Wednesday, 23 January 2013
Snapshot � Company news highlights: Production updates from: BHP, Hochschild and Archipelago, Ormonde/Aurum JV exploration results, Pan Australia refinancing, Rio gas deal update, Kingsgate sale of non-core assets, Discovery Metals provides second supplementary target statement, Guildford Coal sees approval for equity issue, � Commodity review highlights: Indian gold tax increase, global steel output, platinum prices continue to be volatile, Chinese copper production hit record, iron ore port closes due to weather. � Other Economic News: Global unemployment rising, China to invest US$1.36bn in Chile, Australian elections to weigh on resource projects. � African news highlights: Zimbabwe new constitution likely, Eskom coal stocks tighten, Rio write down in Mozambique to affect others. � FTSE futures up 20 points (7am) - another strong lead from the US overnight up 62 points with the House republicans due to vote today on a suspension of the debt ceiling until May 19.

Gold traded up to US1,696/oz before slipping back to US$1,692.50/oz.

The combination of increase US debt and Japanese stimulus measures continues to put increased pressure on the gold price which could be set to advance further over the next 3 months until the US can find a more permanent solution to their fiscal issues.

Bloomberg surveys indicate the state of the US finances is still the greatest risk to the world economy and the main hindrance for equities investment.

Other commodities are fairly mixed this morning, copper US$3.694/lb, platinum US$1,691.8/oz, nickel US$17,335/t, and iron ore flat at US$145.90/t.
Company News
� BHP Billiton (BHP AU) December quarterly production.

Production figures for the DecQ12 were led by iron ore, up 4mt from the prior quarter to 47mt.

Other divisions results were mixed versus the prior period; Oil & Gas down 2%, Alumina up 5%, Aluminium up 10% (quicker than planned recovery from Hillside), Nickel down 6%, Silver -7%, Copper up 8% (higher Escondida grades as expected), Diamonds down 6%, Manganese down 1%, Coking coal down 1%, and Energy coal down 7%.

Source: Company. Investec view: The strong A$ and weak commodity prices continued to pressure the Australian alumina and nickel operations, with estimated EBIT losses of ~US$300m for the half.

The QLD Coking Coal operations suffered from low volumes and a lack of economies of scale.

We estimate DecH12 total costs for BMA of over US$200/t (US$135-145/t JunH13), with poor economies of scale, legacy cost issues and lower coking coal prices indicating an EBIT of just US$60m. � Hochschild (HOC LN) delivers on guidance.

FY12 production on 20.3moz attributable Ag-equiv (13.6moz Ag + 112koz Au), in line with guidance, with HOC still expects FY12 unit costs in Peru, excluding royalties, to be up 15% while Argentina unit cost increases are expected to be lower than the previously guided 15-20%.

FY13E guidance has been held at the same level of 20.0moz, while unit costs are expected to increase 15-20% in Peru and 10-15% in Argentina.

It continues its Advanced Projects, which are planned to lift future production by 50%, while the HOC states that recent acquisition of Andina Minerals adds to its longer-term optionality, including exposure to Chile.

The company ended the year with $359m in cash and minority investments value at $256m, with only debt being $115m convertible bond.

Source: Company Investec view: With stagnant near term growth and escalating unit costs, HOC is heavily dependent on rising metals prices and/or delivering on its longer term projects.

� Archipelago Resources (AR/ LN) (OGC AU) releases production results from its Toka Tindung mine in Indonesia reflecting 139koz Aueq production at a cash cost of US$635/oz (net of silver credits) in line with guidance.

Q4 last year set a record with 42koz produced.

Head grades over the year averaged 2.79g/t Aueq (3.13g/t in Q4) which is high for an open pit mine.

The strip ratio stood at 5.6 over the year.

The second half of the year reflected stronger performance as higher grade near surface ore was extracted which will continue into this year.

The process plant behaved broadly in line with capacity with recovery rates steady at just over 90%, throughputs should be higher this year excluding maintenance this quarter.

The company expects to produce 140-155koz Aueq this year at a cash cost of US$620-680/oz.

Source: Company Investec View: Archipelago is demonstrating considerable success with the Toka Tindung mine clearly performing as production builds up and recent exploration news flow highlighting significant potential in the region that could support a longer mine life or even an expanded development.

� Positive exploration results from Ormonde(ORM LN)/Aurum (AUR LN) gold JV project.

Initial results from second stage drilling at Peralonso, in the Salamanca Province of western Spain, indicate extensions at shallow depths of mineralised structures encountered in the original drilling.

Results have been received from six of eight new holes with some good grades and widths being identified.

ORQ is awaiting the results from the final holes to enable an initial interpretation of the two drilling programmes.

