🕐09.01.14 - 09:54 Uhr

INVESTEC GLOBAL NATURAL RESOURCES DAILY - MINING - THURSDAY 09 JANUARY - SHG LN,
SRX LN, ZOX LN, CMCL LN, 975 HK, ATU AU, ERA AU



[cid:image001.png@01CF0D12.0185EBC0] Thursday, 09 January 2014 [cid:image006.jpg@01CF0D12.01CFED10]
Snapshot ¢ Company news highlights: Shanta Gold solid production performance, Sierra Rutile production update, ZincOx struggling to ramp up, Caledonia Q4 update, Mongolian Mining coking coal production report, Atrum Coal appoints consultants for Groundhog project, Energy Resources of Australia production update, Shaanxi Coal to raise US$1.6bn. ¢ Commodity review highlights: Moody’s to use lower gold price for assessing industry, strike action spreads at Chilean ports, Freeport McMoRan ups 2014 production target at Grasberg, illegal rare earth mining in China remains a problem, European coal prices up in response to Colombian export ban to affect Drummond, proposed amendments to Indonesia’s minerals export ban ¢ Other Economic News: China becomes first country to sell over 20m vehicles in a year, JP Morgan may include sale of futures brokerage business as part of sale of physical commodities business ¢ African Resources Update: Zimbabwe pushes harder for domestic PGM smelter, Japan lifting African profile, Zambia plans sovereign wealth fund ¢ Market notes: FTSE futures +6.6 points this morning.

An uneventful session in the US overnight (Dow -0.41%, S&P -0.02%) as the FOMC meeting revealed few surprises with most members supporting tapering.

The announcement revealed that tapering will probably continue at a slow pace leading the market to closely watch Friday’s US non-farm payrolls which have the potential to surprise on the upside.

Asian markets are mixed (Nikkei -1.50%, Hang Seng -1.10%, ASX200 +0.16%, Shanghai Composite -0.82%) as Chinese inflation eased and producer prices extended declines adding further signs that the economy is weakening. Commodity markets – gold +0.12% $1,227.51/oz, silver +0.21% $19.58/oz, platinum +0.14% $1,416.20/oz, copper -0.63%, $3.3215/lb, nickel +0.08% $13,467.50/t, iron ore -1.72% $131.50/t, thermal coal $84.00/t, WTI +0.39% $92.69/bbl, Brent +0.36% $107.53/bbl, zinc -0.81% $2,026.00/t.

Dual listed – BHP -0.19% A$36.97, RIO -0.08% A$65.30.

Copper slipped following the FOMC minutes, WTI lost 1.4% yesterday as an EIA report showed fuel stockpiles in the US increased more than forecast, and iron ore lost 1.72% as rebar prices continued to fall on concerns over credit tightening in China. Economic data due today:- US – initial jobless claims (forecast 335K), continuing claims (2,850K).

Eurozone – French trade balance (forecast -€4.6bn), Greek industrial production and unemployment, EC services confidence (-0.5), EC business climate indicator (0.22), EC economic confidence (99.1), EC industrial confidence (-3.0), EC consumer confidence (-13.6), German industrial production MoM Nov (1.5%), ECB interest rate announcement (0.25%).

UK – BOE rate decision (forecast 0.50%), BOE asset purchase target (£375bn), trade balance (-£2.3bn).
Company News ¢ Shanta Gold (SHG LN) production update reflects a continued increase in quarterly output up 3.64% qoq at 19,581oz in Q4 taking the total for the year to 64,054koz.

Throughput of the processing plant has stabilised at 1,275tpd supporting consistent output of 6,500ozpm.

Source: Company Investec View: These are a solid set of results that demonstrates stable operational performance from the company’s New Luika mine.

We look toward a resource upgrade following a recent drilling programme that should extend the mine life. ¢ Sierra Rutile (SRX LN) 4Q and 2014 guidance.

Sierra Rutile delivered 4Q production in line with budget to deliver record full year rutile production of 120kt (up 27% YoY) and ilmenite production of 32kt (up 47% YoY).

Cash costs were US$490/t of rutile with all-in costs at US$605/t.

The company has provided FY14E guidance of 131kt rutile and 28kt of ilmenite at the same costs as FY13A.

Sierra Rutile ended the period with $23m in cash and 37kt of rutile inventory, and is in the process of securing a US$30m senior loan facility.

Source: Company ¢ ZincOx (ZOX LN) production update indicates that Korean Recycling Plant (KRP) is in the final stages of ramp up to full production planned for Q2 2014.

2013 suffered numerous maintenance and repair issues that are a consequence of the aggressive operating environment of the process.

Due to downtime for repairs, production in November and December was limited at 2,289t and 1,145t of concentrate respectively.

Revenues for the year stood at US$26m.

The company expects full operating months in January and February, with some downtime in March for maintenance.

Source: Company Investec View: Clearly ZincOx’s zinc recycling technology has had numerous teething problems in the development of its first full scale plant.

