot commissioning a year later. Should the landowner negotiations not be reached by the time Administrative Standing is achieved, then expropriation process for land acquisition will shift the project out a further 6 months. 

There is now momentum for this project to be re-started and it is now a matter of timing over time frame which is now in sight. There is significant upside to the shares once Administrative Standing is achieved which will trigger the process to re-start  the mine particularly if negotiations with landowners are completed within the same time frame. The company has secured the majority of its financing requirements through debt facilities and offtakes once permits are in place and there is scope for resource potential to boost project economics.

*Fairfax acts as UK broker to EMED Mining 

* Fairfax Analyst attended the recent site visit

Firestone Diamonds* (LON:FDI) – Operational Update Q1 2012

• The Liqhobong Mine has demonstrated its potential for large quality diamonds – the company recovered one 74 carat light yellow gem. 

• The existing processing plant is still not fully aligned to the ore being processed with two large stones being broken with 39 light yellow gem carat and a 26 carat white gem which are fragments of larger stones. 

• Over the quarter the company sold 67,148 carats at $71 per carat based on small and near gem stones realising $4,773,000 in revenues. 

• The company continues to focus on improving the production process to reduce diamond breakages – this has resulted in throughput over the quarter down 7% below budget. 

• 45,491 carats were recovered over the quarter 9% below budget and a marginally lower than expected grade of 35.4 carats. 

• The company is planning a second maintenance shut down to begin in May and completed in June where there will be essential replacement of the secondary scrubber and trammel screen with a trammel screen with a double deck screen and a bin and pan feeder which will enable a continual choke feed to the secondary crusher. 

• The DFS for the main treatment plant is on schedule for completion in June 2012. 

• The fund raising in the quarter which gave the company £14.3m net of costs is sufficient for its foreseeable working capital requirement. 

• Grant Ferriman has joined the company as their CFO – he was previously the Group Financial Controller of Mwana Africa. 

Conclusion: While short term operational issues still affecting the operational performance for the company, the real value in this stock will come from success in dealing with the plant problems so that full value can be realised from recovery of large stones at Liqhobong. Changes being made to the process plant during planned maintenance in May/June to provide a continual choke feed to the secondary crusher will be a test of whether the process can be successfully changed to reduce current breakages. The company’s fund raising over the quarter gives them the breathing space to make these changes and push forward on the DFS for the main treatment plant. A significant re-rating may only take place once the breakage rate improves.

*Fairfax analysts have visited the Liqhobong mine and visited the mine in February this year

Goldplat plc (LON:GDP)   - Good Progress at First Gold Mining Operation at Kilimapesa

• The company has updated on the progress to date at the Kilimapesa Gold Mine which is a brownfield gold operation in Kenya.

• 1,151 oz of gold has been produced and sold to date at the mine.

• The mine is currently being developed and a process plant built to target production of 10,000 oz per annum.

• There is an ongoing drilling programme to increase the JORC compliant resource at Kilimapesa targeting 500,000 oz of gold.

• Resource: The company has doubled the resource estimate at Kilimapesa from 1.65 Mt at 2.44 g/t giving 129,000 oz to 3.13 Mt at 2.46 g/t for a total of 247,484 oz.

• The increase comes from the Red Ray target 2 km to the east of the current plant site based on 13 DC holes for 651 m of core with proved strike length 1000 metres to east and west.

• A further phase of infill drilling is planned at this target to test the ore body at depthand extend the strike length.

• The company are evaluating the other target at Kilimapesa the Vim/Rutha south of the Kilimapesa Hill.

• The company expect to update the market by the end of Q2 2012 on the DC drilling programme at Kilimapesa Hill which is aimed at extending the known ore body 140m below the current workings.

• Development of the Underground Mine: The company has established several stopes to allow for a full stopping operation.

• A new Adit has been established and the ensuing development is expected to contribute significantly to the expansion of the ore resource and increased mining tonnages.

• Plant and process: The company is procuring new plant to increase the processing capacity.

Conclusion: Good progress is being achieved at Goldplat's first brownfield gold mine - production is in line with targets. A meaningful contribution from the gold mining operation is not expected till 2013 as underground development continues and plant capacity is expanded. We are currently assuming 4,500 oz of gold production for FY 2013 and 7,500 oz for FY 2014.

With a strongly performing gold recovery business being boosted by revenues from gold mining, Goldplat offers significant upside from current levels. Having a self-funded expansion programme both in terms of gold recovery and gold production, the company is well positioned compared to other companies that need to raise finance to fund their growth programmes.

The stock is trading on a PE of 4x for 2012 and 3.2 x 2013 and with no debt has an EV/EBITDA multiple of 3.5x for 2012 and 2.3x 2013 based on our forecasts.

Our full initiation research note written on 26 March 2012 is available.

* Fairfax analysts and sales have visited the Goldplat's Benoni facilities in Johannesburg. Fairfax acts as nomad and broker to Goldplat in the UK

Anglo Asian Mining* (LON:AAZ) – Gosha project receives government approval

• The Ministry of Ecology and Natural Resources has approved the development and production plan at the Gosha gold deposit.

• According to mining regulation in Azerbaijan, the company has a year starting from 25 April 2012 to begin mine development and move to production.

• Management are looking to start the development programme at Gosha in H1 2013 eg after the completion of the works on the agitation leach plant at the main Gedabek gold/copper mine.

• The team is also looking to continue exploration at Gosha to gain better understanding of the Gosha orebody and its particular mineralisation.

• Gosha is located 50km north west of Gedabek.

• The Company plans to develop the first underground mine in Azerbaijan producing 10,000-15,000oz of gold per annum for up to 5 years.

Conclusion:  We expect the high grade material (c. 10g/t) from Gosha to be trucked to and processed at Gedabek with first production from Gosha to be processed in 2014.  We value the project at US$12m (7p/share) using 15% discount rate.

*Fairfax acts as Nomad and broker to Anglo Asian Mining

*A Fairfax analyst has visited the Gedabek and Gosha mine sites and walked through the exploration tunnels at Gosha to inspect the mineralisation. 

Morning View

JP Morgan - $2bn loss by CIO office shakes markets 

• The news shows that despite all regulation and credit controls banks can still make whopping losses on investment and trading.

• Markets are soft as investors look to protect value ahead and banks prepare for the return of the Drachma.  

• We wonder how many zeros will be on the first notes?

Vale declares force majeure at New Caledonia nickel smelter

• The company is suspending sales and purchase agreements at its Goro project as a result

China – steel export / dumping into Europe threat

• Mittal has called for a "Buy European" policy after week results in Europe 

• ArcelorMittal have now shut down some parts of about six plants in Europe. 

• Their North American division is showing stronger signs of recovery. 

• We suspect that China is overproducing steel and that European steel producers are preparing for a potential flood of Chinese steel into European markets.  However China’s steel exports fell 7.2% month-on-month in April (a 2.3% decline yoy) as buyers failed to take up Chinese offers (Metal Bulletin)

Element Electronics is bringing back a small TV operation from Asia back to the US

• The reason for the shift was not rising Chinese labour cost but high US import duties on larger and more expensive TVs and freight costs. 

• The company says the economics of onshoring ie bringing back production from China more compelling for large electronics such as TV because of higher impact of freight costs.

Glencore / Xstrata – Qatar fund plan to buy 10% of Xstrata 

• It is odd for funds to announce plans to buy something before the purchase is made.

• It seems even stranger for normally secretive sovereign wealth funds to make such statements.

Economic News

China – A barrage of data emerged from China this morning. 

• Consumer prices year on year in April rose 3.4% - down from 3.6% in March and in line with expectations. 

• Producer prices year on year declined by 0.7%, more than the 0.5% decline forecast. 

• Less optimistically, Industrial production figures declined in April. The year to date figure came in below forecasts at 11%. 

• Year on Year production increased 9.3% compared to forecasts of 12.2% 

• Retail sales also failed to reach estimates, rising 14.1% in April but below the 15.1% previously expected. Sales figures have generally trended down since January 2011. 

• Unsurprisingly the level of urban investment was below that expected. Year on year in April urban investment increased by 20.2% - down from 20.9% in March. Investment has been declining since June 2011.   

• Overall the data released today, coupled with the poor trade figures yesterday, will help support the case for a more supportive economic policy. Slowing industrial production and easing inflationary concerns will increase pressure on policy officials to do more to support the economy as it tries to move from export driven growth to domestic consumption driven expansion. 

Europe - CPI figures for Germany rose in April. 

• Month on Month the CPI rose to 0.2% above estimates of a 0.1% increase. 

• Germany is incredibly sensitive to inflationary concerns. Rising inflationary concerns do not help those arguing for a more accommodative growth policy in the Euro area.   

• Moody’s has reiterated a warning to the global banking sector stating that moves to avoid new capital requirement rules and increases in the amount of debt held will reduce their credit worthiness. Stating the obvious?

Japan – Japanese stocks reacted to the news of a slowdown in retail sales and factory activity in China predictably, falling for a third day. 

• The impact that a slowing China has on Japanese exports would be considerable. 

• China is the country’s largest export market accounting for roughly 20% of all exports. 

• The country’s Central Bank today pledged to deploy FX assets to counter any international emergencies as a result of the ongoing debt crisis. 

UK – Unsurprisingly, the BOE maintained interest rates at historic lows yesterday. 

• BOE yesterday indicated that inflation concerns were rising within the monetary policy committee but that the door was still open for further QE if the economy required it. No official statement on further QE was given. 

• The UK economy is facing growing headwinds as a result of the recent strengthening of the pound. Exports need a weak pound to thrive and the recent development of £ as a relative “safe haven” is proving detrimental to domestic businesses looking to export. 

• Figures released this morning, yet again painted a less than pretty picture of the UK market place. 

• Consumer confidence dropped last month, falling to 44 from 53 in March. 

India – Senior officials have indicated that the country is set to reintroduce a number of incentives to the export sector in an attempt to reignite the slowing economy and boost trade. 

• The plan will reintroduce and expand previously phased out subsidies to boost overseas sales of textiles and engineering goods – according to the FT. 

• The country’s deficit increased to $13.4bn in April against $8.9bn last year. 

• Exports increased 3.2% while imports rose 3.8% 

Argentina – Figures released yesterday indicate that consumer prices rose 2.2 percent in April. 

• Prices rose 23.5% from a year earlier. 

Peru – The country’s central bank announced that it would hold borrowing costs unchanged for a 12 month after boosting reserve requirements. 

• The overnight rate was held at 4.25% 

• The country is experiencing an uptick in growth as the government increases infrastructure spending. 

• The Country’s Central Bank is expected to raise its 2012 growth forecast to as much at 6.2% 

South Africa – “Our current tax system is competitive and working well,” the Mines Minister told reporters ahead of her budget speech in Parliament.

• A report on the effects of Section 54 work stoppages on production was completed and would be announced in due course, the Ministry said.

• The Ministry’s comments were made after the 600-page “State intervention mining study” prepared by the ruling African National Congress suggested an introduction of a resources rent tax increasing levies on the mining industry.

South Sudan- The East African nation is struggling to avoid its economy from diving into disarray since it halted oil production over a dispute with Sudan which is tearing the recently seceded countries economies to pieces.

• Reports suggest that a line of credit has been secured worth $100m with the Qatar National Bank 

• South Sudan will receive a $500m loan within a month from an unidentified provider, Deputy Finance Minister Marial Awou Yol said in an interview. 

• Other loans are being sought from countries such as China secured by oil in the ground. 

• South Sudan accused the Khartoum government of stealing $815m worth of its crude. 

• The World Bank has said it is “deeply concerned with the economic and development impact of the unresolved oil issues”. 

• It is in the interests of both sides to resume talks and resolve issues urgently. 

• South Sudan are using funding to build two refineries to meet domestic demand and trucking excess through neighbouring countries for export, with a long term plan to build a pipeline. 

• That will result in starving the North of major revenue will almost certainly result in an increase in armed conflict. 

• So far other mining activities such as La Mancha’s flagship Hassai gold mine said that production has not been effected. 

Currency – The pound has weakened today against the Euro as speculation increases that the BOE will add more stimulus over the summer as the UK economy flat lines. 

• The USD has strengthened against Euro as concerns remerge today over Europe and whether Greek leaders will be able to form a government. 

US$1.2919/eur vs 1.2955/eur yesterday. Yen 79.79/$ vs 79.69/$. SAr 8.091/$ vs 7.984/$. $1.612/gbp vs 1.614/gbp

Commodity News

Precious:

Gold US$1,583/oz vs US$1,594/oz yesterday – Gold is heading for the worst weekly performance since Mar as Greece is trying to form new government and the market fears the Euro zone sovereign debt crisis may worsen.

• Chinese jewellers say it has been the worst start of the year since the financial crisis in 2008 as falling prices weakened investment demand and slower economic growth affected retail sales.

• Turkish banks may be increasing rates on deposits made in gold to boost the lowest savings rate in major emerging markets.

• Turks are estimated to hold around 5,000t of gold which is equivalent to around $260bn, more than a third of the nation’s US$772bn GDP, the Istanbul Gold Exchange said.

• Local banks have to overcome people mistrust in the financial system as the latest financial crisis in 2001 led 20 lenders into receivership.

• Currently the ratio of people holding savings in a deposit and those who are favouring gold and cash stands at 1-to-3, according to a MasterCard WorldWide estimates.

• Turkey is central to the nation’s commercial side of things. Apparently, rents at Istanbul’s 6-century old Grand Bazar are still paid in gold, Bloomberg reports. 

• South African gold production declined for an 11th month in Mar, the Statistics South Africa said.

• SPDR gold trust holdings increased to 1,277t (41.060moz) value US$65.600bn from 1,275t (40.992moz).

Platinum US$1,477/oz vs US$1,507/oz yesterday

Palladium US$610/oz vs US$616/oz yesterday

Silver US$28.76/oz vs US$29.29/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,054/t vs US$8,107/t yesterday – Copper is downbeat today on weaker-than-expected Chinese industrial production in Apr.

• Chinalco, China’s biggest aluminum producer, may be seeking US$0.8-1bn in IPO on the Hong Kong stock exchange of its Peruvian copper mining unit.

• The company is developing the Toromocho project in Peru that was acquired in 2007 from the Canadian firm Peru Copper.

• The deposit hosts 1.5bn tons of reserves of copper, molybdenum and silver with an estimated life of mine if 36 years.

• The mine is set to come online in Oct 2013 producing 117kt of copper ore per day.

Aluminium US$ 2,039/t vs US$2,050/t yesterday

Nickel US$ 17,123/t vs US$17,305/t yesterday

• Vale declared force majeure on nickel shipments from its New Caledonia smelter at the sulphuric plant, according to Metal Bulletin.

Zinc US$ 1,942/t vs US$1,955/t yesterday

Lead US$ 2,074/t vs US$2,080/t yesterday

Tin US$ 20,500/t vs US$20,600/t yesterday

Energy:

Oil US$111.76/bbl vs US$113.05bbl yesterday – Brent crude declines again most likely due a strategic rise in production from OPEC in an effort to bring down the cost of oil and stabilise demand.

• The U.S. has had rising stockpiles for sometime, but it has had little effect on its own in brining oil down. 

• Events in Europe have tipped the balance this week coupled with a four month low in China’s net crude import, prompting futures to decline amid investor concern over the long term prospects for EU nations and the future of the Euro. 

• Brent the European benchmark must fall further towards $100/bbl and hold there if it is to have any effect on macroeconomics and ease pressure for consumer spending. 

• WTI crude is at US$96.04bbl this morning  with US Crude at US$95.89/bbl 

Natural Gas US$2.556/btu vs US$2.559btu yesterday- Futures declined slightly after reports showed that stockpiles were lower than forecast.

Uranium US$51.50/lbs vs US$51.50/lbs yesterday- 

• UX consulting weekly spot as of 7th May 2012 was at US$52.00/lb (+0.25). 

Coal $96.80/t Richards Bay, Newcastle $99.80/t, Rotterdam $91.80/t

• New rules imposed on coal production could see as many as 25% of coal-fired plants close across the U.S.

• As many as 200,000 miners are at risk of loosing their jobs.

• Under a new rule from the EPA, Coal-fired plants must now release no-more than 1,000lbs of carbon-dioxide per megawatt hour.

• For many older mines that means upgrading with carbon capture and storage technology making it capital intensive and not commercially viable.

• Both Republican and Democrat governors have joined forces on fighting the EPA’s rule.  

Company News

Polyus Gold (PLGL) - Polyus Gold sells 5% of stock: 2.5% to Chengdong Investment Corp (a subsidiary of CIC International) and 2.5% to JSC VTB Bank.  Gross proceeds from the transaction were US$635.5m

Shanta Gold* (LON:SHG) Bauhinia Creek assay results.  First production due Q3 2012 

http://www.shantagold.com/

• Shanta Gold have today released assay results from drilling at its Bauhinia Creek pit in Tanzania

• Drilling has intersected mineralisation beyond the planned 120m depth open pit at Bauhinia Creek

• A new pit shell should include these intersections into an extended mine plan extending the gold reserve and resource calculations.

• The extension of the pit is good news but may also raise the waste to ore ratio along with the capital / working capital requirement for mining to increased depth.  Costs are now substantially beyond those stated when the mine was first funded in July 2011.  

• First commissioning which had been expected at end 2011 should now be relatively close with an announcement on cold commissioning expected soon.  

• First gold production is scheduled for Q3 this year but it will take some time for first gold production and sales to come following the cold and then hot commissioning periods.

• The assay results include:

10m at 18.26g/t, 130-140m depth

10m at 3.8g/t, 160-170m 

5m at 3.21g/t, 200-210m 

• The results look good but are seen at some depth and may account for the company’s apparent need to develop the mine to greater depth before the plant is commissioned.  

• Bauhinia Creek mineralisation is also reported to extend to a new strike length of around 500m.  This is good news as it infers that the forthcoming resource update due this quarter should see a reasonable uplift in ounces contained.

• Other results from the Luika licenses show: 

• 11m at 5.24g/t, 120-130m depth

• 6m at 9.02g/t, 160-165m 

• 9m at 9.94g/t, 130-140m 

• 10m at 4.04g/t, 145-155m 

• These are good figures but while the statement does give a table of the drill assays it does not include plan or cross sections to show the placement of the drill holes.  

• The previously published gold resource of 9.7mt at 3.12g/t should rise to comfortably over 1moz on these results but will cutback on the reserve calculation.

http://www.shantagold.com/investors-and-media/company-releases/2012/SHG-2012-05-11-completion-of-drilling-programme-at-new-luika-gold-mine

Conclusion:  The grades and the news of further mineralisation at Bauhinia Creek look good.  We await positive news on a resource upgrade in the next few weeks and look forward to seeing the modeled pit shells and drill intersection plans in this release.  However, the lack of information on cold and hot commissioning suggests that first gold production is still some months away.  

* Fairfax analysts have previously visited the New Luika gold mine site

05/04/12 

Shanta Gold* (LON:SHG) 

• Shanta Gold raised £9.5m through the issue of new equity yesterday at 20p. 

• The company is today placing $25m worth of convertible notes with conversion in the range of 29.53p to 32.0p.  

• The issue appears targeted at managers managing private client funds and we see this as a popular issue. 

• Shareholders should note that convertible notes rank ahead of ordinary shares and that in the event of unforeseen events bond holders get preferential treatment. 

• The 8.5% coupon appears highly attractive and the pricing range, which is substantially lower than the 41p closing on the 23rd of February, again appears attractive in this light. 

• We expect a number of investors to trade their ordinary shares for convertible stock in order to receive the benefit of the 8.5% coupon while retaining the option of convertibility.  We see the volatility of this and many other mining shares as highly attractive for convertible note holders as any recovery in the stock should increase the option value of the convertible note. 

• Use of proceeds:  The convertible proceeds are stated to be “used primarily to fund the Company’s working capital requirements to bring the New Luika Gold Mine in Tanzania into production by Q3 2012”.  The statement implies a substantially larger proportion of working capital than we might expect for this size of mine.  Some of this may be due to the ongoing mining contract and “as well as the stockpiling of important chemicals to avoid possible disruptions once gold production commences.”  We are not sure why this was not included in the company’s initial capital requirements but it may be due to issues relating to the importation of materials through the import of materials into Tanzania. 

• Liquidity of the convertible notes is an issue in the secondary market for smaller company note issues.  Application will be made to the Channel Islands Stock Exchange, LBG (CISX) for the notes to be listed on the Official List of the CISX. 

• Warrants:  in addition to normal market fees 2.65m warrants are being issued to Liberum Capital at 17.72p.  This has an immediate intrinsic value of around £87,000. 

• Dilution:  We expect the convertible to effectively issue around 52.4 million new shares on conversion.  Adding this to the 47,258,980 new shares issued in yesterday’s £9.5m equity raising and the 2.65m warrants issued to Liberum then the company are effectively adding some 102.3m shares through these issues.  This brings the total new number of shares in the company to around 372.2m shares. 

• Valuation:  applying this dilution to our financial model reduces our valuation on a per share basis to 36 pence assuming a 12% discount rate based on a relatively beneficial long term gold price of $1,450/oz. 

• Management hope to access a higher grade zone in the Bunhya Creek pit which may well change our cash flow forecasts and valuation.  However details are not publically available on the scheduling of grade and tonnage for this part of the mine and therefore can not be incorporated into our forecasts and valuation. 

Conclusion:  We recommend the convertible notes for their intrinsic value but note that the very substantial dilution incurred in the issuance of the new ordinary shares, convertible notes and new warrants does reduce our valuation on the ordinary equity.  Management need to highlight the benefit of the additional funds in accelerating access into the higher grade gold zones to show new value.

Mining this week:

Alcoa (NYSE:AA.) is to buy more residential properties in Western Australia to aid expansion of its Wagerup alumina refinery.

EMED Mining* (LON:EMED) Detva Gold Progress and Feedback from site visit

Anglo Asian Mining* (LON:AAZ) Agitation leach to enhance recovery rates at Gedabek

African Minerals (LON:AML)

London Mining (LON:LOND)  

Sierra Leone – former junta leader who handed over power looks to stand again as a civilian president

Centamin Mining (LON:CEY) Q1 gold production 

Glencore (LON:GLEN) Group under pressure to reveal links to Israeli Billionaire 

Petra Diamonds (LON:PDL) Q3 production shows team is on target for 2m cts this year  

Frontier Mining (LON:FML) Benkala copper mine hits 8,000tpd target

Metals Exploration (LON:MTL) Q1 report shows debt funding progress for Runruno mine

Morning View

Toyota – massively bullish on auto sales in US and Asia

• Toyota are forecasting an increase in auto sales in North America of +34% and Asia of +26% this year

• These are big numbers for any market environment 

• Consumers are switching to more fuel efficient models to cut fuel bills while last year’s Tsunami in Japan caused buyers to hold back on purchases last year.

• Vehicle sales are good for metal demand and many US consumers will not want to scrap their larger gas guzzlers.  Autos consumed some 5.5% of global steel production in 2008 but this rises for other metals:

Copper - 11%, zinc - 25%, aluminium – 32%, lead - 50%, Platinum - 55%, palladium  52%, rhodium - 84%.

• If Toyota and other automotive manufacturers raise production rates in line with their forecasts then this must surely offset other negative news out of the Eurozone 

Miners are ‘down’ but should not be ‘out’ of investor portfolios 

• The FT’s Short View says today “we are in an environment where the return of the principal outweighs thoughts of an actual return on capital”

• Commodities have been used as a store of value in recent years through the crises and look likely to hold in this role

• Copper and gold are particularly well regarded for investment while millions of tonnes of aluminium are also locked into financing deals

• Lead, tin and zinc are smaller markets but still offer solid asset value as mining issues hamper the supply chain

• Platinum and palladium are also worthy of investment despite plans to mine asteroids of pgms in outer space

Australia’s socialist, anti-mining, government is looking to remove fuel subsidies - following Egypt!

• Concerns are mounting amongst miners that officials will cut diesel fuel rebates for heavy haulage vehicles. 

• Earlier in the week miners were happy to learn that plans to cut diesel fuel rebates specifically for the industry had not made it into the budget. 

• But concerns are increasing that the rebate cut that was announced for trucking companies - that cuts 2c/ltr from the amount trucking companies can claim back on the 38c/litre fuel excise - will be eventually extended to mine vehicles. 

• Historically mine vehicles had escaped the cut as they operate on private roads and at mine sites. 

• Currently miners can claim back the full 38c/litre fuel excise. 

• The impact of this removal could be catastrophic to many remote and higher cost mines and could have a severe impact on the sector in Australia as bulk ore mining prices pull back and other inflation drives input prices higher.  

• BHP’s Olympic dam mine and mine expansion is seen as sensitive and vulnerable to fuel subsidy removal by some industry experts.  

• Thankfully Australia’s major gas pipelines give protection to nearby mines and the rise of shale gas as a fuel source appears to be helping gas prices lower at least in the US.

Centamin fuel subsidy removal

• The removal of Centamin’s fuel subsidy could raise costs from $550/oz to $700/oz according to yesterday’s conference call.   More likely to be from $600/oz to $750/oz considering other cost inflation 

• This serves to highlight the industry’s huge dependence on diesel and on Egypt’s fuel rebate and raises concerns for other diesel dependent miners.

Economic News

China – Figures released this morning show weaker than expected export and import growth. 

• Annual growth in imports was 0.3% in April against forecasts of 10.9% 

• Exports increased by 4.9% down from 8.9% in March and below forecasts of 8.5% 

• The figures indicate significant weakness in the domestic economy. Much of the bad news surrounding the country’s export end markets is widely known but the hope was that domestic demand would be enough to offset growth concerns. 

• Offering a relative level of support for the figures was strong raw material import data which suggests that domestic infrastructure spending currently remains strong. 

• The country recorded a trade surplus of $18.4bn – mainly attributed to the drop in commodity prices down roughly 17.4% this year. 

• More industrial and inflation related figures will be released tomorrow. 

• China’s manufacturers had shown signs of an uptick in April. 

• Talk is now focused on whether the Government will do more to support the economy. 

Europe – Spanish authorities have part nationalised the country’s largest savings bank Bankia, taking a 45% stake by converting €4.47bn of state aid into ordinary shares. 

• Yields on Spanish debts climbed above 6% yesterday. 

• A new poll carried out by Bloomberg states that over 50% of investors predict that there will be a euro exit in the coming months. 

• 80% of respondents predict more pain in the European bond markets. 

• Yesterday the German Finance Minister, Wolfgang Schaeuble showed a slight change in rhetoric towards Greece stating “ If Greece decides not to stay in the Euro zone we cannot force Greece” 

• It is worth pointing out that should Greece proceed down the road of trying to renegotiate its position it has a potentially useful bargaining chip… The €395bn owed to private bondholders, the IMF and various other institutions. 

• We remain of the belief that the structural issues inherent in the crisis will eventually lead to capitulation, but the road to this end is near impossible to predict. 

• Bloomberg is also reporting today that concerns are mounting that Spanish banks are not attributing large enough write downs to residential mortgages that have gone bad.   

• The government has asked banks to increase provisions for bad debt to €166bn – Bloomberg estimates that in reality banks need to take provisions for 5x that amount. 

• French industrial production declined more than estimated mom in April, declining by 0.9%. 

• Year on Year industrial production declined by 0.9% less than forecasts of a 1.3% decline. 

• Interestingly enough manufacturing production increased by 1.4% month on month and annually it only declined by 0.3% against forecasts for a 2.8% decline. 

• In an interesting / worrying aside – China Investment corp – the nation’s sovereign wealth fund has announced that it has stopped buying European Government debt as the economic crisis deepens. Is this a pre warning that larger Chinese institutions such as SAFE, could well be looking to leave the market? 

US – Big Ben Bernanke has been given a pat on the back by the global economic community. 

• Global investors have provided the Fed Chairman with his highest approval rating since 2009 – in a poll carried out by Bloomberg. Maybe he should consider running for office in the coming years. Obama’s approval rating does not paint such a flattering picture. 

• Forecasts before a report due for release later today suggest that the trade deficit in the US probably widened in March as imports rebounded. 

• The gap is expected to grow to $50bn from 46bn in February. 

• The pickup is being attributed to higher fuel prices and uplift in demand for Chinese goods. 

