[cid:image001.png@01CF8ACC.517ECE20] Wednesday, 18 June 2014 [cid:image006.jpg@01CF8ACC.78C1C500]
Snapshot � Company news highlights: Excellent results from Gemfields maiden ruby auction, First Quantum acquires Lumina Copper for US$430m, CITIC Resources provides update on Qingdao port investigation, Rio Tinto warns of coal job losses if permits not received, Shenhua operational data, Chinalcos Toromocho copper project approaching full production, Sundance signs EPC contract for Congo railway section, lower mineral extraction tax rates for Kazakhmys, Mineral Resources and Aquila terminate discussions, Newcrest settles with ASIC for contravening continuous disclosure obligations � Commodity review highlights: Codelco seeking new CEO with both mining and union-negotiation skills, Fortescue offering deeper iron ore discounts � Other economic news: US treasuries weaken on inflation concerns � African resources update: Zambia to review mining taxes, Gecamines workers to strike over unpaid wages, SA PGM wage negotiations have been agreed in principal but not finalised, Todays African Proverb � Market notes: Japans trade data was mixed with the trade balance coming in better than expected, as falling imports offset worse than expected export numbers.

In China, the local press are still talking about monetary policy, stating that more price based tools will be used instead of quantitative tools.

The WSJ is citing the World Banks top economist who stated overnight that China may have its own financial crisis soon. Commodities.

Oddly gold futures fell on Fed tapering speculation.

Iron ore prices were stable at US$89.30/t, although pressure remains to the downside as further broker downgrades came overnight.

Rebar bounced off its lows last night after ArcelorMittal stated that its still sees "solid" demand for steel from the auto and rail industries even as demand in China falls. Data due: UK - Bank of England June Meeting Minutes, Eurozone - Apr Construction Output (no fcst, -0.6% MoM & 5.2% YoY prev), US: FOMC Rate Decision (0.25% unch fcst); QE3 Tapering Announcement (US$10bn reduction to US$35bn fcst); Fed Treasury & MBS Purchases (US$5bn reduction to US$20bn & US$15bn respectively fcst); MBA Mortgage Applications June (no fcst, 10.3% prev); 1Q Current Account Balance (-US$97.0bn fcst, -US$81.1bn prev)
Company news � Gemfields (GEM LN) excellent results of maiden ruby auction generates US$33.5m realising an average price of US$18.43/carat.

2.03m carats were offered of which 1.82m were sold with 55 companies bidding.

The stones offered were a mix of high quality and low quality.

Cumulative costs incurred on the mine to date total US$34m.

The results take aggregate revenues for rough stones of ruby and emeralds to US$143m in the year to June.

Source: Company Investec View: A great result for the company which had been downplaying expectations for the maiden auction toward around US$15m.

As a first sales event of the product it is partly aimed at better understanding the market.

We note the success the management team has had at lifting pricing for its product with high quality emerald prices rising from US$4.69/carat in 2010 to US$56.7/carat most recently.

The stock has run hard in anticipation of good result, but there is clearly considerable value to be unlocked. � First Quantum (FQM LN) acquires Lumina Copper (LCC CN) for US$430m.

First Quantum will acquire Lumina Copper for stock and cash worth c.

US$430m.

Shareholders have the option of choosing cash of C$10.00/share or 0.4348 First Quantum shares, subject to proration.

Lumina owns the Taca Taca copper project in Argentina, which has a resources of 12.9mt contained copper grading 0.42% (copper equivalent of 0.54%).

A preliminary economic study completed in 2013 indicated an NPV of US$2.1bn for the project based on a US$2.75/lb copper price, US$3.0bn of development capex, and life of mine cash costs of US$1.11/lb after by-product credits.

Production would be at around US$244ktpa Cu, 110kozpa Au and 4.1ktpa Mo.

Source: Company Investec View: We note that this is relatively low capital intensity of around US$12,300/t whereas the industry average for new projects is likely in excess of US$20,000/t.

We wait to see how the development plan evolves under new management, although Argentina can at times be a challenging jurisdiction for miners.

The timings of development could also put pressure on FQMs balance sheet subject to how the major Cobre Panama project is advancing. � CITIC Resources (1205 HK) provides update on Qingdao port investigation.

