Fairfax Market Report including ENCR, African Aura, EMED mining and others


Economic News

US – All eyes are on the US today as the Federal Reserve’s Open Market Committee convenes. Expectations are that there will be no immediate introduction of new quantitative easing measures, despite the recent re-emergence of negative sentiment in the market.
•    The National Association of Homebuilders said on Monday that its Index of sentiment remained stuck at 13 this month mirroring the muted sentiment indicators recently in consumer confidence.
•    President Obama has openly criticised China’s currency policy saying that the government has not done everything they said they would to halt the currency’s advance and that they are operating with a considerable trade advantage as a result.
•    A report by Bloomberg shows that the US has fallen behind the emerging markets of Brazil, China and India as the preferred place to invest.

China – The Head of the national bureau of statistics has predicted that China’s economy will grow faster this year than last and with “better quality and structure”.
•    Rumours are circulating that the government will announce new property tax measures in October that could come into force as early as next year as efforts increase to dampen the property market.  The new tax is expected to be extended to include residential property in an effort to reign in the continued price growth.

UK – More negative housing data was released yesterday. Mortgage approvals fell last month to the lowest level in more than a year.  The number of mortgages approved fell from 47,000 to 45,000 registering the fourth decline in five months.
•    Contrary to the negative data, The Bank of England announced that the average property price at auction rose last quarter suggesting that prices in the broader market could start to improve towards the end of the year.

Australia – Increased its forecast for commodity exports this fiscal year to a record, on the back of increasing demand and climbing prices.
•    According to the Bureau of Agricultural and Resource Economics-Bureau of Rural Sciences, sales may be A$214.9 billion ($203.4 billion) in the year ending June 30, 2011. Earnings this year from energy and mineral exports are forecast at A$179.9 billion, an increase of 30% from the previous year

Greece – Prime Minister George Papandreou has reiterated his commitment to have Greece return to international capital markets as soon as possible and ruled out any plans to restructure the country’s debt. Greece’s budget gap shrank 32.3% in the first eight months of the year, beating the 26.5% target.

Ireland – The Government will today try and sell as much as 1.5bn Euros in bonds in an effort to avoid an EU bailout and stem the recent selling of debt by investors.
•    The premium on Irish 10 year bonds over German bunds rose 6 basis points yesterday as the cost of insuring Ireland’s debt rose by 27 basis points to 443 basis points.  

Currency – The dollar has fallen again today against the Euro and the Yen before reports that are expected to show more negative news for the housing market and expectations that the FED will keep interest rates low for an extended period. The Yuan continued to strengthen against the dollar.

US$1.311/eur vs $1.310/eur last week. Yen85.40/$ vs  85.65/$ SAr7.10/$ vs 7.11/$  $1.553GBP vs 1.563/GBP

Commodity News

Precious Metals:
Gold US$1,276/oz vs US$1,281/oz – Prices continued their record breaking run yesterday before falling back today as investors cash in on recent gains.
•    Increasing expectation about QE introductions in the US could help the metal push on again today ahead of the FED meeting.
•    Gold Fields, Africa’s second largest producer of the precious metal, signed an option to buy 60% of an undeveloped gold and copper deposit in the Philippines for $340 million.
•    SPDR gold holdings increased to 1,300.83 (41,822moz) from 1,294.75 (41,627moz) Current value US$52,271bn.
Silver US$20.67/oz vs US$20.93/oz yesterday –
Palladium US$533/oz vs US$544/oz yesterday –
Rhodium US$2,235/oz vs US$2,175/oz yesterday
Platinum US$1,617/oz vs US$1,625/oz yesterday –

Base metals:
Copper US$7,720t vs US$7,800/t yesterday – Prices are off today on speculation that China will introduce new measures to cool the property market as soon as next month.
•    China: Imports of refined copper gained for the second consecutive month in August.
•    Japan’s copper wire and cable shipments climbed 5.5% in August from a year earlier. Industry groups have raised shipment estimates in the year ending March 2011 to 666,000 tons from the March projection of 661,000 tons.
Tin US$23,375/t vs US$22,750/t yesterday –
Aluminium US$2,209/t vs US$2,218/t yesterday –
Nickel US$23,089/t vsUS$23,425/t yesterday -
Zinc US$2,167t vs US$2,200/t yesterday –
Lead US$2,165/t vs US$2,225t yesterday –

Oil US$79.32/bbl vs US$78.13/bbl – Prices move laterally today. 
•    Energy department report in the US tomorrow is expected to show that supplies fell to a 5 week low as a result of the Endridge pipeline closure earlier in the month.
•    Recent high temperatures in the mid Atlantic are being cited as the cause for the 4 major hurricanes that have moved towards the Caribbean in the past month. Weather experts predict that as the temperatures remain above seasonal levels more hurricanes look likely to develop.  
Gas US$3.814/MMBTU vs US$3.966/MMBTU yesterday – Liquefied natural gas imports in China, the world’s largest increased to a record in August as demand for cleaner burning fuels increased.

