Mining Souring?

Sydney, July 18, 2008 (ABN Newswire) - It has been a week for mining and resource company reports as oil led other commodity prices lower for a second day, and major mining groups reported solid quarterly or full year production figures (and half year in the case of Rio Tinto and Woodside).

Oil is now down $US16 a barrel after another fall Thursday night in northern hemisphere markets. Its now around $US129 a barrel. Gold and most metals fell, but copper rose a touch in a surprise.

Slowing growth in China and more poor news about the US economy were the main factors.

In Brazil a big share offering by the giant Vale mining group (also known as CVRD) fell short of expectations as the slump in metal and oil prices this week took their toll.

We will get a major test of sentiment when BHP Billiton revealsl its 4th quarter and full year production figures on next Wednesday, July 24.

BHP fell more than 4%, or $1.74 to $37.55 yesterday. Rio fell $3.44 to $118 at the close. The BHP 3.4 for one offer is now worth $127.60 per each Rio share. The bid remains under water.



Strategists at Merrill Lynch and Morgan Stanley said investors should sell commodities stocks because demand may decline for raw materials such as copper, nickel and corn.

Minara Resources, Australia's second-largest nickel producer, fell as much as 6% to $2.03 and Oxiana fell 10 cents, or 4% to $2.05.

The uncertainty in metal prices this week and the instability in credit markets had probably trimmed around $US3 billion from what Brazilian mining giant, Vale (CVRD) was expecting from a share sale that was being watched around the world.

When the timing was confirmed a week ago, Value was expecting to get around $US15 billion at the top of the range in the offering. The issue was first announced in June.

But market reports yesterday said around $US11.5 billion had raised from the issue, before a possible supplemental offering, or over-allotment of shares.

Including the so-called green-shoe option of preferred shares, Vale is raising 19.4 billion reais, but the offering only raised 18.4 billion reais.

Value shares have fallen 16% since the offering's first announcement in June, so the market isn't confident the company will spend the money wisely.

But as we have seen in Australia, the prices of all leading miners have weakened in the past month as metal prices have come off. 

Even BHP Billiton and Rio Tinto have seen their shares prices retreat, despite big ore price settlements, strong coal prices, and the as yet unresolved takeover offer from BHP.

Vale sold 256.9 million common shares for 46.28 reais each and 164.4 million preferred shares, excluding the over-allotment option, for 39.9 reais each, according to a filing yesterday reported by Bloomberg and the FT.

The share offering was the largest ever by a Brazilian company, but the shortfall in the expected amount raised will come as a disappointment to many. 

Vale still has cash rolling in from its higher priced iron ore sales (although BHP Billiton and Rio Tinto have done better in the Chinese and other Asian markets.

Vale won price increases of around 71% and will now receive less in Asia because of the discount being applied to its remoteness from the region. Australian producers have successfully argued for a premium in their pricing because of their proximity and cheaper shipping charges.

The share sale had started speculation Vale is preparing to launch another takeover after walking away from a $US90 billion deal with Xstrata.

With metal prices lower (but coal prices higher), Xstrata might be a bit cheaper in coming months.

Newcrest Mining fell 3%, or $1.10, to $32.20 despite gold trading around a three month high of $US963 and the Papua New Guinea joint venture with South Africa's Harmony Gold being confirmed

Newcrest and Harmony said yesterday that the PNG Government had given its approval for a gold joint venture between Harmony and Newcrest.

The approval paves the way for the two companies to pursue the development of their joint venture interests in the country.

These include the Hidden Valley gold mine, which is expected to commence production mid-2009, and the highly prospective Wafi Golpu copper and gold deposit.

Newcrest will bring its technical skills to the joint venture in exploration, project delivery and large scale mining.

Harmony chief executive Graham Briggs said in a statement the ministerial approval allows for the conclusion of all conditions precedent to the joint venture, including regulatory and statutory approvals.

''Not only does the joint venture augur well for both companies, but it will also provide broader employment opportunities and corporate social investment for Papua New Guinea.''

In April, the two companies announced that they had signed an agreement which will allow Newcrest to earn a 50% interest in Harmony's Papua New Guinea (PNG) gold assets.

The joint venture includes: The Hidden Valley mining operation, a gold and silver project, expected to produce over 250,000 ounces of gold and 3.6 Moz of silver p.a. over a 14 year mine life, peaking at over 300,000 ounces of gold p.a. in 2011. Production is scheduled to commence around mid 2009; and the highly-prospective Wafi-Golpu gold/copper deposit and its surrounding exploration tenements.

Located approximately 65kms southwest of Lae in Morobe province, Papua New Guinea, Wafi-Golpu is a highly prospective region with two advanced staged exploration projects – the Wafi gold project and the Golpu porphyry copper/gold project.

Wafi-Golpu comprises two separate mineralised systems in a highly prospective region with potential to develop into a major mineralised province. Wafi-Golpu is currently estimated to contain 9.5Moz of gold and 1.76Mt of copper in resources. Also included is more than 3,400 square kilometres of Harmony's exploration tenements in Morobe province, 300 km north-east of Port Moresby.

The April statement said the PNG assets have a significant resource inventory, with a JORC-compliant resource base of approximately 31 million ounces of contained gold equivalent. Current resources total 15.2Moz gold, 90Moz silver, 1,761kt copper and 22kt molybdenum.