CITIC Resources announced that the Qingdao court in its enforcement of sequestration orders has been unable to sequester c.

123,446t of alumina which CITIC has stored at Qingdao port and to which CITIC holds the title documents.

CITIC has title documents to a total of 223,270t alumina and 7,486t copper at Qingdao port.

CITIC will now undertake its own investigation to assess the impact on the company.

Source: Company Investec view: Any removal of stock from the port supposedly requires the title documents to be presented.

The announcement suggests that multiple title documents for the same goods may exist. � Rio Tinto (RIO LN) warns of job losses if permits not received.

RIOs Coal Australia MD has warned that the future of the Mount Thorley-Warkworth cannot be guaranteed beyond 2015 if the New South Wales state government does not approve a revised expansion plan, putting 1,300 jobs at risk.

The operation is seeking approvals that would enable the mine to continue operating until c.

2035.

Source: MiningNews Investec view: The operation is in a pinch-point between those in the Hunter Valley who benefit from mining operations and want them continued and a growing nimby populace opposed to mining, with various contrasting surveys suggesting general support or opposition. � Shenhua (1088 HK) May 2014 operational data.

Shenhua reported May 2014 commercial coal production of 25.2mt, down 5.6% y-o-y.

Cumulative commercial coal production to end May 2014 is down 2% y-o-y.

Coal sales of 38mt in May 2014 were down 13.8% y-o-y and cumulative coal sales until end May remain down 5.4% y-o-y.

Total power output dispatch of 16.93bn kwh was up 1.1% y-o-y.

Source: Company Investec view: Ytd run rates suggest coal sales/production is lagging guidance whilst power output dispatch is ahead.

Accumulative coal sales/production is down 5.4%/2% y-o-y.

Shenhua is guiding for CY14 commercial coal production/sales of 318.1mt/514.8mt, flat y-o-y.

Power output dispatch guidance of 210.18bn kwh is also flat y-o-y.

Ytd accumulative total power output dispatch is up 2.3% y-o-y.

The company expects revenue in CY14 to fall 3.4% y-o-y to CNY2,741bn and cost of sales to increase 2.6% y-o-y to CNY2,077bn. � Chinalco Minings (3668 HK) Toromocho copper project to reach full production in July 2014.

Chinalco Minings Toromocho copper project in Peru is expected to reach full production capacity of in July 2014.

Source: Company Investec view: The ramp-up of Toromocho has been in line with the companys guidance provided in its January 2013 IPO prospectus.

The company however expects to produce 100kt of copper in concentrate in 2014, down from previous estimates of 120kt, due to more complex than expected project commissioning.

The company has also flagged continued arsenic content above 0.5% in some of its copper concentrate, an issue the company does not see improving for at least 2 years.

This remains a concern for Chinalco.

Smelters typically impose substantial penalties for elevated arsenic levels and can reject concentrate with arsenic levels above 0.5%. � Sundance (SDL AU) signs EPC contract for Congo railway section.

The company has signed the engineering, procurement and construction (EPC) contract for the 52km section of the railway that is planned to be built in the Republic of Congo.

The signing of contracts for both Cameroon and Congo formalises the appointment of the Portuguese company, Mota-Engil (EGL PL), as the EPC contractors for the entire port and railway infrastructure.

Source: Company Investec view: The previously announced appointment of the European EPC company was surprising, given Chinas established presence in the space in Africa.

However, we understand that Mota-Engils bid included a number of significant positives, including performance guarantees, completion bonuses and financing support, that outweighed the modest advantage that slightly cheaper Chinese bids offered. � Lower mineral extraction tax rates for Kazakhmys (KAZ LN/847 HK).

The government of Kazakhstan has agreed to reduce mineral extraction tax (MET) rates for some of Kazakhmys more mature assets.

The assets benefitting from the lower tax are assets that have been identified for disposal in the Zhezkazgan region (excluding the Zhomart mine) and the Konyrat mine.

The new MET is effective 1 January 2014 and the full year benefit of the reduction at current copper prices is estimated at US$40m.

Source: Company Investec view: A number of governments are becoming more pragmatic in the face of possible mine closures and are reducing companies tax burdens.