Iron Ore – China: Imports fell in August as demand waned on the back of power restrictions at steel producers and continued repressed steel prices.
•    Estimates suggest spot prices of 62% iron ore are expected to fall to $105 per tonne fob on average for 2011
Coking Coal – Imports in China grew by 23.2% last month recovering from the previous months drop. Imports for 2011 are expected to increase by 19% to 44 million tonnes from 37 million in 2010.
Uranium - Areva, the French nuclear company, has secured a deal to open a new mine in Niger as the company increases efforts to secure its sustainability.
•    Areva, the world's largest nuclear group, has faced increasing competition in the former French colony after Niger's government awarded uranium exploration permits to Chinese, South African, Canadian, Indian and other competitors in an attempt to distance itself from the French company.

Company News

ENRC (LSE:ENRC) – Completed acquisition of Bahia Minerals for US$670m
•    ENRC has completed the purchase of the remaining 50% of Bahia Minerals (BMBV) from Ardila Investments for a cash consideration of US$670m after assuming net debt of US$650m.  Payment of US$167.5m (the initial consideration) was made at completion from existing cash resources.
•    The remaining US$502.5m is to be paid in two installments of US$167.5m and US$335m. 
•    An option to purchase additional shares in a company (Greystone) in an adjacent license to BMBV for a cash consideration no greater than US$150m has been agreed.  Should the option not be exercised, ENRC will accelerate the payment of the second tranche for BMBV.  Greystone has a 147mt resource at 31.8% F.
•    BMBV has a JORC resource of 1.808bn tonnes at 32.0% Fe in Brazil.  The asset requires port and rail infrastructure.  The company envisages that the project could be developed into a 19.5mtpa saleable iron ore operation.

African Aura+ (LSE:AAAM)– Exciting drill results from Nkout
•    African Aura’s Nkout iron ore project has returned exciting drill results from the current programme currently underway in Cameroon.
•    The company highlights up to 75m of hematite BIF and 195m of magnetite BIF intersected from the first four holes completed for 950m of a 4,200m programme.
•    Nkout has been defined as an 8km long intense geophysical target with a further 12km of iron ore targets around the project defined by geophysics.  To accelerate progress the company is looking to mobilise a second in house rig to accelerate progress.
•    The project sits on what appears likely to be the path of a rail line that Sundance are seeking to develop in conjunction with Chinese partners that should allow make it easier to get the project into production as essential infrastructure could be in place prior to the asset being developed as could well happen of ongoing drilling returns similarly encouraging results.
Conclusion:  African Aura has an exciting portfolio of projects including an iron ore JV with Severstal on its Putu project in Liberia and a 1.4moz resource at its Liberty project also in Liberia.  West Africa is an increasingly exciting place for iron ore and gold projects, the company is exposed to all of these, as well as a 30% stake in Stellar Diamonds.  We look forward to ongoing results from all of these that could see significant value evolve for shareholders.

EMED Mining (LSE:EMED) – Acquisition of Tungsten Project Option
•    EMED has acquired an option over an exploration permit covering the Regua Tungsten Deposit in Portugal that contains an indicated resource of 1.26mt at 0.39% WO3 and an inferred resource of 2.16mt at 0.36% WO3.
•    The resources are JORC compliant and follow on from Iberian Resources work prior to the company being placed into receivership.
•    The deal is subject to shareholder approval and the terms include the issuing of 2.5m EMED shares to Iberian Portugal (428m currently in issue) and a commitment to spend Euro250,000 on the project before the option expiry date of 31st December 2011.  If the option is exercised then EMED would pay Euro750,000 to Iberian in cash or shares and commit to spend Euro1.5m within 3 years.  The vendor would also retain a 3-4% royalty.
•    Tungsten is an exciting space and has been declared a critical raw material by the EU.  We note also that Ormonde Mining* (Fairfax corporate) are in the process of developing a tungsten project also in Spain that could be in production by the end of 2012.
•    EMED also continues to develop its Rio Tinto copper project in Spain.

