You can see why… it’s the fastest growing nation in the world. Its building rate is mind blowing. And it’s set to continue – at ALL costs.

Over the next few years it plans to build the equivalent of ten New York Cities!

And since the recent earthquake the Chinese government has promised to rebuild all the damaged cities in Sichuan and the surrounding areas. This will accelerate demand for these products even further.

But China has a problem… and it’s a big fat expensive one.

You see, to make steel you need iron – and China doesn’t have enough high-grade iron ore within its borders…

It means they are at the mercy of the world’s big exporters – BHP Billiton, Rio Tinto and Vale.

These miners charge what rates they like to ship the stuff over… and the cost is phenomenal. China has NO CHOICE but cough up.

But one firm newly placed just outside its borders could be about to save their bacon… and it kicks off as early as next month!

An iron ore miner with an edge over all its competitors – including the Big Boys!

At first glance there’s nothing unique about this company. It’s a miner… it gigs for iron ore… its reserves are sound.

But they have one thing that gives their business the edge over all their competitors: Its location.

Consider this… the current freight rate from Australia (BHP and Rio’s ore) to China is around $50 per tonne. Rates from Brazil (Vale’s ore) to China standing at around $100 per tonne.

This means transport costs to China are many times of the cost of mining the ore.

Wouldn’t it be better for Chinese steel mills if they could get their iron sourced more locally so transport costs were slashed?

Of course it would. If you could offer the mills iron ore or pig iron on these terms the Chinese would snap your hand off…

Well this company is scheduled to produce its first ore for sale THIS MONTH.

I will be recommending this company in the next issue of Smart Commodities UK, which drops on Saturday 22 June. To get all the exclusive details on this as soon as they’re published click here.

You have no obligation to continue subscribing. You have three whole months to see if it’s for you. And even if you decide it isn’t, everything you get is yours to keep no matter what.

Why one broker thinks these shares are 100% undervalued

By 2012, the company plans to produce up to 10.7m tonnes of iron ore concentrate. From that up to 5 million tonnes of pig iron will be produced.

It also recently announced the acquisition of two mining licenses that could DOUBLE the iron resources of the company.

Broker Cannacord Adams recently reviewed all of the company’s projects and came up with a net asset per share valuation that is double the current share price.

With the outlook for ore prices, I reckon this valuation looks pretty conservative, because iron ore prices remain on the up.

Iron ore prices will continue rise China’s voracious demand has caused iron prices to rise significantly. Recently, Rio Tinto managed to secure a hike of 95% for supplies of iron ore to a few small Chinese firms after intense negotiations.

Renaissance Capital estimated that there was a 30m-tonne gap in expected iron ore shipments and actual deliveries in 2007. There have been problems with weather as well, with many mines flooding in Northern Australia and in Vale’s operations Brazil.

Citigroup is also bullish on the iron ore price. In a note to clients last week, the broker said: “The iron ore market remains under-supplied and only a sharp deceleration in Chinese steel production will change this. We expect iron ore to rise by 30% in 2009… but this may be conservative.”

I am very excited about the prospect for this share. I like the location of its mines, the quality of its management and the pricing outlook for its main source of revenues.

The valuation is attractive and the fact production is set to start imminently should secure good news flow in the months to come – but you’ll have to wait a couple of weeks to find out exactly which company it is as I complete my research.

So sign up here to be sure you’re ready!

Regards,

Garry White
Editor
Smart Commodities UK

Please note: Forecasts are not a reliable indicator of future results.

Source: New Iron Ore Discovery to Save China’s Multibillion Pound Building Spree

Just kidding. Obama looks like he has locked up the Democratic nomination today. Wall Street may not like the prospect of an Obama Presidency.

It’s kind of amusing to watch CNBC as analysts try to explain why the market has taken a sudden turn for the worse. Lehman Brothers is down 8%. Uh oh. GM’s monthly sales were off by 30%. Uh oh.

Of course none of this should have too much of an affect on Australian stock prices. The Reserve Bank elected not to raise the cash rate from 7.25%. The RBA concluded that the last eight rate hikes have made borrowing sufficiently expensive that household and business credit will not contribute to overheating in the economy. Phew!

