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Fairfax Market Report including Condor, Avocet Mining, Baobab Resources and DiamondCorp

Last updated: 06:12 05 Oct 2011 EDT, First published: 05:12 05 Oct 2011 EDT

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Economic News 

Europe- Last night it emerged that a plan was being forged by EU finance ministers to ring fence the European banking system. 

The news came as troubled bank Dexia SA announced plans to pool troubled assets into a “bad bank” – 3 months ago the bank was given a clean bill of health in the EU stress tests. 

A raft of profit warnings is hitting the banking sector today with Deutsche Bank scrapping targets and RBS saying it will have to revisit its initial return of equity forecasts. 

Yesterday Moody’s lowered its credit rating for Italy by 3 levels to A2 from Aa2. The move was not surprising given that S&P had already downgraded the country on the 20th of September. 

Retails sales figures for the Eurozone will be released later today. Expectations are for sales to have fallen 0.3% in August after a 0.2% increase in July. 

Officials meet again tomorrow. The market is expecting the ECB to announce that it will lower interest rates tomorrow. 

On the back of the Italian downgrade, Moody’s has stated that “all but the strongest” sovereigns are likely to face more pressure on their ratings. 

Yesterday Angela Merkel stated that a Greek default would have unpredictable consequences and increase contagion fears. 

US – Yesterday FED Chairman Bernanke stated further asset purchases are still an option. The FED Chairman announced that with regard to the economy the FED doesn’t take “anything off the table” although it does not believe that another round of QE is currently merited. 

The Chairman also reiterated yesterday that political pressure from Republicans concerned with inflation would not stop the FED from using any and all tools to boost the economy. 

The FED has two mandates – firstly to achieve “maximum employment” and secondly to keep “prices in check” 

Lawmakers are not in a position to halt further action unless they can prove that the FED is disregarding one of its duties. 

Inflation expectations are easing. An index of expectations for 5 to 10 years eased to 2.16% from 2.795 at the end of August. 

Some tools the FED still has up its sleeve: Reducing the rate paid on bank reserves, buying securities and providing more information on their rate outlook. 

Bernanke also used the congressional hearing as an opportunity to criticise the Chinese over their currency – the latest move in what is a growing war of words between officials. The FED Chairman stated that the undervalued Renminbi was preventing the rebalancing of global demand towards emerging market economies. 

China – Mainland China markets are closed this week. 

Reports are emerging that a blast at a coal mine in the southern province of Guizhou has killed 17 miners and left one trapped. 

Australia – Retail sales climbed more than forecast in August as consumers bought more household goods. Sales rose 0.6% from the second month in a row. 

Yesterday the Reserve Bank held the benchmark rate at 4.75% - for the 11th month. 

Despite maintaining rates, the Bank stated that it would drop them should the global economic outlook merit such action. 

Portugal – As pressure continues to build on peripheral nations, some evidence is emerging that suggests investor sentiment in the country could well be improving. Rumours are circulating that a number of investors are forgoing the right to be repaid early on a number of “puttable” floating rate notes. 

If true, the move indicates a minor show of support for the government as it strives to cut spending and raise taxes to the terms of the 78bn euro aid package. 

UK – Figures released today show that UK shop price inflation was unchanged in September as supermarkets absorbed costs in an effort to attract customers according to the British retail consortium. Retail prices rose 2.7% from a year earlier. 

Annual food price inflation was 5% last month, the same as in August while non food prices climbed 1.3% down from 1.4% 

Tesco, the UK’s largest retailers announced that first half profits rose 3.7%. The positive figures were mainly down to sales in Asia offsetting a slow domestic business. 

David Cameron takes to the stage at the Tory party conference today. 

Greece – Greece is grinding to a halt just when it needs to prove to the world that it is not a lost cause. Hundreds of thousands of Greeks are on strike at Airports, schools and hospitals in protest against 6.6bn austerity plans. Reserve some sympathy for the Greek PM – It really is a thankless job. 

Brazil – Goldman Sachs has stated that Brazil’s economy is set for a slowdown with industrial production contracting in August as domestic manufacturers struggle with rising interest rates.  The bank cut its forecast for GDP to 3.5% this year from 3.7%. 

Philippines – Inflation accelerated in September on the back of increasing costs from utilities and transport companies. Consumer prices rose 4.8% from a year earlier after a 4.7% gain in August. 

