Thursday, 14 February 2013
Snapshot � Company news highlights: Rio Tinto results, Talvivaara rights issue, Avocet significant reserve downgrade, Goldfields mixed results, Fortescue faces infrastructure deadline, Oceana Gold results, Alumina Ltd placement to CITIC, Indochine site visit feedback, Tigers Realm Feedback, Prairie Downs maiden resource exceeds target � Commodity review highlights: Strong global gold demand in Q4 2012 � Other Economic News: Kinross rights down US$3.09bn � African Resources Update: Zimbabwe gives miners two years to refine platinum locally, Zambia order closure of Chambishi Smelter. � Strong leads from the Australian market, particularly some of the miners.

The S&P/ASX 200 index added 0.7% to 5036.9 points.

While metals prices were mixed overnight, several miners had a good run: Alumina +7.5%, Iluka +6%, Fortescue +4.3%, Atlas +7.8%, with BHP Billiton and Rio Tinto up 2.6% and 2.3% respectively.

Source: MiningNews
Company News � Rio Tinto (RIO AU) CY12 Result and new appointments in Iron Ore and Copper divisions.

RIO reported full year underlying earnings of US$US$9.3b.

Dividend surprised on the upside with a final dividend of US$1.67/share, above consensus of US$1.60/share.

RIO also announced the appointment of Andrew Harding (previously CEO of Rio Tinto Copper) as Iron Ore CEO to replace Sam Walshe and the appointment of Jean-Sebastien Jacques as Copper Chief Executive (formerly president of Copper International operations).

Source: Company Investec view: Earnings in line with expectations.

In our view Sam Walshe will not be operating as a caretaker manager and we expect him to move quickly and decisively to implement management changes in aluminium and refocus the aluminium and energy divisions in particular.

Iron ore guidance (100% basis) of 265mt for CY13 is marginally below our assumed 268mt,but iron ore is still likely to drive profitability for many years to come Volume guidance for other divisions is generally marginally below our estimates, but is not likely to have a material impact on profitability. � Talvivaara (TALV LN) announces an underwritten EUR260m rights issue.

The funds are to be applied towards its near term debt (including convertible bonds due in mid-May), to satisfy a debt conditions and to support the ramp up back to full capacity of 50,000t of nickel per annum.

Terms are to be announced on 08 March.

Talvivaara has secured short term financial support from Cameco and Nyrstar, while it has received irrevocable undertakings from its three largest shareholders (38.3% of the register) to support the rights issue.

The company expects the return to normal capacity to take time and is therefore putting in place a capital structure to support this, particularly given the weak nickel price.

Source: Company Investec view: The company faced serious water contamination and subsequent production issues in Sep12 which impacted the FY12 target, although we note it has not achieved its production targets for three years running.

The rights issue provides a lifeline, but the company is still some way from being out of the water.

� Avocet Mining (AVM LN) disappointing reserve downgrade from previous level of 1.8moz at the end of 2011 to between 0.9-1.2moz.

A down grade was expected in light of the complexities of the ore body; however this is surprising in its extent.

The figure includes depletion of 160koz.

The lower end of the estimate is based on a gold price of US$1,200/oz and the larger at US$1,400/oz.

As a consequence management warns of a significant non-cash impairment to be determined.

2013 production is forecast at around 135kozpa falling to 100kozpa once the 500koz Souma target can contribute.

However, Souma is some time from being incorporated in the mine plan with the company expected to generate a new reserve by the end of 2014.

AVM is in discussions with Macquaries concerning its costly hedge book and may look to raise equity to fund the book.

Stock expected to trade down as a consequence.

Source: Company � Investec View: This is yet another disappointing result from Avocet and raises further significant concerns over the asset base.

Clearly the need to clear the hedge book as the production outlook may be less than previously expected is a major issue.

One benefit Avocet did have was a strong balance sheet, however indications are that this is not enough. � Goldfields (GFI SJ) 4Q highlights mixed results.

GFI announced net earnings for the 4Q of US$54m, a long way away from the 4Q11 result of US$336m.

