[cid:image001.png@01CF39DC.098BF7F0] Friday, 07 March 2014 [cid:image006.jpg@01CF39DC.2AB6DFD0]
Snapshot ¢ Company news highlights: Update note out on Avocet, African Rainbow interims, Sula Iron and placing, speculation Rio Tinto may bid for Turquoise Hill, Maanshan land disposal, Tom Albanese and Vedanta, Mount Gibson completes Shine purchase from Gindalbie, Chinalco to sign off-take with Syrah ¢ Commodity review highlights: Anglo American to exit Abbot Point project, Chalco talks of aluminium market pressure, palladium up on SA strikes, strong iron ore exports from Port Hedland, Indonesia targets 421mt coal this year ¢ Other Economic News: Australia trade surplus up, Australian index rebalances leave behind a number of miners ¢ African Resources Update: AMCU workers march on Pretoria, SA reserves grow, Mozambique approves Tete power station, E&Y highlights risk of Africa’s local beneficiation drive, Today’s African proverb ¢ Market notes: FTSE futures up 9 points this morning.

Markets will be cautious ahead of the US non-farm payrolls with investors already discounting the likely impact of the severe weather.

US markets were up slightly (Dow +0.38%, S&P +0.17%), Asian markets up (Nikkei +0.92%, Hang Seng -0.01%, ASX200 +0.30%).

Shanghai is trading down amid reports of the first default on a corporate bond. Commodity markets – gold -0.03% $1,350.48/oz, silver +0.40% $21.5563/oz, platinum -0.05% $1,486.00/oz, copper -0.79%, $319.25/lb, nickel +1.30% $15,445.50/t, iron ore +0.17% $116.90/t, thermal coal $74.50, WTI +0.32% $101.89/bbl, Brent +0.34% $108.47/bbl, zinc -0.54% $2,107.00/t.

Dual listed – BHP +0.16% A$37.72, RIO +0.56% A$64.94.

Copper fell sharply last night after the Wall Street Journal released a report that Shanghai Chaori Solar Energy failed to make an interest payment.

However at the same time inventories continue to fall and backwardation remains in place with market commentary suggesting a supply orientated move is expected.

Gold traded up towards the end of the session yesterday ahead of the non-farm payrolls, traders expecting a miss.

WTI has also slipped ahead of this afternoons announcement. Economic data due today:- US – trade balance (forecast -$35.5bn), non-farm payrolls (149K), unemployment rate (6.6%).

Eurozone – French trade balance (forecast -€4950m), Italian PPI, BOE inflation target, German industrial production MoM (0.8%).
Company News ¢ Avocet Mining (AVI LN) research note updating numbers following annual results that reflected the major challenges the company has faced in the period.

Company indicates financing requirement of US$20-30m at Inata mine and still needs to pay US$15.7m Elliott loan held against Tri K exploration asset with negotiations continuing.

The US$20-30m is needed to see company through planned shutdowns to rectify operational problems and lead to new life of mine plan that will use a US$950/oz pit shell versus US$1400/oz previously.

The company has considerable resources, but needs to delineate economic ones longer term to extend the mine life and generate further value.

Source Investec ¢ African Rainbow (ARI SJ) 2014 interims.

HEPS amounted to ZAR 10.84 (10.76 diluted) were in line with guidance ZAR10.25–11.30/share.

Ferrous production and earnings, accounted for 92% of earnings.

The platinum division put in a strong performance as did Nkomati Nickel contributing 7% of company earnings (doubling from the previous half (June 2013) benefitting from falling unit costs.

Coal business did poorly turning in a loss with earnings down 132% to ZAR-34m.

Copper contributed a ZAR-122m that is not surprising as it is in ramp-up phase and faced some commissioning setbacks.

Source: Company Investec View: Overall a good performance but the stock appears well valued at present.

Our analyst will update numbers in due course following a presentation later on today. ¢ Sula Iron and Gold (SULA LN) placing.

SULA has raised £2.1m through a placing of 93.3m new shares with institutional investors at a price of 2.25p.

The proceeds will be used to undertake more in-fill drilling to enable the group to estimate a DSO JORC compliant resource by the end of 2014.