Japan – The country has posted a current account surplus for a second month in a row on the back of rising overseas investment. The excess was $20bn. 

• Year on year the surplus was 8.6% smaller. 

• Imports will be dominated by soaring energy demand as the country shut its last reactor last week. 

UK – Focus is turning to the BOE monetary policy committee and whether further QE will be added to the table.

• The BOE will announce rates at 12.30 today. 

• Industrial production figures released today were in line with forecasts. (Not good forecasts!) 

• Month on month production in March declined by 0.3% inline with forecasts. On an annual basis production declined by 2.6% 

• Manufacturing production in March surprised on the upside increasing 0.9% compared with forecast of 0.5% 

• Annually manufacturing production in March declined less than forecast falling 0.9% against forecasts of a 1.3% decline. 

Australia – Surprisingly and positively the country’s unemployment rate dropped to a 1 year low. 

• The jobless rate fell to 4.9% from 5.2% in March. 

Philippines – Exports unexpectedly fell in March as faltering demand in Europe sapped the life out of the market. 

• Shipments out of the country declined by 1.2% in March on the back of a 12.8% increase in February. 

• Forecasts had predicted a 10% increase. 

Indonesia – The threat of higher fuel prices and the implications for inflation have pushed the Central bank into holding off on cuts to interest rates. 

• The reference rate was held at 5.75% today. 

US$1.2955/eur vs 1.2990/eur yesterday. Yen 79.69/$ vs 79.82/$. SAr 7.984/$ vs 7.915/$. $1.614/gbp vs 1.615/gbp

Commodity News

Precious:

Gold US$1,594/oz vs US$1,592/oz yesterday – Gold rebounded after prices dropped 3.2% in the last 3 days to the lowest level since the beginning of Jan.

• Goldman Sachs reiterated its 6-month gold price forecast at US$1,840/oz amid weaker US economic growth, European sovereign debt woes and strong physical demand.

• SPDR gold trust holdings remained at 1,275t (40.992moz) value US$64.837bn 

Platinum US$1,507/oz vs US$1,507/oz yesterday

Palladium US$616/oz vs US$618/oz yesterday

Silver US$29.29/oz vs US$29.06/oz yesterday

• The Shanghai Gold Exchange started trading silver futures today in a move to tap demand from producers seeking to manage their risks and retail investors.

• Quoted prices are higher than the ones provided by overseas bourses as they include China’s 17% VAT on imports.

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,107/t vs US$8,084/t yesterday – Prices are up this morning as buying interest re-emerged after copper dropped below US$8,000/t level yesterday.

• China’s copper imports dropped 19% mom (+43% yoy) to 375,258t in Apr.

Aluminium US$ 2,050/t vs US$2,058/t yesterday

• US Midwest premium, the charge for immediate delivery added on top of the benchmark LME price, has risen 31% to 10.5c/lb (US$232/t) this  year, the highest level since Jan 1999.

• High fees reflect a low availability of the metal in the market with 70% of aluminum stockpiles being tied up in financing transactions.

• Inventories-to-consumption ration stands now at 40 weeks at warehouses monitored by the LME in Detroit that account for 28% of aggregate stockpiles.

• Japanese premiums may rise by more than US$30/t from this quarter US$115-127/t four executives representing smelters and buyers said.

• Premium negotiation talks will start this month and are set to grow to the highest level since 1996 amid strong demand from the auto construction industries and strong buying in China as LME prices dropped below local Chinese levels.

• China’s imports of primary aluminum dropped 15% mom (+177% yoy) to 63,634t in Mar. Imports in Q1 totalled 186,241t, up 149% from the previous year. 

• Shipments to Asia were cut after Norsk Hydro reduced annual production at its Kurri Kurri smelter I Australia by 60,000t and the Middle East smelters increased exports to Europe and the US on higher premiums than in Japan. 

Nickel US$ 17,305/t vs US$17,346/t yesterday

Zinc US$ 1,955/t vs US$1,968/t yesterday

Lead US$ 2,080/t vs US$2,073/t yesterday

Tin US$ 20,600/t vs US$21,250/t yesterday

Energy:

Oil US$113.05/bbl vs US$112.84bbl yesterday – Futures are near a three month low as U.S. releases data showing crude stockpiles climbed coupled with Chinese net imports declining the most in four months off of a slowing economy.

• China’s Cnooc Ltd.’s deep sea drill rig has started operations. In the South China Sea a strategic move to assert territorial authority in the South China Sea and its vast energy reserves against Vietnam and the Philippines 

• Royal Dutch Shell has not renewed its purchase agreement with National Iran Oil Co. in the build up to sanctions coming into force on July 1st, unless Iran complies and radically changes its stance on its nuclear programme. 

• WTI crude is at US$96.73bbl this morning  with US Crude at US$96.77/bbl 

Natural Gas US$2.559/btu vs US$2.511btu yesterday- A slight decline at close yesterday on speculation supplies fell in the U.S. last week but demand from power plants increased.

• Cuadrilla Resources the northwest of England Shale explorer says that it expects to be ready to apply for a full field development permit by 1Q 2013. 

• Production could be underway by 2014, chief executive officer Mark Millers said.    

Uranium US$51.50/lbs vs US$51.60/lbs yesterday- 

• UX consulting weekly spot as of 7th May 2012 was at US$52.00/lb (+0.25). 

Coal $96.80/t Richards Bay, Newcastle $99.80/t, Rotterdam $91.80/t

• China and India’s thirst for coal is making Indonesia avoid the global slump in coal as the two emerging economies are sweeping up even the lowest-quality grades. 

• Indonesia accounted for 35% of china’s coal imports last year and 76% of India’s. 

• Indonesia’s production is forecast to increase 8% this year, an all-time-high. 

• Yanzhou Coal and other potential buyers from India may make an offer for Vale’s stake in the Integra coal mine by as early as the end of May. Vale owns 61% of the mine. 

• Vale has been trimming assets off the back of falling iron ore demand, the raw material for steel. 

Other:

Iron ore – China’s imports of iron ore dropped 8.2% mom (+9% yoy) to 57.69mt in Apr on the back of weaker orders from steelmakers.

• Imports gained 6.5% yoy to 240mt in the first 4 months of this year.

• Iron ore prices for 62% content shipped to China’s Tianjin port have declined for 3 straight weeks to US$141.3/t, 5.4% down from this year’s high on Apr 13.

• Chinese steelmakers are estimated to have recorded combined Q1 losses of more than CNY 1bn, according to the China Iron and Steel Association.

• Baoshan Iron & Steel, the nation’s largest listed steel producer, reported last month its Q1 net income declined 60% on slower demand.

• The Western Australia government is purchasing 4,300 hectares of land 30km away from Karratha and 10km from Cape Lambert with a view to build Anketell port, a 350mtpa iron ore export hub in Pilbara region.

• Annual iron ore shipments from Pilbara equalled 452mt in 2011. The capacity is forecast to double to 900mtpa by 2020, the government said.

Rio Tinto, with more than US$33bn worth of projects in the pipe line, said an exit of Greece from the Euro zone will destabilize the area’s economy and seriously undermine global confidence.

• “Looking at Greece, it is not looking good at all… It will have an impact on our business and it’s one of the things we keep an eye out on all the time,” Chairman of Rio said.

Company News

Alcoa (NYSE:AA.) is to buy more residential properties in Western Australia to aid expansion of its Wagerup alumina refinery.

• While expanding the alumina refinery might look a good idea we have to wonder about the decision to buy property south of Perth in this market

• Profits in the mining community in Perth have driven property values to extreme levels and the cost of a beer is reported to be higher than Mayfair, London. 

• Alcoa may well profit from the refinery expansion but they may well end up giving it all back in property writedowns when the Perth property market collapses

EMED Mining* (LON:EMED) Detva Gold Progress and Feedback from site visit

• EMED Mining has announced a collaboration with Slavia Tools which owns a property adjacent to their Biely Vrch Gold Deposit. 

• The company are conducting legal due diligence during the current month after which they will pay Slavia Tools €340,000 for the option to acquire their site and re-house the existing business. 

• The option will give EMED the right for the next 10 years to pay €11m to acquire the Slavia Tools site for use once the Biely Vrch deposit is permitted and to fund construction of new premises for Slavia Tools. 

Conclusion: The main project and driver for EMED remains the Rio Tinto project with little value being assigned for this gold project in Slovakia which has a NI- 43 101 indicated resource of 15.7 Mt at 0.86 g/t gold containing 434 koz and inferred of 11.8 Mt at 0.85 g/t gold containing 323 koz. A scoping study prepared by AMC (2010) projected production of 600,000 oz over a 10 year mine life for an open pit heap leach project with capex of $64m and an operating cost of $529/oz. The collaboration with a local business should help in the permitting process as it will help in regional development and in creating jobs.

Rio Tinto copper mine (EMED) Site Visit to site report – The company hosted analysts for a site visit on May 8th and provided an update on progress towards achieving Administrative Standing in re-starting the Rio Tinto Mine and in updating capex and opex for the mine.

Good progress is being made to achieving Administrative Standing by Q3 2012.

• The company is still expecting to achieve Administrative Standing in Q3 2012.

• The next step in the process is to have the environmental documentation (AAU) in place for a 30 day public consultation process and this process will begin in May.

• The company have provided a list of all documents submitted to the two bodies/authorities involved in approving mineral rights for the project the mining and the environment ministries.

• There are a small number of outstanding documents which are mainly straightforward – of these the water management and restoration is critical and the company have worked with consultants in Seville who have expertise in this area and process. To achieve permitting they need to have applied for a water discharge permit but do not need it approved before receiving a permit.

• Other substantive issues include the tailings site and deposition method, the management of water balance in the pit and the restoration of the increased footprint of the project following the acquisition of waste dumps south of the pit.

• The company has also been invited to have discussions with the main review agencies for discussions. 

Negotiations with landowners are ongoing and running in tandem

• Negotiations with landowners are running in tandem and the company have been encouraged to try and settle directly with the landowners. 

• As the company comes closer to acquiring its Administrative Standing, the negotiations have come down to a more realistic level. 

• The company have offered €5m to the landowners who acquired the land packages for €2.5m. The company have provided € 8m for landholder acquisition and variance from this sum will not be material.

• Should negotiations with landowners not be successful then they will have to start expropriation process which will take 6-12 months with the most likely time frame likely to be 8 months.

• Q3 2012+ 1 year for hot commissioning is the best case scenario. If land negotiations are not settled ahead of achieving the Administrative Standing then it will be pushed out to Q1 201

With Administrative Standing in Sight, Project Execution in terms of capex and opex is undergoing detailed review

• They are using external contractors to mine and believe there is good opportunity to get competitive terms - there is significant availability in terms of kit as a result of collapse in the construction industry.

• The company will retain control by controlling the drill and blast function and keeping an eye on the material handling.

• The company have engaged the project management contractor Merrit who will be involved in the detail analysis of the start up of the project in terms of process engineering.

• Merrit have been involved in the start up of other brownfield projects and bring strong expertise to a good team already in place.

• Approximately 9 months of engineering work is outstanding with 3-4 months of work to achieve BFS status.

• Phase 1 will include significant electrical and instrumentation work to get the large pieces of plant – crusher, ball mill and floatation circuit into working order.

• Endesa the power supplier has agreed to start reviewing the company’s application for power supply ahead of  the mine restart.

• Once permitting is in place, the company will also plan to drill the probable reserve and upgrade to proven status with 9,000 m of RC drilling planned.

• Results from the drilling will help them establish a geo-metallurgical data base to drive production planning.

Conclusion: Things are progressing well at EMED towards achieving Administrative Standing. The ministers at local government are just being put in place following the local elections – all parties involved are now supportive of the project and should be pushing this project forward towards a mine re-start incentivised by the current political and economic climate in Spain. Review bodies at the regional level are now actively involved in ensuring the project is started in a timely but compliant manner. Negotiations with landowners are ongoing – the time frame for this is still not clear but with approval for Administrative Standing looming, the landowners are negotiating at a more realistic level and should have an economic incentive to settle ahead of a process of expropriation.

As the company gets closer to execution of the project and detailed review is conducted on capital and operational requirements for the project to restart, it is likely that capital and operational assumptions may go up from the current levels – we do not see this as materially affecting the value of the project as capex of €200m and $1.37/lb of operating costs are still at the low end for a copper mine projected to produce 24 kt of copper from initial mining of 5.5 Mt ramping up to 9 Mt producing 37 kt of copper. At $2.50/lb copper price, the project has a NPV of US$262m rising to US$654m at $3.0/lb against a current market cap of $144m leaving significant upside once the mine gets approved.

The best case scenario will be for a mine restart in the third quarter of 2013 with Administrative Standing achieved in Q3 2012, landowner issues settled and hot commissioning a year later. Should the landowner negotiations not be reached by the time Administrative Standing is achieved, then expropriation process for land acquisition will shift the project out a further 6 months.

*Fairfax acts as UK broker to EMED Mining 

* Fairfax Analyst attended the recent site visi 

Anglo Asian Mining* (LON:AAZ) Agitation leach to enhance recovery rates at Gedabek

• Anglo Asian has decided to press ahead with construction of a new agitation leach plant at the Gedabek gold / copper mine in Azerbaijan. 

• The agitation leach process should improve recovery rates to 85% for gold oxide ores from around 70% currently and to 68% for gold sulphide ores. 

• 100t per hour throughput design.

• Commissioning is expected in H2 2013. 

• Capex $52m.

• Funding to be arranged with local and international banks

• Longer lead item plant is already ordered and is expected on site by Q3 2012.

• Plans submitted to government of Azerbaijan for joint venture approval.

• Expect a new JORC reserve update shortly following the publication of the JORC resource recently. 

• The new reserve / resource gives management confidence to press ahead with the agitation leach plant.

*Fairfax acts as Nomad and broker to Anglo Asian Mining

** Fairfax analysts visited the Gedabek goldmine last year in Azerbaijan. 

Morning View

Greek public calls for government to default as politicians struggle to form an effective government  

Greek default would hit quite a number of French and German banks which are holding Greek debt

Investors may also shy away from Italian, Spanish and Portuguese sovereign debt

• Germany may not be open for Eurozone renegotiation, but it doesn’t sound like Greece will bother to renegotiate as the rise of far right and far left political parties polarise political feeling.

Economic News

Europe – Some positive export news emerged from Germany this morning. 

• German exports unexpectedly increased for a 3rd month in a row in March on the back of demand from outside the Eurozone offsetting weaker sales inside the single currency. 

• Exports rose 0.9% from February. 

• The report is prompting speculation that Germany may have returned to growth in Q1 – supported by demand from Asia. 

• Moody’s have stated that they will start cutting the credit ratings of more than 100 banks this month. 

• S&P have stated that Denmark’s banks face larger write downs this year than in anything in the past couple of years. 

• The European Commission President has again called for leaders to approve growth enhancing measures for the single currency region the June meeting. 

• The FT is reporting that Barroso is calling for EU leaders to approve a €10bn increase in lending capacity for the European Investment Bank – aiming to increase lending to small and medium sized business in the region. 

US – Confidence among US chief executive officers in Q1 rose to the highest level in almost 3 years. This is bullish sentiment considering the rising prices of oil and stagnating unemployment. 

China – Chinese stocks fell this morning leading the index to decline by the most in 5 weeks. 

• The Country’s finance Minister has stated that Chinese economic fundamentals are “Good” even as both domestic and international conditions remain complex. 

Australia – Yesterday the Government forecast a A$1.54bn surplus for the fiscal year starting july 1st – Ending 4 years of deficits. The country’s Treasurer stated yesterday that the government will cut spending for the first time in at least 42 years in 12 months starting July 1st. 

• The target will be achieved by cutting spending on defence, overseas aid and by altering pension plan payments for over 50s. 

• Officials are targeting slim surpluses for the coming 3 years underpinned by a forecast rise in overall receipts, expected to grow by 11.8%+   

• PM Gillard stated that the budget provided the Reserve Bank with maximum room to carry out its policies. 

• Corporations will no doubt be disappointed that pre promised tax cuts were not implemented – with aid for families boosted (to the tune of $5bn) instead as the Labour party attempts to return to favour with voters. 

• Yields on 10 year government bonds slid to a record low. 

• This is an ambitious move by the Government how forecasting growth of 3.25% this year and 3% in 2013. 

• The plan is undoubtedly commendable but should growth targets not be hit achieving the surplus maybe little more than a dream. 

Japan – According to a new Central Bank report, The BOJ holdings of government bonds are likely to exceed banknotes this year. 

• The amount held could reach 92tr yen by the end of the year. This compares to an estimates 83tr yen in circulation. 

• The Topix index closed at a 3 month low today. 

UK – The British Retail Association has today announced that retail sales in April fell the most in more than a year.

• Poor weather is being cited for the drop in sales but the reality is that consumers currently have no real reason to feel optimistic about the economy. 

India –The rupee fell for a second day after large numbers of foreign investors increased sales of local stocks as concerns continue to mount over Greece and the Eurozone. 

Brazil – Brazil’s efforts to boost economic growth with the most aggressive interest rate cuts are reportedly driving away investors. Interest rate cuts fuel inflationary concerns that are detrimental further down the line. 

Malaysia – Figure released today show that exports unexpectedly fell in March as manufacturers shipped fewer electrical products.

Africa- South African Judge Hans Fabricius has ordered prosecutors to investigate whether Zimbabwe’s President Mugabe’s government committed human rights abuses.

• Sudanese government appeals to Uganda in an effort to explore ways to mediate between North and South. 

• The IMF is to send letters to Malawi’s donor nations so that funds can be released to help support the countries foreign exchange reserves. 

• The World Bank has appointed Makhtar Diop, a Senegalese national with more than 25 years of development experience, as its new Vice-President for Africa. 

US$1.2990/eur vs 1.3018/eur yesterday. Yen 79.82/$ vs 79.86/$. SAr 7.915/$ vs 7.823/$. $1.615/gbp vs 1.615/gbp

Commodity News

Precious:

Gold US$1,592/oz vs US$1,632/oz yesterday – Gold is trading below US$1,600/oz for the first time since Jan following resurfacing fears that Greece might revise the previous regime on austerity.

• SPDR gold trust holdings remained at 1,275t (40.992moz) value US$65.657bn 

Platinum US$1,507/oz vs US$1,527/oz yesterday

Palladium US$618/oz vs US$645/oz yesterday

Silver US$29.06/oz vs US$29.80/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,084/t vs US$8,192/t yesterday – Copper is off for a 5th day, the longest streak since Feb 17, amid speculation Greece’s new government may cancel terms of the financial bailout and reconsider austerity measures.

Aluminium US$ 2,058/t vs US$2,077/t yesterday

Nickel US$ 17,346/t vs US$17,600/t yesterday

Zinc US$ 1,968/t vs US$1,996/t yesterday

Lead US$ 2,073/t vs US$2,105/t yesterday

Tin US$ 21,250/t vs US$21,585/t yesterday

Energy:

Nigeria- The army has arrested 21 Ghanaians and 5 Nigerians for alleged oil theft as they were caught operating two vessels in a main producing region.

Oil US$112.84/bbl vs US$112.33bbl yesterday – Oil made some slight gains in late trading yesterday, after a steep drop on Monday. Brent fell to US$110.53/bbl Tuesday.

• Further declines should be forthcoming in the next two months comfortably below US$110/bbl, but it’s unlikely that OPEC will assist in dropping the price back below $100/bbl. 

• Expect some declines today as the U.S.’s inventory data is released and is expected to show stockpiles rose last week coupled with boosted operations at refineries. 

• WTI crude is at US$96.73bbl this morning  with US Crude at US$96.62/bbl 

Natural Gas US$2.511/btu vs US$2.431btu yesterday- Prices rose to a two month high and continue to creep up.

• China is poised to spend billions of dollars in reforming its natural gas infrastructure and imports. 

• An investment boom is starting as state companies star buying up local distributors 

• China currently uses circa 70% coal for its energy needs and is set to double the share of gas by 2015 by 8% moving coal back to 60%. 

• More long term China plans to top 500bcm by 2030 which roughly equates to what the EU consumes now. 

Uranium US$51.60/lbs vs US$51.60/lbs yesterday- 

 UX consulting weekly spot as of 30th April 2012 was at US$51.75/lb (Unchanged). 

Coal $96.30/t Richards Bay, Newcastle $99.50/t, Rotterdam $98.80/t

• Coal miner SouthGobi Resources is in hot water with Mongolia’s anti corruption agency as shares in the company hit a record low on Tuesday. 

• The agency is investigating a third party believed to be responsible for a sharp fall. 

• This news comes at a time when China’s Chalco is poised to buy SouthGobi for $926m for a 57.6% stake. 

• The company has cooperated with the authorities and says that it believes SotuhGobi Sands LLC has no reason to believe it is subject to any investigation. 

• SouthGobi has blamed a bill that requires 51% Mongolian ownership of strategic assets. 

Other:

Iron ore – Teck Resources, a Canadian miner, is looking to step into the iron-ore industry and acquire a producing asset.

• “We won’t get into the iron-ore business through project development,” CEO said.

• “There is not a lot out there that’s very interesting. That’s not to say we’re not going to make acquisitions – some day we will.”

• The company is drawing 49% of its revenue from coal sales, with copper accounting for 27% and zinc – 24%.

Mining M&A – Ernst & Young (E&Y) say there is a string deal pipeline in the mining M&A sector despite a certain slow down in Q1 2012.

• The volume of M&A deals dropped by 34% yoy to 195 in Q1 2012, with the total value falling 20% to A$25.3bn.

• 10 deals over US$1bn were recorded in the first quarter which is nearly double the amount seen last year. However, the average deal size was only US$130m versus US$134m in Q1 2011 and US$150m in Q4 2011.

• Canada is reported as the top-ranked target destination by total deal value.

• China was the second most popular address for M&A deals primarily driven by domestic transactions amid industries’ consolidation.

• E&Y said Q1 saw 17 mining and metals listings, just over 50% of the number recorded in Q1 2011 and less than 28 listings in Q4.

• The Hong Kong Stock Exchange recorded 2 of the largest listings accounting for 83% of the aggregate IPO proceeds, while TSX and ASX accounted for most in volume.

CME, Group, NYSE Euronext and Intercontinental Exchange are among bidders for the LME.

Manganese – R1.5bn Kudumane manganese project kicked off near Hotazel in the northern Cape, South Africa.

• It Is the 4th new black-controlled manganese mining development under way in Kalahari, SA.

• The mine is scheduled to commence production in Q4 2012 with an initial rate of 1.5mt per annum, rising potentially to 2.5mt.

• The company will transport ore to Durban and railed to Port Elizabeth, in the Eatern Cape.

• An on-site smelter may be considered due to a lack of rail capacity. The decision on the construction of the plant is subject to a feasibility study.

• Ore will be smelted in China and in Malaysia and traded to such steelmakers as Nippon and Kobe (Japan), Hyundai (Korea) and Bao (China).

• Other manganese projects in the region include: Kalagadi Manganese (50% ArcelorMittal), R1.7bn open pit Tshipi Borwa mine currently being developed by black-controlled Ntsimbintle; and the R1.2bn Renova-backed United Manganese of Kalahari project.

• South Africa accounts for 80% of the world’s manganese reserves and resources, but supplies only 15% of the global production. 

• China, the world’s biggest manganese producer, produces more than 35% of the total supply with less than 5% of the world’s manganese reserves and resources.

Company News

African Minerals (LON:AML)  

London Mining (LON:LOND) 

• Sierra Leone – former junta leader who handed over power looks to stand again as a civilian president

• Elections scheduled for November

• Julius Maada Bio was one of a group of young officers who seized power in a 1992 coup and ruled until 1996.  To his credit Bio served as head of state for a few months stepping down after the elections and handing over power.

• Bio does not see existing mining contracts as fair for Sierra Leone and wishes to renegotiate these contracts according to a Reuters press report 

• Bio recently accused the ruling All People's Congress (APC) party of foul play, denouncing what he said was police harassment of some of his close advisers and a suspect shipment of heavy weaponry.

• This is a worrying development for a country which is struggling to rebuild its mining industry and economy

Centamin Mining (LON:CEY) Q1 gold production 

• Centamin Egypt has raised Q1 gold production 49,071oz versus 58,965oz in Q4 ‘11. 

• Sales $88m vs $86m in Q4

• Cash costs of $637/oz versus 473/oz in Q4 ‘11

• EBITDA rose to $60.5m versus $55m in Q4 ‘11 due to higher gold prices

• Profits fell slightly to $54.285m versus $56.081 yoy – no tax was paid

• EPS 4.962c/s vs 5.183c/s

• Underground mine saw record 71,815t of ore moved in the quarter 

• Plant throughput rose 38% to 1,020kt yoy 

• Record mill throughput of 415,604t in January

• Expansion - stage 4 to 10Mtpa on track to start commissioning in Q1 2013.  

• Capex – stage 4 = $99m 

• Cash and liquid assets $175 million at 31 March 2012 made up of $138.7m in cash, $28.2m as gold sales debtor and $8.2m, in listed equities. 

• No debt and no hedging

• Production guidance for 250,000oz maintained despite production issues

• Expect cash costs of $550/oz assuming fuel price subsidies are reintroduced and paid.  We understand these fuel subsidies have been removed and may not be reintroduced.

• Una Deriam: drilling starts in Ethiopia.

• Funding: the company appears well funded through its capital expansion program and looks set to raise gold production through the year from the slightly lower Q1 production figure.

Conclusion:  Costs rose as grades came in below expectations in both the underground and opencast mines.  While this is of some concern going forward, it feels typical of grade estimation issues at the mine.  While cash generation is good and production levels are very respectable costs will rise if the fuel subsidy is not reintroduced and some investors may be disappointed as this starts to eat into company profit.  

Glencore (LON:GLEN) Group under pressure to reveal links to Israeli Billionaire 

http://www.glencore.com/

• New anti corruption campaign is forcing Glencore to reveal links with Dan Gertler. 

• Glencore is coming under pressure from Anti Corruption group Global Witness, after investigations by the group prompt speculation that the Israeli obtained stakes in some of the Congo’s mines at heavily discounted prices. 

• Gertler is reportedly a close personal friend of Congo’s President Kabila. 

• The Times is reporting that a report published by Global Witness, raises concerns that some of Glencore’s joint ventures may not comply with international laws. 

• Furthermore the report implies that the Congolese have been secretly selling mining assets at knock down prices since 2010. 

• Glencore has been in the Congo since 2007. 

• The Company’s initial investment in the country was in Nikanor a miner seeking to turn around old copper projects. Gertler was involved in the deal also. 

• Global Witness is calling for Glencore shareholders to demand a full audit of the company’s activities in the country – warning that prior actions could “expose shareholders to corrupt practices”   

We refer readers to the recent BBC program on Glencore 

http://www.bbc.co.uk/programmes/b01gk8zc

Petra Diamonds (LON:PDL) Q3 production shows team is on target for 2m cts this year  

• Petra Diamonds reports its Q3 production and sales and interim management statement this morning

• Production rose to 622,509 carats for FY Q3 and 1,576,061 carats year to date

• Target production is for over 2m carats and looks eminently achievable on today’s figures. 

• Management target further growth to over 5m carats by FY 2019

• Sales rose to $98m for Q3 nearly equal to the entire first half of $101m. 

• Company entered into the FTSE 250 Index. 

• There are some concerns over the capital investment program and the risk associated with the undertaking of deep underground mining projects.  We feel that Petra’s expert management team is well set to manage these issues.

Conclusion:  the stock has been marked down by concerns over the Eurozone and general market and consumer sentiment.  We feel this selling has been overdone and that the market for gem quality diamonds is more robust than some expect.  

Morning View

European banking crisis threatens 

A rerun of the banking crisis and potential break away of Greece from the Eurozone should be good for gold but may see copper and other industrial metals weaken

• France elects a new socialist president 

• Germany warns that France that it is not open for Eurozone renegotiation 

• Greece turns to hard line and threatens to pull out of the Euro and effectively drop imposed austerity measures

• The scene is set for a showdown and the ECB will have to give further ground if Athens is not to burn on local unrest

• Spain is a festering wound, too big to fail, to weak to succeed.  Southern Europe is far different from Northern Europe and is struggling to keep pace in time of crisis

• Spain close to bailout Bankia, Spain’s third largest bank by assets – Spain had previously pledged that no further state funds would go into the banking sector

Economic News

Europe – After the events of the weekend the main question is: How will the elections in France and Greece change the dynamic of the Eurozone leadership and the fiscal compact. The simple answer is that it is too early to tell. 

