We have updated our commodity price outlook with some increases to long term prices for the likes of iron ore, gold, platinum and palladium.

Base metals reflect a more mixed picture, although we expect some improvement in the midterm.

Equity markets have traditionally tracked commodity prices and although this correlation fell away in recent years, there are signs now of improvement that we expect to continue into 2013. * Our updated commodity price assumptions do not generally reflect any significant changes, with our outlook remaining supportive of resilient pricing in the near term, strengthening in the medium term in line with an improving macroeconomic outlook.

The only significant (>10%) increases have been to our medium and long-term iron ore and PGM assumptions.

* The historical relationship between commodities and mining equities has diverged in recent years, as mining companies struggled to match development and operational targets (cost inflation undermined improvements in commodity prices), with political risk on the rise (including the revenue grab by governments), and as the global macroeconomic outlook weighed down on sentiment.

* We note, however, that miners are now trending back to levels seen three years ago.

Investor risk appetite does appear to be improving, in sympathy with improving commodity prices, but also buoyed by a lift M&A transactions, with new entrants to the market looking to secure raw material supplies.

We expect, however, that investor caution may still limit the pool of funds available in the near term for the junior end of the market. * We assume that the global growth will firm this year forecasting, 3.3% in 2012, 3.4% in 2013 and 4.2% in 2014, versus IMF forecasts of 3.3%, 3.6% and 4.1% respectively.

The risks in the EU and the US are now better understood and likely largely priced in.

Downside shocks could still take place, particularly in the Eurozone, however, exposure to these shocks we feel is likely reduced, limiting the negative impact. * The changes to our commodity assumptions will likely lead to upgrades to our company target prices, ceteris paribus, particularly for iron ore producers where our long term iron ore price has been lifted by over 20%.

We expect these companies to issue production updates in the coming weeks that may result in further adjustments to forecasts.

We will incorporate our new commodity price assumptions at this point.
To access the full note please click here Analyst: Hunter Hillcoat
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