The weak quarter was largely the impact of strike action at KDC and Beatrix which resulted in 110koz of lost production.

Group production was 754koz, 7% below the SepQ.

A final dividend of ZAR0.75 brings the full year dividend to ZAR2.35.

Investec view: GFI now heads in new direction, following the unbundling of Sibanye.

The GFI CEO highlighting sound strategies of a focus not on ounce targets at any cost, but on the generation of cash returns, a focus on low-risk brownfield opportunities and a continuation of its 25-25% dividend pay-out commitment.

This is a strategy that others in the industry are now adopting to some extent, such as ABG yesterday. � Fortsecues first infrastructure deadline looms.

Fortescues (FMG AU) deadline for the first-round of port & rail stake bids is Friday and, it is believed that China State Grid may have looked at the asset along with pension and sovereign wealth funds.

The sale of 30%-40% is to generate proceeds of $3-4bn.

Source: AFR � RIO (RIO LN) considering ANZ aluminium spin-off.

Rio Tinto (RIO AU) is considering a possible spinoff of its Australia-New Zealand aluminium assets.

The company has appointed Peter Mansell and Ex-BHP China boss Clinton Dines to oversee a possible A$2bn listing.

Source: The Australian.

� OceanaGold (OGC AU) CY12 result.

Oceana reported full year NPAT of US$20.7m, with no dividend declared (as expected).

No change to 2013 guidance at cash cost of US$650 to US$800/oz net of copper by-product credits at US$3.40/lb copper.

On a country basis this represents production of 235koz- 255koz of gold at cash costs of US$880-950/oz per ounce in New Zealand, with the Philippines guidance for 50-70koz of gold and 15-18 tonnes of copper at cash costs of negative US$370-50/oz of gold sold, net of copper by-product credits.

Source: Company Investec view: With financial results provided with the 3rd quarter production we did not expect a surprise in this result.

Didipio continues to commission well, with alterations to the tailings delivery system now completed and the mill operating once again.

Didipio continues to be capitalised and revenue and costs are due to report to the P& L early in the June quarter, with a tighter 2013 cash cost range to be provided with the March quarter production results. � Alumina Ltd (AWC AU) A$452m placement to CITIC Resources.

CITIC has unconditionally subscribed to for ~366m AWC shares at A$1.24/share to raise A$452m for AWC.

The shares will be issued in two tranches today and by Monday 18 February and will rank equally with existing shares, and will give CITIC a 13% holding post dilution.

A Subscriber Agreement requires CITIC to maintain its holding between 13-15% holding for a period of two years, after which it can increase to 19.9%.

Source: Company Investec view: We view the transaction as a smart move for CITIC, which will gain a seat on the board and access to the inner workings of the AWAC JV and hence the mechanics of the Western worlds bauxite and alumina production and markets.

We suspect the acquisition is likely to prove the catalyst for a full bid (from an unrelated third party), albeit not necessarily in the short term.

� Indochine Mining (IDC AU) Site visit feedback.

We visited IDCs Mt Kare project in the Western Highlands of Papua New Guinea earlier in the week.

Under the guidance of Project Director George Niumataiwalu IDC has made significant inroads into solving the landowner issues that have kept the project at bay since discovery by CRA in the late eighties (with a full scale gold rush occurring in 1988-1989 when over 1moz of alluvial gold was extracted).

IDC has now established a strong operating and cultural base upon which to develop the project.

The existing project resource is 28.3mt at 1.9g/t gold and 22.5g/t silver and the company is currently undertaking a Feasibility Study, targeting production in 2015/16 based on this resource, while completing further exploration targeting Bonanza gold grades, in zones identified by Tony Burgess, an ex-Senior Resource Geologist from Porgera (~15km away).

Source: Company Investec view: The site visit re-enforced the projects remote location, with helicopter support in use for all aspects of the project.

Work to date has proven expensive, but the company has now firmly established as strong exploration base at the site, and exploration productivity is likely to improve.

