Fairfax Market Report including Hambledon Mining, North River Resources and International Ferro Metals


Morning View 

Gold $1,806/oz – prices gain ground as global economic turmoil leave few choices for investors

Global slowdown, be it by deleveraging, destocking, loss of consumer confidence or some other means is normally bad for industrial metals prices.

China may continue to stimulate internal growth but its more export led ‘private’ economy may suffer badly if Europe and the US turn to negative economic growth.

Negative market sentiment over Greece and Italy risks taking the world down

IFM warnings over the potential risks to global growth are worth heading 

‘Transitioning’ – should be the new word for removing deadweight economies from the Euro

Copper prices may be held up by Chinese demand and by the prospect for longer term low interest rates but other base metals may well fall.

The biggest risk to metals is US dollar strengthening in a market where the Euro and the US dollar compete to see which currency can go lower.

Economic News 

Europe – Greek finance Minister Evangelos Venizelos stated that “Good progress” is being made in a second round of talks with EU and IMF officials with regard to the next tranche of funding for Greece. 

The only way Greece will ever hit its deficit goals is if Zeus, the Greek god of gods, intervenes.   

Anyone who believes that Greece will be able to grow its way out of the debt crisis in 5/10/20 years should be investigated in our view! 

It has become apparent that markets will not tolerate the current program of continued bailouts having concluded that Greece is deadweight. 

“Deadweight” – definitions: An oppressive burden; the unrelieved weight of a heavy, motionless mass. – In short deadweight suffocates growth. 

Officials must now realise that until the Eurozone implements conclusive structural reform a contagion cycle will infect the markets making them synthetically volatile as macro concerns continually arise overshadowing positive fundamentals achieved by viable, sustainable companies/businesses in Europe. 

Italy – Expectations are increasing that Italy’s banks will be subject to a downgrade in the coming days. Italy follows Spain, Ireland, Portugal, Cyprus and Greece whose credit ratings have been cut. 

China – A ray of light from China emerged this morning. The Conference Board today announced that a leading indicator, that aims to capture prospects over the coming six months rose by 0.6% in July. 

Optimism though is short lived in these markets. The IMF yesterday cut its forecast for global growth and lowered it growth targets for China estimating that the country will grow 9.5%. 

US – All focus will be on the FOMC today. Expectations are that the Committee may decide to replace short term treasuries with long term bonds in a bid to lower rates for mortgages, and consumer loans. 

Existing home sales figures will be announced later today. Expectations are that sales rose in August but probably failed to make up for the decline in the previous month. 

Japan – Japan’s exports increased less than forecast on the back of falling global demand for electronic components, due in part to the global slowdown and the rising yen. 

Overseas shipments increased by 2.8% in August the first gain since March. The figure was below the medium estimate of an 8% increase. 

Forecasts still predict that the Japanese economy will grow this quarter. 

UK – The UK energy secretary has stated that the government should increase the rate of spending to boost the economy, stating that “the UK must be creative and imaginative about bringing forward more spending”

Figures released by the nationwide show that consumer confidence fell to a 4 month low in August as pessimism surrounding the economy increased. 

Australia – Government officials have defended the country’s carbon tax stating that the country’s economy will grow strongly regardless of the new tax rules, estimating that GDP will grow to about Aus$3.6tr by 2050. 

Brazil – Consumer prices rose more than estimated this month. CPI rose by 0.53% in the month through mid September. The President has reiterated that slowing inflation is a “strategic responsibility”.

Currency – The dollar rose this morning against its most traded counterparts amid speculation that the federal reserve may announce further stimulus later today. The yen also rose this morning against the dollar as the IMF stated that global growth is slowing increasing demand for safe haven assets. 

US$1.3695/eur vs 1.3615/eur yesterday. Yen 76.28/$ vs 76.53/$. SAr 7.714/$ vs 7.735/$. $1.572/gbp vs 1.569/gbp

Commodity News 


Gold US$1,812/oz vs US$1,779/oz yesterday – Gold prices are up this morning ahead of the FOMC statement.

Gold vaults are running out of space as some companies see a 5x times increase in a demand for storing facilities. Barclays is building a new vault in London and Brink’s Co, Deutsche Bank and the Perth Mint plan to add more space.

A total of 168,300 tons of gold has been mined by 2010 that can fit into a cube with a 21m long side according to the World Gold Council estimates.

4,500 tons of the US gold reserves are held at the Kentucky Fort Knox Depository, opened in 1937, at a book value of US$42.22/oz.

SPDR gold trust holdings increased to 1,252t (40,260moz) value US$72.408bn from 1,252t (40,250moz).

Platinum US$1,785/oz vs US$1,774/oz yesterday

Palladium US$720/oz vs US$717/oz yesterday

Silver US$40.07/oz vs US$39.42/oz yesterday

iShares Silver Trust, the largest ETF backed by the metal, holdings decreased to 9,921 tons yesterday.