Source: Company Investec view: It is encouraging to see junior mining companies able to raise even modest funds to advance their projects.

SULA’s project looks prospective as it is contiguous with African Minerals (AMI LN) Tonkolili project. ¢ Speculation that Rio Tinto (RIO LN) may bid for Turquoise Hill (TRQ CN).

There is press speculation that Rio Tinto may make a bid for Turquoise Hill, which owns 66% of the Oyu Tolgoi copper/gold mine in Mongolia, at C$8/share.

Source: Daily Mail Investec view: Rio Tinto already owns 50.8% of Turquoise Hill and has control of the company.

Whilst Rio Tinto would probably like to increase its interest in TRQ, a bid at C$8/share would be extremely generous it would represent a premium of 76% to the current share price of C$4.54/share. ¢ Maanshan Iron and Steel (323 HK) disposal of land.

Maanshan announced the disposal of land assets, by its subsidiary Ma Steel (Hefei), in Anhui province to the Hefei Land Reserve Center for cash consideration of CNY1.2bn.

The book value of the assets was CNY477.7m as at 31 December 2013 and the sale will result in a before tax gain of CNY722.2m.

Source: Company Investec view: The main reason given for the disposal is ‘increasing concerns on the issue of pollution and environmental protection’ by the government.

Smelting activities at Ma Steel (Hefei) will cease on 1 October 2014 as Maanshan phases out inefficient and obsolete facilities.

Impairments and losses associated with the closure of Ma Steel (Hefei) are expected to be c.

CNY1.2bn and proceeds from the land sale will be used to offset these losses. ¢ Tom Albanese appointed CEO of Vedanta (VED LN).

Vedanta has appointed Tom Albanese CEO effective 1 April 2014.

Tom Albanese, a former CEO of Rio Tinto, has been Chairman of Vedanta Resources Holdings since September 2013.

Tom will succeed Mr M S Mehta who is retiring.

Source: Company, FT Investec view: At least Mr Albanese knows what he’s getting in for, with him stating that “there’s a big hill to climb there”, according to the FT.

While he was referring specifically to the high level of distrust between Indian society and the Indian mining industry, we expect that the internal workings of Vedanta will also present a challenge. ¢ Mount Gibson (MGX AU) completes Shine purchase from Gindalbie (GBG AU).

Australian iron ore producer Mount Gibson completed the acquisition of the Shine iron ore project from Gindalbie for A$12m plus a royalty for c.

20% of revenue due to spot prices being above A$115/t China CFR (e.g.

A$2/t if the spot price is A$125/t, nothing if the spot price is A$110/t).

Shine is located in the Mid-West region of Western Australia 40km from Gindalbie’s Karara mine and 200km by road from Mount Gibson’s Mullewa rail siding.

Source: Company Investec view: Mount Gibson provided details about its development plans at Shine for the first time, which suggests that the acquisition will be accretive and dovetail nicely with the closure of the 2.5mtpa Tallering Peak mine in DecH14.

Management believe that Shine can be developed for A$9m-A$11m, have cash operating costs excluding royalties of A$75/t FOB Geraldton and achieve first ore sales in MarQ15.

The mine life would, however, be limited: just four years at the indicative 1.6mtpa production rate, as the pit shell contains just 5.6mt of reserves at 59.3% Fe plus an additional 0.8mt of inferred resources at 57.9% Fe.

Mount Gibson is expediting further optimisation studies on the project and also needs to arrange for third party infrastructure access to achieve the extraordinarily low capex intensity of
Media reports indicate that Chinese state-owned mining company Chinalco will sign an offtake agreement with Syrah Resources to take more than a third of the production from the company’s 220ktpa Balama graphite project in Mozambique.

Source: The Australian
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Commodities News ¢ Anglo American (AAL LN) exits Abbot Point port expansion project.

Anglo American has withdrawn from a consortium attempting to develop the AP-X coal terminal at Abbot Point in Queensland, Australia.

The move leaves Indian GVK and Adani as the last major players let in the port expansion project.

