🕐01.07.13 - 10:27 Uhr

INVESTEC GLOBAL NATURAL RESOURCES DAILY - MINING - MONDAY 1 JULY 2013 - LMI LN,
GEM LN, POL LN, CKA AU, FMS AU, NCR AU, DML AU, SLR AU



[cid:image001.png@01CE7632.148ED370] Monday, 01 July 2013 [cid:image003.jpg@01CE7632.2865DDD0]
Snapshot � Company news highlights: Lonmin new CEO starts this morning, Gemfields auction to take place in Zambia, Polo Resources Komahun resource update, Cokal identifies coking coal seams at its BBM project, Flinders Mines DSO start-up plan, Nucoal Resources Mitsui JV terms likely to change, Discovery Metals lenders waive the equity contribution requirement, Silver Lake operational update. � Commodity review highlights: Chinese domestic iron ore production up 10.4% to the end of April 2013, Technical analysis shows gold price may fall to US$1,055/oz, Copper warehouses emptying � Other economic news: China PMI fall in June � African resources update: Obama unveils plan to boost Sub-Saharan African power � FTSE futures up 15.5 points: The market is looking to open up this morning despite the 0.43% fall in the S&P on Friday due to comments from Fed governor Jeremy Stein that stimulus may be cut as early as September.

In Europe, it was bad news for Cyprus after the ECB stated that Cypruss sovereign bonds are temporarily ineligible as collateral after Fitch and S&P both cut their ratings. Asian markets are mixed (Nikkei +1.23%, Hang Seng +1.78%, ASX 200 -1.92%) following the Chinese official PMI data figure dropping to 50.1 (albeit in line with consensus) however the HSBC/Markit data dropped to 48.2 (versus 48.3 consensus), indicating a contraction and confirmation of a slowdown in the Chinese economy.

In Japan the quarterly Tankan index for large manufacturers rose to +4 from -8 in March indicating confidence in Prime Minister Abes reflationary policy, which, combined with the rising factory output data and retails sales provides further evidence of a strengthening Japanese economy. Commodity markets - gold +0.82% (US$1,244.87/oz), silver +0.49% (US$19.777/oz), copper +0.92% (US$3.086/lb), iron ore +1.04% (US$116.50/t), platinum +0.69% (US$1,349.20/oz), WTI -0.01% (US$96.55/bbl), and Brent -0.06% (US$102.10/bbl).

Due listed - BHP AU -1.24% (A$30.98), RIO AU -1.47% (A$51.60). Economic news due today: US - June Markit US PMI (forecast 52.4), Construction spending MoM (forecast 0.6%), ISM manufacturing (forecast 50.5), ISM prices paid (forecast 50.5).

Eurozone - Italian PMI (forecast 47.8), French PMI (forecast 48.3), German PMI (forecast 48.7), EC PMI (forecast 48.7), Eurozone CPI est (forecast 1.6%), Eurozone unemployment (forecast 12.3%).

UK - mortgage approvals (forecast 55.8K).
Company News � Lonmin (LMI LN) new CEO has now started.

LMIs new CEO, Ben Magara has formally assumed his role this morning.

Also, repairs to the Number Two furnace (previously flagged) have been completed on schedule - first matte was poured on 25 June.

Source: Company Investec view: It is very positive news that LMIs work on the Number Two furnace has been completed and that the smelter is up and running.

LMIs CEO certainly joins the company at an interesting time in terms of the platinum industry and we believe that he has the right background to tackle some of LMIs company-specific issues. � Gemfields (GEM LN) auction to take place in Zambia.

GEM had planned to undertake an auction of high quality emeralds in Singapore on 10-14 June but this was placed on hold pending further discussions with the government.

GEM today announces that at the request of the Ministry, this auction is now to take place in Lusaka from 15-19 July.

Given that this is now into H2, GEMs H1 revenue will be markedly lower than last years (US$42m vs US$78m) as the company only participated in two auctions in the first half.

Source: Company Investec view: While it is natural for the Zambian government to want to maximise in-country revenues, ministerial decisions are adversely impacting GEM maximising its revenues.

Given that GEMs Kagem emerald mine is 25% owned by the Zambian government, we believe that the country will see sense and come to a sensible compromise on exporting these valuable stones. � Polo Resources (POL LN) Komahun mineral resource update.

POL has completed its mineral resource update for the Komahun project in Sierra Leone.

At a 2.3g/t Au cut off grade (increased from the June 2012 update of 1.8g/t Au given the weak gold price outlook) the group now has 0.55Moz of gold in the Indicated category (3.6Mt at 4.69g/t) and 0.34g/t Au in the inferred category (2.6Mt at 4.08g/t Au).

Source: Company. Investec view: On the face of it, todays resource does not represent a significant increase in contained gold and the market may well be disappointed.

However, this is largely as a function of the gold price environment and therefore the cut-off grade applied.

In this case though, we believe that the group may have more exploration to do to demonstrate that Komahun could be a mine.

The high grade nature of the deposit is a positive for the group. � Cokal Limited (CKA AU) Identifies additional coking coal seams at its BBM project.

Cokal announced that it has identified additional seams, the K,L and M seams at its 60% owned BBM project in Kalimantan, Indonesia and confirmed that these seams have coking properties.

These seams are not part of the 77mt resource identified to date but are part of Cokals 200-350mt exploration target.

Source: Company Investec view: Cokal intends to release an updated resource statement in SepQ13 and we would expect some increase to the existing 77mt resource.

Importantly though, the company also needs to upgrade more of the existing resource, which contains the J seam which will likely be mined first, to the Measured and Indicated category.

Currently there are only 7mt in the Indicated category.

Cokal is still aiming to complete a BBM feasibility study in late 2013 with initial production of 2mtpa in 1H14.