But if people can’t or won’t borrow more, that doesn’t meant they won’t have more money in their pockets. There’s always an increase in income to drive domestic spending. That income—in the aggregate—comes from Australia’s record terms of trade, as we mentioned earlier this week. As far as we know, there’s not a lot the Reserve Bank can do about that. Wage pressures have to be building.

The share market didn’t find the rate news much of a relief from the weakness in U.S. financial stocks. The Aussie financials were down and so were the miners. If the miners and the banks are down in Australia, the index is down. The only exception is energy, where Santos is making waves in the LNG market.

For the record, we still think banks stocks are dogs. Globally, banks continue to de-leverage and raise capital. You might make a spirited argument that the worst of the housing-related losses have been taken. But, even if that point were generously granted, you’d still have to ask where in the heavens bank earnings are going to come from?

The only possible answer is that the credit cycle is reversing and interest rates are headed lower. This may possibly be true in Australia. But it can’t possibly be true anywhere else in the developed world. The ECB remains hawkish. The Fed never got tight in the first place. And the Bank of Japan is in no position to raise rates with the Japanese economy in a fragile state of expansion.

So once again, Australia is the weird looking kid on the global block, with a cycle that seems to be at odds with everyone else’s. What will it mean for the Aussie dollar? Well, the RBA won’t cut rates until it sees signs that inflation is slowing down. And it’s going to be months before that happens (if it does happen, that is.)

In the meantime, you’d expect traders to sell the Aussie dollar if they don’t think interest rates are headed higher. Yet that did not happen en masse yesterday. On the economic front, building approvals were up 7.8% on a seasonally adjusted basis. This gave the Aussie a little nudge and countered the prospect that interest rates may have topped out.

Since we’re going on the record today, we can’t see the Aussie getting a lot weaker against the greenback this year. The rate differential between the two currencies favours the Aussie. And if rates aren’t driving the pair, then it would economic growth.

You can go ahead and forecast a bottom in housing, a top in oil prices, and a major rebound in the U.S. in the second half—all of which would drive the greenback higher and probably lead to a significant rally in U.S. stocks (and selling in BRIC and emerging markets, including Australia.) But it is easier to write out that scenario and actually believe it.

Still, there are some folks who believe that the U.S. is scraping along the bottom, albeit in prolonged fashion. We think these people fail to realise that the world is witnessing a structural reallocation of capital away from Western markets and toward developing markets. Granted, this theory allows for big rallies in U.S. shares.

However, for our money, it’s best to focus on the long term compound growth in earnings available in the emerging and developing world, than trying to trade rallies in the U.S. stock market, where a decade of managing corporations for short-term profit has put U.S. companies on the back foot in global competition. The game has changed.

There was more perplexing news on the economic front. Australia’s current account deficit was up 4% to $19.49 billion, according to the Australian Bureau of Statistics. The deficit on goods and services rose by $1.4 billion, or 22%.

It’s pretty strange that you have a country in the middle of arguably the greatest export boom of all time—and you’re running a current account deficit. The trouble is, despite its continental size, Australia is small in terms of population. It is hard for an economy of this size to produce the diversity of goods available in the world. There are not enough human resources for a truly diverse economy.

And with globalisation, why would you produce things locally you can buy on international markets? There are some things you want to do locally so you don’t have to rely on trading partners (energy, food, banking). But Australia’s trade and current account deficits seem to be structural in nature. The country will always import capital goods, textiles, and consumer electronics—things not likely to ever be made competitively in Australia.

Is it time to look at base metals again? Zinc, lead, nickel, and copper all came off the boil last year. Meanwhile, energy and bulk commodities (coal, iron ore, phosphate) all zoomed ahead. But now, maybe things are heating up in the base metals again.

Melbourne-based Jervois Mining announced that is has been approached by a Chinese consortium to develop the Young nickel deposit in NSW and produce 50,000 tonnes of nickel a year. When we get back to Melbourne next week, we’ll ask Gabriel and Al what they think of base metals prices and base metals stock and report back to you.

Dan Denning
The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Australia’s Current Account Deficit Up 4%

The Five Reasons Why Now’s the Time to Buy Junior Miners

Gold could be ready to end the summer doldrums even before summer begins.

