Morning View

Gold prices continue to gain as forecast – we see gold rising towards $1,500/oz by the year end.

  • Strong investor and consumer demand could continue to raise gold prices towards the year end.
  • European banking risk, tensions around Gaza and N Korea, rising Indian and Chinese demand and inflationary trends in China and other growth regions could cause gold prices to rise further.
  • Copper and other base metals are falling as the dollar strengthens, we continue to recommend investors sell the rallies for base metals producers as slowing Eurozone growth reduces demand in Europe and for exporters into the Eurozone.
  • Inflation appears to be rising in China.  The May Chinese inflation figure is due on Friday.  This could serve to turn markets around in time.  However, metals markets should continue to fall for now on the weight of the Eurozone banking and sovereign debt crisis.

FTSE 100 –  FTSE 100 index review Tuesday 8/9th June

  • No. 86 - African Barrick Gold at 628p, stated intention to expand by acquisition, should enter the index this year.
  • No. 90 – Bunzl – provider of non-food consumable products.
  • No. 94 – Petropavlovsk at 1,222p, slips away from FTSE 100 entry.  Needs to gain 4.5% to get to 1287p to potentially enter the index based on its market capitalisation tonight if other stocks do not move.
  • No. 105 – Mondi PLC (ex Anglo American paper and packaging).
  • No. 126 – Aquarius Platinum, follows lower platinum and palladium prices.
  • No. 132 – Ferrexpo, should be a FTSE contender with iron ore prices rising.
  • No. 187 – Hochschild Mining

* – A company should rank number 90 by market capitalisation in the FTSE ALL share to gain excess to the index. 


Dow Jones Industrials                                  -1.16% at 9,816.49

Nikkei 225                                                                    +0.18% at 9,537.94

HK Hang Seng                                                          +0.45% at 19,464.71 


US – consumer credit extended to individuals rose by US$1bn, the first increase in 3-months. Higher bank lending may indicate slight recovery in consumer spending. Recent unemployment report showed that the change in private sector employment failed to meet market expectations.  

  • Ben Bernanke said yesterday that recovery is continuing at moderate pace although unemployment may remain high. The comment aimed to calm markets after negative employment report on Friday.

Europe – German factory orders rose by 2.8% mom in April vs 0.4% fall expected. Orders rose by a revised 5.1% rate after stagnation in February.

  • Recovery in orders is brought by weaker euro that makes German exports more competitive and prompts companies to expand production and thus increase capital spending.  
  • The spread between 10year sovereign government debt of Spain, and Italy rose to the highest level since Euro was introduced in 2000.
  • Spain/Germany 10 year sovereign bond spread rose to over 2% yesterday, the highest value since introduction of single currency. Spain’s deficit rose to 11.2% last year, while unemployment jumped to 20% in march  
  • German exports fell by 5.9% mom vs expected 2% fall expected in April. Aprils figure may be just a rebound from the biggest increase in 18 months in March (+10.8% mom). Low Euro is likely to continue supporting European exports.  
  • German Industrial production figure will be released today and may surprise the market from the upside as factory orders rose amid
  • ECB reported it will tighten regulation and introduce new sanctions on nations that fail to reduce deficit to below 3% limit

UK – June 22nd budget may outline significantly higher reduction in spending and tax increase than initially expected

  • David Cameron announced he is in favour of Canadian model of budget cuts. Canada reduced government spending by 20% in the 1990s. The amount of budget cuts will be equivalent to £140bn today, or double £71bn cuts pledged by the Conservative government before elections.

Currency – Euro is picking up against US dollar after reaching the lowest level in more than 4 years. Recent data on German factory orders supports single currency.

 US$1.196/eur vs $1.914/eur yesterday. Yen91.74/$ vs 91.44/$  SAr7.785/$ vs 7.646/$  $1.450/GBP vs 1.444/GBP

Commodity News

Precious Metals 

Gold US$1,243oz vs US$1,216/oz yesterday – rally continues today on European debt/deficit concerns.