• The new French President Francois Hollande will have to wait until the legislative elections to establish the level of his power. 

• In Greece, another round of elections will need to take place probably in June. 

• Yesterday Angela Merkel issued a warning to Greece to stick to reform plans and budget targets. 

• “It is of the utmost importance that the programmes that we agreed on with Greece continue to be implemented” 

• Despite the uncertainty there is little chance that the IMF and European officials will delay the aid scheduled for the end of the month. 

• German industrial production data will be released later today. Forecasts suggest that month on month industrial production increased by 0.8% after a 1.3% decline in February. 

• Yesterday figures showed that Spanish industrial output declined by the most in more than two years. 

• The FT is reporting today that Spanish officials are preparing to inject further funds to the country’s struggling banking system despite previously stating that banks would not be supported. 

US –The markets yesterday managed to shrug off concerns that emerged from Friday’s jobs report. 

• Figures released by the Federal Reserve yesterday showed that consumer borrowing in the US surged in March by the most in more than a decade. 

• This suggests two things: Either the population is becoming more optimistic about the economy or the youth population is having difficulty finding work and requires loans in order to fund education. 

• Optimism figures for small businesses will be released later today. Forecasts suggest that optimism increased in April from March. 

China – The IMF has warned that the risk of over capacity in China in the coming years remains as investment rates will likely remain elevated. 

• Forecasts from the IMF indicate that spending on factories and infrastructure will probably remain above 45 percent of GDP through 2017. 

• The fears are that a continued high level of investment is creating the potential for vulnerabilities to be created in the country. 

Australia – Figures released today show that the trade deficit widened in March to the largest level in almost 2.5 years on the back of a rise in unemployment. 

• Imports outpaced export by A$1.587bn from a revised A$754m deficit in February. 

• The figures are prompting speculation that policy makers will extend interest rates cuts as the economy slows and inflation eases. 

Japan – Finance officials have stated that they are watching the yen for speculative currency moves – boosting expectations that should the yen strengthen any more, officials will intervene. 

India – The country’s finance Minister has retreated on tax proposals in an attempt to rebuild investor confidence in the country’s economy. 

The rules to reduce the level of tax avoidance in the country will be delayed until the fiscal year beginning April 2013. 

Russia – Yesterday Vladimir Putin was sworn in for his third term as President. 

• A Moscow based polling company reports that 53% of Russians trust Putin, with another 24% saying they partially do. 

• Half of Russia’s budget revenue comes from oil and gas. The industry contributes around 4% of the average 7% growth over the last decade. 

UK – According to a report by the CBI optimism among smaller manufacturers rose for the first time since mid 2011. 

• The announcement is prompting a number of bullish forecasts – suggesting that the economy could well return to growth in Q2. 

• Figures released by the Royal Institute of Chartered Surveyors indicate that property prices throughout the country – except London – have started to slide again. 

US$1.3018/eur vs 1.3152/eur last week. Yen 79.86/$ vs 80.19/$. SAr 7.823/$ vs 7.713/$. $1.615/gbp vs 1.619/gbp

Commodity News

Precious:

Gold US$1,632/oz vs US$1,634/oz last week – Gold is off this morning on concerns election in France and Greece may change commitment to austerity measures.

• Mainland China’s gold imports from Hong Kong increased more than 6 times to 135,529kg in Q1 compared to 19,729kg last year, according to the Census and Statistics Department of the Hong Kong government.

• China does not publish gold-trade data.

• Gold shipments climbed 59% mom to 62,913kg in Mar.

• Imports from Hong Kong more than tripled to 431,226kg last year.

• Chinese demand for gold has been supported by rising incomes and curbs in the real estate market.

• Increased imports may signal the state is accumulating gold reserves. The information on reserves is not disclosed regularly and was last made public more than 2 years ago, stating them at 1,054t.

• Peruvian gold export revenue increased 24% yoy to US$2.57bn in Q1 on higher prices, the National Mining Society said.

• India has withdrawn the excise duty on precious metals jewellery, Finance Minister Pranab Mukherjee said. The ministry was forced to re-consider the levy on jewellers following a 21-day industry wide strike in Apr.

• SPDR gold trust holdings increased to 1,275t (40.992moz) value US$67.349bn from 1,274t (40.963moz). 

Platinum US$1,527/oz vs US$1,539/oz last week

Palladium US$645/oz vs US$662/oz last week

Silver US$29.80/oz vs US$30.08/oz last week

Rhodium US$1,390/oz vs US$1,390/oz last week

Base metals:

Copper US$ 8,192/t vs US$8,260/t last week – Copper prices were dragged don by rising US dollar.

• Chile’s copper exports totalled US$$3.58bn in Apr, up 57.3% from the US$2.27bn last year.

• Jan-Apr exports were up 34.2% yoy and stood at US$14.05bn. That represents more than 90% of Chile’s total mining exports of US$15.56bn in the corresponding period.

Aluminium US$ 2,077/t vs US$2,094/t last week

Nickel US$ 17,600/t vs US$17,585/t last week

• Vessels carrying nickel have not been permitted to sale from the Indonesian island of Sulawesi since May 6, when the preciously announced ban on raw ores exports took effect.

• The law applies to 15 types of mineral ores: copper, lead, nickel, gold, silver, zinc, chromium, bauxite, manganese, molybdenum, Platinum, antimony, iron ore, sand iron, and tin.

Zinc US$ 1,996/t vs US$2,007/t last week

Lead US$ 2,105/t vs US$2,097/t last week

Tin US$ 21,585/t vs US$21,900/t last week

Energy:

Oil US$112.84/bbl vs US$116.16bbl yesterday – Oil futures took a tumble yesterday with Brent hitting below $114/bbl.

• US Crude and WTI both reached below $98/bbl; their lowest since February. 

• Saudi Arabia is reportedly pumping 10mbbl/d. Stockpiling close to the fastest rate in 31 years in an effort to help reduce world oil prices. 

• Saudi’s oil minister said they will discuss raising output targets at next months OPEC meeting 

• Hilary Clinton is putting pressure on India as Iran delegates seek contracts from its biggest buyer. 

• An oil trader faces a US trial after allegedly buying and stockpiling millions of barrels of oil back in 2008 

• It is said that he used a group of clients netting them US$50m in illegal profit. 

• Tighter regulation on the commodities market is a key issue for the Obama regime of late. 

• Tullow Oil shares started climb this morning as the company announced it had struck new reserves at its onshore Ngamia-1 exploration well in Kenya. 

• WTI crude was  at US$97.23bbl this morning  with US Crude at US$97.43/bbl 

Natural Gas US$2.431/btu vs US$2.439btu yesterday- U.S. prices have rose 2.5% yesterday signalling heightened demand from power utilities coupled with recent output cuts.

Uranium US$51.60/lbs vs US$51.45/lbs yesterday- 

UX consulting weekly spot as of 30th April 2012 was at US$51.75/lb (Unchanged). 

Coal $97.00/t Richards Bay, Newcastle $100.45/t, Rotterdam $93.25/t

• South Africa’s Richards Bay exported 5.17mt in April down from 6.24mt in March. 

• Australia Newcastle port coal exports have averaged 2.7m mt/week for the past six weeks. 

Other:

Tungsten prices rise in China through May as Minmetals lifts prices by 3.3% (Metal Bulletin)

Jiangxi province, China’s main production hub for tungsten ore, raised production to 15,644 tonnes in Q1 up 32% yoy according to local government stats.

Mining tyre and truck supply should match the industry’s demand by 2014-2015 onwards, as mining equipment manufacturers boost their capital budgets, CEO of Caterpillar said.

• “In 2009-2010 we doubled our capital expenditure every yeat. We have doubled truck production already and we will double it again in the next few years”.

• The company plans to invest the largest share of its US$4bn capex programme on mining-related production.

• Weak technical training at schools was named as one of the challenges of the business as the company expects to hire 20,000 up to 2020.

Company News

Frontier Mining (LON:FML) Benkala copper mine hits 8,000tpd target

• Frontier have announced that the Benkala copper mine has reached its first milestone of 8,000tpd.

• Production from the mine is modest for 2012 at 3,500 – 5,000t of copper cathode with an initial design capacity of just 7,000t per year.

• The market should see this as a precursor to a larger project in time which may be financed from the cash flow and bank lending.

• Expansion to 30,000tpa of copper cathode may be possible in later years

• The team hope to extend the life of the SXEW project 7-11 years through the recent acquisition of South Benkala. 

• Previous estimates by Soviet geologists of the resource base at South Benkala are for a total ore reserve of 175,120 Mt with 609,600 t of contained copper using a 0.25% copper grade. 

Conclusion:  Today’s good news feels like a rare positive announcement and should be positively greeted by the market.

Metals Exploration (LON:MTL) Q1 report shows debt funding progress for Runruno mine

• Metals Exploration appear close to finalising their debt funding package for the completion of the Runruno gold mine in the Philippines.

• Today’s Q1 quarterly update statement comments that legal documentation is in progress for the debt funding implying that the funding package is nearing completion.

• Earthworks at the Runruno mine are ongoing are around 50% complete, are at ‘design activity levels’ and the ‘earthworks contractor is now at full strength’.

• The early start of the site earthworks and causeways along the Sulong River should accelerate mine construction and add value to the business.

• Other exploration to the south of the Runruno project continues to show high grade gold and molybdenum results.

• Stepout drilling at Runruno indicates potential for a ‘8-12m thick zone of flatly dipping gold and molybdenum mineralisation grading between 2-3 g/t Au extending south of the Runruno pit for more than 600m to the Tulingan prospect area and perhaps further south’.  This could present an unusual bulk mining opportunity. 

• The results show 1.08g/t to 1.47g/t with some near surface intersections

• Magnetite Creek drilling shows interesting copper and gold results which may indicate the presence of a reasonably mineralised porphyry structure in this area.  A recent result of 0.63% copper and 0.19g/t gold suggests that this may result in an economic porphyry if the mineralisation shows consistency with these results.

• Leighton’s the major mining construction and engineering group are working through the process plant design for the early start of plant construction once funding is fully in place.

Conclusion:  Metals Exploration continue to push ahead on construction of the Runruno mine and appear close to finalising the remaining funding plant and mine.  Exploration is also showing interesting potential for expansion and for further discovery. 

Miners are quiet today – maybe its because it’s a Friday or maybe its because markets are subdued

- US Payroll numbers expected today

- There is a distinctly bearish feel to the market this week (sell in May and go away)

- Market sentiment can turn on a sixpence – if you can remember what sixpence is then you are older than I!

US Auto sales breathing new life into the US automotive sector with GM and Ford posting new profits driven by the sale of smaller and more energy efficient cars

- Fuel prices are such that consumers are now persuaded their much loved gas guzzlers in favor of lower cost hybrids and smaller cars focusing on fuel economy rather than size.

- Smaller cars may use less steel but the hybrids use significantly more copper and other metals

- A significant move to more fuel efficient vehicles may lead to a reduction in oil prices in time.

Mali – former military commanders say that Bamako is under control

- Question is which military is running Mali?  

- A report on Aljazeera suggests that the former regime is back in charge and that neighboring countries are concerned that Mali could become “a drought-stricken region, long plagued by arms and drug trafficking and kidnappings - will become a haven for fighters planning attacks across the region.”

- A return to more normal military control in Mali should be good news for Randgold Resources

Australian costs continue to rise as seen in continuing statements on operating costs in the region

- Results from British Gas, the leading global energy company yesterday showed how rapidly rising A$ costs and the strength of the A$ is biting.

- The company’s LNG project QCLNG (Queensland) saw sanctioned investment rise from $15.1bn to $20.4 bn – a 35% rise.

- A 19% rise was due to “local” market effects, increased cost of compliance with regulatory processes and some scope change to the project.

- The balance was due to a 20% appreciation in the Australian dollar.

‘Bright Food’ (China) buy Weetabix from Lion Capital for £1.2bn – is anything not sacred in this country!

- Weetabix is Britain’s best selling cereal accounting for 7% of all cereal sales

- Apparently the new owner sits down to a bowl of two weetabix every morning – he likes the product so much he bought the company!

- Toasted Weetabix can be ‘topped with melted cheese, jam or nut butters’ – not sure their tastes are the same as our own judging by the last comment

Economic News

Europe – The ECB held its benchmark rate at 1% yesterday.

• The Bank forecasts inflation to remain above its target rate of 2% for the rest of 2012 before slowing next year.

• Spain saw its yields rise on 3- and 5-year bonds auctioned yesterday for the first time since its recent credit rating downgrade to BBB+ in Apr.

• The government paid 4.96% on 5-year bonds, up from 3.69% at the previous auction. 3-year bond yields increased to 4.03% from 2.62%.

US – Weekly jobless claims dropped 27,000 to 365,000 (vs. 379,000 expected), the largest fall since May last year, the Labour Department said yesterday.

• Services industry growth rate slowed down to a four-month low of 53.5 in Apr from 56 in Mar (vs. 55.3 expected).

• All eye on Apr non-farm payroll figures released later today. Expectations are for the US economy to add 160,000 jobs last month, up from 120,000 in Mar.

• Unemployment rate is forecast to remain at 8.2%.

Australia- Australia’s central bank lowers forecast for growth and inflation following this weeks cut in interest rates.

China –.The benchmark index rose to a seven week high on speculation that government will step up efforts to avoid deeper economic downturn. 

Brazil– President Dilma Rouseff has taken a bold and politically sensitive step and cut the guaranteed return on a popular savings account called Poupanca in a so-called breakthrough effort to lower the country’s interest rates.

• Brazil’s monetary policy committee is set to meet later this month as the Banco Central do Brasil is poised to slash rates again to 8.5% which is less than a 15-year low of 8.75%

Philippines – April CPI rose 3% from previous year in April  compared with 2.6% in March due to increases in food, clothing an house prices.

Indonesia – The government will impose a 20% tax rate of 14 mineral ore exports including copper, gold and nickel effective from Sunday.

• Duties are not extended on coal shipments that would be ruled on separately, mining minister said yesterday.

• Currently, there are no export taxes on metal ores.

US$1.3143ur vs 1.3138/eur yesterday. Yen 80.17 vs 80.25/$. SAr 7.718/$ vs 7.734/$. $1.618/gbp vs 1.618/gbp

Commodity News

Precious:

Gold US$1,634/oz vs US$1,645/oz yesterday – Gold prices are heading for a fourth-day drop on the back of rising US currency as the ECB said the economic outlook for the region is subject for downside risks amid ongoing sovereign debt crisis.

• US Mint sales of American Eagle reached 20,000oz in the first week of May, the rate equivalent to sales in Apr.

• SPDR gold trust holdings remained at 1,274t (40.963moz) value US$67.058bn. 

Platinum US$1,539/oz vs US$1,557/oz yesterday

• Thomson Reuters GFMS reported Platinum market remained in its seventh consecutive gross surplus in 2011.

• Surplus dropped by 12% last year to 735,000oz.

• Narrowing demand/supply gap is attributed to a 7% increase in fabrication demand that reached a three-year high.

• Chinese demand in jewellery sector was solid as prices fell sharply in H2 2011.

• Autocatalyst related demand advanced 4%, limited by an ongoing substitution with palladium, modest auto production in Europe and the tsunami/earthquake disruption in Japan.

• Mining production was driven by a recovery in Canadian supply as Vale’s operations ramped up at the Lac des Iles mine.

• Prices are forecast to range in US$1,475-1,775/oz over the remainder of the year.

Palladium US$662/oz vs US$664/oz yesterday

• Palladium market recorded a deficit in 2011, GFMS said.

• Market deficit halved to 313,000oz in 2011.

• Autocatalyst sector demand increased 5% to an 11-year high on rising use in gasoline engines and substitution-related gains at the expense of Platinum.

• Jewellery demand performed poorly, especially in China, declining to an 8-year low.

• Despite a smaller deficit in the market prices recorded a record high annual average of US$734/oz in 2011.

• Palladium is forecast to trade in a US$575-775/oz range this year.

• The metal is likely to benefit from rising investment demand with a limited downside as demand in autocatalysts is relatively well spread across various geographical regions and is less exposed to Europe, as opposed to Platinum.

Silver US$30.08/oz vs US$30.41/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,260/t vs US$8,271/t yesterday – Copper is little changed today as market is waiting for Apr employment data in the US.

• Escondida operations are unaffected by protests by contract workers demanding pay rise, a spokesman of BHP Billiton said.

• Chinese refined copper consumption may increase 5.2% per annum through 2015 down from 15% average from 2005 to 2010, according to Minmetals estimates. Consumption currently “far exceeds” growth in production, the company said.

• LME monitored inventories dropped 37% this year to the lowest level since Oct 2008.

• It is reported one company holds 50-79% of all stockpiles.

Aluminium US$ 2,094/t vs US$2,099/t yesterday

• Chinese aluminum demand may increase 8.6% per annum through 2015 down fro 17.5% average from 2005 to 2010.

Nickel US$ 17,585/t vs US$17,423/t yesterday

Zinc US$ 2,007/t vs US$2,014/t yesterday

Lead US$ 2,097/t vs US$2,119/t yesterday

Tin US$ 21,900/t vs US$22,350/t yesterday

Energy:

Australia competition and consumer commission starts formal investigation over sharing price information between petrol retailers. 

Oil US$116.16/bbl vs US$119.45bbl yesterday – Oil futures fell sharply yesterday continuing this morning with off a slurry poor world economic data.

• With U.S. Payroll report due out today, record high U.S. inventories coupled with OPEC announcing efforts to reduce oil prices signal further declines that could see Brent fall below $110/bbl before the week-end. 

• WTI crude US$102.60, US Crude US$102.57 

Natural Gas US$2.439/btu vs US$2.478btu yesterday 

Uranium US$51.45/lbs vs US$51.95/lbs yesterday- 

 UX consulting weekly spot as of 23rd April 2012 was at US$51.75/lb (+$0.50). 

Coal $97.30/t Richards Bay, Newcastle $100.80/t, Rotterdam $93.55/t

• Indian government poised to auction coal-mining licences publicly for the first time. 

• Auctions will replace the historical process whereby a government panel selects state-owned companies or private bidders at cut-prices for coal blocks. 

• As the allocation will be more transparent it could attract a lot more foreign investment. 

Other:

LME is considering expanding a warehouse network in China targeting a fast developing region.

• The exchange owns more than 600 storage sites around the globe.

• The plan ”would help to lower logistics fees, and facilitate deliveries. However, regulators may have their own considerations,” the China Nonferrous Metals Industry Association said.

CME delayed the implementation of higher margins by 90 days announced May 2. The rule will be effective on Aug 5.

Company News

Discovery Metals (ASX:DML) Shares fall 8.8% in unexplained move

http://www.discoverymetals.com/IRM/content/projects_boseto_images_jan12.html

- A Director buying notice reported Niall Lenahan, a director of the company bought 50,000 shares paying A$1.72

- Niall Lenahan the ex cfo of Riversdale Mining limited joined as a non-exec director on 2nd April

- We suspect a poorly executed order and profit taking is responsible for the sudden share move

- We hear from investors that there also seems to be some feeling in Perth that African assets have been generally overvalued when risk factors are applied.  We see this as symptomatic of the market mood in general and do not see this as forcing such a marked move in Discovery Metals stock.  

- If anything African assets should look good in comparison with higher-cost Australian operations where mine inflation is forcing the rescue and bankruptcy of some higher costs mining assets.

- It is possible that deleveraging of some investor portfolios and calls for cash elsewhere may prompt some selling in the Australian market of better quality and more liquid stocks.

- Discovery Metals is close to commissioning its new Boseto copper mine in Botswana.  

- Botswana is an island of zero or very near-zero corruption and is known as the Switzerland of Africa by many investors.  It is incredibly mining friendly as the government is looking to diversify away from its dependency on diamond mining and its joint venture with DeBeers.

- We would not expect significant cost inflation in Botswana.  The Botswana Pula is linked to the SA rand but generally devalues periodically to help maintain a lower cost base.

- Please follow the link above to see photos of progress at the Boseto site and camp

- The project is substantially completed and should be close to running its first commissioning 

- While the Boseto is remote in Western terms it is relatively easy to access for contractors in Southern Africa and should not suffer the logistical challenges seen in East Africa or the DRC.

Conclusion:  These are volatile times for mining shares but market volatility and some potential distressed selling may lead to good opportunities to buy oversold shares.  We expect the shares to rerate on confirmation of copper concentrate production in the next few months

Mining this week:

Antofagasta (LON:ANTO) Q1 2012  Production 

Anglo Pacific (LON:APF) Update of Mount Ida Magnetite Royalty Acquisition

Energio (ASX:EIO) Drill Results for the Agbaja Plateau Iron Ore Project

Ovoca Gold* (LON:OVG) New CEO Appointment

Randgold Resources (LON:RRS) Not such a strong start to the year

Beacon Hill Resources (LON:BHR) Scoping Study Results for Magnesite Project in Tasmania

Ovoca Gold (LON:OVG) management issue

Ariana Resources* (LON:AAU) Red Rabbit update

Carbine Resources (ASX:CRB) mineralisation shows continuity at Goussirdou prospect

DiamondCorp* (LON:DCP) Appointment of Non-Executive Director

Metminco (LON:MNC) Quarterly Report

Solomon Gold* (LON:SOLG) Newmont jv drilling update

Xstrata (LON:XTA) First Quarter Production and IMS

Discovery Metals* (ASX:DML) Quarterly Update

Kagara (ASX:KZL) Administrators called in as Australian market fails to refinance Kagara Mining

Sirius Minerals (LON:SSX) Completes Scoping Study

South Boulder Mines (ASX:STB) Quarterly Update on the Colluli Potash Project in Eritrea

Toledo Mining (LON:TMC) Q1 Shipments of nickel laterite ore amount to 103,000wmt

Morning View

Margins look good for gold and copper miners 

• These stocks look good value in a market which has been depressed more by sentiment than by margin erosion

• The better miners are able to hold costs back despite strong inflationary pressures in the industry

• Cash surpluses and strong physical demand for copper and gold are driving miners to develop new projects despite rising capital costs.

• Rates of return still look great and low cost finance is readily available to diversify funding risk if required

• Gold and copper prices look relatively well settled

• Copper prices are still strong while gold has held well despite pullbacks from $1,900/oz seen in August last year.

• Gold may not be driven by the extreme financial strife seen last year but central bank buying activity is holding prices at good levels and inflationary pressures persist 

• Key stocks in the sector look oversold and new investment ensures these companies remain set to be growth stocks for some time.

Economic News

Europe- EU finance ministers were unable to agree a final deal on implementation of Basel III rules in the early hours of Thursday morning.

• Market expectations are for the ECB to keep its benchmark interest rate at a record low 1% today.

• Spanish  government will auction 3 and 5-year notes today.

US – The economy added 119K jobs in Apr, the slowest pace since Sep, versus 201K in Mar and 170K expected, according to ADP Employer Services estimates.

• ADP provides payroll services to many corporations in the country. The estimate may offer a sense of the official employment data published 2 days after.

• Initial jobless claims are forecast to come in at 379K in the week ended Apr 28 compared to the previous estimate of 388K.

• Services PMI is forecast to drop to 55.3 in Apr from 56.0 in Mar. 

• Treasury Secretary Tim Geithner says the US and China must works together supporting global markets, IP and the financial system citing ‘mutual interest’.

Australia- Services sector reports its biggest slump in three years in April.

• The additional poor performing sector is increasing the chances that the Reserve Bank of Australia will cut interest rates this week. 

New Zealand – Unemployment climbed to 6.7% in Q1 this year, the highest reading since 2010, compared with a revised rate of 6.4% in Q4 last year and 6.3% expected.

• Central bank is likely to keep the benchmark interest rate unchanged at 2.5% despite a risk to stimulate inflation. 

China – Services industry PMI came in at 56.1 in Apr compared with 58 in the previous month.

India – Services industry PMI rose to 52.8 in Apr from 52.3 in Mar.

UK – Non-manufacturing PMI were worse-than-expected at 53.3 in Apr versus 55.3 in Mar.

• House prices dropped by 0.2% mom (-0.9% yoy) to an average of £164,134 in April after tax breaks for first time buyers expired.

• BoE reported better-than-forecast numbers on UK mortgage approvals in Mar.

Indonesia – The government will proceed with the imposition of a ban on exports of ores as planned with details of the rule to be issued on May 6.

Mozambique – Public tender for the upgrade of the Sena rail line linking Tete coal province and the central port of Beira will start this month.

• The government Is looking to increase capacity of the railway to 12mt from current 6mt.

US$1.3138/eur vs 1.3221/eur yesterday. Yen 80.25/$ vs 80.55/$. SAr 7.734/$ vs 7.732/$. $1.618/gbp vs 1.623/gbp

Commodity News

Precious:

Gold US$1,645/oz vs US$1,656/oz yesterday – Prices are down this morning as the unemployment in the euro region increased to the highest in nearly 15 year and manufacturing dropped for a ninth month driving the dollar higher against major currencies.

• Capital costs of the largest gold miners are rising at a faster rate than earnings for a second year in a row.

• Barrick, Newmont and Goldcorp, the largest gold products by market value, plan to spend US$11.8bn this year on new projects and expansion of existing operations, 24% more than in 2011.

• Operating profit is forecast to rise by only 12% in 2012, according to Bloomberg estimates.

• SPDR gold trust holdings remained at 1,274t (40.963moz) value US$67.479bn. 

Platinum US$1,557/oz vs US$1,565/oz yesterday

Palladium US$664/oz vs US$676/oz yesterday

Silver US$30.41/oz vs US$30.87/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,271/t vs US$8,388/t yesterday – Copper is little changed today as market awaits the ECB decision on benchmark interest rates. Prices dropped 1.6% yesterday on poor economic data from the US and Euro zone.

Aluminium US$ 2,099/t vs US$2,115/t yesterday

Nickel US$ 17,423/t vs US$17,805/t yesterday

Zinc US$ 2,014/t vs US$2,045/t yesterday

• Korea Zinc, the world’s third-largest producer of refined zinc, recorded a 8.3% yoy decline in net income to 170.8bn won in Q1 versus 186.1bn won forecasted.

• The company said profits may grown in Q2 on stable prices and increased sales volume.

• Average zinc price dropped 15% from the previous year and cash lead fell 20%.

• Zinc and lead accounted for 42.7% of company’s total revenue in 2011.

Lead US$ 2,119/t vs US$2,163/t yesterday

Tin US$ 22,350/t vs US$22,500/t yesterday

Energy:

Oil US$118.25/bbl vs US$119.45bbl yesterday – Brent declines signalling caution ahead of U.S employment report due today.

• Kuwait Oil Tanker Co. is to start building six new oil & gas tankers in 2014 as well as receiving a further nine as part of a deal with South Korea shipping group Daewoo. 

• The deal is part of a modernisation programme of its fleet for crude exports. 

• Kuwait’s output is currently around 3mbbls/d with plans to increase to 4mbbls/d by 2020 

• WTI crude US$105.00, US Crude US$105.10 

Natural Gas US$2.478/btu vs US$2.478btu yesterday – 

• Abu Dhabi National Energy Co. (TAQA) the state-owned oil & gas utility firm has been given the go-ahead from the Dutch government to build the gas storage facility in the Bergermeer Field. 

• The Netherlands plans to become a gas hub when it stops exporting gas in 2025. 

• TAQA is also has significant interests in gas production projects in the North Sea. 

Uranium US$51.95/lbs vs US$51.75/lbs yesterday- Calls for beneficiation of uranium should be a enrichment should be informed on a global market and not just domestic a reports suggests.

• Uranium demand has stagnated and many projects have been shelved following the Fukushima nuclear disaster. 

• However, China appears to be gaining momentum with 14 plants currently in operation with many more planned. 

• North Korea has stockpiled enough weapons-grade-uranium to build six nuclear bombs according to reports. 

 UX consulting weekly spot as of 23rd April 2012 was at US$51.75/lb (+$0.50). 

Coal $96.70/t Richards Bay, Newcastle $100.45/t, Rotterdam $92.20/t

• Rio Tinto is reportedly reviewing its coal expansion plans, blaming investor pressure for greater ROI and increasing capital costs 

• Rio’s Mount Pleasant is one such mine that could be a target for this review. 