The most relevant area of resistance in the way of this outlook is the 30-point range between $890 and $920. If gold can break through and find support at these values it will be poised to rise for the summer.

With that said, I think we’ve had our seasonal low and now it’s gold’s turn to shine…as the most preferable commodity…and better yet, to become money again.

Just writing that makes me realize how early in the game it still is. Who today would believe gold will become money again? Yet, at the top of the market everyone will.

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The Five Best Reasons to Buy Good Quality Precious Metal Juniors

Most of the small-cap and junior resource market has been in decline since gold first broke the $700 level back in 2006. But that’s all about to change, I have five reasons why you should buy juniors now before the window closes — lets get started…

Reason #1, is that, several depressing factors have come together to produce an early seasonal low, at least for the precious metals sector.

Reason #2, as implied in the introduction, gold has lagged the commodity cycle because the market is infatuated with the growth in developing countries, and has inferred a “realness” to their demand for commodities. I’ve never disputed that the growth exists… just that there is a lot more inflation, and that inflation is what drives prices higher.

I believe the gold market is at a bullish inflection point — a point of recognition of sorts.

Reason #3, the precious metal juniors have hardly benefited from the bullish trends in these commodities to date, especially since 2006, never mind the future.

Lots of money found its way into the junior segment over recent years, to be sure, but this expansion in capitalization has been dilutive. The Canadian Venture Exchange (CDNX) has had a hard time keeping up with gold itself, and is at its lowest level relative to gold since 2002. Simply put, the juniors should be tracking gold — and right now they have a lot of catching up to do. The result is a widening gap between the values of majors and juniors. In my mind, that gap will soon contract.

With that said I think it’s the best buying opportunity in this segment since 2002.

Reason #4, The money that has poured into the junior precious metals segment over the past few years has been soundly invested. I am impressed with the value that I’ve seen many juniors create throughout this cycle — the development of assets discovered back in the nineties has been astonishing.

Finally, the best reason to own these juniors now…

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Why Has Oil Surged?

Dwindling value in the dollar, a crisis in U.S. credit, rising demand from overseas. These are all explanations for the recent surge in oil prices. But that’s not the whole story.

There are more dangerous and deadly reasons for the rise in oil prices, and the real truth explains why we can expect this surge to last for a long time to come. Click here to read about the “bloody backlash.”

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Reason #5, the next takeover wave!

Many of the large-cap producers are priced for growth, and they know that if they want to sustain those multiples, they’ll have to buy or find reserves. That’s the incentive.

Meanwhile, the juniors spent lots of investment dollars proving up their assets, and the market has ignored them. So they are ripe for acquisition.

And, the majors have plenty of cash, thanks to the latest run in gold prices.

Some, such as Agnico Eagle have said they’re on the hunt, while others like Gold Fields are obviously in need of assets outside of South Africa. Corrections in the price of gold won’t discourage them.

There’s your ammunition, five Solid reasons to make sure you are small-cap and junior miners. These miners won’t remain at these levels long, so now is your chance to get in!

I’m working on a more comprehensive target list as we speak. I see a window of opportunity between now and the end of this gold price correction to buy the good quality small-caps and juniors before they take off. The window could close earlier than you think.

Regards,
Ed Bugos

P.S.: So now you know the reasons why you should be in the small-cap and junior miner game. There has been a recent downtick for gold, but that should not last. Readers of my Gold and Options Trader service have seen not only the reasons to buy junior miners, but they’ve gotten my personal recommendations instructing them which miners to buy and when. Want to know what I told them? Click here to find out…

Source: Small Cap and Junior Miners

Today, we look at another sector the market is high on: Canadian tar sands. Our chart shows the past five years in Suncor Energy, one of the largest miners operating in Athabasca. When oil is trading for $60 a barrel, mining the tar sands is a good business. When oil is trading for $80, it’s a great business. And when oil is trading for $120, it’s a money machine.

As one of the institutional investors’ favorite ways to take a position in Canada’s tar sands, Suncor’s stock reflects all of the environmental, political, and economic concerns of Athabasca.

Suncor’s first-quarter cash flow increased 40% from one year ago. Shares have appreciated 480% in the past five years. The bull market in the world’s safest large deposit of crude oil is on!

