Thursday, 24 January 2013
Snapshot � Company news highlights: London Mining good Q4, IFL Q4 not so bad, Erdenes receives US$355m loan pledge, Newcrest mixed quarter, Oz Minerals quarterly, FMG, Pan Aust, BC Iron, and Kingsgate Consolidated production reports, Avalon positive drilling results. � Commodity review highlights: Copper off, Japanese smelters face higher costs, Port Hedland re-opens after storm, iron ore prices creep up � Other Economic News: Chinese PMI data improves, risk of China overheating, IMF reduce world forecast, Chinese fiscal deficit to hit record. � African news highlights: Guinean government seeks means to advance Simandou, South Africa tax concerns, Crocodiles escape following flooding. � FTSE Futures off 1 point (7am) - Chinese preliminary PMI from HSBC/Market for Jan is 51.9, ahead of consensus estimates and indicating an expansion and further strengthening of the recovery in China.

The benefits of the announcement in Shanghai were largely offset by the threat of nuclear tests by the North Koreans.

In the US (Dow up 67 points) speculation remains that the Federal Reserve will continue bond buying after next weeks meeting, fuelled by comments from Bernanke that he wants to see substantial gains from the US job market before halting the asset purchases.

The Chinese news was sufficient to outweigh potential Federal Reserve action in relation to the gold price (down to US$1,679.32/oz), again failing to test the US$1,700 level.


Company News � London Mining (LOND LN) - Good 4Q12 production results.

Ended the year with production of 1.52mt (dry) versus guidance of 1.50mt and our expectation of 1.49mt.

The final quarter was running at a rate of over 2.0mtpa.

Sales continue to lag, with only 70% of production sold in the 4Q; FY12A sales were 1.28mt (wet) vs.

production (wet) of 1.63mt.

LOND states, however, that it expects to run down its 390kt stockpile during the 1H13, at higher prices than it would otherwise have received (it has 560kt of 1H13 production hedged at an average CFR price US$132/dmt).

The average received price for the year was $104/t, net of freight charges, while we expect cash costs of close to US$70/t.

As part of the on-going expansion plan to 5mtpa (at targeted cash costs of under $50/t), a second plant is now in commissioning stage and a second transhipment vessel has been mobilised.

The expansion program is still on track for completion in 3Q13.

The Columbia coking operations have been placed on care and maintenance - not a surprise and unlikely to be a disappointment to the market (although there may be an impairment charge - Columbia carried on balance sheet at US$61m).

Source: Company Investec View: We expect on-going production improvements, forecasting 3.6mt in FY13E at c.$55/t costs.

NO reason to change positive outlook. � International Ferro Metals (IFL LN) production report for Q4 last year indicates 10% fall in output to 52,143t as electrode paste replacement was concluded successfully.

Sales fell only 5% to 51,092t qoq.

Furnace 2 reached a near record production target in December.

Mining operations at Sky Chrome saw a fall from 190kt to 149kt as a consequence of holiday periods.

With the co-generation plant working 27% of targeted cost savings were achieved in the period.

Net debt increased notably over the period rising from ZAR390m to ZAR436m, however this remains within the ZAR500m facility and below previous guidance of ZAR460m.

The company has signed today an electricity buy back arrangement with Eskom to shut one furnace from 1st Feb to 31st March.

The company indicates adequate sources of supply from its smelters from its own mines as well as UG2 ore through Anglo Platinum although there is some restructuring with UG2 feed that shouldnt impact operations.

Spot ferrochrome prices have shown signs of recovery and the EU benchmark price was settled up 2.5c/lb in January to 112.5c/lb.

Source: Company Investec View: Not a bad update from the company in light of the various technical issues faced.

Ferrochrome remains a tough market to operate in and management is working hard to bring costs down and improve the operation. � Erdenes Tavan Tolgoi receives pledge for US$355m loan.

The Mongolian government has pledged to loan Mongolian state owned coking coal miner Erdenes Tavan Tolgoi (ETT) US$355m according to CEO Yaichil Batsuuri.

ETT halted coal exports to China from 11 January as the company is short cash and currently loss making, supplying raw coking coal to Chalco at US$53/t which is below its US$61/t cost to the Mongolia/China border.

Batsuuri also said that ETT has postponed its proposed IPO in London and Hong Kong to 2014 at the earliest.

