Gold prices break key $1,503/oz this morning

Reasons:

• US debt downgrade causes global concern prompting some investments to move to gold
• Inflationary concerns driven by rising oil prices
• Fears of further unrest in the Middle East with four killed in the Yemen
• Prospect of a long drawn out conflict in Libya
• Rising wealth in developing economies is generating new demand for gold in dowry and other forms. Low confidence in banks and in related currencies in emerging markets causes local investors to store wealth in physical form eg in gold, silver and other valued metals.
• ETF inflows are reported to have risen in the week although we see the giant SPDR fund as showing some outflows in recent days following a substantial jump on 14^th April from 39moz to 39.6moz.
• The WGC reports that gold jewellery demand remains strong at around 54% of total demand in 2010, a rise of 17% on 2009, this is despite a rise of 26% in the annual average gold price and a 54t fall in demand in the US and Europe.
• Asian consumers made up 51% of total jewellery and investment demand last year according to the WGC. Asian consumers feel good about the price progression of gold. They see gold prices having a strong negative correlation with mainstream markets giving a degree of protection against unforeseen events.
• Indian consumers are seen buying gold on price dips and China is catching up fast as a gold buying market.
• Investment demand is still seen picking up driven by purchases of gold coins.
• Central banks turned to net buyers of gold last year drying up a substantial supply of gold into the market.
• Gold miners also moved to buy back gold hedging programs which tightened the futures market and helped to lift physical prices.
• If central banks continue to hold gold or to make even small purchases then gold prices could lift substantially.

Copper prices rise in Asia as economic growth raises local demand.

• We expect base metals prices to move broadly sideways for some time

Ps. The UK is expecting a golden bank holiday Easter weekend, more down to the weather than to rising gold prices

ECONOMIC NEWS

Dow Jones Industrials +0.53% at 12,266.75

Nikkei 225 +1.76% at 9,606.82

HK Hang Seng +1.16% at 23,793.07

US - Data released yesterday shows that payrolls in 38 states increased last month suggesting that the labour market is moving in the right direction across the majority of the country.

• Housing starts rose 7.2% in March from February, beating forecasts but crucially failing to make up significant ground after a decline of 9.5% in February.

China - According to the New York based conference board, China's economic activity is "moderating" as a result of the government's measures to curb inflation.

• HSBC has upgraded its GDP forecast for Hong Kong and Singapore this year to 5.5% and 5.8% respectively on the back of continuing demand from mainland China.
• Reports are emerging that China has been limiting food imports from 12 areas in Japan as a result of the recent nuclear crisis.

Europe - The positive manufacturing figure released yesterday is bolstering the argument that further rate increases, to tame inflation would not overly hurt the economic recovery. However the figures prompted renewed concerns over disproportional growth in Germany compared to peripheral nations.

Japan - Exports fell more than estimated last month as companies struggled to restore output as a result of the devastating earthquake. Overseas shipments declined 2.2% yoy. Car exports fell 28% yoy.

Burkina Faso - leaders of mutiny apologise for disruption and violence. Students were seen stirring up trouble. President has now named a new Prime Minister. We expect the situation to return to a more normal state of affairs.

• US State Department advises US citizens not to travel to Burkina Faso. This could disrupt some of the more sensitive North American explorers in the area. We do not expect this to worry Australian geologists in the region who seem unaffected by recent political developments.

Greece - Yesterday saw the successful sale of 3 month treasury bills raising 1.625bn euros but anxieties remain over whether the country will have to restructure its debt. The government continues to deny that it will try and extend the maturity of its debt but the market remains wary.

UK - Data compiled by Bloomberg shows that UK companies are becoming more pessimistic with regard to earnings forecasts.

Libya - As the crisis in the country continues with no apparent end in sight, the Italian Foreign Minister, Franco Frattini stated yesterday that 10,000 people have been killed and 55,000 wounded since the conflict began in February. The shocking figures have not been independently confirmed with Frattini citing the leader of the Libyan Rebels governing body Mustafa Abdel Jalil as providing the original figure.