Source: As Go the Oil Services, So Go the Tar Sands

Investors are wary — and rightly so. In these uncertain times, it’s tough predicting which way the commodities run is going.

Take junior platinum producer Sylvania Resources. This Aussie and London-listed player recently released first quarter results. By all accounts the news was pretty good. But the share price barely moved.

Clearly juniors, even if they are good, are out of vogue. And they are even less fashionable if they operate in South Africa. With all the negative news about power cuts, safety and labour issues, foreign investors are understandably cagey.

Despite all that, Sylvania seems to have done pretty well. In fact, it can barely even be called junior anymore!

Stepping up production

Take a look at its recent third quarter financial results to March. Shimmering indeed!

One of Sylvania’s key strategies has been to access platinum tailings dams held by South Africa’s big boys. This is the rubbish they discard.

Of course that is not the only plan. Sylvania is an active explorer. But CEO Terry McConnachie said last year that aggressive growth would come from extrating platinum group metals (PGMs) from chrome tailing dumps. And it seems to be achieving its objectives.

Cash costs here are lower than those of other platinum producers for a number of reasons. Less power is needed, building the retreatment plant comes cheaper than a deep mine, and so on.

That is good news in this precious metals environment. Even if prices remain high, which we think is likely for the short term at least, costs are rising. Anglo Platinum, the world’s biggest producer, saw cash operating costs increase by a whopping 41% for the year ended December 2007.

Wages are up, safety is an expensive headache. Capital costs are up. And as for fuel prices… need we say more!

But in spite of all this, Sylvania’s production is expected to meet the targeted output of 70,000 PGM oz by 2009/2010. Already production in this financial period has risen by 34% with Sylvania’s PGM output hitting over 4,800 oz.

So what has it done? Well, it has gone about improving grades and volumes at its dump treatment operations. The most successful has been the retreatment of the Samancor Chrome dumps for PGMs. Samancor is one of the biggest ferrochrome producers in the world.

And it has been pretty successful. These Samancor dump operations alone saw production rise 48%. Okay, so this was tempered slightly by lower output at its 25% owned Chrome Tailing Retreatment Programme (CTRP) (an operation is 50% owned by Aquarius Platinum). But on the whole it was work well done.

A vision for growth in dark times

The future looks pretty shiny too. In the next quarter production is expected to rise again. That is down to focusing on improving output from the dump operations. It has already improved recoveries and processes at two key Samancor operations — Millsell and Steelport.

It is not the first time treating tailings has been successful. AngloGold, for example, has done it profitably too. And, of course, the plants to retreat the tailings are not that expensive.

And by the end of this calendar year, Sylvania will complete the construction of another plant known as Lannex. That will feed a further 70,000 tonnes of feed per month, doubling the size of the existing two operations.

So, the future may look bright — but Sylvania has not escaped South Africa’s power cuts. Yet, due to the surface and near surface nature of its operations, it uses less power than South Africa’s deep mining operations.

An active explorer too…after all we do need new finds!

Sylvania is more than a one horse wonder. It’s an active explorer too.

Take the Everest North project on a farm in the eastern bushveld of South Africa. There is apparently an inferred resource of some 796,000 ounces of PGMs. Obviously more tests are needed to test the viability of the project — that is happening at Aquarius Platinum’s Everest South Mine, which is currently under construction.

It is quite a complex arrangement, which looks something like this: Sylvania pays ZAR2m to Aquarius for the privilege of testing viability at Everest South and for that gets to prospect the Everest North project area. At its own expense! If the project proves viable the two companies will apply for a mining right to be transferred to Sylvania. Sylvania will then pay Aquarius ZAR6m when the right is granted.

CEO McConnachie appears to be the right guy to be behind this operation. He has 25 years’ mining experience. He has a good track record with black empowerment (crucial in South Africa). Plus, he has experience launching and listing a successful business. (He founded SA Chrome which is now Merafe Resources and the empowerment partner for mining major Xstrata.) He is also keen to keep costs under control.

Add to all of this that Sylvania is a prime takeover target and we can’t help wondering whether here is a horse worth backing!

Keep mining,

Erin and IsabelSource: Platinum Producer Sylvania Resources

Sad too is probably how early stage explorers are feeling in these uncertain times. Raising capital for new projects has become increasingly difficult. Funding from traditional investment sources has all but dried up.

