Fairfax Market Report including Anglo Am. and Discovery Metals

2011 is shaping up to be a promising year for the mining sector
Many commodity prices are at new high levels
But how far can it go and which metals are likely to outperform within group?
Equity prices should outperform metals through 2011 as new funding and confidence lifts the sector
Copper, lead and tin should perform best within the LME base metals complex on a year average basis
Gold and silver should outperform on the year average but it is gold and platinum which may do best on current price levels as silver and palladium have significantly outperformed gold and platinum in recent weeks.

Many fundamental and technical drivers which pushed metals prices higher through 2010 remain in place.
Many metals prices are at new high levels but thin markets may lead to a correction to prices next week
Economic recovery in the US combined with ongoing low US interest rates is generating increasing demand for metals while China is still seen as growing at a relatively rapid rate.
Chinese comments on support for the Euro may strengthen the currency further against the dollar increasing demand for US and Chinese goods in the Eurozone. A Euro now costs 1.34 US Dollars.

Gold $1,408/oz - target $1,685/oz

Economic News

US The US economy started the new year with some positive data yesterday, with the Supply Management s national factory activity index, a crucial gauge of economic activity, rising to 57 points for December from 56.7 in November. The data provided further evidence that the economic recovery remains on track.
Expectations ahead of a report due for release by the commerce department today suggests that bookings for US manufacturing goods declined 0.1% in November after a 0.9% decrease in October.

China Tighter monetary policy and curbs on excessive power generation and waste producing factories slowed manufacturing growth in December data released yesterday showed. A purchasing manager s index fell to 53.9 from 55.2 in November.
President Hu Jintao in a recent speech has reiterated that China will step up efforts to stabilise prices in 2011. China's consumer price index rose to a 28 month high of 5.1% year on year in November. The central bank announced on Christmas day that it would raise rates effective from the 26th.
Continued government pressure will lead to many local governments increasing efforts to restrict home purchases well into 2011 in a continued attempt to rein in property prices. Currently there are more than 10 cities in the country imposing restrictions on home purchasing, either by limiting the number of homes a family can purchase or by stopping mortgages for foreigners.

UK - The Reed Job Index, a gauge of new jobs in the market, dropped yesterday as demand for in the public sector fell. The index in December fell to 104 from 111 in November. The index for public jobs fell to 42, the lowest level since the index started in December 2009

Chile in an attempt to weaken the the peso, the country s central bank is planning to start a program of US$12bn worth of currency purchases according to the Central Bank s President Jose De Gregorio. The Peso has gained 17% against the US dollar since the end of June 2010

Australia Flooding in the state of Queensland is set to worsen in the coming days increasing the chances that thousands more people will be cut off as the goverment mobilises the miltary to help airlift supplies to the areas worst affected. Record rainfall has caused floods to spread across an area the size of France and Germany, forcing towns to be evacuated, mines to be closed and spoiling crops in the nation s third most populous state.

Ivory Coast A delegation of African Leaders have left the Ivory Coast with the nations incumbent President Laurent Gbagbo still refusing to listen to international pressure and stand aside despite the threat of invasion from regional neighbours. The African delegation has returned to Nigeria to report to President Goodluck Jonathan, the West African Leader spearheading the attempts to broker a deal.

Currency - The dollar maintained the gains of yesterday against the yen today ahead of a report on demand for factory orders. The pound is also uptoday ahead of manufacturing and housing data is released later today.
US$1.316/eur vs $1.315eur yesterday. Yen83.57/$ vs 83.74/$ SAr6.80/$ vs 6.88/$ $1.546/GBP vs 1.555/GBP

Commodity News

Precious Metals:
Gold US$1,410/oz vs US$1,412/oz on 31/12/10 Expectations in the first few days of 2011 are that prices may benefit from the US federal reserve maintaining low interest rates.
India s central bank has relaxed regulations and is allowing an additional 7 banks to import gold and silver into the country bringing the total number importing up to 30. India continues to have an insatiable appetite for gold. Buying continued to increase yesterday in Mumbai as prices levelled near a 3 week high.
SPDR gold holdings start the new year at 1,280.72 tonnes (41.176moz) Current value US$58,047bn
Platinum US$1,765/oz vs US$1,750/oz on 31/12/10
Palladium US$791/oz vs US$795/oz on 31/12/10
Silver US$30.6/oz vs US$30.6/oz on 31/12/10 The US Mint is reporting strong sales of bullion with estimates suggesting that nearly 1.7million silver coins have been sold on the first business day of the new year. A total of 34,662,500 one ounce American Eagle silver bullion coins were sold in 2010 a considerable increase from 28,766,500 in 2009.
Rhodium US$2425/oz