  • Gold is trading within 1.5% of a record price as investors continue to have reservations about the stability of the markets and the potential for a double dip.  
  • Europe’s debt crisis and instability of the global financial markets lead Gold to increase by 13% this year.
  • SPDR gold unchanged at 1,286.36t (41.358moz), current value US$50,242bn 

Platinum US$1,523/oz vs US$1,495/oz yesterday –

Palladium US$433/oz vs US$420/oz yesterday –

Rhodium US$2,600/oz vs US$2,600/oz yesterday –

Silver US$18.36/oz versus US$17.42/oz yesterday –

Base metals: 

Copper US$6,125/t vs US$6,109/t yesterday – Prices slip on stronger dollar and should fall further led by the dollar and lower Eurozone growth forecasts.

  • Market participants remain bearish near term.  Chinese CPI data due out on Friday could provide further direction.

Aluminium US$1,879/t vs US$1,835/t yesterday –

Forecasts show prices for the metal will increase in the next two years as demand grows from Auto and aircraft manufacturers

The price could rise by as much as 30% by 2015 on higher demand.

Global demand set to soar in the next 10-15 years in developing countries   China aluminium fabrication forum, starts today in Shanghai.

Chalco, the world’s biggest aluminum producer reported prices have dropped below the cost of production.

Avergae costs of productions are at Rmb15,300/t (US$2,250/t) according to CRU. China: Power charge increase for high-usage companies will push costs higher.

Recent reports indicate that minimum wages in China has risen by 20% reducing profit margins. Global aluminium inventories remain high but demand outside of China is low potentially leading to a drop in prices.


Export growth may falter should the yuan appreciate. Increased labour costs and stronger US dollar are already affecting China’s products overseas making them less competitive. Lightweight metal’s use should continue to increase on higher demand for low carbon emission forms of transport.

Nickel US$18,250/t vs US$17,690/t yesterday –

Lead US$1,576/t vs 1,558/t yesterday –  

Zinc US$1,640/t vs 1,589/t yesterday –

Tin US$15,900/t vs US$15,850/t yesterday –



Oil US$72.29/bbl vs US$75.94/bbl yesterday – Prices creep up in morning trading

  • US Fed Chairman indicated that US recovery remains intact assuaging fears.

Gas US$4.931/MBTU vs US$4.768//MMBTU yesterday –

Coal – Exports from Australia’s major Newcastle port fell 9.5% last week from the previous week with vessels waiting to load unchanged.

  • Exports last week fell to 1.66mt with 38 vessels weighting to load 2.73mt of coal.  Ships are waiting an average of 14.38days to load.
  • Deliveries to Gladstone port in Australia are being disrupted by a train derailment with 20 wagons derailed damaging track and overhead wires.  Xstrata and BHP are miners that use this line that services the southern Bowen Basin in Queensland.


Steel – Drop in demand for Auto and appliance makers could lead to steel production being cut in the 3rd quarter according to the Chinese 2nd largest steel mill. China has seen a decline in benchmark steel prices; consequently this could push ore prices lower in the 4th quarter.

·         Prices have declined by 21% to $147.50 a ton from $186.50 April 21st on 62 %Fe ore imported into China

·         Falling steel prices have lead to an increase in ore inventories at major Chinese ports by 2.1% last week as production levels drop and the requirement to buy reduces.

·         Quarterly pricing contracts have been adopted by a number of companies this year including Vale SA, BHP Billiton Ltd and Rio Tinto Group ending a 40-year tradition of setting prices annually to counteract the price volatility. Quarterly prices are based on the average index prices of prior three months.


Ferrochrome – Stainless steel mills are resisting a rollover for Q3 contract prices arguing that a decrease would better reflect the current state of the market according to Metal Bulletin.

  • Demand is reported to be relatively poor with activity slowing. 
  • The Q2 benchmark was settled at 136c/lb.  High carbon ferrochrome prices have been slipping to around 125-135c/lb from 130-140c/lb with few deals taking place.
  • South African producers are facing rising costs as the country enters winter time which sees electricity prices rise substantially, exacerbating the recently implement annual price increases of 25%pa over 3 years by Eskom.  A decline in contract prices would be particularly detrimental for these producers, although Merafe has already cut production for the summer months as costs are higher.
  • Companies that will be impacted by this include IFM and ENRC, although IFM will have the greater exposure as it is a higher cost producer than ENRC.