Take London’s Alternative Investment Market (AIM). It is increasingly reluctant to list companies in the early stages of exploration. Miners coming to AIM today tend to be producing, or at the very least close to producing.

That is the golden rule we tend to apply too! But we also recognise that exploration is important. After all, minerals are in short supply and in spite of US slowdown, the commodities bulls reckon demand from Asian economies will rise and rise!

So while producers, or near-producers, are certainly preferable, we’d be crazy to write off all explorers. They might be risky but there is always a chance that they will deliver. Even if share prices have taken a hammering!

African Eagle… soaring to production

In spite of a disappointing slump in the share price since August (it is not alone here!), London and now Johannesburg-quoted African Eagle Resources might be one of those.

African Eagle is a copper, gold and now uranium explorer with interests in Zambia, Tanzania and Mozambique – all countries with relatively stable political and economic regimes and good infrastructure.

Better still, a successful secondary listing on Johannesburg’s Alternative Exchange (AltX) last year means African Eagle’s exploration projects are fully funded for 2008 and 2009. And the plan is to fast track the two most advanced of those to production sooner rather than later.

Continues below

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Other projects in a relatively advanced state are the Ndola and Mokambo Copper projects in Zambia. Also in Zambia is the Sasara Eagle Eye copper-gold project… It holds a large iron-oxide-copper-gold system as well as uranium rich mineralised targets.

But for the moment, Mkushi and Miyabi look most promising. Production is expected within three to five years. And from our precious metals vantage point, there is plenty of shine on Miyabi!

Randgold takes a shine to African Eagle

Here is why. First of all Miyabi is located in Tanzania in East Africa, where mining is considered to be a key foreign exchange earner and growth sector. Over the past ten years there have been substantial economic and structural reforms here. The result is that Tanzania is now the third biggest gold producer in Africa, with more than 50m ounces of gold reserves and resources. Fair play to them!

Miyabi, a gold bearing corridor of 7km by 2km, is African Eagle’s most advanced gold project. Drilling in this area has to date defined a JORC-compliant resource of 520,000oz of gold. (For the record, JORC is a professional code that is now widely accepted for reporting resources and reserves.)

More reassurance comes from the fact that London and Nasdaq-listed Randgold Resources, one of our favourite junior gold companies, has been involved in the drilling process.

Randgold and African Eagle have entered a joint venture whereby Randgold not only funds but also carries out the pre-feasibility study. So Randgold obviously wants to get it right. Because getting it right means that it could earn a 50% interest in the project.

African Eagle then has the option to co-fund a full feasibility study or dilute its interest to 35% if Randgold funds the full study. So there is everything to play for.

Clearly Randgold brings its drilling expertise to the project. It recently completed 4068m diamond drill programme across the Miyabi Structural Corridor. Why? To better understand the geology and mineralisation of the area.

After all, African Eagle has pointed out that the area, covering just over 500 km², has only been part drilled. And it seems pretty confident that it can expand that resource to 1m oz.

…and TWP Finance gets in on the act too

Now African Eagle’s strategy is clearly one of finding partners with skills and experience, financial support or local knowledge.

But more recently it sold a 4.48% stake to TWP Finance, a subsidiary of consultant engineers TWP Holdings.

TWP has made it quite clear that it intends to up that to a “strategic stake” in African Eagle. Now, TWP Finance positions itself as company that trades mining skills and intellectual property for sweat equity or mineral rights. A company that is committed to “becoming increasingly involved in early stage exploration projects around the globe,” says TWP Finance’s chief exec Dean Cunningham.

It is a risky strategy but one TWP reckons is worth taking. Explorers are finding it increasingly difficult to find capital. But the world says Mr Cunningham needs “these new projects to supply the current commodity and resources boom”.

So TWP brings its small team of financial and mining experts to a project in return for shares. Then it brings its skills base to the party and helps to fast-track key projects.

Risky but potentially rewarding? African Eagle may just be a takeover target for bigger players. At last look the share price was trading at around 8p a share.

Management can’t say loudly enough that it is undervalued.

Neither can Mr Cunningham, who reckons “African Eagle shares are an attractive prospect at present, as they are relatively undervalued despite the high metals prices in the extended commodity cycle”.