Base metals:
Copper US$9,691/t vs US$9,514/t on 31/12/10 - Copper shipments from Collahuasi are taking place according to Metal Bulletin, however force majeure remains in place on concentrate deliveries as the mine has been suffering a month long strike and logistical problems following the death of three employees at its export port Patache
Aluminium US$2,489/t vs US$2,460/t on 31/12/10 - Metal Bulletin reports that three provinces in northwest China are likely to account for nearly one fifth of aluminium production in 2010, and more than half of all new capacity planned for this year.
The three provinces of Ningxia, Qinghai and Gansu are expected to have produced 3.53mt of aluminium last year. Around 3.7mtpa of capacity is scheduled to be added this year.
Total aluminium output for 2010 was estimated at 17.8mt, up 28% yoy.
Nickel US$25,150/t vs US$24,195/t on 31/12/10
Zinc US$2,449/t vs US$2,430/t on 31/12/10
Lead US$2,574/t vs US$2,542/t on 31/12/10
Tin US$26,970/t vs US$26,800/t on 31/12/10

Energy:
Oil US$95.12/bbl vs US$92.5/bbl on 31/12/10 Oil traded near a 27 month high on the back of the US manufacturing data suggesting that the recovery is sustainable and that demand will increasing in the coming months.
Hedge funds and other commodity traders are increasing their appetite for bullish oil bets to the highest level in 4 years. According to the Commodity futures trading commission net long positions increased by 4.6% in the last week of December.
Gas US$4.652/MMBTU vs US$4.1/MMBTU on 31/12/10 Prices move up today as forecasters in the US predict colder than normal weather will spark greater demand throughout the month.
Uranium US$62.50/lb vs US $63/lb last week

Coal Record flooding in Queensland Australia covering an area reported to be greater than France and Germany combined is impacting coal mining operations.
Around US$980m of damage is estimated to have been caused by the floods. The major coal port of Dalymple has resumed operations but nearly 50 ships are reported to be waiting off shore. Miners including Rio and Anglo American have declared force majeure.

Coking coal Metal Bulletin reports that some consumers are pushing for monthly contract prices for this year, which major producer BHP is reported to be in favour of.
Some steel producers will struggle with this proposal as volatility can be problematic and leaves them carrying greater risk or passing on changes down to their customers directly which will be resisted.

Other:
Tungsten In a surprise move late last year, Metal Bulletin reported that China increased export limits on its first batch of quotas for this year. Chinese companies have been allocated quotas totalling 11,955t for four tungsten products in the first batch, up 10% yoy.
Buyers will welcome this development as prices have been hitting records in response to shortages. We look to see if this will provide any relief on prices. We however remain bullish on the long term fundamentals for tungsten.

Company News

Mining:
Anglo American (LSE:AAL) Sale of Moly-Cop and AltaSteel completed
Anglo American has completed the sale of Moly-Cop and AltaSteel to OneSteel for cash of US$1,076m following the announcement of the deal on 14th November for a total of US$932m on a debt and cash free basis. The total cash proceeds includes cash and debt in the business along with certain adjustments.

Discovery Metals* (LSE:DME) Extensive tenements granted for Manganese
Discovery Metals has been granted extensive tenements covering over 14,000km2 in Botswana within 16 prospecting licenses. Management is taking advantage of its considerable in country expertise to seek other opportunities. Longer term this could also reduce the company s exposure to a single project if economic resources are identified and developed.
The licenses could host an extension of the Kalahari Manganese field located immediately to the south in South Africa. Management aims to commence early stage work to assess the potential of these tenement packages in H1 2011. The structure in South Africa is host to a number of large manganese mines, with South Africa holding around 50% of the world s manganese resources.
Exploration work in the Kalahari manganese field has been historically hampered by the thick cover of Kalahari sand, however, resources could be identified closer to surface that would be attractive.
Conclusion: Clearly management s focus remains on Boseto and its surrounding highly prospective copper tenement package, however, it is a positive for the company to use its considerable in country experience to identify other opportunities potentially diversifying the value proposition for investors. The costs associated with the exploration licenses are relatively low at US$3m over three years assuming that all areas are assessed as prospective and a decision made to retain all the licenses.
* Fairfax acts as Nomad & Broker to Discovery Metals