Vietnam – The IMF has stated that the country must not risk undermining the stabilisation the economy and currency by easing monetary policy. 

Kenya – Expectations are increasing that the Central bank will raise its benchmark interest rate for the second time in a month to help boost the world’s worst performing currency. 

DRC –The country’s national electricity supplier has stated that energy deficit in the country will dramatically increase in the next 4 years due to a surge in demand from mining companies. 

South Africa – New research has revealed that black South Africans own more than 17% of the country’s largest listed companies and that the percentage could well increase in the coming years. The research focused on the top 100 companies listed on the JSE. 

Liberia – The US Ambassador to Liberia has stated that she is hopeful that the upcoming election will progress peacefully and be free and fair. The elections are scheduled for October the 11th but the supreme court needs to rule first on whether the candidates have met the 10 year constitutional requirements to run as a challenge to the candidate’s eligibility has been lodged from the Movement for Progressive Change party. 

The challenge from the party is calling for 6 of the eligible 16 candidates, including incumbent President Ellen Johnson Sirleaf, to be deemed ineligible. 

Commodities – Commodity index net outflows may have totalled US$8.4bn in the week ended Sep 27 versus a total net outflow of US$7.75bn in Aug and net inflows of US$10.3bn in Jul according to market estimates. 

Currency – The euro is off this morning against the dollar and the yen on the back of the credit downgrade for Italy. 

The dollar is being supported by the FED Chairman’s comments that suggest that further QE is not required at this stage. 

US$1.3318/eur vs 1.3216/eur yesterday. Yen 76.71/$ vs 76.69/$. SAr 8.135/$ vs 8.229/$. $1.545/gbp vs 1.545/gbp

Commodity News 

Precious:

Gold US$1,628/oz vs US$1,674/oz yesterday – Gold is up this morning after falling below US$1,600 yesterday as Moody’s decreased Italy’s credit rating 3 levels to A2 exacerbating contagion fears of sovereign debt crisis in the Euro zone.

The total hedge book is expected to result in an annual net addition, the first net hedging since 1999, as some gold miners hedged for the 2nd consecutive quarter this year according to GFMS and SocGen. In Q2 6t of gold were added to the global hedge book that stood at 158t at the end of Jun.

Gold production in Peru, the 6th largest gold miner, increased 23% in Aug on output growth at one of Barrick Gold’s mines.

Randgold Resources expects to commission a gold-processing facility at Kibali project in the DRC in Q4 2013, nearly 2 years ahead of schedule, according to CEO Mark Bristow.

SPDR gold trust holdings decreased to 1,230t (39.530moz) value US$64.720bn from 1,232t (39.617moz).

Platinum US$1,436/oz vs US$1,500/oz yesterday

Palladium US$562/oz vs US$589/oz yesterday

Silver US$29.78/oz vs US$31.14/oz yesterday

Rhodium US$1,625/oz vs US$1,625/oz yesterday

Base metals:

Copper US$ 6,993/t vs US$6,953/t yesterday – Copper is up this morning after falling for 5 days in a row as Ben Bernanke said the Fed is ready to provide further monetary stimulus if necessary.

Mining companies are expected to sustain their investments in mining projects in Chile on few signs of slowing China’s demand. Total investment in the industry will reach US$67bn in the next 8 years with Codelco accounting for US$20bn according to Mining Minister Hernan de Solminihac.

Asian orders are “quite strong” for the next year and orders from Europe look “cautious” according to Codelco CEO Diego Hernandez. 

China should benefit from weak prices and aim to restock, Codelco CEO said. Chinese copper imports totalled 235,509t, +21% month on month and the most since Jan, in Aug and SHFE monitored copper inventories dropped 45% since Mar. Copper prices lost 31% since a record level of US$10,190/t in Feb.

Freeport-McMoRan said it is “selling less” copper in Europe than several months ago and the US sales are “the same”.

Codelco, the world’s biggest copper producer, decreased the premium paid by European buyers by 8% next year on the back of weak economic growth in developed economies.

Mitsubishi Materials, Japan’s third biggest copper producer, has lifted force majeure notice on concentrate for its Onahama smelter that it declared more than 6 months ago after an earthquake and tsunami.

Aluminium US$ 2,205/t vs US$2,213/t yesterday

Aluminum demand is weakening but not significantly with Asia remaining strong, North America flat and Europe recording slowdown according to Rio Tinto. The auto industry orders were strong, while aluminum consumption by construction remained subdued.

