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Fairfax Market Report including Medusa Mining and Mariana Resources

Last updated: 06:19 15 Oct 2010 EDT, First published: 05:19 15 Oct 2010 EDT

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Morning View

Gold $1,380/oz
QE2 – eg a second round of US quantitative easing is expected to be needed to further stimulate US economic recovery
•    The sheer momentum behind gold caught us by surprise this week.  Prices pushed through resistance levels more quickly and easily than previously seen prompting some observers to raise price targets to new levels. 
•    Gold mining funds and equities have substantially lagged the rise in gold price in our view and nearly every gold miner seems to be looking to raise funds in the market place all of a sudden
•    The market appears to be taking on some ‘Dot.com’ similarities but it should have firmer foundations and we do expect many miners to deliver increasing margins and growth in asset value with an increase in gold prices and an inflow of new cash with which to develop new mines and projects.
•    As ever we are at the mercy of the ‘flow of funds’ and with new institutional and private funds flowing the market looks set to post further gains for a while as new money drives this relatively small investment pool into new territory.

Economic News

French ban Eurostar from using German trains on French track, shows the European Union is working perfectly !
SA rand continues to strengthen to SAr6.82 : 1US$ driven by the falling US dollar, higher gold prices and still high local interest rates which serves to drive the carry trade.
The strong rand is going to hurt the South African miners, particularly those on quarterly benchmark contracts
Ferrochrome and coking coal producers will suffer much this quarter on the strong rand
Platinum producers are fighting the rand and higher local mining costs.  Platinum and palladium prices have risen but this barely offsets the increase in costs and the impact of the strong rand.

US$1.409/eur vs $1.410eur yesterday. Yen81.24/$ vs  81.08/$ SAr6.81/$ vs 6.78/$  $1.606GBP vs 1.605/GBP

Commodity News

Precious Metals:
Gold US$1,379/oz vs US$1,382/oz – Prices track sideways following new record achieved yesterday of US$1,387/oz.
•    Any further hints of quantitative easing could prompt a further rally.
•    SPDR gold holdings jump up to 1,304.34t (41.936moz) from 1,285.2t (41.320moz) yesterday. Current value US$57.580bn.
Platinum US$1,700/oz vs US$1,715/oz yesterday – Moving in sympathy to gold
Palladium US$597/oz vs US$600/oz yesterday –
Silver US$24.57oz vs US$24.57/oz yesterday – Silver moving with gold but could demonstrate additional strength if longer term industrial demand is picking up as silver is more of an industrial metal than gold.  However, the metal is typically produced as a by-product to copper, gold and zinc production.
Rhodium US$2,300/oz vs US$2,250/oz yesterday –

Base metals:
Copper US$8,410/t vs US$8,435/t yesterday – Up in morning trading reversing much of yesterday’s loss in response to strong outlook for demand reversing losses from news on US jobless claims.
•    Ground breaking of US$400m Konkola North Copper project in Zambia that is being developed as a 50:50 JV with Vale and African Rainbow Minerals.  The mine is expected to process 2.5mtpa of copper producing 45ktpa of copper in concentrate.
Aluminium US$2,395/t vs US$2,437/t yesterday –
Nickel US$24,200/t vsUS$2,564/t yesterday – Metal Bulletin reports that Norilsk had declined an approach from Glencore to market all of its nickel output as it would have cost then hundreds of millions of dollars. 
•    The comments are from letters being posted to refute claims by United Co Rusal that it is being run to the detriment of its shareholders.  Rusal has also claimed that deficiencies in Norilsk’s sales and market activities are costing the company up to US$900m.
Zinc US$2,411/t vs US$2,433/t yesterday –
Lead US$2,408/t vs US$2,449/t yesterday –
Tin US$26,650/t vs US$27,100/t yesterday –

Energy:
Oil US$83.77/bbl vs US$85.30/bbl –
Gas US$3.670/MMBTU vs US$3.672/MMBTU yesterday – 
Uranium US$46.50/lb vs $46.50/lb last week –

Other
Iron Ore – German Federal Cartel office intends to prohibit the Rio/BHP iron ore JV.  No reason has been given yet but Rio expects details to follow next week following formal notification.
Rare Earths – Chinese Ministry of Finance claims that restrictions on rare earth exports and manufacturing are in line with WTO policy as the government seeks to preserve its asset base and keep supply for domestic consumption.