• Rio CEO Tom Albanese is expected to highlight concerns at a Macquarie Equities conference today. 

Other:

Rio Tinto expects global demand for copper, iron ore and coal to increase until at least 2025 led by rising global incomes. The company is upbeat ion aluminum demand in the long-term.

CME Group, the world’s biggest futures exchange, will raise margins for non-hedged positions effective May 7.

Company News

Antofagasta (LON:ANTO) Q1 2012  Production 

• Q1 production for copper was 162,900 tonnes in Q1 2012 up 25.5% against Q1 2011 reflecting the start of production at Esperanza. 

• On a quarter on quarter basis production is down as a result of planned maintenance and lower grades at Los Pelambres. 

• Esperanza had lower throughput in Feb and March as result of damage to a feed conveyor which is currently being repaired this will result in a full year contribution from Esperanza coming in at the lower end of the production range for the full year at 160,000 – 170,000 tonnes of copper and 240,000 – 260,000 oz of gold. 

• Throughput at Esperanza which was achieving 86,000 tonnes per day close to company targets fell to 62,000 tonnes at day during conveyor repair and is now back at 80,000 tonnes a day in April. 

• The other three mines are likely to come in line with previous forecast. 

• Although down due to the repair work and lower recoveries, Esperanza continues to make a valuable contribution in terms of gold production with 63,500 oz produced at the group level in Q1 2012. 

• Cash costs were helped by higher by product credits with cash costs at 98.1 cents/lb a 9% reduction year on year and largely unchanged on a quarter on quarter abiss. 

• Excluding by-product credits costs were higher at 163.6 cents/lb up 8% from the previous quarter at 151.3 cents/lb reflecting higher on site and shipping costs. 

• The company should benefit from a positive provisional pricing adjustment with respect to copper sales of US$181.1m for Q1 2012, a negative $0.5m for moly and a positive adjustment for gold at US$0.3m. 

Conclusion: While Esperanza continues to have issues related to production impacting short term production numbers, there is still production growth coming out of the company with cost pressures being managed and helped by healthy by-product credits. Given the disappointing copper production numbers coming out of the large diversified miners, exposure to copper growth is still worth having.

Anglo Pacific (LON:APF) Update of Mount Ida Magnetite Royalty Acquisition

• Anglo Pacific has completed its first tranche of the 50% acquisition of the Mount Ida 1.5% royalty from Red Rock Resources. 

• Tranche 1 of US$6m for a 0.3% GRR has been settled by payment of US$3.89 m in cash and the allotment of 416,161 in shares which will rank pari passu with existing shares. 

• Tranche 2 of US$4m payment for a further 0.225% will follow results of a positive DFS, a formal decision to mine and 20% of the pre-production capex outlined in DFS being provided for. 

• Tranche 3 of US$4m becomes due for a further 0.225% when commercial production begins giving the total acquisition costs of US$14m. 

• The base case for Mount Ida is for a 20 year mine life mining 25 mtpa producing 10 mtpa of magnetite concentrate has a capex projected of $1.58bn and operating cost of $62.7 per tonne. 

• For a concentrate price of A$110 per tonne, the project shows an 19.8% IRR. 

• The concentrate has 68-69% Fe low silica, no phosphorous, aluminium oxide and sulphur. 

• The high operating cost to produce this concentrate should be partially mitigated by the concentrate quality which should realise in higher prices. 

Discovery Metals* (ASX:DML) Increase in Resource at Plutus Deposit

• The positive newsflow at the company continued yesterday with a 29% upgrade at the contained copper at Plutus Deposit at the Boseto Copper Project. 

• The new mineral resource estimate is for 87 Mt of 1.4% copper and 13.2 g t silver against 67.4 Mt of 1.4% copper and 14.7 g/t Ag. 

• Measured and Indicated resources are up 66% to 19.2 Mt of 1.4% copper and 13.6 g/t silver. 

• The Plutus deposit is located adjacent to the Boseto copper concentrator with a strike length in excess of 28 km. 

• The mineralisation extends to 450 m below surface and still opened at depth and along strike. 

• A scoping study is currently being planned and is likely to commence in 2013 and will leverage on the recently completed DFS at Zeta. 

Conclusion: The positive momentum at Discovery continues as the company comes into production at the Boseto project. While technical risks rise as commissioning and production start for their main project, there is now increasing value in the other deposits at the project with the prospect of underground mining at the Zeta Deposit and now potential in Plutus.

*Fairfax acts as corporate advisor to Discovery Metals

Energio (ASX:EIO) Drill Results for the Agbaja Plateau Iron Ore Project

• The company announced drill results from its iron ore project in the Kogi State in the central region of Nigeria. 

• The exploration target for the project is 1-2 bn tonnes of  BIF magnetite mineralisation of 30% Fe with a target to achieve a JORC resource in 2012. 

• The results are from 4 holes from a reported 53 holes and 2098 samples. 

• The results from the 4 holes received show the same profile as the previous 49 holes with Fe content of between 30-50%, low phosphorous, moderate to high silica and aluminium over the range of results. 

• The company’s website provides more detail on the results and areas of the deposit that have been drilled. 

• The team pursuing this project include Dr Ian Burston (Chairman) who has a long history in the iron ore business and recent success with the African Iron Mayoko Project in Republic of Congo. 

Ovoca Gold* (LON:OVG) New CEO Appointment

• The company has clarified that Kirill Golovanov has been appointed as CEO following the resignation of Tim McCutcheon. 

• Mr Golovanov became a director of Ovoca Gold on 12 April 2012 and prior to that was the company’s corporate secretary and head of its Russian office. 

• He played a major role in the development and subsequent sale of the Goltsovoye silver deposit. 

• He has extensive experience in mining and corporate law and or working in Russian companies such as Gasprombank and Vneshekonombank. 

Conclusion: Mr Golovanov’s appointment to the board brings useful experience as the time when the company has received its first Exploitation Licence at Olcha and is pushing forward in its activities in Russia.

*Fairfax IS plc acts as UK broker to Ovoca Gold

Randgold Resources (LON:RRS) Not such a strong start to the year

• Randgold Resources sales fell 13% to $271,779 in Q1 versus Q4 2011.

• Gold production rose 19% yoy to 165,443oz but fell 13% on Q4 ’11.

• Profit from mining fell to $152m for Q1 from $185m in Q4 ’11 

• Cash costs rose 10% to $751/oz versus $682/oz.

• Mali coup issues could see cash costs rise further.

• Grades fell by 24% at the Loulo-Gounkoto gold mining complex to 3.5g/t.

• Basic earnings per share fell to 97c/s from 133c/s in the previous quarter.

• Cash and cash equivalents pulled back to $457m from $488m in Q4 ’11 due to capital expenditure.

• Mali political situation appears to be worsening although reports from the region are sketchy

• Kibali in the DRC – construction saide to be started on schedule.  Randgold holds 45% of the project alongside AngloGold.  Lets hope that the project does not suffer a major invasion of artisanal miners as seen at AlgloGold’s New Mongbwala Gold mine to the South of Kibali in the DRC.

Conclusion:  We view Randgold as overvalued in comparison to other gold stocks in the London market although its track record suggests that it may remain as the preferred gold counter by default for some time to come.

Morning View

Market evolution – expansion of ‘alternative finance’

• More money is becoming available in alternative forms in the mining sector 

• Increasing funding through royalty deals, offtake agreement, metal streaming deals, equity drawdown facilities and other  and other innovative investment schemes

• The good thing is that the availability of ‘alternative’ forms of finance is good for confidence and is good for funding companies when equity markets run shy of financing miners.  

• Some finance packages limit dilution while others have been seen bailing out companies through short and longer term bridging finance. 

• We expect to see more finance packages completed through the addition of alternative schemes and for this to enable the expansion of production from the smaller / mid cap sector.

• The proliferation of these financing schemes feels symptomatic of a market where traders and consumers are increasingly desperate to lock in production ranging from copper metal and concentrates to tungsten APT and ilmenite for titanium production.  

• While investors may buy and sell in accordance with the winds of economic change, consumers are locking in production for longer-term security of supply on the assumption that the ‘sky will not actually fall in on our heads’ (quote Asterix) 

Australian cost inflation – could be about to get a whole lot worse for some miners

The Australian government seems to have forgotten why their economy and currency has been so strong

• The Government of Australia is considering proposals to change the diesel tax and removal of the overburden tax break in next week’s budget, according to Business Spectator.  This will mostly affect large-scale operations, such as BHP’s Olympic Dam expansion, which is likely to cost in excess of US$27bn according to company estimates.  The project will require five years of pre-stripping overburden in order to reach the orebody.  Olympic Dam is the world’s largest Uranium deposit, fourth largest Copper resource and fifth largest Gold deposit. Diesel prices will also increase overheads on isolated mining operations that generate their own electricity using diesel generator sets.

Economic News

US – Manufacturing figures released yesterday surprised on the upside. 

• The PMI index jumped from 53.4 in March to 54.8 in April – registering the strongest reading since June. 

• On the other side of the coin – as we predicted yesterday – construction spending in the US increased by a nominal amount in March, failing to hit estimates, ticking up by 0.1% against estimates of 0.5% 

• Factory order figures will be released later today. 

• The manufacturing data has improved sentiment ahead of the non farm payroll figures due to be released on Friday. 

• Early estimates suggest that non farm payrolls increased by 200,000 in April on the back of a 120,000 increase in March. 

• In our opinion an increase of 200,000 seems a bit of a stretch at this stage. Both initial jobless claims and continuing weekly claims rose in April along with a softening of in private payrolls in March. Seasonal weather conditions have been cited for the poor manufacturing data in March. We are sceptical, that beyond manufacturing, there has been ample evidence of growth in the wider economy to merit such a bullish outlook for Friday’s data release. 

• That having been said, the ADP employment data released later today if positive could rubbish our argument. We will just have to wait and see…   

China – The HSBC PMI figure was finalised today at 49.3 – up from the 49.1 that was originally reported. 

• The index came in considerably up from the 48.3 registered in March. 

• Although an improvement, the figure is still at odds with the “official” figure released by the Statistics Bureau that indicated the fastest growth in a year at 53.3 – A very good figure. 

• The yuan weakened today against the dollar ahead of talks between US and Chinese officials in Beijing tomorrow. 

• Figures released today show that home prices in China fell to a 14 month low as the government pledged to maintain property curbs. 

• Residential prices fell 0.3% in April from March. 

• The positive manufacturing data emerging from China is prompting renewed speculation that the economy may have bottomed in Q1. 

Japan - Stocks rose today on the back of the manufacturing and factory orders figures in China. Any increase in production globally is good news for Japanese exporters. 

Europe – Unfortunately the positive manufacturing data emerging in the US and China has not set a trend in Europe. 

• Italian Manufacturing figures released this morning disappointed. The PMI index declined to 43.8 from 47.9 in March and considerably below 47.1 forecast. 

• Italy continues to struggle to generate any crucial signs of life or growth – European officials have to drastically address the potential issue of growth before it is too late. 

• As France prepares to go to the polls again, manufacturing figures released today indicate that the country continues to struggle to increase output. The April PMI figure came in below forecasts at 46.9 – down from 47.3 in March and below forecasts of 47.3. 

• German manufacturing failed to hit estimates. The PMI in April was 46.2 below forecasts of 46.3.   

• Worryingly the German unemployment rate rose to 6.8% in April from 6.7% in March. 

India – The HSBC PMI came in at 54.9 in April compared to 54.7 in March. 

• Interest rates were cut in April for the first time since 2009 as the government tried to reverse the slowing trend that has infected the economy in the last 12 months. 

Thailand – Consumer confidence rose for a fifth straight month in April as the economy recovered from the devastating flooding at the end of last year. 

• The index measuring sentiment climbed to 67.5 from 66.5 in March. 

• Officials kept its key interest rate unchanged for a second straight meeting. 

Africa - A counter attack conducted by ex-presidential guardsman in Mali was foiled by incumbent ruling Junta.

• Clashes will only delay talks to return the country to constitutional order over junta rule, assuming the Junta will in-fact step aside and not interfere with a democratic process in transition. 

• Islamist rebels are spreading there chaos across pockets of Africa posing serious security risk to countries striving for democracy where leaders strive to rule a state that is separate from religion. 

• So-called strong men leaders who refuse to handover power and rule autocratically are a dying breed as international sanctions are making it tougher for them to survive. 

Currency – The yen weakened today against the dollar on the back of the strong manufacturing data emerging from the US. 

• The dollar index, is up this morning as optimism surrounding the US economy grows and poor manufacturing figures in Europe spark renewed concerns about where growth could possibly originate from in Eurozone. 

US$1.3221/eur vs 1.3255/eur yesterday. Yen 80.55/$ vs 79.73/$. SAr 7.732/$ vs 7.757/$. $1.623/gbp vs 1.622/gbp

Commodity News

Precious:

Gold US$1,656/oz vs US$1,664/oz yesterday – Gold prices fell today on stronger US dollar following better-than-expected manufacturing data and holdings in exchange traded products backed by the metal declined to the lowest reading in 3 months.

• SPDR gold trust holdings dropped further to 1,274t (40.963moz) value US$68.135bn from 1,278t (41.099moz). 

Platinum US$1,565/oz vs US$1,566/oz yesterday

Palladium US$676/oz vs US$683/oz yesterday

Silver US$30.87/oz vs US$30.98/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,388/t vs US$8,405/t yesterday – Copper prices are off this morning driven by appreciating US currency and market expectations for US Mar factory orders to register a 1.7%mom decline. 

• BHP Billiton may see its returns on the Olympic Dam copper mine expansion decline as the Australian government plans to revise the diesel tax and waste removal breaks in the next week’s budget.

• Cost of the planned expansion is estimated at US$27.4bn and the company plans to spend 5-6 years removing as much as 350m of material before reaching the ore body.

• Minmetals Resources, a subsidiary of China’s biggest metals trader, said copper production at its Kinsevere copper mine in DRC would fall short of its annual target due to power shortages.

• The mine should produce 28,000-32,000t of copper cathode from March to December. Production is expected to ramp up to full capacity of 60,000t by the end of 2012.

• Minmetals purchased the Kinsevere project in the DRC as part of the US$1.3bn takeover of Anvil Mining.

• Copper market recorded a deficit of 29,000t in Jan, according to the International Copper Study Group estimates.

Aluminium US$ 2,115/t vs US$2,116/t yesterday

• JV Alumina-Alcoa cut its production target for 2012 to 15.5mt, 3% lower than its Feb estimate, expecting weaker demand growth and subdued prices.

• Aluminum demand growth will average 5-7% this year, slower than 2011.

• JV output accounts for 25% of the world’s alumina supply.

Nickel US$ 17,805/t vs US$18,020/t yesterday

Zinc US$ 2,045/t vs US$2,067/t yesterday

Lead US$ 2,163/t vs US$2,159/t yesterday

Tin US$ 22,500/t vs US$22,765/t yesterday

Energy:

JAPAN- The last time Japan was without nuclear power was in 1965. The government is in hot debate over whether or not it can avoid power cuts in major regions including Tokyo during the summer months without nuclear power.

Oil US$119.45/bbl vs US$119.24bbl yesterday – Oil prices have gained off of positive data released on U.S. manufacturing improving.

• The US Energy Information Administration (EIA) report on crude and distillate stocks is expected to confirm speculation that stockpiles have increased the most in over a decade. 

• Statoil announce they will ship over 4mbbls of crude grades to Asian markets in May. 

• The delivery could offer some well received support in the North Sea markets 

• WTI the U.S. benchmark moved to a five week high overnight taking back over the $105 mark. 

• Iraq’s exports in April rose 8.2% from March to over 2.5mbbl/d compared with just over 2.3mbbl/d in March. 

• Armed gunmen at one of Libya’s oil refineries are still preventing workers from entering, claiming compensation rights for protecting the plant during the war. 

• WTI crude US$105.81, US Crude US$105.85 

Natural Gas US$2.478/btu vs US$2.415btu yesterday – Japan’s Mitsui and Mitsubishi will buy 14.7% stake jointly in Australian LNG Woodside Petroleum for $2 billion.

• The move highlights Japan’s desperate need to secure energy stock in the aftershock and halting of nuclear power. 

• Energy companies including Chevron and Royal Dutch Shell have developed standards for there own shale exploration and production projects in the Appalachian region. 

• The companies have looked to quell regulators fears over the controversial hydraulic fracturing technique otherwise known as fracking, prior to President Obama’s administration push on imposing greater national regulation. 

Uranium US$51.75/lbs vs US$51.75/lbs yesterday

• UX consulting weekly spot as of 23rd April 2012 was at US$51.75/lb (+$0.50). 

Coal $96.90/t Richards Bay, Newcastle $101.60/t, Rotterdam $93.10/t

Other:

Iron ore – Costs of shipping iron ore and coal from Australia may gain by US$3.76/t due to an increase of a mining tax to 30% starting from Jul 1, said ICAP Shipping International.

• Australian exports of iron ore are expected to come in 513mt this year and prices to average US$151/t according to Morgan Stanley.

• Coking coal exports will equal 144mt and prices will average US$207/t.

Ferrochrome – Chinese Baosteel released its order price of high carbon ferrechrome for May at CNY 7,650/t, equivalent to the one for April.

Company News

Anglo Pacific (LON:APF) Update of Mount Ida Magnetite Royalty Acquisition

• Anglo Pacific has completed its first tranche of the 20% acquisition of the Mount Ida 1.5% royalty from Red Rock Resources. 

• Tranche 1 of US$6m for a 0.3% GRR has been settled by payment of US$3.89 m in cash and the allotment of 416,161 in shares which will rank pari passu with existing shares. 

• Tranche 2 of US$4m payment for a further 0.225% will follow results of a positive DFS, a formal decision to mine and 20% of the pre-production capex outlined in DFS being provided for. 

• Tranche 3 of US$4m becomes due for a further 0.225% when commercial production begins giving the total acquisition costs of US$14m. 

• The base case for Mount Ida is for a 20 year mine life mining 25 mtpa producing 10 mtpa of magnetite concentrate has a capex projected of $1.58bn and operating cost of $62.7 per tonne. 

• For a concentrate price of A$110 per tonne, the project shows an 19.8% IRR. 

• The concentrate has 68-69% Fe low silica, no phosphorous, aluminium oxide and sulphur. 

• The high operating cost to produce this concentrate should be partially mitigated by the concentrate quality which should realise in higher prices. 

Beacon Hill Resources (LON:BHR) Scoping Study Results for Magnesite Project in Tasmania

• The company’s wholly owned subsidiary Tasmania Magnesite NL has completed a scoping study on one of its magnesite deposits at Arthur River. 

• The study has modelled the production of Caustic calcined magnesia (CCM) a chemical used in number of markets including in fertiliser and feedstock as well as treatment of nickel, copper, cobalt, pulp & paper and water treatment. 

• The study looked at ROM production of 100,000 tpa of CCM from 292,000 tpa of magnesite. 

• The deposit has been estimated by Derwent Geoscience  to have 25 Mt of magnesite grading 42.4% MgO, 4.8% SiO2 , 1.4% Iron Oxide and 2.6% CaO to a max depth of 100m. 

• Using a discount rate of 10% for a 17 year mine life the study demonstrates a pre-tax NPV of A$42m for a total capex of A$155m and opex/tonne of A$250/t FOB. 

• The long term price per tonne assumed is $600 per tonne for sale into the seaborne market from the port of Burnie 55 km from the mine site. 

• The Scoping study will be used as a basis for a full Feasibility Study. 

Ovoca Gold (LON:OVG) – management issue

http://www.ovocagold.com/

http://www.digitaljournal.com/pr/689181

• News has emerged that Tim McCutcheon, ceo of Ovoca Gold has been appointed as ceo of Abzu Gold Ltd, a TSX Venture exchange company (see link above).

• The statement from Abzu Gold is worded such that it implies that McCutcheon may have left Ovoca.  We have not seen a statement from Ovoca on this matter and are seeking clarification on Mr McCutcheon’s current position.

• The company recently appointed Kirill Andreyevich Golovanov as a NED.  Golovanov currently works as the Company Secretary and is head of the Russian office and has been with Ovoca since 2007. 

• He has played a major role in the development and subsequent sale of the Goltsovoye silver deposit. 

• He has extensive experience in mining and corporate law and or working in Russian companies such as Gasprombank and Vneshekonombank. 

*Fairfax IS plc acts as UK broker to Ovoca Gold

Morning View

Kagara collapse – hits supply chain for zinc – expect more Australian mine closures to impact a range of metals

• Kagara Mining collapse to impact zinc deliveries to Korea Zinc through subsidiary.  Sudden mine collapses cause metal and concentrate buyers to scramble for new supply in the market.  The impact usually raises prices, at least on a temporary basis.

• We believe many other higher-cost Australian mining operations are at risk from the strong dollar and volatile metals prices.

AngloGold – New Mongbwala Gold mine in the DRC may see delays due to invasion of 200,000 artisanal miners.

• Many of the new artisanal miners are said to be ex-fighters from the civil war

• The miners are reported to be making as much as $50 per day, a substantial sum for this part of the world

• It would be easy for artisanal miners and ex-fighters to take up arms if the forced from their new artisanal pits 

• Many miners are likely to dissipate over time and others may be rehabilitated into more structured working over time.  Peace in this part of the DRC may rest on a diplomatic solution to the artisanal issue at Mongbwala

• We must hope that other miners looking to open gold mines in the region are as well considered and diplomatic as AngloGold.

Economic News

China – Figures released this morning show that Chinese PMI expanded for a 5th month in April. 

• The March PMI rose to 53.3 in April from 53.1 in March according to the Statistics Bureau. 

• The figure contradicts the preliminary HSBC PMI figure last week that indicated that manufacturing had contracted in April. – A finalised figure from HSBC will be released tomorrow. 

• The announcement has increased speculation that officials will continue with plans to dampen the inflationary environment in the country over the coming months. 

• It appears that China is making progress in its goal of moving away from export driven growth to domestic consumption driven growth. This cannot be engineered over night and is a long process. Managing the inevitable slowdown in the short term is crucial and it appears that current policy, is at present, successfully doing this. 

• Chinese markets are closed again today. 

US – Figures released yesterday disappointed.

• The April Chicago purchasing managers index, widely seen as a barometer of business activity in the Midwest fell to the lowest level since November 2009. 

• The Supply Management Manufacturing index will be released later today. Forecasts are predicting a slowing to 53.0 in April from 53.4 in March. 

• Additionally the construction spending figure will be released at 15.00. Forecasts are for a 0.5% increase compared to a decline of 1.1% in March. We would be surprised if the figure lived up to expectations such are the headwinds continuing to face the real estate market in the US. 

• Expectations continue to build towards the Non farm payroll figure on Friday. 

Europe – As concerns surrounding Spain continue to grow, more and more voices of discontent appear to be emerging over the continued push towards austerity in the core Euro area.  

• Policy makers from peripheral nations to core countries such as France and Spain have substantially changed the direction of rhetoric of late, arguing more forcefully that accommodative policy is required sooner rather than later. 

• Will this lead to a general revolt against austerity? – Should Francois Hollande win in France, a hammer blow will be have been dealt to the political will invested in fighting the debt crisis. 

• Hollande’s proposal could well prove too radical to implement given the perilous position that France finds itself in – but in any case a win in the elections could well mark the turning point for debt crisis as a whole. 

Japan – The yen strengthened today as the day – pushing the Nikkei down to close at a ten week low. 

• Unsurprisingly figures released today show that vehicle sales yoy rose substantially in Japan in April. 

Australia – The Reserve Bank of Australia has today lowered its official cash rate. 

• The rate now sits at 3.75% 

• The reduction is the first revision since December and comes on the back of growing concerns about growth in the Australian economy. 

• Figures released today indicate that the housing market in the country continues to struggle, with house prices declining by 1.1% in Q1 2012. 

South Korea – Exports declined for a second month in April.

• Overseas shipments fell 4.7% from a year earlier after a 1.4% decline in March. 

• The decline in shipments is being attributed to the country’s elections last month which meant that plants were idled for a couple of days. 

Thailand – Figures released today showed that inflation slowed in April to the lowest level in more than two years – on the back of state intervention and subsidies offsetting ringing energy prices. 

• Consumer CPI climbed 2.47% from a year earlier. 

• Rates are expected to remain on hold for the rest of the year. 

Mexico – According to official figures, Mexico’s economy expanded at around 4% in Q1 2012. 

• The country has been benefiting of late from continued expansions in consumer spending and industrial production. 

US$1.3255/eur vs 1.3260/eur yesterday. Yen 79.73/$ vs 80.13/$. SAr 7.757/$ vs 7.733/$. $1.622/gBP vs 1.629/gBP

Commodity News

Precious:

Gold US$1,664/oz vs US$1,664/oz yesterday – Gold is off slightly this morning after reaching a 2-week high on weaker US dollar following worse-than-expected Apr PMI data released yesterday.

• The US Mint sold 20,000ozof gold coins in Apr, the smallest monthly total since Jun 2008 and 68% down from March sales.

• Polyus Gold International agreed to sell 151.6m shares to the Chinese sovereign fund CIC International and 50.2m shares and 25.2mdepositary receipts to VTB, Russian second-largest lender.

• The company is applying for a premium listing on the LSE.

• SPDR gold trust holdings dropped to 1,278t (41.099moz) value US$67.838bn from 1,284t (41.293moz). 

Platinum US$1,566/oz vs US$1,575/oz yesterday

• Acquarius Platinum reported a 20% yoy decrease in production to 97,802oz in Q1 on the back of Section 54 stoppages, weak labour performance and poor ground conditions.

• The company was issued 8 Section 54 stoppages at the Rustenburg mine leading to the loss of 15 production days.

• Additionally, the company’s K2 processing plant was shut for 5 days due to Section 54 review.

• Net loss came in at US$9.4m in Q1 compared with US$25.3m profit earned last year.

Palladium US$683/oz vs US$683/oz yesterday

Silver US$30.98/oz vs US$31.38/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,405/t vs US$8,490/t yesterday – Prices climbed as China’s manufacturing accelerated last month.

• Chinese firm Gingko Energy will invest US$100m over 5 years to restart the Kilembe copper mine in western Uganda.

• Resources are estimated at 4mt at 1.98% copper and 0.17% cobalt.

• The mine had been operated by Falconbridge before it was acquired by Xstrata. Production reached its max capacity iin the 1970s at around 18,000t of copper cathode per annum.

• In the early 1980’s the mine was shut down due to political instability in the region and a drop in prices.

• China has financed various transport and communications infrastructure projects in Uganda including a US$350m toll road between the local airport and the capital, Kampala, that should open in Jul.

Aluminium US$ 2,116/t vs US$2,111/t yesterday

Nickel US$ 18,020/t vs US$18,300/t yesterday

Zinc US$ 2,067/t vs US$2,052/t yesterday

Lead US$ 2,159/t vs US$2,147/t yesterday

• Cancelled warrants or orders to remove lead from warehouses monitored by the LME more than doubled in a week to 76,900t, the bourse said yesterday.

• Warrants in Europe that account for 28% of LME inventories, increased to 48,625t from 900t on Apr 20.

• “There is nothing to suggest there is physical tightness in the market. Its traders that are doing it and it might be that its premium-based game where they are looking to get a better deal from another warehouse,” the researcher Brook Hunt said.

Tin US$ 22,765/t vs US$22,700/t yesterday

Energy:

Oil US$119.24/bbl vs US$119.73bbl yesterday- Asia futures slip in cautious holiday trade and ongoing concerns over the impact in the EU as Spain enters in to recession.

• U.S. stockpiles rose 2.5mbbl last week as a government report from the EIA due on Wednesday may show inventories at a level not seen in over ten years. 

• Oil market is poised ahead of world manufacturing data to set targets in the build up to summer demand. 

• BP announced lower-than-expected first quarter profits despite the high price of oil caused in part by lower than expected production. 

• WTI crude US$104.68, US Crude US$104.69 

Natural Gas US$2.415/btu vs US$2.036btu yesterday – 

• Energy Transfer Partners agrees to buy Sunoco for $5.3bn, the deal will create one of the largest energy partnerships in the U.S. 