Iron ore – BHP and Rio have notified Japanese steel makers that iron ore prices for July-September period will be raised by around 23% from Q2 according to the Nikkei business daily news.  This would put prices at around US$147/t

Company News


Centamin Egypt (CEY LN) 162.5p mkt cap £1,620m – Resource upgrade

  • Following 33,400m of drilling Centamin has increased its resource by 699,000oz measured and indicated to take this to a total of 10.99moz at 1.45g/t (0.5g/t cut off), and an additional 74,000oz inferred taking the total inferred resource to 3.5moz at 1.6g/t.  
  • This upgrade factors in depletion of around 100,000oz of gold from mining activities.  
  • Resource drilling continues on this major resource, with 8 rigs currently active.  

EMED Mining (EMED LN) 8.25p mkt cap £35.14m – Debt payment plan agreed with government ·        

As another step towards the development of the Rio Tinto Mine, EMED has agreed with the Department of Social Security a schedule to repay Euro16.9m of debt over a 5 year period.    ·        

The department will extinguish its liens against the principal land holdings that underlie the entire mine, minerals title area and plant site.  The liens had been granted as a form of security set against land holdings for the government.  ·         The debt repayment includes accrued interest and will be paid over 5 years back end weighted: Euro1.3m initially followed by Euro1.1m, Euro2.9m, Euro3.6m, Euro4.2m and Euro5.9m.  Once the project is developed these payments should not be a significant burden, and the company indicates that it has always anticipated that such payments will be required. 

Conclusion:     This is another step forward towards the development of the Rio Tinto mine and cleans up another legal issue and should bring the government more onside as it will provide some near term cash for the government in addition to the longer term jobs, investment and taxes to be generated from a mine. 

Oxus Gold* (OXS LN) 6.75p, mkt cap £27m – Profits return zas gold and silver sales push group back into profit

BUY – target price 32p reiterated

  • Oxus Gold has returned to profit marking a new turn in the fortunes of the group.
  • Operating profit $10.96m vs $2.7m in 2008.
  • Net Profit $1.02m vs loss of $0.6m in 2008.
  • Sales $13.26m from 50% of the sale of gold and silver from refined dore bars..
  • Admin costs:  $8.6m vs $9.7m yoy  
  • Restructuring costs $2.6m vs $10m in 2008  
  • Cash:  $6.7m.
  • Dilution:          The Chinese consortium will subscribe to the following shares in equity, convertible, warrant form 573m at 6p, 268m at 7p, 89m at 7p 62.5m at 10p.  Total potential dilution +992.5m new shares.
  • Restructured loans:  $18.5m loan to convert to 96m shares at 12p + 29m shares ($2.5m to shares at 6p).
  • Total dilution:   1,500m shares = 992.5m + 96m +29m + 382.8m existing shares
  • 24 million ounce gold resource potential review started within AGF license area costing $22m over 5 years.
  • Exploration restarted to develop greater JORC resource / reserves.
  • Chinese consortium is keen to press ahead and invest in new plant, equipment and mines.  The company has signed a ‘conditional financing agreement’ with the Chinese consortia to invest and arrange up to $185m of funding for the group.  We expect funds to be released to enable the progression of new development.
  • Oxus is one of the lowest rated gold shares in the market for the following reasons: 
    • Funding uncertainty (Chinese Consortium + recent sales of metal)
    • Restructuring of debt instrument (now done)
    • Uzbek government risk and past problems with local Uzbek refinery (refining issues solved)
    • Perceived shareholder overhang (effectively removed)
    • Suspension of mining (now restarted)
    • Management ream restructured to reduce costs and to reflect shareholder views

These issues have been largely resolved with respect to the group

  • Gold production target: 300,000oz pa.
  • Funding:          The group is now poised to start its major expansion and funding for the ordering of long lead time items and for the early start of some development activity may be accelerated by the development of new cash flow from the restarted operations.