Spin if ever I heard it, says Erin. But even she has a twinkle in her eye.

Keep mining,

Erin and Isabel

PS Make sure you don’t miss out on getting all the latest industry news in one daily hit with a brand new free eletter from Fleet Street Publications.

Businesses are supposed to be informed when the lights will go out, but apparently the reality is quite different. The outages are random. Worse still Eskom, the state electricity supplier, has its “head well and truly buried in the sand”. Bad news for miners!

But today our musings are on the impact this is having on platinum prices. And here, at least, there may be a bit of light in the darkness! Precious metals consultancy GFMS recently released its 2008 Platinum and Palladium Survey. Its view is that the outlook for the platinum price is good – in the short term, at least. Supply and demand are tightly balanced, so at the moment “any supply disruptions will have noticeable consequences for the platinum market”!

AngloPlat proves the point

And supply disruptions are expected! Electricity is not the only problem for miners in South Africa, supplier of 80% of the world’s platinum. It now seems certain that a much tougher line will be taken on mine safety. Climate change has made weather unpredictable, too. Severe flooding has affected output at several mines. Add to this the fact that production in Russia, the world’s second biggest producer, has contracted. If it is going anywhere, the price of platinum is going up.

To prove the point, refined platinum production in South Africa slumped 18.9% in the first quarter of this year. And, surprise, surprise that was down to power shortages!

Poor old Anglo Platinum, the world’s biggest producer, was hardest hit. Its production fell a significant 24% in the first quarter, with the shortfall for 2007 coming in at around 136,500oz – or 8% of the world’s total refined supply.

That said, in spite of output which one analyst described as “shocking”, AngloPlat it is still on target to produce 2.4 million ounces this year. There is still ore in the pipeline from the first quarter. Repairs at the Polokwane smelter – shut down because of flooding – will be completed, putting that pipeline back in the picture.

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You see the forecasts also presume that there will be no safety, labour or technical problems this year. Now we know South Africans are eternally optimistic. But this might be pushing it a bit.

The only way is up up UP!

So, in recent weeks the platinum prices have fallen and stabilised as the dollar strengthened. Other precious metals have been hit, too.

But it is worth remembering that three quarters of the world’s platinum comes from South Africa. And not only does South Africa have a serious power crisis, it is also not immune to political crises! Moreover, South African supplies are dwindling. Furthermore, much of the balance comes from Russia and political tension there could herald more supply troubles.

Platinum is a rare metal and not exactly easy to mine…which all points to another platinum deficit. In 2007 there was a platinum deficit of 412,000oz. Okay so the deficit won’t be so big this year says VM (Virtual Mining) Group. But VM Group’s Lindsay Williams still reckons that mined platinum supply has “never been more vulnerable”.

So, while platinum may be overbought in the short term, the fundamentals of platinum for 2008 point to rising prices. Platinum started 2008 at $1,530/oz. Some say it could go to $2,400 by year end.

Words of warning

What goes up must come down, says Erin. You only have to look at what has happened to the fall back in all precious metals prices recently to see truth in that old cliché! What’s more, high prices could curb demand. Jewellery sales, for example, have certainly pulled back by some 268,000oz this year. And palladium could eventually replace platinum in auto-catalyst converters.

All that has not stopped investors from throwing money into platinum-backed exchange traded funds (ETFs). Just for the record, platinum group information specialists Johnson Matthey says the combined positions of various platinum funds in February 2008 was 330,000oz, up from just 50,000 oz in July 2007.

Of course, ETFs allow investors to benefit from rising (one hopes!) prices of commodities without having to take physical delivery or enter the futures markets. Platinum ETFs differ from other precious funds. There is significantly less refined above ground stocks than in, say, silver and gold. Platinum backed ETFs reduce liquidity in the market, which in turn reinforces price movements.

And there is still potential for profits, it seems! GFMS reckons that the worst case scenario will see platinum prices of $1,700 by the end of 2008. Moreover, there is “every possibility” that the price could be hovering at $2,400 by year end. Yet in current volatile markets buying in at the right time is obviously crucial!

So, for the moment at least it looks as though there is still some glitter in platinum.

Keep mining,

Erin and Isabel