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Fairfax Market Report including Stellar Diamonds, Shanta Gold, African Aura and others

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Morning View

Gold $1,290/oz – breaks new records
•    Rumours of gold miners restructuring gold hedging programs 
•    Weaker US dollar
•    Quantitative easing as US Fed are willing to take additional measures to protect recovery in the US economy
•    Ongoing investor interest in physical gold and in ETF funds

Economic News

US – The Federal reserve yesterday announced that it “will provide additional accommodation if needed” to maintain the recovery. The statement from the FOMC acknowledged that inflation was below desired levels and that the economy was growing marginally. As a result of the announcement it now looks likely that unless there is a considerable upturn in the coming months the FED will re-introduce another program of quantative easing with the intention of driving down borrowing costs.
•    Figures released by the Commerce Department yesterday showed that housing starts rose by 10.5% last month to an adjusted annual rate of 598,000. The figure comfortably beat expectations.
•    Labour department figures released yesterday showed that payrolls in 36 states fell in August indicating that the jobs market is going to take more time to recover than previously expected.

China – New regulations to raise awareness about mine safety are creating a spate of promotions at a coal mine in the Guangxi Zhuang region. The new regulations require mine “Leaders or management” to make regular underground trips to promote safety concerns and encourage best practice.  Strangely enough shortly after the announcement the coal mine in question, privately owned by the Hongshan Chaoyang Coal mining Company announced the promotion of 7 junior miners to management positions.

UK – Data released yesterday showed that government borrowing remains on track. Public sector net borrowing in August was £15.9bn, higher than forecast and well above the £14.1bn figure a year earlier. On the positive side the figure for borrowing earlier in the year was revised down by £2.7bn.
•    The Confederation of British Industry stated yesterday that the UK economy will grow slower than previously forecast next year as the austerity measures kick in. GDP will rise 2% next year, down from a forecast in June of 2.5%.

South Africa – IMF has acknowledged that the South African rand could be over valued by 5-15%, however the size of the currency market and dominance of non-residents will limit the government’s ability to influence the level of the Rand.
•    Nonresidents account for nearly 75% of the daily turnover of US$10-12bn in South African foreign exchange markets.  Daily trade of all currencies has been estimated at close to US$4trillion.
•    IMF sees the SA Economy growing by 3.25% this year and 4.5%pa over the medium term.  Employment levels unfortunately are only set to return to their 2008 peak by around 2015.
•    Mining MX reported yesterday that the ANC has called for concrete proposals on what can be done to transfer more mineral wealth to the poor
•    The ANC has rejected calls to nationalise mines according to officials yesterday. ANC Secretary General Gwede Mantashe said that the nationalisation debate would be heard but no action taken.
•    South Africa's National Union of Mineworkers announced yesterday plans to strike at the Kumba Iron Ore project for better wages and that it had failed to meet agreement with BHP’s coal unit over wage disputes.

Australia - The Australian dollar is in spitting distance of parity to the US$ at A$0.96/US$, its highest since July 2008 as the US Fed decides to proceed with further quantitative easing.
•    Australia is a major exporter of raw materials to Asia which implies a continued inflow of US$ that will keep the currency strong.  This could put some miners under pressure since the stronger Australian dollar will undermine the benefits of stronger commodity prices as domestic mines’ cost base is in the local currency yet revenues will be in US$.

Malaysia – The government has announced plans to develop the country’s nuclear energy industry and improve infrastructure in order to encourage foreign investment and accelerate growth. Malaysia has been struggling over the past few years to maintain foreign investment as China and India have continued to gain status. Foreign direct investment into Malaysia slumped to $1.4 billion in 2009 from $7.3 billion in 2008

Europe – Yesterday saw two successful bond auctions. Greece successfully sold Euro390m of 3 month bills at an average yield of 3.98% down from 4.05% in the July sale. Spain also had a good day selling Euro 7billion of 12 month and 18 month bills.

