Fairfax Market Report including Allied Gold, Discovery Metals and Carbine Resources

Fairfax Market Report including Allied Gold, Discovery Metals and Carbine Resources
apan – 7.3 magnitude earthquake off the coast of northern Japan that was felt as far away as Tokyo,  Tsunami warnings have been issued for the Pacific coast.

Australia – Prime minister Julia Gillard sees support fall to new lows according to a newspoll as voters reject her plans for climate change.
•    We suspect many participants in the mining industry welcome this fall from grace.

Portugal – Government plans to borrow Euro1bn today in its first bond sale for two months as it tries to avoid following Greece and Ireland in a bailout.  
•    The bonds are being sold with a 5.45% coupon due in September 2013.

Zambia – In a reassuring piece of news Zambia’s president Rupiah Banda has ruled out windfall taxes for mining companies
•    An election is looming in the next 6 months and with copper prices at record levels there is pressure to maximise revenues from the sector.  Prior to the global economic crisis the government tried to introduce windfall taxes, however, when commodities collapsed this move had to be reversed.
•    It would appear that the current government is conscious of the negative impact the introduction of windfall taxes would have on foreign investment and developments of new assets as companies will shy away from the unpredictable political risk that would result.  Zambia attracted US$2bn of foreign investment last year and cooking the golden goose would not be sensible.
•    Despite this, windfall taxes and nationalisation of mining assets are still a threat if the election goes against the incumbent president.

US$1.387/eur vs $1.393eur yesterday. Yen82.84/$ vs 82.44/$ SAr6.90$ vs 6.87/$  $1.674GBP vs 1.618/GBP 

Commodity News

Gold US$1,426/oz vs US$1,427/oz yesterday – Prices are slipping again as oil prices ease back easing inflationary fears. 
•    Gold bugs speculate that this weakness is temporary.
•    SPDR gold trust holdings unchanged at 1,217.30t (39.137moz). Current value US$55,813bn 
Platinum US$1,807/oz vs US$1,813/oz yesterday – Prices track sideways in morning trading
Palladium US$793/oz vs US$788/oz yesterday –  
Silver US$35.92/oz vs US$35.78/oz yesterday –  
Rhodium US$2,400/oz vs US$2,400/oz yesterday –
Diamonds – Zimbabwe’s prime minister Morgan Tsvangirai has said that the country will use diamonds to pay off external debts amounting US$7.1bn.  Thus far the minister indicates that it has sold US$300m.

Base metals: 
Copper US$9,575/t vs US$9,427/t yesterday – Prices show a little strength after recent weakness
•    Falling crude oil prices are easing concerns that fuel costs will curb economic growth and reduce demand for key raw materials such as copper.
Aluminium US$2,617/t vs US$2,566/t yesterday –
Nickel US$27,263/t vs US$26,851/t yesterday – 
Zinc US$2,408/t vs US$2,358/t yesterday – 
Lead US$2,599/t vs US$2,545/t yesterday –
Tin US$30,750/t vs US$29,900/t yesterday – 

Oil US$113.52/bbl vs US$114.15/bbl yesterday – Prices fall again as reports indicate that OPEC is considering raising output to compensate for disruptions caused by Libya and rising US supplies implying weaker demand.
•    Super tankers are sailing ships at the slowest speeds in at least three years reducing vessel supply and raising chartering rates as the carriers seek to save on fuel costs.  The carriers are moving at an average of 10.7knots last month around a knot slower than a year ago according to Bloomberg.  This effectively cuts fleet capacity by 9%.  No doubt a similar trend is to be seen in other shipping markets.
Gas US$3.864/MMBTU vs US$3.925/MMBTU yesterday – 
Uranium US$69.75/lb vs US $69.75/lb last week – 
Coking Coal – Asian steel makers face up to 44% price increases according to Merrills.  
•    Mills have already agreed to US$225/t for this quarter as supplies were severely disrupted by the floods in Queensland.
•    Thermal coal users also face rising prices due to the same disruptions to supplies and strong demand for power in the growing Asian markets.

Iron Ore – Spot prices are continuing to show weakness from recent highs, although Credit Suisse has recently stated that the weakness could be short lived and prices could hit record levels up to US$250/t in May as industrial activity picks up and India’s monsoon season squeezes supplies.
Company News

Allied Gold (LON:AGLD)– First pour at Gold Ridge Mine
•    Allied Gold has poured first gold from the Gold Ridge mine on Guadalcanal in the Solomon Islands since the asset has come under its ownership, since taking control and spending US$150m on the asset.  The mine is expected to produce 120,000ozpa for a minimum of 10 years.
•    This marks a major milestone and demonstrates that its not just major companies that can operate in the Solomon Islands.
•    The asset complements the company’s operating Simberi Gold Mine in PNG that is being expanded to 100,000ozpa.
Conclusion:  This mile stone is demonstration of management’s ability at developing mid tier assets in what are perceived to be tough jurisdictions that are normally left to majors.  The company is building up a substantial production base and we look forward to future developments.