• It’s a huge strategic move for ETP diversifying into oil pipelines as shale drilling expands compounded by anticipated slowdown in natural gas sector as a result of the decade low natural gas prices. 

Uranium US$51.75/lbs vs US$51.75/lbs yesterday- 

• First Uranium angry shareholders may upset the planned $70m sale of the Ezulwini mine in a dispute over AngloGold Ashanti’s $335m purchase of the company’s dump reprocessing division Mine Waste Solutions. 

• UX consulting weekly spot as of 23rd April 2012 was at US$51.75/lb (+$0.50). 

Coal $97.30/t Richards Bay, Newcastle $101.30/t, Rotterdam $94.80/t

• Mozambique is set to launch a bidding round for new coal prospecting and mining licences in central Tete province. 

Other:

Steel – World steel consumption will grow at a slower pace in 2012 and 2013 as China is aiming for a less steel-intensive growth and Euro zone is battling its sovereign debt crisis, according to the World Steel Association estimates.

• Steel demand will rise 3.6% to 1.42bn tons in 2012 and 4.5% to 1.49bn tons in 2013 compared with 5.6% growth in 2011.

• Chinese consumption is forecast to grow 4% to 648mt in 2012 and another 4% in 2013 versus 6.2% in 2011.

• Worldsteel said the developed world demand would still be at 14% below the 2007 levels, while the emerging economies consumption would be 45% above and account for 73%  of world’s total.

Ferrochrome - Xstrata comment that ferrochrome prices have jumped due to the closure of furnaces in South Africa

• Ferrochrome prices are 1.35c/lb – 12.5% up on the beginning of this year

• ESKOM is paying to buyback electricity in South Africa causing production to plummet and prices to rise

• Ferrochrome volumes were 20% lower for Xstrata highlighting the impact of the furnace closures

Company News

Ariana Resources* (LON:AAU) Red Rabbit update

See note published 30 September 2011

http://www.arianaresources.com/

• Ariana report on exploration and development at the proposed Red Rabbit gold mine in Turkey. 

Tailings Storage Facility design expected ahead of permits for construction

The report is required for the application of permits before mining starts

• Freehold land acquired in strategic position in Arzu South proposed open pit area. 

• 2,000m of drilling completed at Kiziltepe. 

• Continuity confirmed between Arzu north and Arzu south structures. 

• Implication is that the JORC resource of 448,000oz of gold could expand significantly. 

Conclusion:  Ariana is moving towards the start of construction of the Red Rabbit project.  We expect this project to expand further in time and for the mine to take on new value as management prove up further reserves and resources.  The key elements are coming into place and we expect the key permits to be received this year before construction starts.  The mine should start at around a 20,000ozpa production rate.

*Fairfax acts as broker to Ariana Resources. *Fairfax analysts have visited the Ariana trial mine and other licenses 

Carbine Resources (ASX:CRB) mineralisation shows continuity at Goussirdou prospect

• Carbine Resources announced yesterday results from the Goussirdou gold prospect in Burkina Faso.

• The results confirm continuity of gold mineralisation at the prospect with one spectacular near surface intersection of 50g/t over an intersection of 5m. Best results include:

11m at 2.91g/t gold from 60m (GSRC001) 

32m at 1.00g/t gold from 100m (GSRC006) 

5m at 50.37g/t gold from 13m (GSRC027) 

5m at 2.23g/t gold from 19m and 6m at 1.88g/t gold from 69m (GSRC028) 

4m at 4.55g/t gold from 98m and 1m at 20.31g/t gold from 107m (GSRC029)

Larger widths are shown in the following results

11m at 2.91g/t gold from 60m (GSRC001); 

32m at 1.00g/t gold from 100m (GSRC006); 

7m at 1.23g/t gold from 105m (GSRC011); 

6m at 1.15g/t gold from 107m (GSRC014); 

14m at 0.85g/t gold from 112m (GSRC018); 

5m at 50.37g/t gold from 13m (GSRC027); and 

5m at 2.23g/t gold from 19m and 6m at 1.88g/t gold from 69m (GSRC028).

• Dore: Further holes from the Dore prospect also show good gold grades although over shorter intervals.

1m at 7.33g/t gold from 36m (DORC036); 

2m at 3.98g/t gold from 126m (DORC041); 

2m at 4.41g/t gold from 107m (DORC042); 

2m at 3.27g/t gold from 68m (DORC044); 

1m at 4.18g/t gold from 61m (DORC047); and 

1m at 35.75g/t gold from 17m (DORC048).

• Further assay results are due from the key Nazala prospect within the Madougou license and for the Foufaka prospect within the Kandy permit.

Conclusion:  The market has not been kind to Carbine as with other gold explorers in the region.  Carbine is well funded to continue working at a good pace without recourse to the market for at least 18 months if not two years.  We expect the shares to start to go better on the release of these and other new results and on better sentiment in the gold market in general.  We see the stock as substantially oversold.  

DiamondCorp* (LON:DCP) Appointment of Non-Executive Director

New director to finalise financing to complete Lace Diamond Mine development

Company expects to finalise funding package soon with drawdown expected by mid year.

• The company announced the appointment of Michael Toxvaerd to the Board. 

• Mr Toxvaerd is the CIO of HGB Management Partners a private equity firm with high net worth and institutional clients in the Arabian Gulf. 

• He is also the founder and also more recently CEO and Deputy Chairman of NeutraHealth Plc. 

• Mr Toxvaerd is also a NED of the European Islamic Investment Bank (EIIB) which is significant shareholder in DiamondCorp with a 23% holding. 

• HBG Management Partners holds 15.55% of the share capital of EIIB. 

Conclusion: The appointment of Mr Toxvaerd underlines the support of the company’s major shareholder and his background should help in the company’s plans to finalise the financing of the Lace Diamond Mine.

* Fairfax acts as Nomad and joint broker to DiamondCorp PLC 

* Fairfax analysts recently visited the Lace Diamond Site. 

Metminco (ASX:MNC) Quarterly Report

• Copper resources increase at their Los Calatos Project in Peru with indicated increasing to 885mt at 0.42% copper and 0.027% molybdenum at a 0.2% cut off grade. 

• Total contained metal for the resource increases to 9.4mt of copper and 0.5mt of moly. 

• Drilling continues to upgrade the resource at Los Calatos. 

• At the Mollacas project a final resource estimate is expected in Q2 2012 at which point the company expect to commission a feasibility study. 

• The company has cash reserves of A$43.2m following the completion of their A$ 40m capital raising at the beginning of this year from the issue of new shares although there was a very low take up of a rights issue being conducted over the same period to Australian and NZ resident shareholders with only a 2% take up. 

Conclusion: Although the resource increase of 150% at Los Calatos using a cut-off grade of 0.20% with an average grade of 0.4%.  Copper prices are able to support existing mines moving to lower than previously seen cut-off grades but an average grade of 0.4% does feel low for the industry.  The mine will be more sensitive to fuel and power costs due to its lower grade profile.

Solomon Gold* (LON:SOLG) Newmont jv drilling update

• Solomon Gold announce indications from drilling by Newmont on the Guadacanal joint venture in the Solomon Islands. 

• A Newmont drill hole is reported at 300m depth heading towards 700m depending on geological evaluation.  

• Trenching shows high grades of copper over very good distances at surface at Mbetilonga.  Eg 1.76% copper over 80m and 0.88% copper over 30m 

• Newmont are drilling some unusually deep drill holes to determine the source of these surface grades and of formerly discovered ultra high grade ‘float’ samples.  Float samples are samples picked up at surface without trenching or drilling. 

• Newmont spent some US$8m last year versus a minimum commitment of $5m on the licenses as part of their earn-in for a 70% interest in the licenses. 

• Sutakiki exploration is underway.  Sutakiki has already produced an exceptional drill intersection of 354m grading 0.5g/t gold and 0.13% copper.  This result is not economic on its own but could well indicate the potential for high grade ore nearby with greater economic value.  

Conclusion:  Solomon Gold has potential for discovery on a number of fronts.  Exploration takes time to drill and to interpret in the Solomon Islands but the potential for discovery looks good.  In the meantime, management are preparing for an ASX listing and to also acquire assets for development elsewhere.  We should expect news on the Rannes and Mt Perry gold projects in Australia which have significant resource value.

* Fairfax acts as sole broker to Solomon Gold

Xstrata (LON:XTA) First Quarter Production and IMS

• Copper output is down 18% lower than first quarter 2011 with total mined copper production of 171,121 tonnes and copper cathode from mined and third party of 158,545 tonnes. 

• Copper Reductions: The Ernest Henry open pit mine closed and moved to underground operations The open pit mine had produced 100,000 tonnes of copper last year and the underground mine is ramping up with a lower rate and lower grades producing 7,300 tonnes for the first quarter. 

• A catalogue of planned and unplanned reasons decreased the company’s share of copper in concentrate production by 34% to 29,400 tonnes in the first quarter. 

• At the Tintaya mine copper production fell by 53% to 11,500 tonnes as the mine entered its last year in production. 

• Copper Expansion: At Antamina the expansion project to increase processing capacity by 28% to 130,000 tonnes per day was successfully commissioned  with the company’s share of copper production increased by 24%. 

• Copper production also increased by 13% in the first quarter of 2012 at Alumbrera as a result of access to higher grade material. 

• Coal production increased by 9% to 21.1 million tonnes in the first quarter of 2012 as result of uninterrupted production at the Australian and South African thermal coal operations. 

• Australian coking coal production was down by 0.3 mt  to 1.4 mt (versus 1.7 mt) due to the timing of long wall moves at the Oaky Creek underground complex. 

• Nickel was up 8% and zinc increased by 12% as an increase in Australian operations offset a planned reduction of zinc production at Antamina as the mine plan operates mainly in the copper zone. 

• Ferrochome volumes were down 20% as a result of maintenance programmes and power buy backs with Eskom – in total seven furnaces were impacted by Eskom’s requirements for consumption reductions to support their maintenance programmes. 

• The reduction in ferrochrome supply has resulted in a 17% increase in ferrochrome prices from $1.15 per pound to $1.35 per pound in the second quarter. 

Conclusion: Reduced copper production continues to pervade the sector with coking coal also under pressure. Eskom’s power shortage has resulted in a sharp reduction in ferrochrome volume which has helped in a sharp recovery in prices.

Kagara Mining calls in administrators in Australia due to:

• The strong Australian dollar

• Lower zinc prices

• High local operating cost inflation – eg high local labour rates and reagent prices

• Stock market and bank failure to support Kagara 

Economic News

US – GDP figures released on Friday disappointed, prompting speculation that the Fed would move towards further QE. 

• Q1 GDP came in at 2.2% - against forecasts of 2.5%

• Consumption growth has been strong at annualized pace of 2.9% adding 2 percentage points to growth rate. 

• Disposable income rose by 0.4% compared with above 2% increase last year signalling a decline in consumer spending. 

• Savings rate fell to 3.9% from 4.5% in the previous quarter. 

• The dollar declined against the yen today as risk aversion increased. 

• Personal consumption figures will be released later today. Initial expectations suggest an increase of 1.9% in March. 

• Tomorrow – ISM manufacturing figures will be released. 

• The big headline figure for the week is the Non-farm payroll figures for April that will be released on Friday. 

• Forecasts are looking for a 175,000 gain in April on the back of a disappointing 120,000 in March. 

• After several months of positive data, the lower than estimated GDP figure on Friday suggests that the market may well have been getting slightly ahead of itself. 

• We would not be surprised if the jobs data on Friday failed to live up to expectations. 

• This week Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner face a tough week of talks and negotiations with Chinese counterparts. 

Europe – Focus returns to Spain today – Q1 figures show a contraction of 0.4% year on year putting the country in recession. 

• The figure was better than expected. Forecasts suggested a 0.6% contraction. 

• Export figures for Spain surprised helping the Q1 figure beat estimates. 

• Last week unemployment in the country reached 1 in 4. 

• S&P has cut the ratings of 16 of Spain’s biggest banks today

• Spain’s government is considering splitting bad property loans in to smaller groups of asset management companies to support struggling lenders.

• Reports are emerging that suggest that the European Commission is considering the creation of a 200-billion-euro investment fund to kick-start economic growth across the continent.

• German retail sales adjusted for inflation and seasonal swings, rose 0.8% in March from February, when they fell a revised 0.9% according to the Federal Statistics Office.

• Inflation figures for the euro zone are expected at 2.6% in March. 

• German engineers have gone on strike over pay.  They are looking for a 6.5% increase in wages that is prompting renewed concerns over inflation. 

• The move highlights the renewed confidence that German trade unions have regarding their contribution in Economy. 

China – Chinese markets are closed today. 

• The FT is reporting that the Chinese second hand car market is starting to ramp up. 

• Second hand vehicle sales rose 12.5% last year in volume terms, compared to 2.5% growth in new cars. 

• Used car sales currently sit at around a quarter of new car sales overall in China.

• China and Russia have signed 27 trade contracts worth a reported $15 billion.

• China’s increasing food imports supports fears of food inflation 

Japan – Markets in Japan are closed today. 

• Over the weekend it emerged that Japanese officials had agreed a roadmap to boost trade between the world’s third largest economy and its fast expanding neighbours. 

• Forecasts indicate that agreements will work towards liberalising trade, harmonisation of systems and narrowing development gaps.

• The Nikkei has recorded its worst performance in 7 years in April. 

Australia – The dollar is off today as markets expect a cut of 25 basis points in the overnight cash rate on May 1.

Zambia – It has emerged that officials are going to make a push towards tightening the tax process in an effort to make sure miners operating in the country comply with current regulations. 

South Korea – Industrial output falls 3.1% in March wiping out previous two month gains. 

South Sudan – It has emerged over the weekend that Officials in South Sudan say China has agreed to loan it $8bn for major development projects.

• Money would be spent on improving infrastructure through out the country. 

• China currently is the largest exporter of oil from both Sudan and South Sudan. 

Currency – The Euro weakens a third day against the yen off of news of Spain’s economy shrinking in 1Q 2012.

US$1.3260/eur vs 1.3172/eur last week. Yen 80.13/$ vs 80.80/$. SAr 7.733/$ vs 7.822/$. $1.629/gbp vs 1.617/gbp

Commodity News

Precious:

Gold US$1,664/oz vs US$1,652/oz last week – Prices are held steady this morning after a US$10/oz increase on Friday following the release of weaker-than-expected US GDP numbers and speculation the Fed may embark on another round of quantitative easing.

• SPDR gold trust holdings increased to 1,284t (41.293moz) value US$68.667bn from 1,282t (41.216moz).

Platinum US$1,575/oz vs US$1,564/oz last week

Palladium US$683/oz vs US$669/oz last week

Silver US$31.38/oz vs US$30.94/oz last week

Rhodium US$1,390/oz vs US$1,390/oz last week

Base metals:

Copper US$ 8,490/t vs US$8,287/t last week – Copper prices are little changed today at a three week high on the news of tight LME inventories and weaker US dollar.

• Jiangxi Copper Company, Chinese largest copper producer, together with local smelters agreed to ship refined copper cathodes to the LME in the next to 2 months in an effort to raise the availability of the material in the world market.

• Low LME copper inventories took cash prices to a premium compared with three-month futures, while Chinese copper stockpiles have been increasing.

• Shanghai monitored stockpiles dropped by 6,408t to 204,762t last week, the lowest level in more than 2 months.

Aluminium US$ 2,111/t vs US$2,082/t last week

• Aluminum inventories in China declined by 4.6% to 349,054t last week, the biggest fall in 7 months.

Nickel US$ 18,300/t vs US$18,182/t last week

Zinc US$ 2,052/t vs US$2,022/t last week

• Zinc inventories fell 8,121t to 358,489t last week, the lowest since Mar 2011.

• US galvanized steel shipments reached a 3-year high in Q1 driven by stronger autos and durable goods numbers.

• Chinese galvanized steel production grew 18% yoy in Q1. H1 is traditionally the strongest period in production terms in China.

• Japanese galvanized steel output growth was muted in Q1 despite a pick up in vehicles production.

• Galvanized steel is the primary use of zinc and accounts for more than 50% of world’s supply.

Lead US$ 2,147/t vs US$2,110/t last week

• Lead inventories in China increased 129t to 26,013t last week.

Tin US$ 22,700/t vs US$22,350/t last week

Energy:

China, India and South Korea are considering offering sovereign guarantees for its ships to continue shipping oil from Iran when the EU sanctions on 1 July come in to effect. 

Oil US$119.73/bbl vs US$119.36bbl last week- Oil prices gain on positive U.S and Asia economic outlook.

• However, consumers in Europe struggle to cope with rising petrol prices. 

• Libya is on track to return to full production 

• However, the Arabian Gulf Oil Company may have to suspend operations in a dispute with local gunmen cannot be resolved. 

• The US imported a record 2.517mbbl/d from Canada in February an EIA report showed on Friday. 

• The largest ever monthly volume imported from a single supplier   

• WTI crude US$104.99, US Crude US$104.97 

Natural Gas US$2.036/btu vs US$2.036btu last week – prices have marginally increased back over the $2-mark with cooler temperatures offering the battered fuel some support indicating a short spell in consumer demand.  

Uranium US$51.75/lbs vs US$51.75/lbs last week- 

• UX consulting weekly spot as of 23rd April 2012 was at US$51.75/lb (+$0.50). 

Coal $98.75/t Richards Bay, Newcastle $102.55/t, Rotterdam $99.00/t

Company News

Discovery Metals* (ASX:DML) - Quarterly Update

• The Boseto Copper project is on schedule for production in June 2012 with the EPC contract  nearing completion.

• Commissioning of the process plant is expected to commence before the end of the June.

• The project is on budget at $175m – the company has $82.6m in cash and has fully drawn down on their project financing of $180m.

• Open pit mining continues at Zeta with a total of 3.5 Mt of ore and waste moved at the end of March.

• As reported last week the company has successfully completed the DFS on Zeta Underground Mine – please see below.

Conclusion: Everything is on budget and on time so far on the 35,000 tpa Boseto copper project – this is great credit to the management team for getting this copper project of the ground in what is a remote location. Combined with a positive DFS on Zeta Underground this leaves Discovery as an attractive junior copper play – the positive flow of news from the company means that Discovery has not seen the setback in its share price experienced by a number of junior miners on the ASX.

Fairfax acts as corporate advisor to Discovery Metals

Kagara (ASX:KZL) - Administrators called in as Australian market fails to refinance Kagara Mining

• Kagara Mining became a casualty of the strong Australian dollar and a sharp fall in zinc prices and some softening in copper prices. 

• The company has zinc and copper operations in North Queensland and Western Australia

• Production target 53-59,000 zinc for 2012 and 17-20,000t of copper

• The poor state of the Australian stock market for mining shares

• Administrators have been called in following the failure of the company to refinance its operations

• The stock went into suspension on 23rd April expecting to emerge refinanced

• Debt facilities are listed as ANZ A$40m, leasing facility of A$11m and a guarantee facility of A$32m with $22m drawn down in a performance bond

• Working capital facility expired in February 28th but was only extended for another month and this has presumably not been renewed.

• The company reported a loss of A$49m for the six months to end December versus a A$2.2m profit for 2010

• Kagara also owes A$19m to Guangxin Holdings as part of a A$25m advance for development of the Vomacka deposit at the Thalang operations

Conclusion:  Australian mining operations are being severely tested by the very strong Australian dollar and local inflation.  Many more mines are likely to enter administration in this tough operating environment.  The Australian stock market is not in the mood to refinance loss making operations. 

Sirius Minerals (LON:SXX) – Completes Scoping Study

• The completed scoping study shows a Phase 1 capex of US$2.7bn starting with the mining of 2.5 mtpa for Polyhalite to produce 0.7 mtpa of Sulphate of Potash (SOP) in 2017– this ramps up to mining at 5 mtpa of Polyhalite to produce 1.4 mtpa of SOP to 2020.

• At full production the company will also produce by products of 1.9 mtpa of Epsomite and 2.3 mtpa of Gypsum.

• The operating costs are estimated at US$225/tonne before by-product credits and US$65/tonne after by-product credits which assumes a price of by-products of US$160/t.

• Operating costs are high without by-products as would be expected with processing accounting for 72% of costs at $162/t.

• The company show other greenfield MOP (KCI) opex/tonne costs range from between US$120/t to US$190/t.

• Base case after tax of NPV for the project is estimated at $6,141 bn assuming a long term SOP price of $550/t and by product credit value of $160/t using a discount rate of 8% and debt financing of US$2.5bn which provides a tax shield.

• The company expect to have a maiden JORC resource by Q2 2012, feasibility studies completed by Q2 2013 with production start up in Q1 2017 to Q4 2018.

Conclusion: The NPV of the project looks attractive on the base assumptions made by the company for the project – the pricing of by-product credits is important. The project is particularly sensitive to the pricing of by-product credits as this can move the opex/t net of by product credits significantly (71% change with and without by-product credits). Given the time frame for the project a number of variables could change in the project to influence the NPV including the already high capex of US$2.7bn.

South Boulder Mines (ASX:STB) – Quarterly Update on the Colluli Potash Project in Eritrea

• The company is fast-tracking the DFS on its open cut Potash project in Eritrea with results scheduled for 2013.

• The Colluli project has a Sylvite, Carnallite and Kainite JORC resource of 1.079 bn tonnes of high grade (18%) KCI with a current exploration target of between 1.25-1.75 bn tonnes of resource.

• Studies on the project show a pre-tax NPV of US$1.33 bn with start up costs of US$0.74 bn for a 1 mtpa of KCI production for a 17 year open pit operation using a discount rate of 12%.

• Opex/t for the project is estimated at $100/tonne with processing accounting of $50/t.

• The company is in negotiations with the Eritrean government for its purchase of a paid participating interest in the project which will pave the way for the formation of a JV on the project and the granting of a Mining Exploitation Licence.

• The government gets a 10% free carry but will have to buy in for a further 30% interest – including royalties and taxes, the government ends up with 65% of the project.

• Production is targeted for 2016.

Conclusion: The company are planning to produce Muriate of Potash (MOP) or potassium chloride which is the more widely used fertilizer accounting for between 90-95% of potash fertilizers worldwide. It has a high nutrient content and is relatively price competitive with the chloride content of MOP being beneficial where chloride content is low.

SOP by contrast is a smaller proportion of the market and is used where special crop or soil needs exist – it is used in crops that are sensitive to chloride or fertiliser burn like tobacco, pineapple or avocado. 

It is striking to see the difference in the potash projects from Sirius and South Boulder Mines. The former is a high cost project both in terms of capex and opex with a smaller proportion of the end market with the NPV sensitive to the price of the by product credit and uses a discount rate of 8%.

South Boulder Mines is much more attractive from an absolute NPV basis as a low cost high grade open pit operation. The location of the project dictates using a discount rate of 12% with the government taking 65% of the value including all royalties and taxes. The government participation should however bring useful capital to the project and co-operation on the mining licence to take it to production. The value of the shares should improve as the project gains traction.

Toledo Mining (LON:TMC) – Q1 Shipments of nickel laterite ore amount to 103,000wmt

• Two further shipments to China were send in Q1 amounting to 103,000 wmt (wet metric tonnes) grading around 1.7% nickel

• 328wmt of lower grade nickel laterite ore is now stockpiled pending shipment 

• Shipping normally ends in September due to seasonal weather 

• Toledo is restricted to mining lower grade ore for now.  Higher grade 1.8% ore mining should resume on receipt of a logging permit.  This is expected to take at least a further three months to process and means that shipping of higher grade ores will resume next year at the earliest. 

• Toledo has an MOU with Jinchuan for the purchase of 1mtpa of nickel ore from 2013 rising to at least 2 mtpa by 2016 

• Jichuan is China’s largest nickel producer 

Conclusion:  Toledo may continue to achieve target production but is restricted to shipping lower grade laterite ores with lesser value.  

Mining last week:

Norsk Hydro (LON:NHY) – Warns that global aluminium demand would grow at the low end of market expectations

Inmet Mining Corp. (TSX:INM) – profits rise 62% on rising copper production

Beacon Hill Resources (LON:BHR) – Quarterly Update

Discovery Metals (ASX:DML) – DFS on Zeta Underground shows attractive economics

Chalice Gold Mines (ASX:CHN) — Trading Halt pending announcement 

Sundance Resources Ltd (ASX:SDL) – Agreed Terms for development of Mbalam iron ore project

Sylvania Platinum (LON:SLP) Delisting from ASX — Sylvania will then only trade on AIM

Caterpillar (NYSE:CAT) – Q1 profits rise 29% to beat expectations

Kazakhmys (LON:KAZ) – Q1 production sees 65,000t of copper cathode production

Polymetal (LON:POLY) – Final Results

Rio Tinto (LON:RIO) – Completes formation of iron ore JV at Simandou in Guinea

West African Minerals (LON:WAFM) – Update on iron ore exploration in Cameroon

Anglo American (LON:AAL) – Disposal of Scaw Metals Group 

Equatorial Resources (LON:EQX) – Good DTR results from Mayoko –Moussondji Iron Ore Project

Highland Gold (LON:HGM) – Finals Results

Medusa Mining* (LON:MML) – costs hold at US$239 despite fall in gold production

Trans-Siberian Gold (LON:TSG) – Q1 2012 Production Update

Planetary Resources is creating headlines with its aim to survey asteroids with a view to mining

Anglo Asian Mining* (LON:AAZ) Notice of Discovery at Ordubad, Azerbaijan, submitted 

Afferro Mining (LON:AFF) – Operational Update at Nkout Project (Cameroon)

Hummingbird Resources (LON:HUM) – Drill results extends resource potential at Tuzon

US – Q1 GDP figures will be released later today. 

• Forecasts indicate that the value of all goods and services produced in the US increased at a 2.5% annual rate on the back of a 3% gain in the previous 3 months. 

• Improved job creation and subsequently an increase in household purchases of big ticket items such as cars is being cited. 

• The emphasis is changing towards domestic consumption as export growth is curtailed by weak demand in Europe. 

• Figures released yesterday showed that initial jobless claims were down by 1,000 – below estimates and trending with recent housing and industrial production figures that are cooling after a run of impressive figures. 

• Q2 GDP figures are expected to be slightly lower than Q1. 

China – Industrial profits rose by 4.5% in March. 

• On the back of the positive figures the question now is will sentiment for a more accommodative policy stance diminish? 

• The IMF has come down on the tightening side of the debate, stating that Asian nations should prepare to “shift gears” and tighten monetary policy as inflationary pressures return to centre stage. 

Europe – Yesterday S&P cut Spain’s rating to BBB+, 3 steps from Junk status, citing concerns that the country will need to recapitalise the banks. 

• With austerity measures tightening, a non performing property market and soaring unemployment (24.4%) the prospects for the Spanish economy look bleak to say the least. 

• The Bank of Spain announced last week that GDP contracted 0.4% in Q1. 

• The nation’s budget shortfall is forecast to reach 6% this year with debt reaching 84% of GDP. 

• Where will growth come from? 

• As the second round of the French election nears, socialist candidate Hollande, has reiterated his intention to renegotiate the European fiscal compact should he win. 

• Unemployment in France now sits at around 10%. 

• On the positive side of the equation, Portuguese bond yields appear to be moving in the right direction, decoupling from those of other peripheral nations. 

• Yields on the country’s ten year bonds have dropped 50 basis points this week. 

• Officials have reiterated that Portugal will return to the debt markets next year and that the country is not a contender to implement PSI cuts. 

• To sum up, there is growing optimism that Portugal will implement the required legislation and adjustments to turn the corner – unfortunately for Spain the market’s perception about the political will invested in driving changes is declining. 

Japan – The BOJ has expanded its bond purchase plan by 10 trillion yen, boosting the asset purchase fund to 40 trillion by June 2013.

• The Bank reiterated that it expects the 1% inflation goal to be hit. 

• The yen initially reacted as expected – slipping, but it then subsequently recovered. 

• Manufactures have been struggling of late as the yen has been making it difficult for production to remain in Japan. 

• Confirming this industrial production in March increased by 1% - compared to forecasts of 2.3%. 

• The benchmark interest rate was maintained at between 0-0. 0.1% today. 

• Consumer prices excluding fresh food rose 0.2% yoy. 

• If officials remain focused on driving inflation up than the Japanese markets could well be a very interesting place in the coming years. 