We have seen similar trends in Mongolia and lower royalties are certainly a possibility for Australias coal producers.

Ultimately through lower taxes/royalties, we are likely to see cost curves shift lower and commodity prices potentially remaining lower for longer. � Mineral Resources (MIN AU) and Aquila (AQA AU) terminate discussions.

Following the purchase by Mineral Resources of a 12.78% stake in Aquila at A$3.75/share discussions were held between the companies on a proposed recommended all scrip off-market bid at an effective price of A$3.75/share.

Terms were not agreed and discussions have been terminated.

Aquila now intends to recommend the Baosteel and Aurizon (AZJ AU) offer in the absence of a superior proposal.

Source: Company Investec view: The cash offer of A$3.40/share from Baosteel/Aurizon remains open until 11 July 2014.

Baosteel/Aurizon have already indicated they will not increase their offer.

It was always going to be difficult to see how the all-cash offer, made by companies with strong financial backing, could be beat by a likely scrip offer from Mineral Resources, with subsequent project financing uncertainties. � Newcrest (NCM AU) settles with ASIC for contravening continuous disclosure obligations.

Newcrest has settled with the Australian Securities and Investments Commission (ASIC) following an investigation into Newcrests conduct over disclosure of its expectations for FY14 gold production and capex.

Newcrest has agreed to two contraventions of its continuous disclosure requirements and an A$1.2m fine.

Source: Company
[cid:image007.png@01CF8ACC.78C1C500] Commodities news � Copper major Codelco seeking new CEO with both mining skills and ability to negotiate with unions with whom relations are reportedly tense.

Around 2,150 workers are likely to see their jobs go by 2016 as falling ore grades make the open pit at Chuquicamata unprofitable.

The company is planning to spend US$4.2bn turning it into an underground mine.

The miner produces around 1.6mtpa of copper.

Source: Thomson Reuters � Fortescue (FMG AU) offering deep iron ore discounts.

The worlds largest supplier of seaborne iron ore, outside of the majors, is offering discount for its low-grade product that are at the levels that were offered during the global financial crisis.

Steel Home has reported that the company was offering a discount of 14% for its lowest grade product from July 1, up from 12% in June and an average discount of c.2% last year.

Source: AFR Investec view: This follows the theme our analysts noted a couple of weeks ago when the benchmark price for 58% Fe product was trading at a 14% discount to the 62% Fe product, when compared on equivalent iron units basis. Other economic news � US treasuries weaken on inflation concerns.

The yield on the 10yr government bond was up 6bp to 2.66% on the back of news that headline consumer prices had risen 0.4% in May.

The annual rate of inflation increased to 2.1% in May from 2.0% in April.

Core CPI, excluding the more volatile food and energy prices, rose 0.3%in May, which was also more than expected.

This adds to the chances that the Fed will raise interest rates before the middle of next year.

Source: FT
African resources update � Zambia to review mining taxes (again) to boost government revenue after inadequate receipts from the sector.

Mining taxes contributed 18.8% to government revenue in 2013.

Source: Thomson Reuters Investec View: This is not an infrequent action by the Zambian government and highlights the political risk of operating in country certainly isnt easing. � Employees at DRC state mining company Gecamines to strike over unpaid wages covering a three month period.

Miners at Kamoto Copper Company (KCC) have apparently striked for a few hours but little impact thus far.

The company is a JV between Glencore (GLEN LN) and Gecamines with a 20% stake.

GLEN is looking to expand production at KCC to 300ktpa over 2014/15.

Source: Thomson Reuters � Wage negotiations have been agreed in principal but not finalised at PGM miners in SA.

Details such as the timeframe and additional benefits are still outstanding.

Striking union AMCU plans to call a mass meeting this week to decide on the latest company offers.

The strike has been the longest (5 months) and costliest in South African history.

Source: Thomson Reuters Investec View: We are not surprised that despite progress made the process continues to drag on.

We hope that miners dont cave into possible demands for back pay during the striking period as that would certainly not disincentivise future strike action as miners would assume that they could strike and still get paid in the end. � Todays African Proverb.

"One can only go round a pepper tree, but can never climb it".

Source: BBC
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