Rhodium US$1,805/oz vs US$1,790/oz yesterday                                     

Base metals:

Copper US$ 8,370/t vs US$8,352/t yesterday – Copper is little change today on the mixed news flow.

The market was 130,000t in deficit in H1 this year versus a 286,000t shortage same period last year according to the International Copper Study Group.

A cut in global economic growth by IMF to 4% in 2011 and 2012 from its previous estimates of 4.3% and 4.5%, respectively, and a 5% drop, the most since April, in the US housing starts in Aug put pressure on copper prices.

Japan’s production of copper and copper-alloy goods dropped 5.3% year on year to 62,260 metric tons in Aug, a 3rd drop in a row, amid weak demand from a recovering auto industry and a drop in shipments of electronic parts.

Aluminium US$ 2,338/t vs US$2,329/t yesterday

Nickel US$ 21,250/t vs US$21,025/t yesterday

Zinc US$ 2,118/t vs US$2,105/t yesterday

Prices averaged US$2,327/t so far in 2011 and may climb to US$2,800 by 2014 due to the market deficit led by orders from China according to Beijing Antaike. 

The market is expected to be in surplus by 250kt and 300kt in 2011 and 2012 while slipping into a shortage of 100kt and 150kt in 2013 and 2014.

Lead US$ 2,330/t vs US$2,300/t yesterday

Tin US$ 22,900/t vs US$22,750/t yesterday


Oil US$110.6/bbl vs US$109.0/bbl yesterday - Prices fell in NY as rising stocks add concerns that demand may  fall.

Libya’s Arabian Gulf Oil Co. will be ready to export 1mbbls of crude within one week, company official Hassan Bolifa said yesterday.

China is withstanding the global slowdown - API conference board.

The IMF cut its forecast for China to 9.5% from 9.6%.

Cyprus says it has begun exploratory drilling for oil and gas in the eastern Mediterranean Sea - risking escalating tensions with Turkey.

The UK government has announced a 12% increase in the tax rate on profits of North Sea oil producers. The £10bn tax bill could wipe £2bn off shares.

North Sea operators have responded saying the move risks investor confidence.

Royal Dutch Shell has been granted two crucial permits for Arctic oil exploration but, the deal comes with strict environmental conditions.

These new permits require Shell to reduce emissions of soot and nitrogen dioxide by more than half compared with its previous plans. It will be able to drill for 120 days a year.

Natural Gas US$3.791/mmbtu vs US$3.830/mmbtu yesterday

Pakistan’s Government has decided to allow oil and gas exploration companies to sell 10% of their oil and gas findings directly to consumers, under the Petroleum Policy 2011.

Uranium – US$54.00/lb vs $52.75 last week


Steel – Tokyo Steel raised its prices by 3-7% for the first time in 7m amid a recovery in demand and increasing costs. 

The company said it paid 7% more for scrap in he last several weeks with no decrease expected any time soon.

Demand from the housing market in Japan is weak and a reconstruction in areas damaged by March 11 earthquake is not expected to commence until 2012. 

Company News:

International Ferro Metals (LON:IFM) – IFM confirms progress towards low cost operation

We met with IFM management yesterday for a run through of their results.

Furnace restart and modifications are all but complete with the first furnace ramping up production and the second furnace due on-stream in November. The first furnace started operating on 30th July and is now working at full load while the second was switched on the 2nd September and expected to ramp up to full load by mid-October.  Total nameplate capacity of both furnaces is 265,000 tonnes 

Costs should fall to just under 80c/lb next year as a result to the modifications lowering IFM’s cost base to below that of many of its competitors.  We believe that costs could rank lower than Xstrata, Hernic and Tata and with costs rising fast in China we can see the price structure and dynamics of the industry changing appreciably next year.

Some furnaces are already being converted to production of other alloys with ASA moving away from ferrochrome in favour of manganese alloy production.  Others are sure to follow, particularly in China where power and other costs are rising fast.

Power supplies now appear relatively stable with Eskom having sorted out many of the problems which beset the state power utility two years ago but power prices are still due to rise by +25% next year as part of the price increase package which got Eskom back on its feet again.

Coke: mixing coke with anthracite coal has also helped cut costs further with the furnaces now running on 40-45% coke supplemented with anthracite.  Using less than 40% coke can damage a furnace.

Co-generation: The team have done well to install new co-generation equipment and other initiatives to reduce costs.  

Borrowings stand at SAr250m out of a SAr500m low cost facility with the Bank of China.  Management expect net borrowings to rise to around SAr400m at their peak leaving relatively little headroom for error. The BoC facility needs to be renewed next June.

Sales:  Management report ‘buoyant’ sales into China and good sales into the US and Europe.  ‘Buyoant’ does not mean strong in this case but is more like sales are just done.  Rio Tinto now report some consumers asking to defer shipments of other commodities (not ferrochrome).  We see the Rio Tinto comment as a warning that industrial consumers may well look to reduce ferrochrome stocks and may ask to defer shipments in this area.