Source: Bloomberg Investec view: Anglo’s withdrawal from AP-X is most likely due to the dismal thermal coal market and makes it less likely that coal from Galilee basin projects will reach the market including GVK’s Alpha thermal coal project and Adani’s Carmicael thermal coal project. ¢ Chalco (2600 HK) has stated that the “aluminium market is facing great pressure now” and that “a lot” of businesses that use their assets to get bank loans and put the money into other investments will close this year because of declining prices, rising energy costs and increasing levels of debt.

Management are also citing a poor economic situation and a property market that has limited support from the government.

Expectations are that 1.5Mt of capacity will shut in Henan province, 600-700Kt will close in Guizhou province and some factories in Qinghai and Gansu will also close.

Source: Company ¢ Palladium jumps on South Africa strikes.

The palladium price rose to a near two-year high on Thursday, above US$780/oz as strikes in South Africa coupled with Russian and Ukrainian tensions raised supply concerns.

Source: FT Investec view: Russia produces more palladium than South Africa (about 40% of the world’s production) and the market is concerned about sanctions against Russia regarding Ukraine affecting palladium supplies. ¢ Iron ore exports from Port Hedland up 39.62% YoY in February to 27.79mt.

Source: Reuters ¢ Indonesia targets coal production of 421mt this year matching 2013’s production level, and 6% above its previous target for the year.

Source: Thomson Reuters Investec View: Indonesia is a major exporter of coal, however, much of its product is lower quality.

Coal prices remain depressed and governments are tightening up on coal quality regulations in an effort to reduce pollution that could hit the Indonesian coal industry.
Other economic news ¢ Australia trade surplus leaps.

A 4% boost in exports helped the trade surplus leap to A$1,433m in January from A$591m in December.

Source: FT ¢ Australian index rebalances leave behind a number of miners.

Resources stocks have been badly impacted in the Mar’Q rebalance of Australian indices.

Gold major, Newcrest Mining (NCM AU) was removed from the S&P/ASX 20 index, while OZ Minerals (OZL AU) was removed from the S&P/ASX 100 index.

Other notable exclusion from their past indexes include: Silver Lake Resources, Ausdrill, Discovery Metals, Panoramic Resources and Elemental Minerals.

More than thirty miners have been excluded from the All Ordinaries.

Source: Bloomberg Investec view: Disappointing, but no surprise given the fall in market caps over the past year.

Many companies can blame the fall in their underlying commodity prices, but several exclusions include companies that just didn’t live up to their promise.
African Resources update ¢ AMCU workers marched on Pretoria yesterday protesting over wages.

Strike action is likely to have cost producers 300koz of platinum output thus far with both parties remaining far apart.

The protest was peaceful.

Major miner Amplats is suing AMCI for ZAR600m (US$56m) for damages caused by striking members stemming from vandalism and intimidation of non-striking workers.

Source: Thomson Reuters Investec View: Producers were well prepared for the strike action with significant inventories.

However, the strike is continuing longer than many people would have expected.

AMCU risks losing significant membership if its bold plans unravel, consequently it is difficult to ascertain how long the strike could continue as producers cannot support materially higher costs in light of tough operating margins. ¢ South African reserves grow.

South Africa’s net gold and foreign exchange reserves beat expectations in February, rising to US$45.3bn from US$44.9bn in January.

Gross revenues also rose to US$50.1bn from US$49.7bn.

Source: Reuters ¢ Mozambique approves construction of a coal-fired power station in Tete province.

The Mozambican government has approved construction of a coal-fired power station of up to 600MW at Moatize in Tete province.

The power plant will be constructed and managed by ACWA Power Moatize Termoelectrica (APMT) a consortium that includes Vale, Mitsui and ACWA Power of Saudi Arabia.

The first phase of the project will involve the construction of a 300MW plant for c.

US$1bn.

Source: Bloomberg ¢ Ernst & Young highlight risks of African Government local beneficiation policies that could backfire as commodity prices fall undermining the economics of assets, and making major investment in beneficiation facilities prohibitive.

Major mining companies are all in the process of slashing capital programmes as they face tougher operating environments.

Source: Thomson Reuters ¢ Today’s African proverb.

“The very thing a goat likes to eat most will give it an upset stomach”.

Source: BBC
Investec Global Natural Resources Research Team: UK Hong Kong South Africa Hunter Hillcoat Tel: +44 (0) 20 7597 5182
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