Based on the companys MarQ13 cash flow statement we believe Cokal will require additional funds, with CKAs estimate suggesting cash of A$3m at 30 June. � Flinders Mines (FMS AU) DSO start-up plan FMS released a conceptual DSO production plan for the Pilbara Iron Ore Project, that sees 60% Fe product produced at a 5mtpa rate for eight years, by focusing on two startup pits within the broader Delta pit.

FMS is spending ~A$0.9m on BID drilling in the current quarter and has cash expenditures of A$0.7m per month (following some redundancies).

FMS believes its $6m cash balance is sufficient to see it through to "positive outcomes at a corporate level".

Discussions with third parties have entered the due diligence phase and include the potential for mining joint ventures and consolidation at a corporate level.

Given these discussions FMS believes it is impractical to appoint a new Managing Director.

Source: Company Investec view: Capex for FMSs 5mtpa start up option under the Jan11 PFS was estimated at A$488m, with A$144m for a processing plant and A$120m in project management and contingencies within that.

The current plan, with simple DSO mining at a ~1:1 strip ratio should require materially lower capex (A$250m?), and deliver strong operating margins.

The PFS LOM operating cost estimate of A$35/t included A$9.42/t for mining and A$4.89/t for processing.

With all site approvals gained, the project could be in production very rapidly (~12m) post agreement on infrastructure.

A deal providing certainty on infrastructure remains key, and the lack of an MD is somewhat unsettling.

The Board is loathe to raise capital at these dilutive levels, but with 8 months of cash (on FMSs estimated burn rate) the company is likely to need a third party deal, rather than directly trying to gain access to FMGs infrastructure.

Brockman? Atlas? Now that FMSs ore is more likely than not to go via Port Hedland the commercial landscape is somewhat broader than in the past. � Nucoal Resources (NCR AU) Mitsui JV terms likely to change In May 2012, NCR announced a JV with Mitsui Matsushima, whereby Mitsui would earn up to 10% in Doyles Creek by spending up to A$40m, and had an option to acquire a further 10% post completion of the BFS.

A condition precedent of the deal was that Mitsui gain regulatory approval (essentially its name on the lease) by 30 June 2013.

This has not been achieved and NCR and Mitsui have renegotiated the deal, extending the conditions precedent date from 30 June 2013 to 30 June 2014, but with materially changed commercial terms.

Terms will be announced following Board approval by both parties.

Source: Company Investec view: The original JV deal would have seen Mitsui cover the next A$40m of exploration and development costs at Doyles Creek, backdated to 28th May 2012.

As a result of the delay, NCR has spent ~A$12m more of its own cash than it other wise would have done.

With the coal market in a sharply worse state than May 2012, it is unlikely NCR will manage to retain as favourable JV terms as achieved back in 2012.

Another likely example of the NSW government process costing NSW coal companies money. � Discovery Metals (DML AU) lenders waive the equity contribution requirement DMLs lenders have waived a requirement to contribute an additional $30m in equity to the project by 15 August 2013.

However, an additional event of default will occur if the Board has not recommended a bid to acquire the company by 31 July 2013.

The lenders have not waived the existing defaults, but have not taken any action.

Revised Resource and Reserve estimates are expected to be released in mid July.

Source: Company Investec view: DML previously announced it was in breach of profitability covenant and an available cash covenant.

The presence of a 31 July deadline is not an ideal situation for negotiating terms of any potential change of control transaction. � Silver Lake (SLR AU) Operational update: Deferring capital and reducing costs in FY14.

SLR achieved gold sales of 56,450oz in the June quarter, with 43,189oz from Mt Monger and 13,261oz from Murchison Gold operations, with an estimated 2,500oz of bullion on hand.

Full year gold sales were 151,060 oz.

An updated Reserve and Resource statement is to be released late in July 2013.

Operational changes at Mt Monger (implemented in April) have improved business outcomes, but Mt Monger business optimisation is to be announced after the updated resource and reserve statement, and FY14 budget.

The FY14 budget will focus on deferring capital and reducing costs and is currently being finalised, taking into account the weaker A$ gold price.

Source: Company Investec view: No mention of hedging this time, but another in the recent flurry of gold companies reviewing the available levers to respond to a sharply weaker gold price.
[cid:image005.png@01CE7632.2865DDD0] Commodities News � Chinese domestic iron ore production up 10.4% to the end of April 2013.

Domestic Chinese iron ore production was 110.5mt in April 2013 (104mt April 2012) bringing Jan-Apr production to 398mt, 10% higher than the same period last year.

Source: Tex Report � Technical analysis shows gold price may fall to US$1,055/oz.

According to technical analysis, the gold price has broken key support levels and therefore may fall to US$1,055/oz this year.

Gold for immediate delivery rose by 0.6% in Shanghai this morning, but has fallen by 23% in Q2.

Source: Bloomberg � Copper warehouses emptying.

Copper imports into China are poised to rise further from a two-year low in April as a drop in global prices has triggered a record number of orders to remove the metal from warehouses across Asia.

Cancelled warrants have doubled in the past month and reached an all-time high in Malaysia, Singapore and South Korea.

Source: Bloomberg
Other economic news � China PMI fall in June.

The official purchasing managers index (PMI) fell from 50.8 in May to 50.1 in June, which was the lowest figure in four months, but just ahead of expectations.

This demonstrates that Chinese factories have virtually stopped growing, and this appears to be as a result of weak domestic demand.

Source: FT
African Resources update � Obama unveils plan to boost Sub-Saharan African power.

In a speech at the University of Cape Town, Obama unveiled his US$7bn plan, named Power Africa to promote trade and investment on the continent.

The goal is to double the access to electricity across six countries - Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania.

Source: Bloomberg
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