Source: Company Investec view: This is an interesting but secondary project for ORQ, with its key focus developing the Barruecopardo mining operation � Pan Australia (PNA AU) refinancing of debt facility, quarterly production due tomorrow PNA announced it had entered into debt facilities of US$275m (US$250m revolving debt facility and US$25m working capital facility).

The revolving debt facility replaces the previous US$100m facility scheduled to mature in SepQ13.

Pan Aust is due to report its quarterly production results tomorrow.

Source: Company. Investec view: The four year debt facility is on reasonable terms (US Libor plus 3.5%) and will provide headroom for capex on growth projects.

In terms of tomorrows quarterly we are expecting production of 62kt payable copper and 73koz Au for the full year. � Gas deal for Rio Tintos (RIO AU) Gove refinery "needs more time".

The NT Government today approved the release of gas from a contract for a government-owned utility for supply to the Gove site instead.

However, it still needs to aggregate more gas, and indicated it will need another eight months to reach a deal.

Meanwhile, the Government has called on RIO to continue operating the unprofitable plant until that time, with the hope that RIOs new CEO, Sam Walsh, would be "more flexible" in the deadline (planned for the end of January 13) for deciding on the refinerys fate.

Source: Australian Financial Review. Investec View: We believe it is a tough call for RIO to continue operating the refinery with such large losses, and in any event there is no guarantee they will get the gas required in eight months.

Despite the Governments wishes it is difficult to see how the refinery can be kept open.

BREAKING NEWS: RIO has rejected the request of an extension, perhaps this is a sign of Sam Walshs resolve? � Kingsgate Consolidated (KCN AU) sale of non-core exploration assets - quarterly due pre ASX open Thursday.

Kingsgate has announced the sale of non-core exploration assets in WA and Qld (acquired in Dominion takeover) to listed explorer Caravel Minerals (CVV).

KCN will be issued 135m shares and 20m options in the A$8m market cap company.

Kingsgate expects to incur a A$15m non cash write down in the DecH12 financials as a result of the sale.

Source: Company. Investec view: Kingsgate is widely viewed too have paid too much in its 2011 acquisition of Dominion (DOM ASX).

The write down is not material and the sale of assets most investors and analysts were not aware the company held is a positive sign of improving focus in our view.

Focus for tomorrows quarterly will be production at Dominions Challenger mine, where production has been modest (~17koz in SepQ) as the company undertakes development setting the stage for improved production, with an expectation for ~25koz per quarter in theJunH13.

We are expecting 19.7koz Au from Challenger and 33.4koz Au for Chatree. � Discovery Metals (DML AU) Second supplementary target statement released.

DMLs statement reveals reasonably good correlation between the Ore Reserve Model and the Grade control model for material mined to 31 December 2012.

Total metal content in material mined to date has been 13% below the Ore Reserve Model, with the Reserve Model having underestimated the amount of oxide and transitional ore in the Zeta open pit.

The C1 cash cost for the DecH12 was $4.28/lb and DML expects costs to reduce to $1.92/lb in the JunH13.

An updated ore reserve estimate is being completed for Zeta , with ~5mt of mineralisation possibly having been included in both the open pit and underground reserves.

DML is approximately halfway through plans to expand production by 67% to 5mtpa, with construction to start during 2013 if approved.

Source: Company. Investec view: Commissioning is rarely straightforward, but DML may be wishing it were right now.

The bid from Cathay Fortune Investment Limited has been extended to 8 February 2013. � Guildford Coal (GUF AU) seeks shareholder approval to issue ~74m shares to fulfil all commitments of management agreement.

GUF listed with a contentious management Agreement in place that had the potential to reward the management group, TheChairmen1 Pty Ltd with payments of A$20m for each 100mt of Indicated JORC resource at certain Australian coal projects (capped at A$100m).

The company now proposes to vary the management agreement, and issue 74m GUF shares to relieve the company of any further obligation to pay success fees.

Source: Company. Investec view: While openly disclosed, and considered along the line of vendor consideration, the agreement with TheChairmen1 was always contentious.

With a market cap of ~A$270m the A$80m of potential payments remaining was material.

Given the current questionable viability of the companys Galilee Basin coal deposits and the length timeframe likely prior to any production, the issue of 74m shares is a good result for TheChairmen1.

Despite dilution of ~14%, it is also probably a good result for other investors, with 44.2m shares having been issued to satisfy the first A$20m instalment.

Notably the staged payments related only to resource scale not economic viability, and there is little doubt the coal is there.


Commodities News � Gold: India raises gold tax on imports.

India has raised the import duty on gold and platinum from 4% to 6% effective immediately, with the tariff to be reviewed if imports moderate.

The measure is intended to reduce a record current account deficit, with the reserve Bank of India saying about 80% of the Current Account Deficit was due to gold imports.