Company News

Mining:
Medusa Mining* (LSE:MML) - Medusa Moving to main list on the LSE
•    Move to main list: Medusa Mining has announced yesterday confirmation of the cancellation of its AIM listing to move to the standard listing segment of the official list on the LSE.  Documentation is being finalised and the move is due to take place on or around the 28th October subject to necessary approvals from the UKLA and the LSE.  The company has also published its annual report.
•    The move marks a significant step in the evolution of the company as a mid tier gold miner.
•    We have upgraded our target price to 421p to factor in higher gold prices and a two times premium to the NPV (previously 50% premium) of the Co-O mine (US$583m NPV using an 8% discount rate).  We feel that the premium is justified on the basis that the company is moving to the main board which will open the door to new investors and that the company is a dividend paying gold company which attract premiums.  Based on forecast numbers the company does not appear expensive with P/Es of 10-11 times this year’s earnings.
•    Valuation: Our valuation of the company is based off the Co-O mine ramping up production to 130,000ozpa at a cash cost of US$200/oz by 2013.  We have downgraded our forecast production for this year (June Y/E) from 120,000oz to 110,000oz, however higher gold prices have more than offset the effect of this.  We assume that the company spends US$12m on capex this year and US$8mpa longer term on the mine.  We model the depletion of the resource as the end of the mine life in 2021.  We feel is conservative as the company continues to identify new veins and the majority identified are open at depth and along strike.  A conceptual model indicated the potential for 3-7moz of resources at Co-O.
•    Cash:  The company had close to 25,000oz of bullion on account at the June year end, which we have valued at current prices equivalent to US$34m of cash in addition to the year end cash position of US$9.09m.  We are forecasting a year end cash position for June 2011 of US$92m.
•    Dividends we maintain at Ac10/share flat going forwards following the company’s announced maiden dividend of 5Ac/share for the year ended June.  This provides a yield of 1.79% for this year’s earnings which is covered by over 6 times from this year’s operating cashflow.
•    Exploration: Medusa is spending US$21m on exploration this year on Co-O and at some of its exploration targets within its highly prospective tenement package.  We look forward to newsflow from drilling at Bananghilig where there is a 650,000oz inferred resource, and the possibility of identifying extensions to Co-O that could support an enlarged operation.  We have attributed US$52.4m of value to the company for exploration which comprises US$50/oz in the ground for Bananghilig and a further US$20m for other projects.  The company has a number of copper gold porphyry targets, numerous gold vein structures and disseminated gold targets within the tenement packages.  The potential within the tenements means that the company has little reason to seek other prospects in other regions and we expect these to lead to considerable value supporting organic growth towards 300,000-400,000ozpa of gold production long term.
•    Conclusion:  Medusa is a high quality gold producer delivering on promises with significant organic growth potential.  The move to the main board and the decision to start paying dividends marks major milestones in the company’s evolution.  The current gold price environment make this an excellent low risk means to seek exposure to gold for which the outlook is strong with market participants forecasting further increases which would add further value to the company.  If we apply current gold prices into perpetuity (US$1379/oz) then our target price would rise to 613p/share.  Risks associated with mining we view as being relatively low as the company has been mining for a number of years gaining considerable experience, and with a strong balance sheet Medusa is well capitalised to support its current development and exploration programmes.
Source: Fairfax & Medusa Mining
* Fairfax acts as Broker and Nomad to Medusa Mining

Mariana Resources (LSE:MARL)– Additional good intercepts from Calandria Norte
•    Drilling from the company’s flag ship Calandria Norte project in Argentina have returned some high grade intercepts highlighting the potential for high grade vein breccias at Las Calandrias and Calandria Norte in particular in addition to the bulk tonnage style gold mineralisation at Calandria Sur.
•    11 holes were drilled totaling 1,367m following up previous intersections over 200m of strike in the central portion of the vein trend with all holes intersecting gold mineralisation.
Conclusion: Las Calandrias appears to be an exciting project with considerable potential, we wait for further newsflow on the drilling programme and an eventual resource.

Mining this week:     
African Barrick (LSE:ABG)– Update on Buzwagi Mine
Mariana Resources (LSE:MARL)– Surface rights secured at Las Calandrias
Stellar Diamonds (LSE:STEL) – Q3 Update on Mandala Mine demonstrates progress

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