Source: Bloomberg Investec View: The loan will provide ETT the financial means to resume production.

It is unclear if ETT will look to resume production immediately as mining is currently uneconomic and ETT receives little cash from delivering coal under its off take agreement with Chalco, which made US$250m of prepayments for coal from ETT that was primarily distributed to the Mongolian government (not ETT).

We believe ETT may attempt to renegotiate the off take agreement and wait for prices to rise at the Mongolia/China border before resuming production, although as a state company ETT makes decisions for reasons beyond simple economics.

Seaborne coking coal market prices rose last week on the news that ETT had halted shipments.

We believe ETT exported c.

3mt of raw coking coal to China in 2012. � Newcrest (NCM AU) - Mixed quarter for Australias biggest gold miner.

Newcrest reported that gold production for the 2Q13 of 492,906oz at a cash costs of $A727/oz (net of copper credits), compared with 460,425oz at $A703/oz in the 1Q13.

While NCM expects production to progressively increase over the remainder of FY13 as its expansion projects come online, it expects full-year output to be at the bottom of its guidance (at the low end of the 2.3-2.5moz range).

Capital cost are above expectations, with the final project cost for the Lihir expansion to be $US1.4bn, up 7.7% from the original budget while works at Cadia are estimated to be $A2.05bn, compared to the original $1.91bn.

budget.

Source: MiningNews, Company � Oz Minerals (OZL AU) DecQ12 production report, guidance for CY13.

OZL today announced CY12 production figures of 101,700t copper and 140,700oz of gold at C1 cash cost of US$1.20/lb.

While CY12 numbers were pretty much as anticipated, CY13E guidance confirmed significant reductions in copper output, with a target of 90-95kt (down 7-12% on CY12), at a cash cost of US$1.50-US$1.65/lb (up 25-38%).

Source: Company. Investec View: We expect the stock to trade under some pressure as the market adapts to the lower forecasts, strong dollar, and slightly lower than expected gold prices. � Fortescue Metals (FMG AU) DecQ12 production report.

Ore shipments in line with expectations, costs in line with expectations Company sales guidance of 82-84mt for FY13E maintained.

Ramp up to 155mt capacity by the end of CY13 appears well in hand. � PanAust (PNA AU) DecQ12 production report, guidance for FY13.

CY12 production numbers were much as expected with the real news being a significant increase in cash cost guidance for both copper (up 4-13%) and gold (up 2-12%). � BC Iron (BCI AU) DecQ12 production report, guidance for FY13.

BCI reported lower than expected production for the quarter (1.09mt) due mainly to issues with the newly upgraded crusher and an on-going lower grade zone of ore.

Cash costs for the quarter came in at ~$47/t, in line with market expectations.

Guidance for the remainder of the year remained positive, with the Company sticking to its ~5mt (100% basis) production target for FY13E, with cash costs staying in the guided LOM range of $45-$50/t. � Kingsgate Consolidated (KCN AU) DecQ12 production report, Full year guidance unchanged.

Group gold production of 46,149oz Au in the quarter at cash costs of US$975 (incl,.

royalty).

Chatree production (30,391oz) was up 14% over September levels, but costs were also higher at US$843/oz, while Challenger production (15,758oz) was 11% lower than the September quarter, with costs higher at US$1229/oz.

Investec view: Production from Challenger is a disappointment.

Informal guidance had been for improvement to 20koz in DecQ, increasing to 25koz in the current half as the focus on development eases.

KCN achieved record development rates at Challenger, and gold recoveries improved to 95.4% during the quarter, but with production of 33,395oz in the DecH12, guidance (80-90koz) requires ~47koz production in the current half, now a stretch target in our view.

At Chatree, despite a 10 day plant shut at the start of the quarter and a 4 day shut in late December, throughput was close to expectations.

However, head grade of 0.81g/t and recovery of 78.3% was below expectations, and with grade expected to remain ~0.7-0.8g/t and recovery between 78-82% in the area currently being mined, suggesting Chatree production will be at the low end of guidance. � Avalon Minerals (AVI AU) assay results from 2 drill holes extend the mineralisation at Zone A at the Viscaria copper project in Sweden.

High grade results are reported, with 8.3m at 2.0% Cu and 0.5g/t Au with a second mineralised zone intersected returning 6m at 1.4% Cu and 0.1g/t Au that could reflect a structural repetition of the Main A zone mineralisation.