The long term outlook is for aluminum demand to grow at 4.25% CAGR over 35 years Rio Tinto said.

LME will consider ways to eliminate a backlog of industrial metals including building up at warehouses and leading to late deliveries to customers.

As much as 70% of aluminum inventory can be tied up in financing deals according to market estimates.

Nickel US$ 19,000/t vs US$18,897/t yesterday

Zinc US$ 1,890/t vs US$1,906/t yesterday

Lead US$ 1,925/t vs US$1,976/t yesterday

Tin US$ 20,990/t vs US$20,800/t yesterday

Energy:

Oil US$101.6/bbl vs US$101.3/bbl yesterday - ICE Brent Crude- which is the global benchmark- for November delivery fell $1.92 settling at $99.79bbl on Tuesday the lowest close since February this year. Today prices rose for the first time in four days gaining $1.76 or 1.8% to $101.55bbl.

Many traders are holding short positions or bets that prices will keep falling. 

OPEC members are likely to reduce output for 2012 to keep prices above $90bbl as plans to increase spending in Middle East continue in order to quell the civil unrest. 

Ministers meet in Vienna in December to discuss oil output as oil companies continue to return to Libya and production increases. 

EU’s climate change commission supports new fuel quality directive to ban oil sands projects and could have a major affect on coal to liquid and oil from rock shale production. 

Natural Gas US$3.664/mmbtu vs US$3.607/mmbtu yesterday

Egypt and Qatar have agreed to cut natural gas supply to Israel at an Arab conference in Tehran according to news reports. If true Israel’s fuels prices are likely to hyper-inflate. Egypt provides c40% of Israel’s natural gas. 

Israel however, has awarded new contract to Italian company to build new offshore terminal which will allow Israel to import from other sources. 

Uranium – US$52.75/lb vs $52.5/lb last week

Other:

Rare Earths – Molycorp said to have discovered a heavy rare earth deposit near Mountain Pass in California.

Coal- A challenge to stop a new coal-fired power station in Ayrshire in Scotland has been quashed as the £3bn project gets the green light subject to location and design of facility. 

Australian coal miner New Hope is up for auction with reports that Chinese or Indian firms are likely to be the key bidders. Value surges 15% to over $5bn.

Company News:

DiamondCorp (LON:DCP) - Update confirms better grades at Lace Mine and New Development Plan

Bulk sampling has been completed at the Lace mine between the 25 and 26 levels. 

The mining grade has been confirmed at 26 carats per hundred tonnes (“cpht”).

This high grade brown VK kimberlite represents approximately 40% of the pipe at the sampling level and re-examination of the drill core below level 33 by the consultants confirms that the 26cpht kimberlite dominates the entire pipe. The lower grade grey VK kimberlite (14 cpht) and contact VK grading 9 cpht were not found at greater depth. 

Grade results from the kimberlite bulk sampling are summarised below: 

A consistent carat value of $160 has been established. The objective of the bulk sample was to establish both value and grade. $160/carat and a production rate of 26cpht are at the upper end of expectations. 

This valuation has been based on the 15,414 tonnes processed so far with a recovery of 2,157.41 carats, This is less than the company’s initial target of extracting 30,000 tonnes and +3,000 carats as difficult ground conditions would have made this process unsafe and not timely and the company do not believe there has been any bias in the valuation by one or two exceptional value stones.

Carat value is above $120 base case This carat value is above the company’s base case valuation of $120 per carat. It is key to note we use $120/carat in our model so the $160/carat consistency provides good upside. 

Approximately 80% of the diamonds recovered are of gem quality with 37% larger than one-third of a carat.

Mine plans revised: Mine plans announced in June have been reviewed and revised with consultants. 

As only 40% of the kimberlite at the 25 level is high grade kimberlite and the reduced tonnage above the initial 29 stoping level combined with the difficult ground conditions in the old tunnels, the company will start production at level 34, 10m below any old drives put in place by previous mining.

The block cave established at 34 level will be mining virgin kimberlite and the first cave will mine 3 million tonnes over 2.5 years while a new block cave is established on level 44 to mine 6.75 m tonnes over 5 years. This development will be replicated in 100m blocks to the 84 level (840 m depth) accessing a total of 28 m tonnes over a 25 year period. 