• Britain is reportedly sending 10 military officers to eastern Libya to support the rebels and discuss tactics. Who would now bet against seeing British forces on the ground?

Nigeria - The Red Cross has stated that 16,000 people have been displaced in six states across the country as result of post election violence. Uncharacteristically for West Africa both the recognised winner of the election President Goodluck Jonathan and his main rival General Muhammadu Buhari have condemned the violence as "sad, unwarranted and criminal"

Syria - In an attempt to stave off further protests Syria's Government has lifted the decades old state of emergency that was widely seen as a mechanism of repression in the country. The country's interior minister has again urged people to refrain from taking part in rallies in the interests of safety.

Yemen - Aljazeera is reporting that security forces in Yemen have killed at least 4 people and wounded hundreds more after opening fire on demonstrations in the capital Sanaa.

Currency - The dollar is off this morning as debt concerns persist and the yen weakened on the back of the falling export figures as expectations increased that the government will maintain its stimulus program.

US$1.442/eur vs $1.425eur yesterday. Yen82.85/$ vs 82.47/$, SAr6.785$ vs 6.850/$ $1.637/GBP vs 1.625/GBP

COMMODITY NEWS

Precious metals:

Gold US$1,501/oz vs US$1,494/oz on yesterday - Prices have extended their rally and breached the 1,500 mark as the dollar weakens today and the sovereign debt concerns in Europe boost demand for safe haven investments.

• Harmony Gold has announced that operations at the No. 5 Shaft at the Masimong Mine in South Africa will restart today after the government lifted a safety expansion.
• SPDR gold trust holdings fall slightly to 1,230t (39.553moz) from 1,231t (39.582moz) current value US$58,940bn

Platinum US$1,789/oz vs US$1,783/oz yesterday -

Palladium US$747/oz vs US$736/oz yesterday -

Silver US$44.35/oz vs US$43.21/oz yesterday - Prices continue to move up today as silver benefits from its dual capacity as an alternative value store to gold and its industrial appeal.

• Hochschild Mining, the producer in Peru has announced that it has produced 5.6moz of attributable silver in Q1

Rhodium US$2,325/oz

Base metals:

Copper US$9,450/t vs US$9,269t yesterday - Freeport-McMoRan have closed part of an underground mining area at is Grasberg Mine in Indonesia after a land slide killed one worker and left another missing according to Coverago. The closure is moving prices this morning as the market expects the incident will exacerbate the expected shortfall this year.

• Sterlite raises copper concentrate rates. Sterlite's Tutacorin copper smelter runs on the ISA smelt process which, while energy efficient, runs on diesel fuel and is sensitive to rising oil prices. This and other cost pressures make the strategically placed smelter at the lower end of India sensitive to low-cost competition from China. Sterlite's move to raise Tc/Rc rates is likely to be in response to the closure of copper smelters in Japan following the earthquake.
• With Grasberg in Indonesia shut yet again this year copper concentrates may again be in short supply making the concept of raising Tc/Rc charges problematic.
• BHP has announced that in Q1 2011 copper production rose by a fifth on the back of improving production rates at its Pampa Norte and Olympic Dam operations.

Aluminium US$2,738/t vs US$2,680/t yesterday - Prices are up this morning on the back of the announcement made in China by the Ministry of Industry and Information Technology that stated China will issue an emergency notice to reduce the production of Aluminum products as a result of soaring over capacity.

Nickel US$25,825/t vs US$25,474/t yesterday -

Zinc US$2,355/t vs US$2,325/t yesterday -

Lead US$2,597/t vs US$2,557/t yesterday -

Tin US$32,950/t vs US$32,600/t yesterday -

Energy:

Oil US$122.07/bbl vs US$120.74/bbl yesterday -Prices are up this morning as the better than forecast housing figure in the US suggests that the economic recovery is maintaining pace and concerns remain over the geo-political situation in the Middle East.