We hope that the learning process will ensure that future similar developments will be possible without so many problems as the company will have learnt from the process.

The outlook for zinc prices is encouraging with ZincOx presenting one of the few pure zinc resources companies around, however, we await stable and consistent operational performance. ¢ Caledonia (CMCL LN) 4Q update.

The company produced 11.4koz Au in the 4Q to deliver 45.5koz in the full year.

It is guiding production of 48.0koz for FY14E.

Financial results will be released on March 31.

Source: Company ¢ Mongolian Mining (975 HK) DecQ13 production.

Mongolian Mining Corp (MMC) reported DecQ13A washed coking coal exports of 0.9mt, beneath our analysts’ forecasts and the lowest quarterly level in the last year.

A 1.5mt increase in product inventories in DecH13A suggests that demand from Chinese customers remains weak raising the probability of reduced production from the UHG mine in MarQ14.

MMC’s cash position is increasingly perilous, especially with prices showing no signs of recovery, and our analysts believe the company is likely to require cash by end JunH14E.

Source: Company Investec view: MMC had a US$129m cash balance as at the end of June 2013 and we believe the company is likely to require further cash by the end of JunH14E.

Possible sources of cash include a strategic transaction, offtake agreement and/or a rights issue, but the Mongolian government remains the most obvious potential source.

The government owes MMC US$78m in VAT reimbursements, another US$58m for work MMC completed on the nationalised UHG to Gants Mod rail project and possibly up to US$100m if the government completes the UHG to Gants Mod road purchase.

See our analysts’ report Staring down a hole dated 8 January 2014. ¢ Atrum Coal (ATU AU) appoints consultants for mine development.

Atrum has appointed consultants to progress the pre-feasibility study (PFS) for stage 1 of its Groundhog anthracite project in British Columbia.

The PFS is expected to be completed in 1Q14.

Source: Company ¢ Energy Resources of Australia (ERA AU) DecQ13 production.

ERA (68% owned by Rio Tinto) reported DecQ13 uranium oxide production from its Ranger mine of 503t bring the total to 2,960t for 2013.

Production was adversely affected in the December quarter by the failure of a leach tank.

Source: Company Investec view: Production at the Ranger mine is suspended while recovery operations at Ranger leach tank continue and will remain depressed as lower grade stockpiled material is processed until the commencement of production from Ranger 3 Deeps, should it receive regulatory approvals.

There is also still little signs of recovery in uranium spot prices with the current spot price at US$34.65/lb. ¢ Shaanxi Coal to raise US$1.6bn in Shanghai IPO.

Shaanxi Coal, China’s third largest coal producer, plans to raise CNY9.8bn (US$1.6bn) through the sale of 10% of the company in an IPO on the Shanghai Stock Exchange scheduled for 17 January.

Shaanxi Coal produced 107mt of coal at its 17 mines in 2012 and has minable coal reserves of 9.7bnt.

Source: Bloomberg
[cid:image007.png@01CF0D12.01CFED10] Commodities News ¢ Moody’s to use a lower assume gold price when assessing the industry.

The decision to move from using $1,200/oz to US$1,100/oz means that the rating agency is likely to take a harsher view on the outlook for the gold companies whose debt it rates, potentially leading to credit rating downgrades and therefore higher borrowing costs.

Source: FT Investec view: No surprise as all industry players, including research analysts try to come to terms with where the gold price should lie.

We note that broker forecasts for 2014 lie between a wide range of $1,050/oz to $1,400/oz, with the mean around $1,260/oz.

As the year progresses, gold mining companies are expected to revise down their reserve and resource positions to reflect lower assumed gold prices.

No-one has a mandate on gold price forecasts, but it suggests that the World Gold Council should perhaps be more prescriptive in setting a standard gold price for reserve reporting. ¢ Strike action at Chilean ports exporting copper spreads.

The northern port of Angamoz resumed operations yesterday, however, unions at some Southern Ports have gone on strike with around 13 ports involved.

Miners such as Codelco and Antofagasta have been affected.

Source: Thomson Reuters Investec View: If strike action takes a while to resolve then it is supportive of copper prices.

For the company’s affected however, it will be more a problem of timing of sales.

There have not been reports of strike action at the mines themselves. ¢ Freeport McMoRan (FCX US) expects 2014 output from the giant Grasberg copper mine to increase 12% to 500kt provided that it is allowed to export concentrates.

Gold output is expected to increase by up to 47% to 50-55t (1.7-1.8moz).

Source: Thomson Reuters ¢ Illegal rare earth metal mining in China remains a problem despite a two year campaign to reduce this.

The country produces 90% of the world’s rare earth metals and has been pushing to consolidate and organise the industry, with larger firms taking over smaller ones.

Source: Thomson Reuters ¢ European coal prices up yesterday following renewed Colombian government scrutiny over coal exports leading to a US$3.6/t increase to US$84.75/t.

Taking a firm environmental stance, the country has ordered Drummond to cease ship-loading until it installs a conveyor belt system to replace the current arrangement of barges and cranes.