• Figures released this morning showed that retail sales yoy in March increased by 10.3 % - having come from a repressed base last year. Forecasts had expected an increase of 10%. 

South Korea – Today a report indicated that the current account surplus widened in March to a 4 month high as overseas orders of cars, and oil products rose. 

• The excess in March sat at US$3bn. 

Brazil – The country’s central bank has indicated that it will continue to cut its benchmark lending rate towards historic lows as the economy struggles regain momentum. 

• Inflationary pressures continue to ease in the country prompting officials to cut rates. 

• The selic rate now sits at 9% - It was at 12% this time last year. 

• The Government continues to cut taxes on consumer and industrial goods as well as increasing the level of low cost loans in an effort to get the population spending again. 

Chile – The government announced an overhaul of the tax system following 7 months of demonstrations with protesters demanding the state to raise spending on education.

• Corporate tax rate will increase to 20% from 18.5%, while income taxes and the stamp duty on loans will drop.

Kenya – The country’s finance Ministry has announced that it intends to raise spending by 26% in the next fiscal year to meet demands by public workers for wage increases. 

Currency – The euro fell today, extending its monthly decline against the dollar and the yen as concerns mount over Spain. 

• Despite the BOJ stimulus the yen gained against most of its peers. 

US$1.3172/eur vs 1.3232/eur yesterday. Yen 80.80/$ vs 81.19/$. SAr 7.822/$ vs 7.733/$. $1.617/gbp vs 1.619/gbp

Commodity News

Precious:

Gold US$1,652/oz vs US$1,648/oz yesterday – Gold held steady ahead of US GDP data that is due later today.

• Mexico, Russia and Turkey added about 44.8 metric tons valued at $2.39 to reserves in March, according to the International Monetary Fund.

• SPDR gold trust holdings remained at 1,282t (41.216moz) value US$68.126bn. 

Platinum US$1,564/oz vs US$1,558/oz yesterday

Palladium US$669/oz vs US$667/oz yesterday

Silver US$30.94/oz vs US$30.78/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,287/t vs US$8,237/t yesterday – Prices climbed to a 3-week high after pending home sales in the US increased more than forecast.

• Aggregate Chinese inventories may have climbed to a record high of around 1mt , according to Standard Chartered estimates.

Aluminium US$ 2,082/t vs US$2,081/t yesterday

• Slowing exports of Chinese appliances, weak domestic real estate market  and high inventory levels may cap aluminum prices in the future,  ccording to the China Household Electrical Appliances Association.

• Norsk Hydro, European third largest aluminum producer, reported a US$87m net income in Q1 this year, down 36% from last year (excluding revaluation gains), on the back of “continued weak demand and low aluminum prices”.

• The company forecasts global aluminium demand growth outside China to average 3% in 2012.

• Japanese aluminum products shipments increased 1.7% yoy to 173,723t in Mar.

Nickel US$ 18,182/t vs US$17,809/t yesterday

Zinc US$ 2,022/t vs US$2,014/t yesterday

Lead US$ 2,110/t vs US$2,097/t yesterday

Tin US$ 22,350/t vs US$21,900/t yesterday

Energy:

UK Prime Minister David Cameron calls on energy companies to bring down fuel bills at world energy summit.

Oil US$119.36/bbl vs US$119.17bl yesterday- We should see a trending fall in oil prices next week as demand weakens across European countries on news like Spain’s credit rating being downgrade by S&P throwing further concern over EU recovery.

• A report due for release today by the EIA is likely to indicate the U.S. has sufficient capacity to release emergency oil stockpiles to take steam out of gasoline prices; the UK is likely to follow suit. 

• As always it will be interesting to see how long and how it takes gas stations to pass on any savings which so that we see any economic benefit. 

• Argentina’s Senate approved bill to expropriate YPF SA raising concerns for other companies such as Vale about their projects.   

• Eni’s Libyan production could be fully returned by 2H 2012 as profits rose 42% on increased production, largely due to higher oil prices. 

• WTI was at US$103.96/bbl, US Crude was at US$103.95/bbl. 

Natural Gas US$2.036/btu vs US$2.073btu yesterday – Statoil has found a partner to take 25% stake in its Mozambican blocks 2 and 5 in the Rovuma basin where drilling is expected to start next year.

• Reuters has reported that the Mozambique government plans to increase the max stake the country can hold in future oil blocks fro the current 25% level. 

Uranium US$51.75/lbs vs US$51.75/lbs yesterday- The EU energy chief has called for greater safety tests on EU nuclear plants despite assurances from regulators that all EU countries are taking more stringent safety measure.

• UX consulting weekly spot as of 23rd April 2012 was at US$51.75/lb (+0.50). 

Coal $101.55/t Richards Bay, Newcastle $103.05/t, Rotterdam $100.00/t

Other:

Iron ore – Vale, the largest iron ore producer, forecasts demand and prices for the material to recover in 2012; though, higher company tax rates and royalties will likely limit the extent of improvement in markets.

• The company reiterated its 2012 estimates for sales of 310mt of iron ore.

• Prices are expected to climb to around US$180/t this year.

• In Brazil the company is facing higher taxes and is combating the federal government over back taxes over the last several years that are estimated at US$16bn.

• Switzerland charged Vale with back taxes.

• Furthermore, the company is “re-evaluating its Rio Colorado project in Argentina over inflation fears and political risks”.

Potash – Vale SA has raised concerns over its $5.9bn Argentinean potash project and plans a review of the political and foreign investment dangers after the government seized control of oil company YPF SA last week. 

Steel – Rising steel inventories in Japan offer a concern with regards to demand in the nation’s market.

• Stockpiles are currently at the highest level in 5 months at 2.76mt, according to the Japan Iron and Steel Federation.

• In particular, producers are concerned with an increase of steel inventories for the construction secor. H-beam sales increased by 2.9% mom from record lows in Feb to 219,000t; whereas, stockpiles increased more by 3% to 241,000t.

• Flat steel sector recorded a more positive month, with stockpiles rising at a lower pace than sales.

• Nippon Steel, the largest steelmaker in Japan, reported a profit of ¥59.7bn (US$735m) in the last quarter helped by the weakening of the yen compared with ¥16.2bn expected and ¥11.2bn loss last year.

• China Steel, the biggest steel producer in Taiwan, recorded a US$24m loss in the three months ended Mar 31 which is its second quarterly loss in a row on the back of lower prices and waning demand.

Ferrochrome – China’s ferrochrome imports surged 48% mom to 168,506t (-29.2% yoy), according to nation’s customs.

• Volumes in Apr and May are expected to slow down as market weakened during Mar and few orders came into the market.

• “All this material (Mar shi[pments) was booked in late Jan and Feb, when the domestic market was still stable to firm,” a local trader said.

• Ferro-chrome imports from South Africa came in at 114,777t, followed by Kazakhstan at 27,376t.

• Imports of chrome ore and concentrate increased 10.9% mom to 758,883t (-21% yoy)

• South Africa, the top supplier of chrome ore and ferro-chrome to China in Mar, shipped 406,968t of chrome ore and concentrate, followed by Turkey with 146,581t.

Manganese – China’s manganese ore and concentrate imports dropped 19% mom to 992,038t in Mar.

• Local traders say the Chinese market for silico-manganese and ferro-manganese remain weak.

• Silico-manganese and ferro-manganese traded at the lowest level since last Nov this week in China and stood at CNY 7,350-7,700/t and CNY 6,600-6,800/t, respectively.

• Australia was the biggest exporter of the material to China, supplying 336,197t of ore and concentrate in Mar, up 4.2% mom and 2.3% yoy.

• South Africa was the second biggest supplier in Mar, exporting 197,139t to China, down 51.3% mom and 14.4% yoy.

Company News

Norsk Hydro (LON:NHY) – Warns that global aluminium demand would grow at the low end of market expectations

Inmet Mining Corp. (TSX:IMN) profits rise 62% on rising copper production

• Net income C496m, C$1.39/s versus C$59m, 97c/s a year earlier 

• The figures beat market expectations

• Production forecasts maintained but costs forecast to rise on rising power and royalty rates

• Inmet is looking to sell a 20-40% stake in its Cobre Panama copper project to help finance the project

• Cobre Panama is currently 80% Inco and 20% KPMC (LS-Nikko copper and Korea Resources Corp.)

Beacon Hill Resources (LON:BHR) Quarterly Update

• Q1 2012 Production was impacted by significant rainfall impacting the continuous mining and stripping operation. 

• This has not impacted current production levels which are in line with forecasts. 

• For Q1 2012 the company produced ROM production of 29,355 tonnes with saleable coal of 21,952 t this compares to Q4 2011 ROM production of 49,288 t and saleable coal of 13,742 t. 

• The Group remains on track to produce and export 100,000 tonnes of coking coal in 2012. 

• Coal is being transported to Beira and stockpiled at the Group’s laydown area and the first shipment is planned for mid-2012. 

Conclusion: The share price of BHR has come back in line with the rest of the junior mining space. Given that the company has valuable coking coal this is surprising. Once shipments start in mid-2012 the market may focus on the cash flows even from small tonnages of coking coal. There has been no shortage of interest from the marketing side with the marketing partnership struck with Vitol in March which gives them a US$20m debt facility and access to one of the largest energy trading groups.

Discovery Metals* (ASX:DML) DFS on Zeta Underground shows attractive economics

• The DFS has evaluated the development of an underground mining operation at Zeta and shows an NPV of US$131m on a discount rate of 10% and a copper price of US$3.00/lb. 

• The DFS shows production of 35,000 tpa of copper at a cash cost of $1.82/lb with capex to first ore production of US$26.8m and $80m for the current planned life of mine. 

• The maiden underground reserve at Zeta is 7.3 Mt at 1.3% Cu and 24.5 g/t Ag. 

• The preferred method for mining chosen is sublevel caving with twin decline development from the Zeta open pit providing underground access.  This process can be tested in the upper levels eg at 55m depth before committing the process to deeper levels.  All lateral development is said to be in ore, which should accelerate some cash flow ahead of larger scale mining.

• The DFS assumes that the development of the Zeta underground mine will be financed from cash flows from the Boseto open pit operations. 

• The company are seeking permitting for the underground mine and have submitted an addendum to the original ESIA submitted for the approved Boseto project.  

• Approval for the addendum is expected in the second half of 2012.  We expect the permits to be received in good order and good time in Botswana.

• The optimum extraction and processing sequence for the combined open pit and new underground ore reserves at Boseto has not yet been determined and timing depends on the planned expansion of the Boseto Concentrator to deliver 50,000 tonnes of copper per annum. 

• The company expect to provide more detail on the expansion of the concentrator in late 2012 after the concentrator is running at the nameplate throughput of 3 Mtpa.

Conclusion:  The Zeta mining plan enables the team to expand the Boseto plant production rate to over 50,000tpa of copper contained in concentrate.  It is possible that the Boseto plant nameplate capacity could be raised to some 70,000tpa in time if all goes well and if the sequencing of the two mining operations allows for sufficient ore production.  Mine head grades and dilution control will be critical to any expansion of copper production beyond the 50,000tpa target.

* Fairfax acts as corporate advisor to Discovery Metals

Chalice Gold Mines (ASX:CHN) Trading Halt pending announcement 

• The company may announce a renegotiation of its agreement with the Eritrean government

• Management have been in discussions with ENAMCO the Eritrean National Mining Corporation over a 30% stake in the Zara project.  Mining agreement and related discussions are also being negotiated.  The stake is in addition to the state’s existing 10% free carry. 

• Zara is in northern Eritrea with a probable reserve of 760,000oz within a 840,000oz indicated resource.  

• Production forecast to average 104,000ozpa of gold with an initial year mine life of seven years 

• Cash cost of US$338/oz with a capex of US$122m. 

Eritrea fiscal regime:

o 10% government free carry, 

o option for the state to acquire a further 30% in a project on an agreed valuation and government payment for its share 

o taxation at 38%, 

o royalties at 5% for precious and 3.5% for base metals 

o no tax holidays. 

• We expect ENAMCO to pay for its participating interest after the grant of the mining license reducing the funding obligation for Chalice.  

• The Chalice and ENAMCO need to agree fair valuation, which if not reached an independent valuation will be undertaken. 

Conclusion:  Chalice shares have been hit hard by general weakness in the Australian market.  Uncertainty pending negotiations in Eritrea has also not helped.  Rising industry costs for capex and opex also eroding value.  Much depends on the terms of the deal with ENAMCO and on the forward funding terms and level of payment by the Eritrean state.  Nevsun has trail blazed in Eritrea and is a key stock to watch in relation to Chalice (NSU CA).

Sundance Resources Ltd (ASX:SDL) Agreed Terms for development of Mbalam iron ore project

• The company has agreed key terms for the development of the Mbalam project with the Republic of Cameroon. 

• The agreement is based on a convention between Sundance Resources, the Hanlong Group and the Cameroon Government. 

• The parties have agreed that the Cameroon government will have a 10% free carry and the option to buy a further 10% on a contributory basis. 

• The convention confirmed a 25 term permit – ownership of the rail and port infrastructure will transfer to the Govt of the Cameroon after 25 years. 

• Attractive royalty and tax have been negotiated with royalties set at 2.5%, a minimum 5 year tax holiday and a max tax rate of 25% at the end of the tax holiday. 

• The company has also received a mining permit for the project from the Republic of Congo. 

Conclusion: Completion of these agreed terms will enable Hanlong to proceed with its acquisition of Sundance at 57 cents a share subject to approval from the National Development and Reform Commission of China – this is expected by 31 May 2012.

Should the Hanlong bid succeed and funding found for the investment (DFS projected $4.7bn) to take this project forward, it would be good news for other iron ore projects in the region. The railway is expected to cost $2bn, 43% of the project value with the port accounting for a further 12%. There are a number of projects in the vicinity looking for infrastructure development including Afferro’s Nkout project, Core Mining’s Avima project and Equatorial’s Badondo project. There is also talk that BHP may be a potential buyer for the large scale Belinga deposit in Gabon brining potential capital for infrastructure investment in the area.

Sylvania Platinum (LON:SLP) Delisting from ASX — Sylvania will then only trade on AIM.

Mining this week:

Caterpillar (NYSE:CAT) Q1 profits rise 29% to beat expectations

Kazakhmys (LON:KAZ) Q1 production sees 65,000t of copper cathode production

Polymetal (LON:POLY) Final Results

Rio Tinto (LON:RIO) Completes formation of iron ore JV at Simandou in Guinea

West African Minerals (LON:WAFM) Update on iron ore exploration in Cameroon

Anglo American (LON:AAL) Disposal of Scaw Metals Group 

Equatorial Resources (LON:EQX) Good DTR results from Mayoko –Moussondji Iron Ore Project

Highland Gold (LON:HGM) Finals Results

Medusa Mining* (LON:MML) costs hold at US$239 despite fall in gold production

Trans-Siberian Gold (LON:TSG) Q1 2012 Production Update

Planetary Resources is creating headlines with its aim to survey asteroids with a view to mining

Anglo Asian Mining* (LON:AAZ) Notice of Discovery at Ordubad, Azerbaijan, submitted 

Afferro Mining (LON:AFF) Operational Update at Nkout Project (Cameroon)

Hummingbird Resources (LON:HUM) Drill results extends resource potential at Tuzon

Morning View

Chinese banks appear to be struggling to finance bulk commodity shipments weakening prices

Letters of credit are increasingly difficult for end users to obtain

• Vale comment that iron ore prices are softening in China

• Thermal coal prices are also seen falling for shipments into China

• US coal is being increasingly shipped to China as the US moves to increase use of shale gas

• Ilmenite prices in China – ‘Industrial Minerals’ comments that TiO2 prices have fallen by around 20% in two weeks.  Ilmenite prices have fallen from around $400/t at the year end to $270-290/t but relatively high Ilmenite prices at the end of 2011 were not expected to sustain and the pullback was widely forecast by producer.

China plans to phase out outdated smelting capacity (Bloomberg) 

- to reduce pollution and to improve energy efficiency

• Steel – 7.8mt (versus closure of 28mt in 2011)

• Iron – 10mt

• Copper - 700,000t (versus closure of 425,300t in 2011)

• Zinc – 320,000t

• Lead – 1.15mt

• Aluminium 270,000t

While China may close this capacity it may also replace the capacity through expansion elsewhere

Bernanke hints that QE is over – further US stimulus would be reckless

But central bankers were prepared to take action if conditions worsened.

Borrowing costs to remain low till 2014

FOMC - growth will remain moderate over the coming quarters with GDP forecast to at 2.4% to 2.9%

US dollar weakened following the statement 

• The US economy has been seen as investors as the most likely to emerge from this latest recession

• Euro strength and Eurozone debt issues may well hold back a return to European growth

• China, with its command economy, may well continue to command 7.5-9.0% growth

Eurozone – traders appear to be renewing short positions on Spain but leave stronger economies alone

• Concerns over new French government dissipate on Hollande’s seemingly pragmatic stance

Economic News                                                            

US – Yesterday Federal Reserve Officials upgraded their forecasts for the US economy – dampening the prospects of another round of QE. 

• Officials are now forecasting growth in GDP of between 2.4% and 2.9% this year up from original forecasts of 2.2%-2.7% in January. 

• Additionally unemployment is expected to fall, dropping to the 7.8-8% level versus forecasts of 8.2-8.5% in January.

• “Significant downside risks” to the US still remain though and the problems facing the global economy will likely still have negative implications for US growth through out the rest of the year. 

• Core inflation is expected to rise at a faster pace: between 1.8-2% in 2012 – Reports indicate that now only 4 (out of 10) FOMC participants think that rates should remain at current levels 0-0.25% through to the end of 2014. 

• This change in attitude is one of the more interesting pieces to emerge yesterday – Inflation concerns are picking up and although the Fed has some room to manoeuvre with regard to its rate policy, should the economy continue to pick up over the summer than 2014 may prove to be too long to wait for a rise. 

Europe –Eurozone officials may try and include an additional aspect to the budget treaty that will provide guidelines on how specific countries can boost growth. 

• Such guidelines will include steps to improve competitiveness and suggested structural reforms. 

• Will this be growth on a German model? 

• Is the emphasis turning from austerity to growth? 

• We hope that policy makers do not take a step back. Fiscal and monetary discipline must remain the priority in the short term. Sustainable growth can only be achieved if structural improvements are made. 

• The IMF has reiterated that Spanish banks must do more and that some of the nation’s savings banks remain a threat to the country’s economy. 

• Spanish banks have already raised €50bn in new provisions this year alone. 

China – The PBOC has set a record reference rate for the yuan at 6.2829 per dollar – the strongest level since the peg was ended 7 yrs ago. 

• Additionally the benchmark money market rate rose to the highest level in more than 2 weeks. 

• The increase occurred as banks sought to increase cash holdings to meet capital requirements at month end. 

• Some poor earnings figures weighed heavy on Chinese markets today. 

• Concerns continue to mount that earnings for Q2 will mirror poor figures, generally speaking, in Q1. 

• The yuan strengthened again – for the 3rd day on the back of the reference rate marker. 

Japan – BOJ policy meeting tomorrow.

• Expectations are that more details will be provided as to further stimulus plans and increased clarity on long term policy plans. 

• The market is expecting further asset purchases to be announced. 

• Japanese markets were today supported by the Fed Chairman’s comments that further stimulus could be added if required. 

UK – New forecasts suggest that the pound could well have rallied too far against the dollar and that the currency that has strengthened 3.8% this year could well see a reversal.

• Consumer confidence figures compiled by the Nationwide rose to a 9 month high in March. 

New Zealand – The country’s central bank left interest rates at record lows as the threat of rising inflation remains muted. The official cash rate was held at 2.5%

• Inflation remains within the Government’s target range of 1-3%. 

Singapore – Industrial production fell for the second time in 3 months in March. 

• Manufacturing fell 3.4% from a year earlier – on the back of an 11.8% gain in February. The drop last month is being attributed to a fall in demand for consumer electronics and petrochemicals from China. 

South Korea – GDP has dropped to the weakest level in two and a half years as exports remain weak as a result of the problems facing the global economy. 

• Official figures show that growth slowed 2.8% in Q1 yoy - down from 6.3% in 2010. 

• QoQ growth registered at 0.9% - The positive QoQ figure was coming from a very repressed base. 

• Exports of goods rose 4.5% yoy.   

US$1.3232/eur vs 1.3191/eur yesterday. Yen 81.19/$ vs 81.42/$. SAr 7.733/$ vs 7.784/$. $1.619/gbp vs 1.614/gbp

Commodity News

Precious:

Gold US$1,648/oz vs US$1,642/oz yesterday – Gold is upbeat this morning helped by the Fed announcement yesterday that the US economy is improving which in turn dragged the dollar down.

• Gold sales during Akshaya Tritiya, the second largest gold buying festival in India after Dhanteras, are estimated to have dropped by 50% to 10t this year on the back of higher prices, according to Reuters.

• Polyus Gold is planning a sale of a stake of 7.5-10.5% worth up to US$1bn ahead of the London listing, Reuters reported. 

• SPDR gold trust holdings remained at 1,282t (41.216moz) value US$67.476bn. 

Platinum US$1,558/oz vs US$1,549/oz yesterday

Palladium US$667/oz vs US$667/oz yesterday

Silver US$30.78/oz vs US$30.82/oz yesterday

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,237/t vs US$8,119/t yesterday – Prices climbed for a third day on the back of falling US dollar.

• Japanese copper and copper-alloy fabricated goods production contracted by 8.1% yoy to 67,210t in Mar, a 10th decline in a row, as stronger yen weakened sales.

• The rate of decrease slowed down in the last 3 months signalling the market may be close to the bottom.

• Orders from the auto and semiconductor industries showed recovery, while electronics sector remained weak.

• Total production in the year ending Mar 2012 came in at 806,143t, down 6.7% from 864,046t in 2011.

• Annual outputs is forecast to climb 2.4$ to 825,320t this year, the Japan Copper & Brass Association said.

• Jiangxi Copper, China’s largest copper producer, reported a 9.6% drop in net income in Q1 as slowing demand dropped prices.

• The company plans to produce 210,000t of copper concentrate from its own operations in 2012.

• Anglo American said a Chilean court rejected the Codelco’s request to freeze dividends from 49% of its south-central Chilean assets.

Aluminium US$ 2,081/t vs US$2,082/t yesterday

• China’s planned capacity expansion by 15mt by 2015 is more than the 6mt required to be self-sufficient given a run-rate of 90%, China Minmetals Nonferrous Metals said.

• An increased capacity would bring the total to 40.6mt.

• The company forecasts higher-cost producers to drop out of the market or utilization rates to fall should the expansion progress as planned.

Nickel US$ 17,809/t vs US$17,525/t yesterday

Zinc US$ 2,014/t vs US$1,995/t yesterday

Lead US$ 2,097/t vs US$2,070/t yesterday

Tin US$ 21,900/t vs US$21,550/t yesterday

Energy:

Financial sustainability in renewable energy and the need to have a more diverse global energy supply are expected to be key issues in Prime Minister David Cameron’s meeting with 23 of the world’s biggest economies today in London.

Oil US$119.17/bbl vs US$118.26bl yesterday- Oil gains this morning off of Fed reporting interest rates to stay close to zero for the next two years.

• Crude imports have risen in the U.S. from Saudi Arabia to the Gulf Coast 

• Some of which is destined for the Saudi Aramco and Shell JV 325,000/bbl/d expansion of the Motiva Port Arthur refinery in Texas. 

• Shell’s fourth quarter profits beat forecasts where gains made on high oil prices outweighed the lower U.S. natural gas prices. 

• Chief Executive warned that cheap natural gas is continuing to eat into profits 

• WTI was at US$104.27/bbl, US Crude was at US$104.16/bbl. 

Natural Gas US$2.073/btu vs US$1.972btu yesterday –

Uranium US$51.75/lbs vs US$51.25/lbs yesterday- 

• UX consulting weekly spot as of 23rd April 2012 was at US$51.75/lb (+0.50). 

Coal $101.45/t Richards Bay, Newcastle $103.05/t, Rotterdam $99.25/t

• Indonesian thermal coal prices fell on Wednesday of weak demand from China coupled with strong dollar. 

• Coal of Africa Limited loaded first batch of thermal coal 

• 1,500mt from its Vele Colliery in South Africa's Limpopo province for the Matola Terminal in Maputo, Mozambique is destined for Asian markets. 

Other:

China – The nation will cut the following amounts of outdated capacities in 2012: 320,000of zinc, 1.15mt of lead, 270,000t of aluminum and 700,000t of copper.

Iron ore – Chalco made an earn-in-payment of US$1.35bn with regards to the Simandou project in Guinea, which in effect completes the formation of the JV with Rio Tinto on 44.65/50.35 terms.

• The project is forecast to produce 95mtof iron ore per annum.

• First shipment of the material should be completed by mid-2015.

• The JV also plans to construct a 700km railway link to the coast and a deep-water port around 60km south of Canakry.

• Total capex for he project was estimated at US$10bn.

Rare Earths- China bites back at WTO investigation over quota restrictions. 

• China’s Zhu Hongren, chief engineer of the Ministry of Industry and Information Technology said the quotas are meant to protect the environment. 

Company News

Caterpillar (NSYE:CAT) Q1 profits rise 29% to beat expectations

• Net profit rises to $1.6bn, $2.37/s - 2012 company profit guidance rises to $9.5/s from $9.25/s

• Sales rise 23% to $16bn

• Profit growth is despite a softening of conditions in construction and key emerging markets 

• Orderbook:  $30.7bn versus $30bn at end 2011 and $21bn a year ago

Kazakhmys (LON:KAZ) Q1 production sees 65,000t of copper cathode production

• Kazakhmys report 65,000t of copper cathode production for Q1

• Zinc production came in at 32,000t

• Management are guiding to 285,000t to 295,000t for the year with production rising in H2 as the Konyrat mine is restarted

• Buyback program reports 10.6m shares repurchased for $150m since September

Conclusion:  The company appears to offer good value at current copper prices.  We see copper prices as holding relatively good levels as many mines are struggling to maintain production levels and are expected to miss targets.  It is good to see the buyback program in action as it shows a commitment to return surplus funds to the market in support of the shares.

Morning View

Gold and resource stocks to remain attractive as prospects for further stimulus and QE rise 

UK GDP Q1 growth flatlines at 0% versus 0.3% growth forecast – (technical recession in our books)

• Other forecasts indicate that the UK may not be suffering as badly as the ONS stats show and that the official figures may revise upwards in time.

• The lack of significant economic growth in the UK highlights the impact of European issues on the UK

• Strong Euro is a symptom of US dollar issues and IMF deal to increase bail out fund

Apple results surprise the market on the upside 

• AT&T and 3M also impressed investors with earnings ahead of forecasts

• EU fiscal uncertainty starts to fade following successful Dutch bond auction although political crisis may see investors prefer other sovereigns.

• Francois Hollande, likely to be the next president of France, appears to be winning support for his economic ideas for structures to boost growth within the current EU economic pact.  

• Hollande is looking to inject Eur20bn over five years and sees no fiscal austerity without some form of growth program.  Hollande plans to fund infrastructure projects using project bonds.  

Whittle consulting presentation highlights value to be gained through optimisation of mining projects

• Gerald Whittle presented to private equity and other funds at Fairfax yesterday.

• Whittle’s work describes how value can be realised through the optimisation of mining and processing schedules to generate 15%-74% more value in certain instances.

• Whittle pit optimisation is generally applied across the industry for pit scheduling but few realise that further optimisation of grade, processing and other schedules can realise significantly greater value through accelerating cash flow recovery.

• Whittle optimisation has been successfully applied to most Australasian nickel laterite projects, making many marginal projects successful 

• Optimisation works best for mines with variable grades and mineralogy affecting recovery rates 

• Whittle’s work overturns conventional mining thinking to realise new value out of projects.

• Generating greater potential value from mines has should be a must within the sector.

• We recommend Whittle to investors and to company execs.

ANZAC day today – Australian markets are closed in respect for the Australian and New Zealand servicemen who fought at Gallipoli as part of the Allied expedition.  The Gallipoli landings started on 25 April 1915.

Economic News

UK – GDP figures released today published by the Office of National Statistics show that the economy flat lined last quarter. 

• There was no growth in Q1 yoy. The market was expecting 0.3% growth. 