Source: AFR � Steel: World steel output increased by 1.2% in 2012 according to World Steel.

Chinese steel production grew by 2.1% in 2012 to 716.5mt.

Japanese steel production (number 2 in the world fell by 0.3% to 107.6mt.

Of the Top 10 steel producing countries four recorded a reduction in steel production in 2012.

World steel capacity utilisation fell to 73.2% in December 2012 (down from 76.1% in November). Investec View: Given the weakness in iron ore prices late in 2012 it comes as little surprise to see steel capacity utilisation hitting its lowest level in December.

It is perhaps surprising that the Dec12 utilisation was so close to the Dec11 figure of 73.5%.

� Platinum prices continue to be volatile with news reports from South Africa referring to government and union discontent over how the Anglo Platinum production cuts were handled and how the issues faced by the industry may be resolved longer term.

Source: Mining Weekly & Bloomberg � Chinese copper output hit a record in December of 580kt, up 22% yoy.

Total output in the year was up 11% to 6.06mt.

Surplus smelting and refining capacity continues to come on stream that will constrain margins as smelters fight to secure concentrates, which is good news for copper concentrate producers.

Source: Bloomberg � Iron Ore - Dampier Port closed from 11am Australia time due to weather conditions with cyclone evolving off the coast.

Source: Bloomberg
Other economic News � Global unemployment worsening with 202m people expected to be without work this year from 197m in 2012 according to the International Labour Organisation.

Despite an economic pickup forecast over the next two years, unemployment is on the increase.

Global unemployment is forecast to remain at 6% up to 2017.

Source: Engineering News � China to invest US$1.36bn in Chile, as Chinas Sky Solar holdings plans to invest the sum of money.

Chinese companies are interested in investing in infrastructure and energy in the country.

Source: Xinhua Investec View: We highlight that Chile is also the worlds largest copper producer and China is no doubt keen to ensure it has good relations with major sources of supply. � Australian elections likely to weigh on resource projects.

Two key elections are being held this year that may throw a spanner in the works: WA and federal.

On the west coast there is the state election and while existing Premier Colin Barnett and his Liberal-National party have a handsome lead, development of Browse LNG project in becoming an increasing issue.

Dovetailing neatly into the discussion is a recent decision from the federal environment minister to reject an Apache plan to search for oil and gas within the Ningaloo Reef Marine zone and a delay in approving Toro Energys proposal to mine uranium at Wiluna, with speculation that the Labour party is focusing on either to getting the Greens to remain on side or to get Green voters to vote Labour.

This points to a year when environmental approvals may be used for political gain by both sides of politics.

Source: MiningNews
African Resources Update � Zimbabwes new constitution which includes limiting the president to two terms in office will likely be approved in a March referendum according to Prime Minister Morgan Tsvangirai, allowing elections to take place this year.

The prime ministers party and the presidents have shared power since 2009 following the disputed elections.

Source: Bloomberg � Eskom sees coal stocks tighten with an average of 46 days of reserves, sufficient to meet needs until normal supplies resume.

Eskom sources 95% of South Africas electricity.

Source: Bloomberg � Rio write down potentially hobbles Mozambiques transport and coal aspirations.

The write-down of Rio Tintos (RIO LN) Mozambican coal assets suggests that Sam Walsh will be under pressure to either sell the asset or sign a JV with a like-minded neighbour in Mozambique on a rail route.

Anglo American (AAL LN) owns a majority stake in the nearby Revubo� prospect, but it wouldnt make sense for AAL to build its own rail infrastructure, as Revubo� was only likely to be a 10mtpa operation.

It falls then on incoming CEO, Mark Cutifani, to decide whether AAL presses ahead with Mozambique.

There are, other potential JV partners for RIO, including Eurasian Natural Resources Company (ENRC LN), which is targeting a 40Mtpa rail line for its mine, although this is seen as hugely optimistic.

Mozambiques government had set a target of 100mtpa by 2018.

Source: MiningMX
Investec Global Natural Resources Research Team: UK Australia South Africa Hunter Hillcoat Tim Gerrard Albert Minassian Tel: +44 (0) 20 7597 5182 Tel: +61 (0) 2 9293 2168 Tel: +27 (0) 21 416 1454
Marc Elliott Colin McLelland Tel: +61 (0) 2 9293 2140
Tel: +44 (0) 20 7597 5189

Simon Haggarty Tel: +61 (0) 2 9293 2462
Investec Global Natural Resources Sales Team: UK Australia South Africa Jamie Campbell Rod Clarkson Hayden Smith Tel: +44 (0) 20 7597 5038 Tel: +61 (0) 2 9293 2278 Tel: +27 (0) 21 416 1401
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