Discovery Metals* (LON:DME)– More value to come
We note that since the financing and move towards construction Discovery Metal’s share price has been languishing.  We suspect that in part this is due to perception that the company is moving into that traditionally less exciting box ticking phase of development until cash starts flowing from production.  However, Discovery has an exciting exploration portfolio and is pushing ahead with identifying potential new resources.  Following Indaba we went to site and were impressed with the rapid progress with both development and exploration.
•    Boseto is now fully financed and scheduled to start producing around 35-36ktpa of copper starting from next year with commissioning planned for the first half of 2012.  Management has systematically de-risked the project and has been focused on developing its first mine and proving up sufficient resources to support this asset. 
•    Now that the financing is complete, construction underway with market conditions much stronger as copper prices trade close to records, the company is able to increase efforts in regional exploration.  
•    Discovery Metals has a well established exploration camp in place which we visited, with a growing number of people as activities pick up.  The company has 100% of 9,656km2 of tenement packages under license along the Kalahari copper belt (including Boseto).  We flew over some of the tenement package on a recent site visit and it really is a vast area that runs over 300km.  The company has identified 1,300km of favourable geology that hosts the potential for copper silver mineralisation.  Only 400km of this prospective horizon has been tested by the soil sampling programme, of which only 70km has been drill tested.  Considerable work is going into understanding the geology to help identify other possible resources. 
•    A number of targets have been identified for follow up drilling including the Ophion target where a 75 hole programme is underway and due to be completed in the coming month or two.  This is one of 10 named targets amoungst others  Additionally there is along strike potential at the current resource base that sits across the Plutus, Petra and Zeta ore bodies (Plutus and Petra are contiguous). 
•    We expect exploration work at and around Boseto to add value through the delineation of resources away from the current Boseto mine that could support a standalone operation potentially doubling, or more, the planned output.  Additionally, exploration around Boseto could add further resources to warrant up scaling the current 3mtpa operation that is being constructed.  Underground potential at Zeta could also allow for expansion potential. 
•    In addition to the exploration potential on the Kalahari copper belt, Discovery Metals has tenements in Southern Botswana that are prospective for manganese as well as a JV with JOGMEC on the Dikoloti nickel sulphide project in the East of the country. 
•    Valuation:  We value Discovery Metals at 94p/share using an NPV on Boseto with a 9% discount rate adding in cash and US$20m for exploration.  We updated our numbers to reflect the A$142m equity financing of last year, year end cash position, and the US$180m debt financing package using the latest copper forward curve for 50% of the first 2.5 years of production as we would expect from the debt package.  Our copper price assumption starts at 340c/lb next year falling to 250c/lb by 2018.  We have modelled a ramp up from 0.75mt ore milled in financial year ending June 2012 rising to 3mtpa from the open pit that then goes to 1.5mtpa from 2016 as the underground is phased in.  Total capex modelled amounts to around US$300m over the next 3 years which includes around US$170m for plant and mine, US$70m on the fleet and US$40m (funded from cash flows in 2013) on a mini coal power station with the remainder on working and sustaining capital.  Cash costs from the open pit are around 125c/lb rising to 170c/lb once the underground starts up, although we note that the underground could be considerably lower cost if higher grade zones (1.5% currently assumed) are mined, and the work from the DFS could better optimise the mine plan and reduce costs. 
Conclusion:  With a mine now fully funded and the fundamentals for the copper price remaining robust as consultants forecast deficits for the next few years, Discovery should get its first mine up and running in a strong environment that will see very substantial cashflow generation.  To add to this, the exploration programme is now well funded and picking up pace as this could add very substantial value through the delineation of another stand alone project. Such a development in the same region should be relatively straight forward particularly now that the company has considerable expertise to draw upon from its experience with Boseto.  Furthermore Boseto has the potential to expand with further drilling.  Another Boseto sized asset would put the Botswana copper assets firmly into being a mid tier copper asset.  We see additional value coming from a number potential sources, and the recent share price weakness presents an excellent buying opportunity.  Management’s methodical and structure approach to the development of this project also gives us confidence in the team’s ability to deliver a mine.

* Fairfax acts as broker and Nomad to Discovery Metals

Carbine Resources*+ (ASX:CRB)– Drilling begins at Madougou to asses mineralisation
•    Carbine has carefully and methodically worked over the ground on the Madougou license area for geochemical samples. 
•    Samples have been taken from the upper saprolite to give an idea as to gold presence and grades in this near-surface weathered rock. 
•    Geochemical grades of over 25ppb over the 4.5km anomaly look promising and drilling should start to give an indication of the scale and grade of this or these ore bodies. 
•    This gives a good indication of the potential below as the rock samples have not been transported far from the ores which lie below. 
•    The sampling shows strong geochemical anomalies along some 4.5km of strike over three distinct but adjoining properties. 
•    Aircore drilling across these anomalies is planned to reveal their mineralisation and indicate potential grades. 
Conclusion:  Carbine’s geochemical signature looks similar to maps shown by Ampella Mining.  The data does not guarantee discovery of a major orebody but is an indication of mineralisation below and we are hopeful of some positive results in the short term.  We are excited by the prospect of some positive news now that the geological team have worked out the best targets to drill with promising geochemical grades of >25ppb in the upper saprolite.
* Fairfax has acted for Carbine Resources in the raising of funds in the past