• Quarter on Quarter growth contracted by 0.2% - compared to forecasts of 0.1% growth.    

• Calls for further QE will undoubtedly now resonate around the UK. 

• Additionally the Index of Services contracted by 0.4% month on month – further highlighting the level of under performance from sector. 

US - Yesterday the Commerce Department announced that new home sales dropped 7.1% in March. 

• Although not encouraging, the figure was better than markets expected. 

• Figures for February were revised up to a 7.3% increase yoy. 

• The Conference Board said its confidence index was down to 69.2 in April compared with a revised 69.5 in March. 

• Home prices dropped in February in most major cities for the 6th month in a row. 

• Forecasts ahead of a report due for release later today suggest that US durable goods orders probably rose in March. 

• Forecasts predict 0.5% growth – compared to 1.8% the prior month. 

China - Premier Wen Jiabao has reiterated his pledge to maintain steady economic growth. 

• The statement encouraged market to rise this morning in Asia.    

• Forecasts suggest that officials will extend measures to support growth imminently. 

• Additionally the Premier stated that “China will remain committed to reform and opening up”   

Europe – Interestingly Bloomberg is reporting that no European banks have sold unsecured debt this month and that the cost of insuring against default has climbed to levels last seen in the first month of the year. 

• To compare – in Q1 2012 there were more than 30 unsecured bond sales. 

• The ECB’s requirement that banks post collateral in return for ECB loans is sapping demand from the market as it reduces the amount unsecured bond holders would get back in a default. 

• New estimates in the market suggest that European banks need to refinance €700bn by the end of 2013. 

• Yesterday Spain sold €2bn euros worth of debt maturing after 3 and six months. 

• Similarly the Dutch successfully sold bonds raising €2bn yesterday. 

Japan – Figures released this morning showed that machine tool sales softened in April to 1.6% growth from 2.4% March 

• Forecasts increase that Japan’s central bank is set to increase stimulus measures as the recent rebound in the yen indicates that the impact of asset purchases at the start of the year is waning. 

• A stronger yen reduces export sales and profits. 

India – S&P has revised the country’s outlook to negative, BBB-

• The agency reaffirmed the credit rating at investment grade but suggested that a downgrade was on the cards. 

• Large fiscal deficits and debt as well as low middle income across the wider economy are being credited for the revision. 

• S&P has little confidence in the country’s ability to control the fiscal deficit moving forward. 

Brazil – Consumer prices rose more than analysts forecast in the first half of April. 

• The announcement is prompting further speculation that the country will miss its inflation target this year. 

• Prices gained 0.43% through mid April. 

• Annual inflation slowed to 5.25% in mid April. 

US$1.3145/eur vs 1.3144/eur yesterday. Yen 79.12/$ vs 78.67/$. SAr 7.769/$ vs 7.794/$. $1.577/gbp vs 1.568/gbp

Commodity News

Precious:

Gold US$1,720/oz vs US$1,719/oz yesterday – Gold is little changed as investors wait for a report on US durable goods in Mar and the Fed press conference later today.

• Gold backed ETP holdings dropped to 2,391t yesterday, the lowest level since Mar 28.

• SPDR gold trust holdings remained at 1,282t (41.216moz) value US$67.963bn. 

Platinum US$1,640/oz vs US$1,611/oz yesterday

Palladium US$695/oz vs US$682/oz yesterday

Silver US$33.19/oz vs US$33.21/oz yesterday

Rhodium US$1,480/oz vs US$1,510/oz yesterday

Base metals:

Copper US$ 8,327/t vs US$8,267/t yesterday – Copper prices held steady ahead of a 2-day Fed’s meeting that should finish today.

• The pipeline of copper projects in Chile may face significant constraints should the country fail to expand its power supply accordingly.

• Chile needs additional 8,000 mW to current 17,000 mW by 2020, according to the National Energy Commission. Mining sector accounts for 20% of total electricity demand.

• However, protesters ranging from environmentalists and local communities oppose construction of power projects, including HidroAysen in Patagonia that should become the nation’s largest power generator. 

• Power prices at Chile’s central grid increased from US$100/mWh at the beginning of 2010 to more than US$150/mWh at the end of 2011.

• China International Capital Corporation forecasts Chinese copper demand to increase by 4.8-4.9% in 2012 compared to a growth of 6.0% last year due to state regulation of the real estate sector.

• Trafigura forecasts copper prices may drop US$7,000/t in Q3 before climbing back in H1 2013 amid Chinese rising stockpiles that currently stand at 3mt (CRU estimates) and slowing nation’s economic growth.

• Deutsche Bank expects prices to average US$8,600/t this year on “improved US and Chinese growth” and “challenged global copper supply growth”.

Aluminium US$ 2,179/t vs US$2,175/t yesterday

• China’s aluminum demand may rise 11% this year - packaging (+15-20%), construction (+7%) and auto sector (+2-7%) , - according to Alcoa estimates.

• Gulf aluminum production will grow to 5.21mt in 2015 from 3.48mt last year, the Gulf Aluminum Council said.

• US and Canada’s aluminum consumption grew 8% yoy to 842,000t in Feb, according to the Aluminum Association.

Nickel US$ 20,160/t vs US$19,925/t yesterday

Zinc US$ 1,994/t vs US$1,993/t yesterday

Lead US$ 2,040/t vs US$2,033/t yesterday

Tin US$ 24,350/t vs US$24,400/t yesterday

• Malaysia, once the largest producer of the metal, may see tin industry thriving again supported by above US$20,000/t prices.

• Current Malaysian tin reserves are estimated at 1mt, equivalent to US$114bn.

Energy:

Oil US$118.26/bbl vs US$118.62bl yesterday

• Power stations at the Heglig oilfields have been left in ruins after Sudan’s heavy attacks 

• China calls for restraint and a return to talks between Sudan and South Sudan leaders and to halt all military action. U.N. Council in talks to discuss action. 

• Shell’s bid is favoured by Cove directors over PTTEP’s equivalent offer in £1.12bn deal or 220p-a-share. 

• More M&A deals are likely to follow whoever wins Cove and its minor 8.5% stake in the Mozambique region. 

• A $10bn Indian Energy fund seen as a drop in the ocean when competing for assets amidst the race of emerging economies. China’s sovereign wealth fund was launched with $200bn of capital back in 2007 

• Venezuela has secured $1bn from a consortium of Japanese companies for upgrades, maintenance and expansion works on state-owned refineries. 

• WTI was at US$103.73/bbl, US Crude was at US$103.68/bbl. 

Natural Gas US$1.972/btu vs US$1.93btu yesterday – Low natural gas prices which have reduced the cost at blast furnaces and boosted players like U.S. Steel Corp’s first quarter earnings.

Uranium US$51.25/lbs vs US$51.25/lbs yesterday- First Uranium may be a step closer to a deal to sell its Ezulwini mine that includes talks with Russia’s Renova Group

Coal $101.60/t Richards Bay, Newcastle $103.25/t, Rotterdam $100.25/t

• Coal of Africa Limited has taken delivery of its coal washing plant as its Vele colliery in Limpopo. 

• The plant has been designed to avoid discharging effluent into the local environment and protect endangered trees and vegetation. 

Other:

Rare Earth – Vale may replace China as supplier of rare earth oxide (REO) Lanthanum to Petrobras 

• The REO is used in the for oil refining process. 

• Vale is seeking a long term contract to supply 900t o lanthanum oxide per year. 

• Vale is investigating the prospect of rare earth production in Brazil but wants long-term commitments from Petrobras before it makes any significant investment. 

Company News

Polymetal (LON:POLY) Final Results

• The company announced a 33% increase in EBITDA of £530m for 2011 versus £398m in 2010 and net income of $347m which was less analyst estimates of $412m. 

• Cash costs at the group level was up 66% from $416/oz to $688/oz with consumable and spare parts were up 66% which accounts for 33% of costs and services and labour up 99% and 90% respectively. 

• Services are 30% of costs and labour 19%. 

• The company implemented a new dividend policy to pay a dividend of 20% of net earnings provided net debt to adjusted EBITDA is below 1.75. 

• For the full year the company has declared a divided of US$0.20 a share – based on the current share price this dividend is not particularly meaningful. 

Conclusion: The cost pressures being reported by the gold miners in Russia is striking – a 66% increase in costs sounds as if costs need to be reigned in and the performance on costs is worst than other gold miners in Russia where cost inflation is running at around 30%.

Rio Tinto (LON:RIO) Completes formation of iron ore JV at Simandou in Guinea

• Rio Tinto and Chinalco’s subsidiary Chalco have completed the formation of the JV at Simandou holding 53% and 47% respectively. 

• Rio and Chalco will now hold 50.35% and 44.65% in the Simandou project with the remaining 5% held by the IFC. 

• Chalco has made an earn-in payment to the JV of US$1.35 bn as set out in the agreement made in March 2010. 

Conclusion: Rio Tinto’s Simandou project is one of the high profile projects being developed in West Africa and will be the largest integrated mining project in Africa.

The project located in south-eastern Guinea has attracted more than $3bn of investment to date including $2bn of mining expenditure. The project will involve the construction of a 650 km railway.

In October last year, Rio Tinto announced the acceleration of the Simandou project with approval of a further $211m for continued studies and $1.1bn of funding for commitments for early works and procurement of early lead time articles. First production is being targeted in mid-2015 increasing to 95 mtpa over five years – Simandou will become a meaningful part of Rio Tinto’s iron ore production growth from 2016.

West African Minerals (LON:WAFM) Update on iron ore exploration in Cameroon

• The company has completed the first phase of exploration on its six licences in the Cameroon having completed 27,000 line kilometre aeromagnetic survey across these licences.

• The survey has identified 30 discrete demagnetised zones overlying magnetite enriched bedrock which the geophysical team consider as potential DSO targets.

• 10 of these targets are near the coastal concessions of Binga and Minko near the planned deep water port of Kribi.

• The remaining 20 targets are in the company’s south-eastern permits.

Conclusion: This is a good start to the strategy the company is pursuing of finding iron ore deposits which have DSO and have proximity to potential infrastructure key to getting iron ore project economics right. The share price has more than doubled when we first recommended it in January 2012 as a speculative buy.  At these levels we would wait for further results on the prospectivity of these identified targets.

Morning View

Copper US$8,099/t  -  Gold US$1,636/oz – metals continue to hold good levels despite economic uncertainty

• Negative Eurozone and US manufacturing services figures yesterday prompted markets to sell off

• Buyers seem to be returning to the market as China’s leading activity index shows gains for a second month

• US GDP expected Friday

• Miners look likely to track sideways pending better news 

• The majors look good value at current price levels assuming commodity prices remain at present levels as margins still look good despite forecast high levels of mine inflation in major producing regions eg Australia

ANZAC day tomorrow – Australian markets will close in respect for the Australian and New Zealand servicemen who fought at Gallipoli as part of the Allied expedition.  The Gallipoli landings started on 25 April 1915.

Economic News

China – Domestic stocks dropped the most in a month today.

• The Leading Index for China gained 0.8% from the previous month, compared to a 1% increase in February. 

• Increased political uncertainty in Europe is weighing on sentiment – dampening demand for Chinese exports. 

• Forecasts indicate that manufacturing may contract for a 6th month in April. 

• Expectations continue to increase that officials will take action and instigate measures to boost the economy. 

• Chinese banks in 2011 posted their fastest profit growth in at least 4 years according to Bloomberg. Additionally lenders advanced 7.47tr yuan of new loans last year 6% less than the most offered in 2010. 

• New figures compiled by Bloomberg indicate that China is importing 11% more oil than a year ago to expand its stores. 

• Bridgestone Corp has stated that tire demand in China, the largest rubber consumer, is growing at a slower pace than last year. 

• Despite the negative news, the Deputy Director General of the National Bureau of Statistics has stated that Chinese growth will not fall “drastically”. 

• Official’s figures indicate that China’s net overseas financial assets declined in the Q4 2011. 

Europe – Are we seeing a changing of the guard in Europe that will result in a new direction being forged for the debt crisis?

• Political will is being tested in the centre of the Eurozone. 

• Yesterday Dutch PM Mark Rutte offered his cabinet’s resignation as a revolt against austerity measures and spending cuts took hold within the coalition government. 

• The cost of insuring the country against default soared to the highest level in 5 months. 

• Speculation continues to mount that in France incumbent President Sarkozy, an ardent supporter of current Eurozone efforts, will be ousted by Fancois Hollande in Early May as the “no vote on austerity” increases. 

• French government debt ranks as the third worst performer this month. 

US – Forecasts ahead of a report due for release later today, suggest that sales of previously owned homes increased in March for the first time in three months.

• Forecasts suggest purchases rose to 318,000 on an annual basis up 1.6%. 

• The Residential market has continued to struggle against a backdrop tight lending standards and more foreclosures – depressing property values. 

• Additionally the Conference Board is expected to announce that consumer confidence decreased to 69.7 in April from 70.2 the prior month. The report will be released at 15.00 today. 

• The Richmond Fed will announce manufacturing index figures for April today. Forecasts suggest the index will hit 6 – compared to a reading of 7 in the prior month. 

Japan – Shares dropped for a 4th day today on the back of the fresh concerns surrounding the Eurozone and the implications that it would have for the nation’s exports. 

• The yen gained against all of its major counterparts today as risk concerns escalated. 

India – Government plans to curb the budget deficit are legitimate and achievable according to Fitch Ratings.

• The goal is to reduce the gap to 5.1% of GDP from 5.9% currently. 

• The rupee weakened this morning. 

• The country’s sovereign rating will ultimately benefit from structural fiscal reforms. 

• Mumbai residential home sales recovered from a three year low in the quarter ended March as new projects boosted demand. 

• New reports indicate that India will not see shale gas production within 5 years as environmental concerns override needs for shale gas energy in the country. 

Australia – Core consumer prices, rose last quarter at the slowest pace in 14 years. 

• Investors continue to forecasts that the central bank will accelerate rate cuts next month in an effort to sustain demand. 

• The consumer price index increased rose 0.1% from the previous 3 months. 

• An interesting aside today – has a giant bubble in the aussie dollar resulted in Australian flocking to buy basement apartments in Notting Hill? 

• Aussies apparently like to buy basement flats as generally speaking it provides outside space and critically room for a BBQ. 

• The question now is: should the bubble burst, will we see a flood of basement flats hitting the London market? 

Brazil – The head of country’s State Development Bank has stated that the perils of the global economy, creates an opportunity for Latin America’s largest economy to cut interest rates. 

US$1.3181/eur vs 1.3169/eur yesterday. Yen 80.98/$ vs 81.24/$. SAr 7.830/$ vs 7.832/$. $1.614/gbp vs 1.611/gbp

Commodity News

Precious:

Gold US$1,636/oz vs US$1,642/oz yesterday – Gold is slightly off as market fears the outcome of French and Dutch elections may harm future negotiations with regards to the continuing European sovereign debt crisis.

• India celebrates Akshaya Tritiya today. Traditionally, it is believed that gold jewellery bought on the day will bring prosperity and success.

• IMF released data on sovereign gold reserves.

• Mexico added 16.8t to 122.6t in Mar. Belarus reserves increased by 0.1t, Kazakhstan – 4.3t, Tajikistan – 0.4t, Turkey – 11.5t and Ukraine – 1.2t.

• SPDR gold trust holdings decreased to 1,282t (41.216moz) value US$67.118bn from 1,286t (41.352moz). 

Platinum US$1,557/oz vs US$1,577/oz yesterday          

Palladium US$672/oz vs US$673/oz yesterday  

Silver US$30.78/oz vs US$31.48/oz yesterday

• Silver fell to a 3-month low yesterday driven by stronger dollar and mounting concerns declining manufacturing may hurt demand for the metal.

Rhodium US$1,390/oz vs US$1,390/oz yesterday          

Base metals:

Copper US$ 8,099/t vs US$8,075/t yesterday – Prices are up this morning as the LME data showed cancelled warrants (orders to remove the metal from stockpiles) increased 67% to 103,575t yesterday, the highest since 2004.

Aluminium US$ 2,072/t vs US$2,075/t yesterday

• Chinese bauxite imports gained to a record of 5.3mt in Mar, up 50% yoy, ahead of the export ban on unrefined ore like nickel copper, iron ore, gold and manganese in Indonesia to come into effect on  May 6th.

• Indonesia accounted for 83% of Chinese imported bauxite ore in Mar.

• European aluminum producers do not expect demand to improve towards the end of the year.

• Traditionally Q2 is the strongest quarter in the region whereas suppliers say Q1 may have the strongest.

• The price and demand uncertainty led to the nearby-buying nature of the market with rising orders towards the end of the quarter as consumers cover the ir short-term needs.

• Autos and aerospace sectors are 2 sectors with strong demand for the metal. Other industries like construction are in weaker shape.  

Nickel US$ 17,710/t vs US$17,790/t yesterday

• Chinese nickel ore imports jumped 73% yoy to 3.67mt in Mar 2012. Indonesia accounted for 79% of imported ore.

Zinc US$ 2,000/t vs US$2,005/t yesterday           

Lead US$ 2,073/t vs US$2,100/t yesterday         

Tin US$ 21,440/t vs US$21,500/t yesterday         

Energy:

Oil US$118.62/bbl vs US$118.72bl yesterday- Oil fell off of China’s decline in manufacturing where demand for oil fell to its lowest level in six months yesterday.

• Iran was suffered a cyber attack from hackers at its oil ministry yesterday, its output was unaffected officials said. 

• Crude futures in Asia declined over concerns of the Eurozone political issues coupled with U.S. inventories rising. 

• Cove Energy directors recommend shareholders accept offer of 220p per share in cash offer from Royal Dutch Shell valuing the deal at £1.12bn 

• Valiant Petroleum sells 40% stake in UK northern North Sea to Agora oil and Gas in a share of costs deal. 

• Results from the drilling expected in May. Agora was sold to Cairn Energy for $450m earlier this month. 

• WTI was at US$103.03/bbl, US Crude was at US$102.90/bbl. 

• Unilever is negotiating plans to build a $100m palm oil processing plant in Indonesia. 

Natural Gas US$1.93/btu vs US$1.94btu yesterday- Falkland Islands Borders & Southern share took a tumble off of its discovery of gas condensate.

• The liquid that often trades at a premium to crude may take a long time to become commercially viable and was not what the market was expecting. 

Uranium US$51.25/lbs vs US$51.10/lbs yesterday- 

• UX consulting weekly spot as of 16th April 2012 was at US$51.25/lb. 

• TradeTech weekly spot price indicator has risen 25c to $51.50 

• Sellers are showing restraint as reports indicated by TradeTech; suggest the potential for a rise in prices. 

• TradeTech term price indicators are US$53.50/lb (mid) and US$60.00/lb (long) 

• South Africa’s Energy Minister Dipuo Peters seeks to calm NUM fears that development of a nuclear power sector would lead to systematic phasing out of the coal industry. 

Coal $100.55/t Richards Bay, Newcastle $102.70/t, Rotterdam $101.15/t

• China and India demand for raw material will force the rebound in coking coal prices by July after it suffered declines over four quarters. 

• China is leading demand with a growth forecast close to 10% this year with 10 new blast furnaces starting in the past six months which boosted output to a record in March. 

• India has a $1 trillion road/rail/bridges construction plan set to boost its coking coal capacity to over 100m/t by March. 

Other:

Steel – German steel production grew by 7% qoq to 10.9mt in Q1 2012.

• FY 2012 production is forecast to stabilise and total 44mt according to the nation’s steel industry association.

• A drop in H2 last year is unlikely to happen in the last 6 months of 2012.

• Spanish steel output fell 19.5% yoy to 1.3mt in Mar led by permanent and temporary closures at ArcelorMittal operations in the country.

• ArcelorMittal Espana delayed the restart of its Sesato electric arc furnace in Bibao for a third time on the back of current economic uncertainty in the region.

• Madrid EAF was idled in Oct 2011 with no indication of the time the company will restart the plant.

Company News

Anglo American (LON:AAL) Disposal of Scaw Metals Group 

• Anglo has disposed of Scaw South Africa to a consortium led by IDC and Anglo American’s partners in Scaw South Africa for a total consideration of R3.4bn ($440m). 

• The transaction follows the sale of Scaw’s international businesses Moly-Corp and AltaSteel to Onesteel in Dec 2010 for $932m achieving a total consideration of $1.4bn. 

• The sale to the IDC and its local BEE partners Izingwe Holdings, Shanduka Resources, Southern Palace Group of Companies leaves Scaw as a local steel company. 

Conclusion: Anglo has netted $3.7bn from the sale of its non-core assets and continues to reduce exposure to South Africa. The local steel consortium will now have to deal with the infrastructure issues related to power and transport to build up its steel business. Power continues to be an issue in South Africa.

Equatorial Resources (ASX:EQX) Good DTR results from Mayoko –Moussondji Iron Ore Project

• The company announced good DTR results from 33 fresh magnetite BIF samples at its flagship iron ore project in Republic of Congo. 

• The results show high mass recovery of 49.8% and concentrate grades of  68.9% Fe with 3.7% silica and 0.11% alumina. 

• Each sample selected represented a nominal 4m downhole intersection through fresh magnetite with a grind size of 63 microns. 

Conclusion: DTR results show high mass recoveries and grades for an iron ore concentrate product from this project with reasonable concentration of deleterious elements. 

However, the  grain size is small and could result in higher power costs – separation of 75 microns typically requires 10 kwh per tonne for 80-90% liberation – lowering the micron size from 75 to 50 microns can more than double power requirements.

Highland Gold (LON:HGM) Finals Results

• EBITDA rose by 30% to $157,118 helped by gold sales. 

• Production for the year was 184,102 oz down 8% from 200,028 in 2010. 

• The company anticipate increasing output to 200,000 to 215,000 oz based on their further acquisition in the Novo Mine which now gives then 96.6% ownership of the mine. 

• Cash costs were $594 per oz up 16% from 2010 as company experiences cost pressures seen industry wide. 

• The company continues to spend on its expansion and exploration projects with capex for the year of $65.6m up 66% from the previous year. 

Conclusion: While cash costs are up, the performance on costs is better than industry average with costs seen escalating by 30% and still leaves the company with good margins at current gold prices. This gives the company the cash flow potential to continue its expansion and development programme.

Medusa Mining* (LON:MML) costs hold at US$239 despite fall in gold production

http://www.medusamining.com.au/reports/120423_march2012quarterlyreport.pdf

Target Price 573 pence. (June year end)

• Medusa Mining produced some 18,258oz of gold through the quarter ended 31 March 2012 due to development work in preparation for the raising of gold production to a run rate of 120,000oz next year.

• Further upgrade to 200,000ozpa through the implementation of a 750,000tpd mill awaits permission from Manila on completion of the ‘mining industry policy review’.

• We had forecast 10,000-15,000oz of gold production for the Jan-March quarter due to subsidence at some at the gold leach tanks in April.  

• We expect the June quarter to produce around 20,000oz.  We have previously reduced the forecast to 20,000oz from 25,000oz due to the subsidence of the leach tanks as announced in March.

• Grades remained steady at 8.1g/t.

• Cash costs remain low at US$239 through the quarter with an average cash cost of US$250/oz now expected for the full financial year end June 2012.  While there are some cost pressures these costs are near industry lows and have risen less than for many other gold miners.  This shows good cost control and financial and mining discipline.

• Saga shaft:  the shaft is at 264m headed for 350m depth.  The completion of this shaft in Q4 will help raise production and help reduce operating costs.

• Co-O mine drilling continues: see previous comments.

• Tambis area – Bananhhilig project – seven rigs at site with a planned inferred resource due late August this year.

• Cash and cash equivalents (eg. gold on metal account) = US$71.3m versus US$80.2m at end 31 December.

• Capex: US$70m to be funded entirely through company cash flow

• Interim dividend A$0.5/s paid on 23rd March.

• The quarterly contains detailed maps and a diagram of the phase 3 production schedule which is worth looking at.

Conclusion:  Medusa continues to mine gold at industry low costs while developing the mine to significantly larger production capacity.  The cost control is good on its own but with the disruption of so much ongoing development work it is particularly impressive.  We look forward to rising production and even the potential for costs to fall further.  

Trans-Siberian Gold (LON:TSG) Q1 2012 Production Update

• Over the quarter the company achieved gold production of 6,689 oz of gold and 6,975 oz. 

• Gold production was down from the previous quarter 15% of 7,836 oz as grades fell to 6.97 g/t (versus 9.36 g/t) and the plant suffered throughput problems. 

• Grades improved in March to 9.1 g/t with recoveries remaining high at 95.1%. 

Conclusion: While grades are down over the quarter they are still high and recoveries are good at 95.1%. TSG has majority shareholdings of 54.88% by UFG Private Equity Fund and 30.9% by AngloGold Ashan

Planetary Resources – is creating headlines with its aim to survey asteroids with a view to mining

• The first move is to develop low-cost robotic spacecraft for surveying missions.  Surely a job for Fugro 

• The plan is to demonstrate its remote surveying equipment in a mission in around two years

• Harrison Schmitt, the last astronaut to walk on the moon was also a geologist with a particular interest in the potential of mining Helium 3 which is present in surface material on the moon.  

• Helium 3 a non-radioactive isotope of helium is used in fusion research and could become a significant power source for earth.  However NASA has not followed through with the idea preferring to focus on other forms of research.

• Hollywood has made the most out of extra-terrestrial mining and is likely to for some time in our view and for once we advise investors to put their money into extra-terrestrial mining films rather than out-of-this world mining ventures.

• See Bruce Willis in Armageddon. Other extraterrestrial mining films are Moon, Avatar, Star Trek, Outland, Chronicles of Riddick, Dune to name just a few

• Google Inc exes Larry Page and Eric Schmidt and filmmaker James Cameron are reported to be funding Planetary Resources, so I guess that means that we should be taking this more seriously.

• Nautilus Minerals continue to advance their sub-sea mining project off the coast of PNG.  Nautilus have signed a deal with Tongling (China) to supply 1.1mt of material from their Solwara 1 deposit.  We reckon the sub-sea mining part is relatively easy but the company needs to show how it may economically and reliably lift the material to surface from the ocean floor.  

Metals prices pull back from higher levels on Friday despite Eurozone fears 

- rising US dollar also serves to soften prices

• Poor Eurozone economic figures 

• Hedge funds seen reducing speculative long positions in metals on Eurozone issues

• In Asia, POSCO forecast earnings to improve in H2 on a better global economic outlook

• US business sentiment improves ( see comment below)

• Chinese over production of steel must cause some concern for overseas steel makers and iron ore producers

• High Chinese copper inventories also cause some concern despite forecast supply demand deficit for 2012.  

• Q1 Chinese copper imports rose by 77% on Q1 2011.  The market expects Chinese imports to total 2.7mt this year versus 2.8mt in 2011,

• Chinese copper imports are falling but high inventory levels may reflect ongoing concern over mine supply.

Well done to Simon Harrison at Fairfax for running the London Marathon in 3 hours 51 mins.                       

Economic News

Europe - The socialist challenger, Francois Hollande has won the first round of the French election setting up a run off against incumbent President Sarkozy. 

• The lead is a narrow one with Hollande winning 28.2% of the vote. 

• Interestingly, the headline grabbing figure of the night was the 18.6% result for the National Front’s Marine Le Pen who beat all predictions. 

• The run off will take place on May 6th. New polls indicate that the socialist challenger will beat Sarkozy in the run off. 

• The markets are keenly aware of the uncertainty that would be created within the Eurozone leadership should Hollande win in May. 

• Some weaker than expected PMI data emerged today. 

• A very poor Eurozone PMI manufacturing figure of 46 was announced – below forecasts of 48.1 and down from 47.7 in March. 

• Services, similarly poor at 47.9 below forecasts of 49.3. 

• Looking at specific countries - German PMI manufacturing came in significantly down on March’s figure of 48.4 at 46.3. Forecasts had predicted a recovery of 49.   

• In France there was a slight improvement in manufacturing with the figure rising to 47.3 from 46.7. The increase was slightly below forecasts of 47.4. Services in France fell to 46.4 from 50.1 in March. 

• On the other side of the coin, PMI services in Germany expanded more than forecast – 52.6 in April compared to 52.1 in March. 

• For the Eurozone as a whole, the PMI composite index painted a worrying picture with the figure for April coming in at 47.4 below March’s figure of 49.1 and forecasts of 49.3.   