Ireland - Bailout fears receded yesterday as the country successfully sold 1.5b euros worth of bonds. The extra yield that investors demand to hold 10 year Irish debt over German bunds fell 21 basis points to 381 points after the auction.

India – A Group of Ministers headed by the Union finance minister Pranab Mukherjee has arrived with a proposed mining bill that suggests miners should share 26% of profits with local communities. The proposed bill met with immediate criticism as miners claimed the parameters were too ambiguous and that the larger more pressing issues that face the industry have been ignored. The bill will be put before the government later in the Autumn.

Canada - Consumer prices rose 1.7% in Canada in the 12 months to August, close to the target 2% but a fall from the figures released for July.

The World Trade Organisation has announced that world trade is expected to grow by 13.5% this year, a third higher than the previous estimate made in March. The figures released suggest that trade growth would be best in the developing world with volumes anticipated to rise 17% compared with 11% in the developed world.

Currency – The dollar fell to its weakest level in 6 weeks against the Euro on speculation of further monetary policy easing.

US$1.330/eur vs $1.311/eur last week. Yen84.78/$ vs  85.40/$ SAr7.03/$ vs 7.10/$  $1.569GBP vs 1.563/GBP

Commodity News

Precious Metals:
Gold US$1,290/oz vs US$1,276/oz – Gold hits new record this morning as US$ fell following comments that the US Fed was willing to ease monetary policy further.  We’re now a whisker from US$1,300/oz.
•    FT reported yesterday that Severstal is preparing to list its gold division in London this year that should value the business at around US$4bn.  The group expects to retain a stake of 65-70%.  Gold production is expected to be around 640,000-670,000oz this year, rising to 1mozpa by 2013.
•    GoldCorp sees gold prices reaching US$1,500/oz in the next couple of years.
•    African Barrick reported to be aiming to produce 1mozpa in the next 4-5 years.
•    SPDR gold holdings increased to 1,304.17 (41,930moz) from 1,300.83 (41,822moz) Current value US$53,447bn.

Platinum US$1,633/oz vs US$1,617/oz yesterday – Northam Platinum continues to suffer strike action at its Zondereinde mine as a second round of talks fail following management’s rejection of a 15% wage increase and living allowance from SAr1,600/month to SAr3,500/month.  The total demand would add 32% in costs to the company and appears particularly greedy of unions.
Palladium US$542/oz vs US$533/oz yesterday –
Silver US$21.04/oz vs US$20.67/oz yesterday – Prices move higher today as demand for safe haven investments increases.
Rhodium US$2,350/oz vs US$2,235/oz yesterday

Base metals:
Copper US$7,727t vs US$7,720/t yesterday – The weakening of the dollar is leading prices higher as commodities increased in appeal as alternative investments. 
•    Japan’s output of copper and copper-alloy fabricated products, climbed 18.2% in August from a year earlier

Tin US$23,275/t vs US$23,375/t yesterday – Zijin Mining Group announced that recent rain caused by Typoon Fanapi has triggered the collapse of a tailings dam at the company’s Yinyan Tin mine in the Guangdong province. Power, communication and transport are all suspended at the mine.
Aluminium US$2,189/t vs US$2,209/t yesterday – Rusal, the world’s biggest aluminium producer has predicted that prices will rise to $2,400 to $2,500/t next year as China scales back on domestic production and increases imports as a more cost effective approach.
 
Nickel US$22,469/t vsUS$23,089/t yesterday -
Zinc US$2,167t vs US$2,167/t yesterday –
Lead US$2,188/t vs US$2,165/t yesterday –

Energy:
Oil US$78.67/bbl vs US$79.32/bbl – Prices have been climbing slightly this morning after falling again yesterday as the market digests the Fed comments and Asian equities rise.
Gas US$3.950/MMBTU vs US$3.814/MMBTU yesterday – Two explosions in western Kazakhstan have damaged a pipeline according to a statement from the Emergency Ministry. No estimate was given as to when the pipeline would re open.