The project now has 67km of drilling, but scant attention had been paid to developing a geological model prior to Indochiness acquisition of the project.

Tony Burgess has been key to the identification of bonanza grade targets (thought to be analogous to Porgeras high grade Zone XII) at Mt Kare, based on analysis of historical assays.

Current drilling appears to support the hypothesised faulting in the Western Roscoelite Zone which could deliver a meaningful volume of bonanza grade ore.

There is much work to be done at Mt Kare, but Tony appears convinced that Mt Kare is a replica of Porgera, and George (fresh from delivering PNGs last project - Hidden Valley) is driving the development of Mt Kare, and is likely to be instrumental to the projects success in our view.

Lots of work to be done, with ultimate value likely to depend on drill results from the bonaza grade targets, but well worth keeping a close eye on in our view.

� Tigers Realm (TIG AU) feedback.

Tigers Realm has undergone substantial change in the past six months with a re-invigorated management team and the emergence of Amaam North as a potential low capex, low opex source of cashflow.

Craig confirmed that despite initial misgivings Russia has in fact proven to be the best jurisdiction he and the team have ever operated in.

TIG expects to release its Pre-Feasibility study into the larger 10mtpa ROM Amaam project in the current quarter with the expectation that a Mining Licence will be awarded in the June half.

At Amaam North, the company expects to complete the initial drilling program in the current quarter and deliver an initial resource estimate as soon as June quarter.

Source: Company Investec view: Our Hong Kong team recently initiated coverage on TIG, and we see strong value upside, with the Amaam North project representing an eminently deliverable project for a small cap miner.

Amaam North is capacity constrained at 1mtpa by the existing port at Beringovsky, but there is the potential for Amaam North to overtake Amaam as the companys lead project.

Amaam North has an exploration target of 30-430mt but the coal quality is expected to allow the sale of unwashed coal, a key advantage over Amaam, which has a product yield of c.

50%.

There is a renewed sense of enthusiasm at Tigers Realm and we expect strong news flow over the coming months.

� Prairie Downs (PDZ AU) Maiden coal resource at Lublin exceeds the exploration target.

Prairie Downs today delivered its maiden JORC resource for the Lublin coal project in Poland.

The Maiden JORC resource of 1.58b tonnes has an average calorific value of 6,484kcal/kg and 12.2% ash, and is larger than the exploration target of 1.1-1,3bt announced in November 2012.

Source: Company Investec view: The Lublin project is clearly shaping up to be a long life project of high quality thermal coal.

More important than the overall resource number (across 20 seams) is the 679mt resource estimated across just three target seams, with seam 391appearing a standout target, with an inferred resource tonnage of 327mt, an average ash content of 8.4% and an energy content of 6,894kcal/kg.

While the resource is deep, the neighbouring Bogdanka mine (www.bogdanka.eu ) demonstrates strong profitability, even in the difficult year that was 2012.


Commodities News � Gold demand rose 3.8% yoy in Q4 2012 according to the World Gold Council taking global demand to 1,195.9t in the period with Indian consumption surging 41%.

Total 2012 demand however is down 3.9% yoy to 4,405t.

Central banks boosted purchases 29% in the quarter to 145t an eighth successive quarter of net buying.

Source: Bloomberg Other economic news � In another example of right downs from mining companies, Kinross Gold Corp has taken a US$3.09bn write down on its Tasiast mine in Mauritania.

Following a US$2.49bn right down on the same project a year earlier.

The mine was acquired as part of a C$8bn purchase of Redback Mining in 2010.

Source: Bloomberg African Resources update � Zimbabwe gives producers two years to refine platinum locally.

Zimbabwes government has told platinum producers to start refining the metal locally within two years, placing a further requirement on an industry already forced to surrender majority shares to locals.

Producers will likely struggle to meet the new goal, given the high cost of refineries and Zimbabwean skills shortage.

Source: MiningWeekly � Zambia orders closure of Chambishi copper smelter due to environmental pollution.

Source: Bloomberg
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