US – According to the National Association of Business Economics 78% of businesses project that the US economy will expand more than 2% in 2012. 

• 4 in 10 firms, the most since July 2011, said they expect employment to pick up in the next 6 months. 

• 40% of companies polled stated that earnings were increasing. 

• Interestingly, companies indicated in the latest survey that materials costs may be less of a concern with only 37% stating input prices rising. 

China - New forecasts suggest that Chinese manufacturing may shrink for a sixth month in April. 

• According to new forecasts the preliminary reading of the HSBC purchasing managers’ index comes in at 49.1 in April. 

• The continued contraction may well prompt officials to move towards more accommodative economic policy. 

Australia – Prices paid by Australian producers unexpectedly fell last quarter for the first time in more than two years. 

• Producer price index dropped 0.3% in January to March. 

• On the back of the fall speculation has increased that a rate cut is imminent. 

• The Aussie dollar weakened today on the back of the announcement. 

Japan – Japanese stocks moved between gains and losses today.

• The yen rose today as concerns over the implications of the French elections increased. 

Indonesia – Foreign and domestic investments increased in the Q1 on the expansion of its mining, food and plantation industries according to official figures. 

• Investment rose 32.9% to 71.2 trillion rupiah – $7.8bn 

• FDI rose 32.9%. 

Vietnam – The country’s inflation rate slowed to the lowest level in 18 months today.

• Prices rose 10.5% in April – down from 14.15% previously reported. 

• Forecasts now indicate that another rate cut is on the cards in the coming months. 

Currency – The Euro fell today against risk protection currencies, as concerns grew that the French elections will add problems to the euro crisis. 

• The Aussie dollar is off today after a report showed the nation’s producer prices fell last quarter. 

US$1.3169/eur vs 1.3129/eur last week. Yen 81.24/$ vs 81.59/$. SAr 7.832/$ vs 7.826/$. $1.611/gbp vs 1.606/gbp

Commodity News

Precious:

Gold US$1,642/oz vs US$1,644/oz last week – Gold is off this morning amid poor Euro zone and Chinese PMI data driving the US dollar up.

• The Shanghai Gold Exchange will increase margin requirements and trading bands for gold and silver contracts during May holidays.

• Gold contracts margins will be increased to 13% from 12%.

• Silver margins will be raised to 16% from 15%.

• SPDR gold trust holdings remained at 1,286t (41.352moz) value US$67.859bn. 

Platinum US$1,577/oz vs US$1,580/oz last week

• China imported 7.4t in Mar compared to 5.9t in Feb.

Palladium US$673/oz vs US$666/oz last week

Silver US$31.48/oz vs US$31.78/oz last week

• China’s silver imports were 255.5t in Mar versus 213.2t in Feb.

• Silver Institute released its world market survey last week.

• Industrial demand dropped 2.5% to 486.5moz due to a slow down in the Euro zone towards the end of 2011.

• Jewellery demand fell 4.54% to 159.8moz on the back of high price volatility.

• Photography sector use recorded the lowest decrease in 6 years at 8.32% as the medical sector postponed a change to digital devices due to insufficient funding.

• Silverware demand decreased 10.15% to 46moz.

• Total fabrication demand reached its second highest reading since 2000.

• Silver bullion bar investment advanced 67% 95.7moz and coins and medals demand grew 19% to an all-time record of 118.2moz.

• Silver ETFs lost 4% to 576.1moz.

• Mine supply increased 1.4% to 761.6moz on an upbeat by-product production from gold and lead/zinc mines.

• Silver mining lost 29% last year on falling headgrades.

• Operating cash costs rose to US$7.25/oz on the back of increasing labour costs and slowing production.

• Mexico was the largest supplier of the metal followed by Peru, China, Australia and Chile.

• Government sales declined 74% to a 14-year low of 11.5moz driven by weaker figures from Russia.

• Producers cut their hedging positions to 10.7moz.

• Scrap supply rose 12% to 256.7moz as average prices increased 74% to a record of US$35.12 in 2011.

Rhodium US$1,390/oz vs US$1,390/oz last week

Base metals:

Copper US$ 8,075/t vs US$8,060/t last week – Poor preliminary Chinese PMI released this morning and worse than expected manufacturing and services PMI data in the Euro zone drove copper prices down this morning.

• China’s refined copper imports were 350,568t in Mar compared to 375,831t in Fb and a record high of 406,937t in Dec last year.

• Zambia’s environmental management agency allowed Glencores Mopani to resume operations at the Mufulira plant on Thursday.

• The plant was shut last month due to high emissions of the pollutant acid mist.

Aluminium US$ 2,075/t vs US$2,071/t last week

• Rusal and Glencore signed an agreement according to which aluminum producer will sell US$43bn worth of the metal (14.5mt) over 7 years to a trader at multi-decade high premiums.

• Premiums to LME prices are currently at US$140/t compared to US$83/t at the start of 2010.

• The contract accounts for a 3rd of Rusal’s annual production.

• Glencore accounted for c. 45% of Rusal’s aluminum sales in 2010.

• The company also sealed a deal with Rusal to sell its alumina through 2019.

Nickel US$ 17,790/t vs US$17,697/t last week

Zinc US$ 2,005/t vs US$2,004/t last week

Lead US$ 2,100/t vs US$2,083/t last week

Tin US$ 21,500/t vs US$21,400/t last week            

Energy:

Oil US$118.72/bbl vs US$118.27/bbl Friday- Oil rises as Iraq halted some exports because of a technical fault at a pipeline network supported by increased demand  in the U.S. form a rise in consumer spending in 1Q2012

• Oil trading faces tough disclosure rules proposed by the industry-backed “Extractive Industries Transparency Initiative”. 

• This latest news comes after President Barack Obama called for tougher regulation on oil speculators manipulating the price of oil on futures trading. 

• South Sudan ordered its troops to withdraw from the Heglig oil field to avert the risk of all-out-war.    

• WTI was at US$103.76/bbl, US Crude was at US$103.76/bbl. 

Natural Gas US$1.94/btu vs US$1.92/btu Friday- 

• Falkland Island oil and gas explorer Borders and Southern Petroleum Plc confirmed a “significant gas condensate discovery” in its first exploration well. 

Uranium US$51.10/lbs vs US$51.10/lbs Friday- Kazakhstan the world’s largest uranium producer has boosted output, producing almost 5% more uranium from Jan-Mar 2012 than in the same period last year.

• UX consulting weekly spot as of 16th April 2012 was at US$51.25/lb. 

Coal $101.55/t Richards Bay, Newcastle $103.20/t, Rotterdam $102.10/t

• A dispute on a thermal coal tax between the ministry of energy and minerals and the trade ministry in Indonesia is still in discussions 

• Indonesia is seeking ways to increase revenues and investment into its mining industry. 

• Some major miners have said they hold contracts that are decades old which contain clauses that would make it very difficult for the government to change should any tax hikes come into force. 

• Coal shipments from Newcastle port rose 6.6% last week. 

• U.S. demand for coal from power utilities has declined forcing some producers to idle mines. 

Company News

Anglo Asian Mining* (LON:AAZ) Notice of Discovery at Ordubad, Azerbaijan, submitted 

• The company filed the Notice of Discovery with regards to the 462sq km Ordubad Contract Area with the Ministry of Ecology and Natural Resources of Azerbaijan. 

• The Ordubad Contract Area covers licenses located in the Nakhchivan region, western Azerbaijan. 

• The document details the exploration programme completed at Agyurt and Piyazbashi (meaning “Head of Onion”) deposits during 2010 and 2011 complemented by the Soviet period data. 

• The exploration work consisted of surface trenching and sampling, re-sampling 3,000m of adits, 2,500m of surface drilling and 1,400m of underground drilling at Agyurt. Results should be announced in due course. 

• More exploration activity is planned in the region with a view to set up a small gold production. 

• The Agyurt and Piyazbashi areas are close to each other and may potentially benefit from common processing facilities. 

• Following the submission of the Notice of Discovery the company has 6 months to submit a Development and Production Programme to the government. 

• Upon approval of a Development plan the company is granted a license to commence the 15 year production stage with two 5 year extensions.

• We have not included any value for the Agyurt and Piyazbashi in our current valuation of the company.  Our valuation is determined on forecast cash flow from the Gedabek mine and the Gosha project.

Conclusion:  The submission of the Notice of Discovery is another step in the direction of growing the company’s resource base with a potential to develop gold operations in addition to the flagship Gedabek project. We are looking forward to further detail on the exploration programme completed in the region.  

 *Fairfax acts as Nomad and broker to Anglo Asian Mining

** A Fairfax analyst has previously visited the Nakhchivan region in western Azerbaijan with Anglo Asian. 

Afferro Mining (LON:AFF) Operational Update at Nkout Project (Cameroon)

• Afferro Mining have announced drill results from Nkout in the Cameroon which show high grade iron with potential for DSO (Direct Shipping Ore).

• Grades at Nkout centre include intercepts of 47m at 60.7% Fe from 3.5 metres below surface. 

• At Nkout East intercepts include 58.2% Fe from surface. 

• The company expect to release a fourth mineral resource estimate at the project in Q2 2012. 

• Early metallurgical results show that project economics could be helped by the coarse grind of the high Fe product with 150 microns for 65% Fe with a soft rock bond work index of 12-13 WHr and high recoveries of 80-90%. 

• The company also low deleterious materials in the product with aluminium below 0.2%, phosphorous below 0.01% and negligible sulphur. 

• Afferro Mining recently sold its 38.5% minority stake in the Putu project in Liberia to Severstal for US$55.25m + US$9.75m held in with respect to a potential government 15% withholding tax. 

Conclusion: Resource economics should be helped by the discovery of potential DSO at the Nkout project. The company have the funds to take the forward to PFS stage and the company should be looking to collaborate with other projects in the vicinity to push forward developments on the infrastructure front so that over time the resource potential can be realised.

Hummingbird Resources (LON:HUM) Drill results extends resource potential at Tuzon

• Hummingbird Resources have announced some good drill results from a drill programme at the north extension of the existing resource at Tuzon. 

• 17 drill hole results from a 28 hole 5,700 m drill programme to the north extends could potentially extend the strike of the resource by 300 to 400m. 

• The grades are higher than the grades seen so far from Tuzon with grades north of 2 g/t  in relatively shallow areas with good success at TD047, TD 052 and TD 054 

o TD 047 – 19.32m at 2.3 g/t gold from 65-85m 

o 6.87m at 2.98 g/t gold from 138-145m 

o TD052 – 13 m at 1.73 g/t gold from 85 to 98m 

o TD054 22.38m at 2.15 g/t gold from 28.86 m to 51 m 

o 29.46m at 1.78 g/t gold from 111 to 141 m 

• The company also announced trench results from the Sackor gold target 3 km SW of the 1.8m oz Dugbe F gold resource ahead of drill programme at the target. 

Conclusion: These are good drill results from Tuzon and better than grades historically been achieved and promises well for a resource upgrade at Tuzon. We look forward to hearing about any progress made to do a feasibility study on the project to take it forward.

Mining last week:

Hambledon Mining* (LON:HMB) Quarterly Report to 31 March 2012 

Vital Metals* (ASX:VML) Update on Watershed Tungsten DFS and Burkina Faso Exploration

Wolf Minerals* (LON:WLFE) Signing of offtake agreements 

Central Asia Metals (LON:CAML) Full-year results 

(Kounrad copper project in Kazakhstan 60% owned)

Fortescue Metals (ASX:FMG) Report iron ore shipments of 12.6m vs guidance of 13-13.5mt

Noricum Gold (LON:NMG) Exploration Update at Schonberg

Rio Tinto (LON:RIO) Gains control over Oyu Tolgoi

Talvivaara Mining (LON:TALV) Q1 operating loss expected due to lower production volumes and nickel prices

BHP Billiton (LON:BLT) Quarterly production numbers

Firestone Diamonds (LON:FDI) Resignation of CFO from the Board

EMED Mining (LON:EMED) Hard Line on budgets by Spain’s Central Govt should be helpful

Rio Tinto (LON:RIO) First Quarter Operations Review 

Scotgold Resources Ltd (LON:SGZ) Positive Results from Development Study

Cluff Gold (LON:CLF) Annual results 

Gem Diamonds (LON:GEMD) Interim Management Statement to 15 April 2012

North River Resources* (LON:NRRP) Progress update on Namib Lead and Zinc Mine

Sumatra Copper and Gold& (ASX:SUM) Tembang Project Optimisation

Morning View

Economic News

G20 finance ministers will meet today in Washington to discuss measures to combat the continuing sovereign debt crisis in Europe.

• IMF is seeking more than US$400bn in new reserves to raise the fire power of the rescue fund.

Europe – Repsol YPF rating was cut to BBB- from BBB with a negative outlook following the news that Argentina which took control of YPF on Apr 16 said it will not provide “near term” compensation to the company.

• YPF contributed 40% to Resol’s aggregate EBITDA in 2011.

Germany – The Ifo Institute business climate index increased to 109.9 in Apr for a sixth month in a row versus 109.5 expected and 109.8 in Mar.

US – Initial jobless claims in the week ended Apr 14 came in at 386k compared to 370k expected and 388k in the previous week.

• Existing home sales declined for a second month and stood at 4.48m in Mar versus 4.61m expected and 4.6m (revised) in Feb.

• Philadelphia Fed Manufacturing Index dropped to 8.5 in Apr compared to 12.0 expected and 12.5 in Mar. Above 0.0 indicates improving conditions.

China – Market expectations are for China to announce a cut in bank’s reserve requirements in the coming weeks.

US$1.3129/eur vs 1.3130/eur yesterday. Yen 81.59/$ vs 81.48/$. SAr 7.826/$ vs 7.817/$. $1.606/gbp vs 1.607/gbp

Commodity News

Precious:

Gold US$1,644/oz vs US$1,643/oz yesterday – Prices are little changed as market digests a mixed news flow: worse than expected economic data in the US and positive business confidence figures in Geramny.

• Thomson Reuters GFMS said yesterday gold prices may follow a “weak patch” and drop to US$1,600/oz in the short term.

• SPDR gold trust holdings remained at 1,286t (41.352moz) value US$68,211bn. 

Platinum US$1,580/oz vs US$1,582/oz yesterday

Palladium US$666/oz vs US$659/oz yesterday

Silver US$31.78/oz vs US$31.59/oz yesterday

• Thomson Reuters GFMS expects silver to range in between US$28.7-32.9/oz in Q2 this year and rise to US$40/oz in H2.

Rhodium US$1,390/oz vs US$1,390/oz yesterday

Base metals:

Copper US$ 8,060/t vs US$8,061/t yesterday – Copper is heading for the first weekly gain in the last three weeks on expectations the Chinese central bank may further lower the bank deposit reserve requirement ratio.

• Freeport-McMoRan forecasts another year of deficit in 2012.

• “Europe is weak, but its not as weak as some feared going in to the second half of 2011,” company’s CEO said.

• “China continues to spend money on infrastructure projects. Its fundamental economy appears to be strong”.

• Demand in the US is stronger-than-expected.

• The company reported yesterday a 49% yoy drop in net income in Q1 2012 to US$764mt due to lower sales and higher cash costs.

• The industry is expected to “face supply constraints from interruptions to existing operations and the challenges of bringing on new production because of a whole variety of issues: technical, cost constraints, environmental, etc.”.

• Japanese copper wire and cable shipments including exports and local business climbed 5.9% yoy to 59,500t in Mar driven by a pick up in demand from the auto and electric-machinery industries.

Aluminium US$ 2,071/t vs US$2,068/t yesterday

Nickel US$ 17,697/t vs US$17,753/t yesterday

Zinc US$ 2,004/t vs US$1,995/t yesterday

Lead US$ 2,083/t vs US$2,048/t yesterday

Tin US$ 21,400/t vs US$21,006/t yesterday

Energy:

Oil US$118.27/bbl vs US$118.26/bbl yesterday – Brent holds just above $118/bbl as investors remain nervous about the Eurozone after Spain’s high borrowing costs on 2 and 10-year bond sale.

• In a backlash to President Obama’s plans to increase regulation on speculators of oil futures contracts. 

• CME Group has warned the President that speculation should not be confused with manipulation and his plans could have the exact opposite effect. 

• WTI was at US$103.19/bbl, US Crude was at US$102.76/bbl. 

Natural Gas US$1.92/btu vs US$1.95/btu yesterday- 

Uranium US$51.10/lbs vs US$51.10/lbs yesterday – UX consulting weekly spot as of 16th April 2012 was at US$51.25/lb.

Coal – $101.55/t Richards Bay, Newcastle $103.05/t, Rotterdam $101.15/t

Other:

Steel – JFE Holdings, Japanese second-biggest steel producer, reported a 625m yen (US$7.7m) in the quarter ended Mar 31, compared with a loss of 5.9bn yen last year. 

• Expectations were for the company to record a net loss of 2.7bn yen.

• The yen fell by 9% against the dollar at the end of Mar from its record high of 75.35 on Oct 31 which in turn improved the competitiveness of Japanese mills compared to South Korean and Chinese producers.

• Posco, the world’s third-largest steelmaker, reported a 42% yoy drop in profits to US$472.6m in the three months ended on Mar 31 on higher raw-material costs and weaker demand.

Iron ore – Anglo American reported a legal interruption with regards to a construction of a power transmission line at its US$6bn Minas Rio iron ore project in Brazil.

Tungsten – Chinese production of tungsten concentrate with 65% metal content grew 24.2% mom in Mar to 13,525t, according to the National Bureau of Statistics data.

• Q1 production totalled 31,869t (+25.9% yoy).

• Jiangxi province was the largest contributor to the total output producing 15,644t (+32.2% yoy).

• Hunan province was the second biggest producing 15,644 (+13.5% yoy).

• “Q2 is usually the peak season for noble alloys,” MetalBulletin reports citing local analyst.

Molybdenum – Chinese production of molybdenum concentrate with 45% content increased 12.3% mom in Mar to 21,748t.

• Q1 production came in at 58,928t (+11% yoy).

• Henan produced the most molybdenum concentrate in Q1 with total output of 26,644t, little changed from the previous year.

• Shanxi province, the second-biggest manufacturer in China, produced 11,348t in Q1 (+19.7% yoy).

Rare Earth- Lynas Corp Rare Earth project is struggling to obtain the refining licence in Malaysia it needs where the first phase of the worlds largest plant is near finishing.  

Company News

Hambledon Mining* (LON:HMB) – Quarterly Report to 31 March 2012 

• The company announced quarterly gold production of 4870 oz in line with management expectations with 26,000 oz targeted for the full year. 

• Underground production contributed to 22% of this at around 1057 oz. 

• The company retains its target to achieve ore mined from underground of 100,000 tonnes for the full year against the level achieved in Q1 of 14,504 tonnes. 

• The decline to access the next level of the underground ore zone is said to be on plan according to management. 

• Recoveries for the quarter at 78% are below budgeted levels as a result of the processing of increased levels of clays and carbonates in the underground ore and deeper sections of the open pit. 

• Tailings dam remediation work has commenced and is expected to be completed in Q3 2012. 

• The company is still hopeful that it can achieve a reduction to the fines being imposed for the tailings incident and have engaged two specialist law firms to assist them. 

• Negotiations are ongoing with respect to the Akmola acquisition. 

Conclusion: There is a lot of bad news discounted in the Hambldeon share price given the flow of negative news. Management have said that they are meeting their budgets to reach targets for this year of 26,000 oz which includes production from mining 100,000 tons from underground production for the full year from 14,504 tonnes achieved so far – should they achieve these there is value in the shares.

* Fairfax acts as Nomad & Broker to Hambledon Mining

Vital Metals* (ASX:VML) – Update on Watershed Tungsten DFS and Burkina Faso Exploration

• Watershed Tungsten: The DFS being conducted on Vital’s tungsten project Watershed has strong support from JOGMEC who is funding $5.4m to earn a 30% stake in the project. 

• The DFS is expected to be completed by the end of 2012 at which point the JOGMEC stake will be assigned to a Japanese corporation who will partner with Vital in the development and operation of the Watershed mine. 

• To facilitate this transfer discussions with a number of potential partners are ongoing with respect to potential off-takes as well as project finance. 

• The DFS is progressing well in tandem with environmental permitting. 

• The DFS is showing gravity concentrates in excess of 70% WO3 . 

• Burkina Faso Gold Project: The company expect to have a JORC estimate of resource at the Kollo Prospect by the end of the quarter. 

• A program of soil sampling is being undertaken to identify further targets for first pass drilling. 

Conclusion: The current share price does not reflect the value being assigned for the tungsten project which based on JOGMEC’s participation of $5.4m for a 30% stake, value the project at $18m against the current market cap for the company of A$9.7m. JOGMEC is also helping the company find partners to take the project to the next stage once the DFS is completed expected at the end of this year. The current share price gives a discounted participation in a tungsten project while having potential value in the Burkina Faso gold project once a JORC resource is achieved expected in the second quarter of this year. We remain buyers of the shares.

*Fairfax has previously raised funds for Vital Metals.

Wolf Minerals* (LON:WLFE)– Signing of offtake agreements 

• The company has signed an offtake and loan facility for the amount of £20m with Wolfram Bergbau in Austria and Global Tungsten & Powders Corp in Pennsylvania. 

• These offtake agreements cover 80% of the average annual production of tungsten for a minimum period of 5 years which can be extended by mutual agreement. 

• The mine is projected to produce 345,000 mtu’s of 65% WO3  tungsten concentrate per year for a 9.25 year mine life. 

• The additional loan facility adds to an existing debt facility of £55m giving them around £75m towards the £104m estimated project capital cost leaving a potential 30% equity component. 

• The ungeared NPV based on the DFS completed in May 2011 is £74m. 

Conclusion: This is good news for Wolfe Minerals with most of the funding in place for their low cost tungsten project. We remain positive on the outlook for tungsten prices. Tungsten is a ‘critical’ strategic metal as defined by the EU and prices have moved higher in recent years to support its importance in global manufacturing.  While tungsten prices will move with global demand for machine tools and other uses we also see new potential demand from strategic stockpiles giving support to prices.   

Other listed tungsten plays which we support are Vital metals and Ormonde Mining**. 

* Fairfax analysts recently visited the Hemerdon site in Devon, UK (it really is a mine in the UK!)

Mining this week:

Central Asia Metals (LON:CAML) – Full-year results 

(Kounrad copper project in Kazakhstan 60% owned)

Fortescue Metals (ASX:FMG) – Report iron ore shipments of 12.6m vs guidance of 13-13.5mt

Noricum Gold (LON:NMG) – Exploration Update at Schonberg

Rio Tinto (LON:RIO) – Gains control over Oyu Tolgoi

Talvivaara Mining (LON:TALV) – Q1 operating loss expected due to lower production volumes and nickel prices

BHP Billiton (LON:BLT) -  Quarterly production numbers

Firestone Diamonds (LON:FDI) – Resignation of CFO from the Board

EMED Mining (LON:EMED) – Hard Line on budgets by Spain’s Central Govt should be helpful

Rio Tinto (LON:RIO) – First Quarter Operations Review 

Scotgold Resources Ltd (LON:SGZ) – Positive Results from Development Study

Cluff Gold (LON:CLF) – Annual results 

Gem Diamonds (LON:GEMD) – Interim Management Statement to 15 April 2012

North River Resources* (LON:NRRP) - Progress update on Namib Lead and Zinc Mine

Sumatra Copper and Gold& (ASX:SUM) – Tembang Project Optimisation

Morning View

Mining Equities – Asset plays to remain in favour as Eurozone issues worry investors

Miners look good value as IFM upgrades prospects for global growth

Gold US$1,643/oz - Copper US$ 8,061/t

• Expectations for stronger US existing home sales 

• Some weakening of the US dollar

• Spanish debt auction today – expectations for Eur2.5bn target to be achieved 

• – a 10-year benchmark yield of under 6% for Spanish debt is seen as critical.  Anything over 6% is negative.

• IMF documents offer conflicting advice – that global growth should be better than expected – also that European banks will struggle to continue to extend credit 

• Focus on Europe this week – French elections may see Socialist win which could change the dynamics of European politics

• China slowdown / reorientation likely to be compensated by monetary easing and more expansionary fiscal policy

Tesco – Dividend statement slip up causes shares to rise and then collapse as the company misstated the final dividend at 14.76p but corrected this to 10.13p three hours later.  The market had expected a profit warning.  

• The full year dividend was still up 2% on last year.  As they say “Every little helps”!

Economic News

China – Officials have announced that the Central Bank will ensure that there is enough liquidity in the system and available cash to allow reductions in reserve requirements and increased lending. 

• Chinese officials have been keen to emphasis that they will take appropriate measures to manage the country’s economic slowdown as the emphasis moves from export lead growth to consumption. 

• Some forecasts suggest that there is room for two or three more reduction in the reserve requirement ratio this year. 

• Chinese officials have received a pat on the back from Treasury Secretary Tim Geithner who stated that official decisions to widen the yuan’s trading band against the dollar reflects changes that are “very significant and very promising” 

US – Sales of previously owned US homes probably increased in March as a drop in mortgage rates increased demand, according to forecasts ahead of a report due for release later today. 

• Initial forecasts suggest purchases climbed 0.7% to 4.62m. 

• Home starts slowed in March to a 5 month low according to official figures released earlier this week. 

• The US real estate market has been balancing an improving jobs market and cheap properties against increasing levels of foreclosures. 

• For consumer sentiment and spending to recover, the US needs to see the housing market make a considerable improvement. 

Europe – All focus will be on debt auctions by Spain and France today. 

• Spain is issuing as much as €2.5bn of notes. 

• Spain’s yields have ranged dangerously high of late with the markets concerned that the country’s officials lack the political will power required to implement austerity measures critical to sure up the nation’s finances and bring the budget deficit down to 5.3% of GDP. 

• In France the political situation is heating up. Investors are bracing for elections that could well result in a change in President if recent polls are anything to go by. 

• The election kicks off this weekend and Socialist candidate Hollande has increased his lead over incumbent Sarkozy in the most recent polls. 

• France plans to sell as much as €8bn of bonds today. 

• The IMF has been painting a positive picture for the market…Yesterday officials stated that a drastic contraction in the balance sheets of Euro banks the next 18 months could jeopardise the fragile financial stability of the region. 

• In the Global Financial stability report, the fund warned that European banks look set to shrink balance sheets by $2.6bn over that period – dumping 7% of their assets by the end of 2013. 

• Credit supply could also shrink by 1.7%. 

Japan – Figure released today show the fastest export growth in a year along with a smaller than expected trade deficit. 

• Overseas shipments increased 5.9% in March supported by rising demand for automobiles from the US. 

• The deficit sat at US$1bn, considerably less than the forecast US$2.7bn. 

• The yen strengthened on the back of the news before falling off. 

• Speculation continues to mount that officials will announce further asset purchases imminently. 

• Stocks were off today, despite the good trade figures as concerns continued to mount on today’s Eurozone debt auctions. 

Australia – PM Julia Gillard has reportedly increased pressure on the country’s central bank to reduce the high level of interest rates in an effort to reduce pressure on struggling industries out side the Resource sector. 

• The country is pushing to return to a surplus by cutting spending as a proportion of GDP. 

India – The country’s trade deficit has increased 56% in the fiscal year according to new government data.

• The deficit sits at a record of $184.9bn – increasing pressure on the rupee. 

• The shortfall in the country’s current account was $19.6bn in the final quarter of 2011. 

• The country has been severely impacted by the European debt crisis which has impacted demand for the nation’s exports. 

Brazil – The Central Bank has cut its benchmark interest rate to the lowest level in two years in an attempt to revive growth. 

• The cut is the 6th consecutive reduction and brings the rate down to 9%. 

• Officials have stated that the threat of inflation at this stage remains “limited”. 

Kenya- Fuels prices could triple in the next two months as Kenya Petroleum Refinery Ltd. transforms from tolling to merchant operations.

• The cost rise comes on the introduction in processing of crude oil starting July 1 when KPRL will import its crude oil, refine it and sell the end product at a profit to local and export market.

• The refinery is to undergo a $1 billion upgrade backed by Indian investors.

Sudan- President Omar al-Bashir has vowed publicly to topple his southern rivals as fears grow over an all-out war between the two nations that only separated as recently as July last year.