The cost will be paid in two stages: (i) an initial US$180 million payment to acquire a 30.01% interest by 30 June 2008, together with a reimbursement to Harmony of US$45 million in project expenditure ("Stage 1 Completion"), and (ii) a farm-in commitment for the remaining 19.99% of approximately US$300 million, to fund project expenditure up to the commencement of mining operations at Hidden Valley. Newcrest will fund the deal from internal cash flows.

Harmony and Newcrest said they will jointly operate the PNG assets from the date of Stage 1 Completion with voting rights in the operator to be in proportion to each joint venturer's interest. As a 30.01% interest holder, during the earn-in period, Newcrest's approval will be required for major decisions in the joint venture.

Shares in Kagara Ltd hit a 52 week low yesterday of $3.20 (down 7.5%) as lower metal prices caused investors to offload shares, despite producing more copper and less zinc in the three months to June.

That followed 19 cent or 5% fall on Wednesday off the back of weakening zinc and copper prices on world markets.

The company's shares are down well over 46% so far this year, compared to the 23% fall in the overall market.

Kagara said the lift in copper production to record levels was due to increased production from its two treatment plants in Queensland..

Copper production increased to 9,000 tonnes in the quarter, from 6,227 in the same quarter of 2007. Zinc output fell 9.6% to 8,568 tonnes.

Kagara started building its new Mungana plant in the quarter. That's in north Queensland . It will double the company's zinc production and boost copper output.

Total full-year output was 40,940 tonnes of zinc and 26,329 tonnes of copper.

The company said operating costs for copper output fell during the quarter, with copper sales achieved at $US3.12 a pound compared with costs of $US1.37 a pound. Zinc sales were made at 97 US cents a pound, compared with costs of 58 US cents a pound.

Zinc prices are down 24% this year, copper prices are up.

"The June quarter production capped a very successful year for Kagara with copper and zinc production coming in on target at 26,329 tonnes of copper and 40,940 tonnes of zinc for the financial year."

The company said quarterly copper production from both Thalanga and Mt. Garnet copper treatment facilities were at record levels of 5,261 tonnes and 2,755 tonnes respectively at very high recovery rates.

"Copper production overall was 52 percent higher than the previous quarter and 31 percent higher in the June half compared with the December half year. 

"Copper price received for the half year was lower than the previous half however margins increased as a result of lower unit costs due to higher production.

"Plant construction at Mungana commenced during the quarter and this will more than double our zinc production and further increase our copper production when it comes on line in April of 2009.

"The base metal ore body at Mungana is now being accessed with underground development and this high grade development ore will be processed through the Mt. Garnet polymetallic plant until the Mungana processing facility is available.

"Several gold intersections including 69.00 metres at 2.44 grams per tonne gold from underground grade control drilling at Mungana and 63.45 metres at 3.14 grams per tonne gold at Red Dome have enhanced the probability of a large scale underground gold mining operation as the next growth phase at Mungana.

"During the quarter, initial inferred and indicated resources of 3.44 million tonnes grading 5.1% zinc and 1.0% copper for the Victoria deposit and 5.712 million tonnes at 1.08% nickel including 263,000 tonnes at 6.4% nickel for the Lounge Lizard nickel deposit were announced. Both deposits will grow larger as drilling continues.

"At Admiral Bay, an inferred resource is expected to be finalised in August. It is becoming increasingly likely that an exploration shaft will be commissioned in advance of full scale development.

"Initial discussions with engineering consultants regarding the advancement of the project have begun.

"Cash on hand as at 30 June 2008 was A15.8 million and receivables were $55.3 million>" the company said.

Shares in Iluka, the mineral sands miner, were also easier, dropping 9 cents to $4.20 yesterday, despite selling more in the June quarter as production was hurt by the WA gas crisis.

Iluka (ILU) said production fell across all of its mineral sands products in the June quarter because of the interruption of gas supplies in Western Australia.

Around 30% of the state's gas supplies were cut following an explosion on the Varanus Island facility in early June but Iluka says it was able to restore most of its WA production this month.

It said yesterday that any adverse financial impact from the interruption should be mitigated by its moves to sell stocks, save money from lower production and reclaim lost profits and sales from insurance.

Total mineral sands production in the June quarter was fell 20% to 592,089 tonnes from 741,765 in the same quarter of 2007.

Sales revenue was $259.5 million, up 21.8% in the same period last year.

Zircon production fell 32.7% to 94,702 tonnes in the June quarter and rutile was down 1.6% to 51,886 tonnes.

Synthetic rutile declined 27.7% to 99,488, and saleable ilmenite fell 17.1% to 177,740 tonnes.

Iluka said that because of commercial considerations related to pricing negotiations, it was no longer disclosing sales volumes as it moves to complete pricing arrangements for uncontracted zircon volumes in the second half of this year.

"On the basis of continuing strong demand, especially in developing economies, and tight supply conditions, Iluka expects to achieve appreciable second half price increases," it said.

The company said it is experiencing strong demand across its product range, especially from China.

In the first half of 2008, Iluka sold over 100,000 tonnes of zircon into China, a 75% increase on the same period in 2007.

"This sales growth has been underpinned by the decision to warehouse zircon inventory in China to capitalise on new sales opportunities, including that associated with the decline in supply from Indonesia."


 

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