Other:
Uranium – Prices have risen to the highest level in more than 10 months and the prospect of an increase in supply is attracting interest from a number of alternative investors including Hedge Funds who are keen to capitalise on the prospect of growing demand in the sector.

Steel – World crude steel production for the 66 countries reporting was 113 million tonnes in August, 4.2% higher than August 2009 and almost back to the levels seen in August 2008.
•    China’s crude steel production for August 2010 was 51.6 tonnes, a decrease of -1.1% compared to August 2009. Japan produced 8.9 mmt of crude steel in August 2010, up 7.1% compared to the same month last year. Germany’s crude steel production for August 2010 was 3.5 mmt, an increase of 17.1% on August 2009.

Coking Coal – Teck Resources has completed Q4 coking coal negotiations for prime quality products in the Pacific and Atlantic regions at around US$209/t in line with BHP and Japanese steel mills.
•    Australian Bureau of Resources sees coking coal prices averaging US$200/t next year, up 6% yoy.  We recommend Anglo Pacific for exposure to coking coal as its largest royalty is for the Kestrel Coking Coal mine in Australia.

Iron Ore – Metal Bulletin reports that spot prices could continue to slip following the Chinese Mid Autumn festival next week due to weak demand. 
•    Prices for Indian fines are currently around US$145-146/t cfr China, having been at US$156-158/t cfr four weeks ago. 
•    The Australian Bureau of Resources sees spot prices for iron ore falling next year to US$105/t for 62% Fe product as increased supply comes on stream.

Company News

Mining:
Shanta Gold* (LSE:SHG)– Drill results cause company to pre-announce placing
•    Shanta Gold have announced further meaningful drill results for the Chunya project in Tanzania.
•    The results contain meaningful gold grades over sensible intersections.  Note that due to the ongoing placing we are not able to fully describe what we think of these results.
•    The statement talks about ‘a further 150m of strong mineralisation to the west’.
•    “The best results achieved along the western extent of Bauhinia Creek are 3.72g/t over 14.0m, 14.07g/t over 6m, 4.21g/t over 15.0m, 22.58g/t over 16m, 3.5g/t over 13.0m and 16.44g/t over 10m.”
•    The company has also announced the placing of up to $20m of new equity as part of a financing deal arranged with a new institutional investor.  The new cornerstone investor is committing $10m in return for equity at 25p/s. 
Conclusion:  We are not permitted to give a view of how meaningful these drill results may be to the value of the Chunya gold mine.  In other instances the publication of higher grade gold results from drilling over significant widths can lead to share price movement.  Shares can go up as well as down.
* Fairfax acts as UK Nomad and broker to Shanta Gold.  Fairfax is acting as placing agent to Shanta Gold.

Stellar Diamonds (LSE:STEL)
– Proposed placing for £1.9m
•    Stellar Diamonds has announced a conditional placing of 38m shares at 5p to raise £1.9m along with one warrant for every two placing shares that will give the right for a shareholder to subscribe for one new share at 12p for 18months from when the new shares start trading.
•    The funds will be used to accelerate exploration at its Droujba Kimberlite (around £1m) through the start of a drilling programme to allow modeling of the pipe at depth and diamond grade analysis of core.  £200,000 will be allocated to ongoing Tongo kimberlite dyke bulk sampling in Sierra Leone with the balance for working capital.
•    Poor weather conditions have hampered progress at the company’s Mandala and Bomboko Diamond mines in Guinea which would have been providing reasonable cash flow.  Consequently management felt the need to raise some more capital to accelerate drilling at Droujba and Tongo

Mining this week

Discovery Metals * (LSE:DML)– Kalahari Copperbelt targets give potential for greater resource
Hambledon Mining* (LSE:HMB)– Interim results show on going developments
ENRC (LSE:ENRC)– Completed acquisition of Bahia Minerals for US$670m
African Aura+ (LSE:AAAM) – Exciting drill results from Nkout
ZincOx Resources (LSE:ZOX)– Interims show Korean project to be first recycling plant
EMED Mining (LSE:EMED) – Acquisition of Tungsten Project Option

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