This was a requirement of an earlier ruling that had a Jan 1 deadline.

Drummond has been exporting around 80kt/day, and will reportedly not be able to comply with the rules until March, so Columbia will also suffer lower coal royalties as a result.

All other coal exporters in the country, including BHP Billiton and Glencore Xstrata, have complied and will be able to continue operating.

Source: Coal prices at Richards Bay, South Africa were down very slightly at US$80.75/t.

Source: FT, Bloomberg.

Thomson Reuters Investec View: The debate over Drummond’s Colombian coal exports has been dragging on for some time and until yesterday an accommodation was expected that would continue to enable exports. ¢ Proposed amendments to Indonesia’s export ban on raw ore.

Indonesia’s Energy and Resources Ministry has reportedly proposed that mining companies be allowed to continue shipping concentrate until 2017.

The minimum level of copper in concentrate is being proposed at 15%.

Source: Bloomberg Investec view: Indonesia’s ban on the export of raw ore is due to come into effect on 12 January 2014 but there remains considerable market uncertainty around the implementation.

The proposed amendment to allow concentrate exports until 2017 may alleviate market concerns over disruptions to the copper market but there doesn’t appear to be any relief for the ban on exports of nickel laterite ore and bauxite.
Other economic news ¢ China becomes first country to sell more than 20m vehicles in a year.

Total wholesale deliveries rose 14% to 21.98m units, with sales of passenger vehicles, excluding buses and commercial trucks, up 16% to 17.93m.

The increasing number of cars has come at the expense of air quality, with sales potentially slowing this year as more cities limit the number of new vehicles in order to meet central government air pollution targets.

China’s State Council released a national plan in September calling for a 15-25% reduction in particulate matter by 2017 in the three key manufacturing regions anchored by Beijing, Shanghai and Guangzhou.

Source: Bloomberg ¢ JP Morgan may be planning to include its metals futures brokerage business to the sale of its physical commodities business, although this has been denied by the company.

Commodities business run by banks have come under scrutiny by US regulators.

JP Morgan has been trying to sell its Henry Bath metals warehousing unit since May but has yet to find a buyer.

Source: Thomson Reuters
African Resources update ¢ Zimbabwe to host a meeting to get platinum miners to invest in a refinery in country to meet a requirement that by year end miners must set up a refinery.

The country has already increased pressure on miners demanding a 15% levy from this year on raw platinum exports.

Failure to set up a refinery will lead to the government banning shipments.

Miners have been given till 18 January to submit proposals to build a refinery, the cost of which has been estimated at US$2bn.

Source: Mining MX & Thomson Reuters Investec View: This will be a challenging commitment for miners as the government is already demanding 51% indigenisation of mining operations, an uncertain outlook politically and fiscally, unreliable power as well as a difficult economic environment for PGM mining.

The commitment to a refinery is a major long term investment that would typically require investors to be confident in long term stability.

It may be safer for miners to accept closure of assets and preservation of capital unless PGM prices appreciate significantly should Zimbabwe refuse to change its stance.

Closing output in Zimbabwe would also help PGM prices benefitting South African operations that form the majority of supply. ¢ Japan aiming to lift its African profile.

The Japanese Prime Minister, Shinzo Abe, will make visits to the Ivory Coast, Mozambique and Ethiopia, in a bid to expand Japans diplomatic reach and help Japanese companies win business overseas.

Japan has pledged $14bn in aid over the next five years and billions more in private investment.

Source: Bloomberg ¢ Zambia Plans Sovereign Wealth Fund.

The country aims to build a sovereign wealth fund to spur investment outside the mining industry, with the fund to be set up through the Industrial Development Corp (IDC).

The fund is to get funding from the dividends of about 40 state-owned companies, while the government will also provide some “seed capital”.

This follows similar styles funds set up by Africa’s largest oil producers, Nigeria and Angola.

Zimbabwe is reportedly also planning a fund, financed by mining royalties and special dividends on state mineral and metal sales.

Source: Bloomberg
Investec Global Natural Resources Research Team: UK Hong Kong South Africa Hunter Hillcoat Tel: +44 (0) 20 7597 5182
Matthew Whittall Tel: +852 3187 5075
Albert Minassian Tel: +27 (0) 21 416 1454
Marc Elliott Tel: +44 (0) 20 7597 5189
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Louise Collinge Tel: +44 (0) 20 7597 5779
Investec Global Natural Resources Sales Team: UK Hong Kong South Africa Jamie Campbell Tel: +44 (0) 20 7597 5038
Will Robbins Tel: +852 3187 5098
Hayden Smith Tel: +27 (0) 21 416 1401
USA Thomas Lawrence Tel: +1 212 2595604
Alistair Roberts Tel: +852 3187 5097
Investec Commodity Hedging Team: http://treasury.investec.co.uk/products-and-services/commodities.html UK Callum Macpherson Tel: +44 (0) 20 7597 5070
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