The second drill hole returned 5.5m at 1.2%.

The results have extended the known mineralised zones by 150m down plunge and add to several historic holes that returned similar results.

Further results are to be released over the next two weeks as a 25,000m drill programme continues aimed at extending the resources.

Source: Company Investec View: Exploration work at Viscaria continues to be successful giving greater confidence in the value proposition of this development as management look to build up the resource base.

These results should contribute to an improved economic assessment that historical studies have outlined.

There has been considerable feasibility work in the past that indicated an economic proposition, however the new management team are refocusing the development more toward the copper than the iron ore which should make the project more attractive.
Commodities News � Copper, off marginally to US$3.677/lb failed to be boosted by the Chinese PMI data after Codelco CEO Thomas Keller made comments that the copper market faces a surplus towards the end of 2013. � Japanese base metal smelters face US$135m cost increases if power companies raise rates following Tokyo Electric Power Co.

Smelters purchase around 5bn kWhpa.

The closing of nuclear reactors following Fukushima have led to alternative energy sources pushing up costs.

Source: Bloomberg � Port Hedland has resumed normal operations after tropical storm passed by.

The port is the worlds biggest iron ore export terminal.

Source: Bloomberg. � Iron ore, slight move upwards to US$147.7/t, possibly around speculation that Pilbara iron ore operations would be shut down from longer than expected as cyclone Peta threatened operations.

The storm has since subsided and port operations at Port Hedland and Dampier have resumed.


Other economic News � China January flash manufacturing PMI accelerates to 51.9.

The HSBC/Market China flash manufacturing PMI for January was 51.9, up from 51.5 in December and better than the Bloomberg consensus median of 51.7, signalling that the Chinese manufacturing sector continues to expand.

Source: Bloomberg � Davos comments suggest China shifting back to overheating risk, Yuan appreciation.

Former Peoples Bank of China adviser Fan Gan said Chinas economic risks have shifted back to growing too quickly and he expects modest appreciation in the Chinese Yuan against the US Dollar during 2013 at in interview conducted during the World Economic Forum at Davos.

Source: Bloomberg Investec View: Resumption of appreciation in the Chinese Yuan would be a positive for ex-China mining companies, particularly those producing commodities like iron ore and aluminium where China is the marginal producer, as it moves the top of the cost curve higher and improves their cost positioning relative to Chinese producers. � IMF cut global growth forecasts and projects a second year of contraction in the Euro region.

The world economy is set to grow 3.5% this year versus 3.6% forecast in October.

The group put global growth last year at 3.2%.

The Euro area is forecast to shrink 0.2% this year versus a previous expectation of 0.2% growth.

No changes to Japanese and Chinese growth forecasts of 1.2% and 8.2% respectively.

Source: Bloomberg � Chinas fiscal deficit is forecast to hit a record high of US$193bn in the new fiscal year, up from last fiscal years deficit US$128bn according to Bank of Communications.

Funds have been going into key infrastructure projects.

Should GDP grow 8% this year the deficit to GDP ratio will stand at 2.2%.

Source: Xinhua African Resources Update � Guinean government is looking at ways for Vale SA to resume work at the Simandou project.

Vale bought a 51% stake in the project in 2010 and put the scope and schedule for the US$1.26bn Zogota iron ore project at Simandou South under review in October.

The 2mpta project was due to start producing in H2 of last year but suspended activities awaiting clarity from government on regulations and infrastructure costs.

Full development of the project could cost as much as US$10bn.

Vales partner in the project is BSG Resources controlled by Beny Steinmetz Source: Bloomberg � South African finance minister brings perspective to tax concerns.

Amid fears the RSA government was imminently planning a tax overhaul of the mining industry, Mr Gordhan said planned tax changes were in discussion but would only be implemented "at the right time", that "there is no question of any taxes at this time".

He added, however, that the production cut-back proposals by Anglo American Platinum, had been an "unhelpful" development.

Source: MiningMX � 15,000 crocodiles have escaped a farm in South Africas northern Limpopo province following flooding.

A few thousand have been caught but over half are still on the loose.

Source: Bloomberg
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
Matt Martin USA
Tel: +61 (0) 2 9293 2168 Thomas Lawrence
Tel: + 1 212 2595604

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