The capital required for the initial Block Cave at level 34 is estimated to be Rand 143 million (£11m) - this is an increase of 15% in rand terms but the same in sterling as the rand has depreciated against sterling. Importantly after the initial capex for the first block, the development of the mine should be funded from cash flows. 

Ramp up to full scale production is expected to take 19 months - based on a carat value of $160 per carat and a 10% discount rate the project has an NPV of £117m.

There is scope for upside as the old plans show an increase in the size of the pipe by 50% for the 33 level compared to 24 level.

Management have recommended to the board that the company proceeds with the necessary £11.4 m investment for full scale underground mine development.

Conclusion:

Project parameters for the development mine have improved from base projections provided in June. 

Improved grades of 26 cpht and the $160/carat value are both at the upper end of expectations.

Revisions to the mine plan have resulted in a 15% increase in capex in Rand but this has been mitigated by the depreciation of the rand against sterling. These revisions are based on experience from the mining of the bulk sample. 

Post the fund raise for the £11.4m investment the mine becomes self funding as the mine plan provides for further blocks to be developed. 

Based on the projections presented in June our value for the share was 28 pence providing significant upside from here - with both grades and values revised upwards this provides even further scope/cushion in the valuation of the shares. 

Baobab Resources (LON:BAO) - Positive Drill Results from Ruoni South

The first drill results from Ruoni South have come up with some of the best grades so far in drilling on the Massamba Group at the company’s Tete Iron Ore Project.

Drilling found significant intercepts with an average head grade of 30% Fe – the DTR concentrate grades are much higher at 64% Fe, 1% Vanadium and 5% Titanium Dioxide with a mass recovery of 26%.

Consultants Coffey have started preliminary data validation and geological modelling of the Ruoni North and Ruoni South blocks in preparation of a resource statements scheduled for release in October and November 2011.

The DTR results for Vanadium at 1%  in the concentrate is 25% higher than reported from Ruoni North and 40% higher than indicated concentrate grades from South Zone and Chitongue Grande.

Conclusion:

These drill results from Ruoni South show the potential to deliver high quality concentrate from this project.

Resource statements are due out from Ruoni South, Ruoni North and the Chitongue Grande prospects which will leave the company exceeding its 300 Mt resource target for this year.

In parallel to putting together the resource statement, the company are conducting metallurgical test work to determine the best grind fraction/magnetic strength conditions to optimise the concentrate quality and the good concentrate grades from Ruoni South will help in this regard.

The recent sell off the shares in the company and the mining sector make the shares look very cheap at these levels – Baobab’s Tete Iron ore project is only one part of its portfolio with other valuable exploration assets – confirmation of the Hanlong acquisition for Sundance at a price 14% higher than their initial offer should highlight value in this sector. 

The Tete project benefits from being located close to available transport and cheap power giving them greater flexibility as the project progresses through its pre-feasibility stage.

*Fairfax acts as nomad and advisor to Baobab Resources  

Avocet Mining (LON:AVM) - Mineral Reserve at Inata Mine Increased

The Reserve (Proven and Probable) increased by 417,200 oz or 40% to 1,462,500 oz (23.6 mt at 1.93 g/t gold) from 1,045,3000 oz reported in December (15.4 Mt at 2.11 g/t gold) before taking into account depletion.

Net of depletion of 92,000 oz, the Mineral Reserve increased by 49% by 509,200 oz.

The new Mineral Reserve is the result of a thorough economic analysis and revised pit design that is based on the recently announced Mineral Resource for the Inata mine license area of 3.36 million ounces.

The increase announced will enable production to increase at the Inata mine from 165,000 oz per annum to 245,000 oz in line with management’s objective.

Condor (LON:CNR) - Update at La India Project

SRK, the consultants, have updated the Mineral Resource estimate on the Cacao Vein at the Cacao Concession.

The JORC resource estimate is for 0.59 Mt at a grade of 3.0 g/t for 58,000 oz.

The total resource at the La India project now stands at 1,046,000 oz gold at 6.0 g/t (849,000 oz attributable).

The Cacao Resource has been estimated over a 500m strike length and the depth extends between 170m and 210m down dip. SRK applied a 1.5g/t gold cut off grade based on economic assumptions based on a gold price of US$1,200 and 90% recovery, and a top cut of 25g/t based on statistical analysis of the data. 

Mining this week:

Solomon Gold (LON:SOLG)   - Appointment of New CEO

Sundance Resources (ASX:SDL) - Sichuan Hanlong Bid


 

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