Hambledon Mining* (LSE:HMB)– Interim results show on going developments
Corporate - Buy
•    Hambledon’s Interim results reflect a period of considerable development both for the open pit and underground mine.  As previously stated Q1 was hit hard by extreme weather conditions, but Q2 saw record production as winter ended. 
•    Production during the 6 month period totaled 9,669oz gold and 21,339oz silver, slightly ahead of the previous year which did not suffer the extreme winter conditions.  Cash costs for the period stood at US$877/oz, and realised gold prices achieved stood at US$1,129/oz.  The operating costs have been impacted by the weak Q1.
•    Cash at the end of the period stood at £1.1m and the company has no material debt.  Capital expenditure for the 6 months stood at £0.9m.  Revenue for the period stood at £7.224m leading to a small operating profit and a small loss for the period of £304,000.
•    Open Pit Mining:  Development of the pit continues with the maximum surface extension of the pit now reached.  The central area of the main pit is well developed although further stripping of northern benches continuing that are keeping strip ratios relatively high (we assume 6:1 this year falling back to 2:1 by 2014).  Production has recently be restrained by poor availability of Atlas Copco drill rigs for blasting, however, to solve this a Chinese air track drill has been purchased which although only has 60% capacity of the Atlas rigs, should be a significant help.  Work on stage 3 tailings dam is progressing on schedule for use next year.
•    Higher grade ore zones are being encountered in lower benches which should help lift production and recovery rates.  Management has also recruited a specialist maintenance manager to ensure all is maintained and spare parts are available for the onset of winter.
•    Processing: As previously indicated, Q1 of this year was particularly tough due to extreme winter conditions, yet Q2 saw operations improve substantially.  The company is working to winterise crushing facilities, and the majority of conveyors are already enclosed, with the major support structures for enclosing jaw, cones and screens in place.  Other work continues to ensure disruptions from extreme weather conditions are minimised.
•    Gold output for the current quarter thus far is 2,281oz in July and 1,860oz in August. This is down on Q2 rates but is a consequence of annual maintenance work on the main transformer, major crusher maintenance and a reline of the primary mill.  We would expect to see production pick up during the months ahead as the work is completed and the new Chinese drill rig alleviates the limit on drilling capacity in the open pit.  Management have also signed gold some gold concentrate supply from a nearby alluvial plant with an initial 14t at 82g/t Au, which although not much if this continues then it could help boost output.
•    During the period, there were some problems exporting gold from Kazakhstan due to the implementation of new regulations, however the temporary delay resulted in the company achieving higher gold prices as gold firmed and exports resumed.
•    Underground: Refurbishment of the underground shaft to the 320m level is completed to allow a diamond drilling programme to commence.  A second drill rig is due to arrive next month which has been slightly delayed due to a change in Government policy for ordering mining equipment.  Development of the surface decline has been delayed by softer than expected ground conditions, and a rock fall at the decline face.  However, since early September rock being excavated has been sufficiently hard to require drilling and blasting for which a small drilling jumbo is due to arrive later this month that should allow development rates to pick up.
Conclusion:  Considerable progress has been made at Sekisovskoye although not without some problems particularly in Q1.  The company is clearly focusing on ensuring that disruptions from extreme weather are minimised and strong gold prices are helping to ensure the company is sufficiently capitalised to continue progress.  This quarter has been impacted by maintenance work, but we hope that in the months ahead we should see improvements.  The company has also appointed Tim Daffern as CEO to take over from Nick Bridgen who will remain on the board.  We note that management is also looking to secure an exploration tenement in trucking distance to Sekisovskoye that could be rapidly developed to feed the plant which should have capacity to take additional tonnes to boost production.  Hambledon remains an undervalued gold producer and progress in the months ahead as improvements yield results should see the company re-rate.  We will be updating our forecasts in due course.
* Fairfax acts as Nomad & Broker to Hambledon Mining

ZincOx Resources (LSE:ZOX)
– Interims show Korean project to be first recycling plant
•    ZincOx’s interims show that the company is seeking to develop its first recycling project in Korea (KRP) for which a preliminary model indicates an NPV post tax of US$162m and IRR of 21%.  The company is at an advanced stage of negotiations to pursue the development and has been awarded Foreign Investment Zone status with a rent free lease for a site being negotiated.
•    During the period management has also completed the acquisition of the waste oxide recycling facility for US$4m, suspended development of Ohio Recycling and impaired Big River Zinc.  
•    The company is trading well below its cash of £42m at the end of June.  The cash is to be used on the Korean project in conjunction with conventional project finance.  KRP is to be developed in two equal phases treating 200ktpa of steel waste to produce 46ktpa of zinc in concentrate, which with both operations would be equivalent to a medium sized zinc mine, however, the life will not be limited by resources as it will be processing a continually produced waste product from steel companies.
Conclusion: The development of this first project if successful should lead to further opportunities as it presents a highly effective way by which to treat what is effectively a toxic waste.  We look forward to further updates on the progress for the technology.  The company also has other projects to develop but its focus is KRP.


Ampella Mining*+ (LSE:AMX)– Awesome drill results from Konkera
Oxus Gold* (LSE:OXS)– AGF jv returns to profit following resumption of mining at Amantaytau
Vatukoula Gold Mines (LSE:VGM)– Q4 raises gold prod’n causing substantial fall in cash costs

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