Stock levels: IFM are already reducing stock levels with the stock of 25,000t of ferrochrome to fall to 12,000t in time.

Mining: investment into the mine has led to self sufficiency and to surplus chrome ore production.  IFM sales of chrome ore are helpful although selling ore to competitors may be self defeating in general practice.

Takeover potential:  The replacement cost of building IFM’s furnaces, mines, structure ect is way ahead of the current market capitalisation.  While we see risk over the next few months in terms of cash flow the company is vulnerable to takeover.  We reckon it would probably pay for a competitor to buy the business to replace their own higher cost furnaces or to simply shut down a competitor till demand recovers. 

Conclusion:  IFM stock has performed well considering market conditions, the impact of closing furnaces to their roofs and the capital investment required for co-generation etc.. The next few months are critical for the business as the cost of the work done raises debt levels while production restarts.  If customers defer or turn away orders for ferrochrome over the next few months then IFM may need to work hard to replace these sales at a critical time.  Our advice is to watch the shares and buy on dips.

North River Resources (LON:NRRP)- High grade mineralisation at Namib lead-zinc project

North River Resources announce high grade intersections at their Namib Lead-Zinc Project in Namibia which was a previously operating mine.

Results follow a 1,300 metre underground drilling campaign which has been undertaken to assess the potential of the mine – with a total of 21 completed holes.

The grades and widths of the intersections below are good indications of the potential for the project to be developed into a profitable mine.

The company are undertaking a conceptual study to assess the level of reserves/resources to enable the re-opening of the mine and whether to commence underground development to facilitate further exploration.

Intersections include:

- 10.98 at 13.49% zinc, 7.28% lead, 86 g/t silver and 16 ppm indium

- 6.81 m at 16.86% zinc, 0.43% lead, 45g/t silver and 114 ppm indium

- 5.05 m at 8.16% zinc, 5.06% lead, 78 g/t silver and 45 ppm indium

- 12.1 m at 3.3% zinc, 1.22% lead, 42 g/t silver and 17 ppm indium

The Namib lead/zinc mine is North River’s key asset and the company commenced drilling at the mine in April 2011.

The mine ran from 1965-1992 and was closed following the Asian crisis as a result of low metals prices and a lack of investment.  

Previous non-JORC mine studies indicate surface tailing and underground mine reserves of 1.65 mt at 5.7% zinc, 1.6% lead, 40.2 g/t silver

The company are targeting an initial 1m tonnes below the existing mined area

On a recent visit to the mine, the mine was found to be well developed and has substantial underground infrastructure. The company have cleaned up much of the mine site and should the conceptual study being undertaken support the good drill results so far, the company are well positioned to restart the mine.

Conclusion:  North River Resources is well placed to restart this lead / zinc and to develop its more advanced copper prospect at Koperberg.   The stock is woefully undervalued at the current price in our view.

* Fairfax analysts visited the North River licenses this summer 

* Fairfax acts as joint broker to North River Resources

Orsu Metals (LON:OSU) - Receives Cash Consideration for Varvariskoye in Kazakhstan

Hambledon Mining (LON:HMB)– Varvariskoye Gold/Copper sale by Orsu 

Orsu Metals has received an aggregate of US$6.83 million in cash - US$5.5 million is in cash from Polymetal as early and final settlement of its outstanding deferred consideration entitlement to the sale and purchase agreement dated June 13, 2009, relating to the sale of the Varvarinskoye gold-copper project in Kazakhstan.

The Varvarinskoye deposit in Kazakhstan showed total ore reserves of 0.9 million ounces gold at an average grade of 0.9 grams per tonne based on a reserves audit according to Russian miner Polymetal said in a statement on Tuesday.

The audit, performed by Snowden Mining Industry Consultants, also showed 56,000 tonnes of copper at an average grade of 0.5%.

According to Polymetal, the ore reserves are sufficient to support a seven year mine life for a leach circuit and 12 years for a float circuit.

Hambledon Mining : The $5.5m paid by Polymetal for the Varvarinskoye mine for 1.15m gold equivalent oz at a grade of 0.9 g/t highlights the  value of Hambledon’s recent acquisition of two Kazakhstan gold and copper projects , Tellur and Stepok, for $5m. 

The acquisition looks good for Hambledon.  The Tellur mine has a resource of 140,000 of gold at 17g/t and adds high grade gold bearing ore (12g/t after dilution)  to the existing operation and the Stepok pit increases the potential further.  The deal adds to the gold production growth and gives new scale to the company and its operations.

The two mines acquired as part of the acquisition could produce 50,000ozpa to 60,000ozpa combined making this a low cost deal for the team add this to the 50,000oz – 65,000oz gold production expected from Hambledon over the next few years and the company could be producing in excess of 100,000ozpa by 2014/15.

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