Conclusion:  Oxus is now on track for a return to more normal operation.  The company has raised sales and cut costs.  Mining has restarted in Uzbekistan and the business is now all but funded for its major expansion.  Gold and silver prices enable the partial expansion of production while the major funding awaits final approval.  We feel increasingly confident on our recommendation of Oxus Gold as the company pushes towards its major expansion plan. 

*Fairfax acts as Nomad & Broker to Oxus Gold

Mining this week:

Petropavlovsk (POG LN) 1256p, mkt cap £2,286m – $60n equity investment values into iron ore business at $860m

BUY – valuation 1795p (formerly Peter Hambro Mining)

Central Rand Gold (CRND LN) 2.36p mkt cap £6.41 – Net US$35m to be raised

Solomon Gold* (SOLG LN) 5.63p mkt cap £10.87m – 201koz maiden resource

Economic calendar:




Event: G7, AU, China








Sentix Investor Confidence






Factory Orders MoM (sa)







Factory Orders YoY (nsa)







Euro-Area Finance Ministers Meet in Luxembourg




Merkel Hosts French President Nicolas Sarkozy for Talks




Consumer Credit








Trade Balance (BoP Basis)







Bank Lending (YoY)


- -





Bankruptcies (YoY)


- -





Trade Balance







Imports SA (MoM)







Exports SA (MoM)







Bank of France Bus. Sentiment






Trade Balance (Euros)



- -




EU Finance Ministers Hold Meeting in Luxembourg




SAP AG Holds its Annual Shareholders' Meeting




Industrial Production MoM (sa)



- -




Industrial Prod. YoY (nsa wda)



- -




Fed's Evans Speaks in Chicago on Economic Outlook




API U.S. Crude Oil Inventories


- -

- -



Constantin Medien Holds its Annula Shareholders' Meeting


Source: Bloomberg


MacArthur Coal (MCC AU) A$11.25 mkt cap A$2,861m – Revised offer from Peabody rejected

·        Downgraded offer of A$15/share from A$16/share has been rejected by the board.

Red Back Mining (RBI CN) C$24.82 mkt cap C$5,769m – Kinross buys C$600m stake

  • Major producer Kinross Gold Corp has paid C$600m for a 9.4% stake in Red Back as part of a private placement at C$25/share.  The funds are to be used for future expansions at Tasiast, and provides Kinross with access into opportunities in West Africa.

Lihir Gold (LGL AU) A$3.75 mkt cap A$8,882m – A$9.5bn take over offer agreed

  • News reports indicate that Lihir has accepted NewCrests latest offer in a deal that would create the world’s fourth largest gold company.  The recent Australian Henry Tax being proposed may not affect the merger.  

Polo Resources (PLM CN) 5.15p, mkt cap £120m – possible merger with Caledon Resources

  • Polo and Caledon reached principle understanding regarding merger of two companies. In case management decide to proceed with the deal, Polo will be prepared to make all share offer for 100% stake in Caledon at 11.4 Polo shares for 1 Share in Caledon.

Rio Tinto apparently in talks with Chinalco to develop the Simandou iron-ore project in Guinea.

·                The project is expected to cost $12bn

·                Rio have declined to comment

Atlas Iron (AGO AU) A$2.31 mkt cap A$1,033m – Deal to acquire Aurox Resources for A$131m

  • All scrip bid agreed to buy Aurox resources to expand Atlas’s port capacity and iron ore resources.  The merger if agreed by shareholders is due to complete in May  

Arrow Energy (AOE) A$5.11 mkt cap A$3,747m – Shell & PetroChina make A$3.3bn offer

  • Cash offer made by Shell and PetroChina for Arrow Energy, which is the largest holder of coal-seam gas acreage in Australia.  

Chariot Resources (CHD CN) C$0.64 mkt cap C$234m – Sale agreement with China Sci-Tech

  • Copper exploration company Chariot with a deposit in Peru has signed a sales agreement with China Sci-Tech Holdings to purchase all shares for C$0.67/share.  
  • This highlights Chinese interest in securing copper assets.


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