Natural Gas US$4.295/mmbut vs US$4.137/mmbtu - Warmer weather in the US is helping move prices this morning as the market predicts that electricity demand will jump.

Uranium US$57.25 vs US$58.00 last week - Prices fall off again this week as the market remains cautious over the outlook for uranium in the short term as governments around the world review their nuclear programs in light of the issues in Japan.

Coal - BHP has announced that its Q3 coking coal output declined 14% as a result of disruption caused by the devasting flooding in Australia. For the 3 month to the end of March production was 6.67mt compared to market estimates of 8mt. Force Majeure remains in place at the majority of the company's brown basin products with sales, production and costs likely to be impacted for the rest of the year the company added.

Other:

Chrome Ore - The government of Zimbabwe has banned chrome explorts to build internal capacity according to the Ministry of Mines and Development.

• There are three large scale ferrochrome mines in Zimbabwe including China's Sinosteel through its company Zimbasco which told state media it planned a US$300m investment in the second half of 2011 to build a new smelter.
• We wonder whether the Chinese will carry through on their investment in light of the indiginisation plans (51% to be held by locals/state) as well as this ban.

COMPANY NEWS

Gem Diamonds (GEMD LN) 264p mkt cap £365m - Interim management statement

• Gem Diamonds IMS reflects good diamond value results from Letseng, although we note stripping ratios are increasing, additionally Elendale has suffered poor weather conditions.
• Letseng - The company is achieving US$4,272/carat for its April 2011 export bringing the average tender price for the quarter to US$3,067/carat. A number of large stones achieved particularly high prices as did a few coloureds. Total carats recovered came to 26,541 up 29% yoy and ahead of the previous quarter at 22,066. The grade appears to have picked up moving to 1.51cpht from 1.30cpht in Q4 last year.
• Total ore mined stood at 1.8mt with a strip ratio of 3.25:1 up from around 3:1 the previous quarter. Versus a year ago total ore throughput is down as alluvial ventures from low grade DeBeers stockpiles has been depleted. 91% of the ore treated came from the main pipe which has exceeded expectations at typically the satellite pipe holds the better diamonds.
• Ellendale - The mine is suffering with grades falling to 3.74cpht from 3.85cpht the previous quarter and 4.43cpht a year ago. Consequently recovered diamonds are down 35% qoq at 25,468carats. Ore treated was also down substantially pushing down output. Excessive rains are adversely impacting output which are extending beyond the typical wet season. Mining recommenced in March as during the peak wet season mining is effectively halted and the plant processes stockpiles which need to dry out. This asset will also be suffering from the high Australian dollar so it may not be profitable at present.
• Gope - This developing project is proceeding with a logistics camp being established at Lephephe and onsite construction of the on site camp has started. Mobilisation for underground access via a decline is on schedule to start in Q3, which is likely to be costly as the ground is likely to be unconsolidated.

Conclusion: Letseng is returning some good stones and the diamond market appears robust, additionally the grade picking up is also a benefit. We note stripping is increasing. Ellendale looks like its struggling and probably draining cash from the group, we hope that dry weather allows the company to get back on track on this somewhat marginal asset. We also look to see progress at Gope longer term to provide growth to the group.

Exco Resources (EXC LN) A$0.685 mkt cap A$237m - Xstrata to acquire Cloncurry Copper project for A$175m

• In a good result for the company and shareholders Exco has sold its Cloncurry copper project to Xstrata for A$175m which would take the group's cash balance to A$220m, nearly the same as the company's market capitalisation. Management plans to distribute US$100m of surplus funds to shareholders.
• The sale comes as no surprise as Cloncurry was ideally placed to provide a feed source for Xstrata's Ernest Henry Mine.
• The company will be well funded for a major programme of drilling at test work at Hazel Creek where results have shown the existence of large copper-gold-magnetite mineralisation with potential to define large tonnage open style deposits.
• In the mean time the company's JV (75% Exco) of the White Dam Gold mine continues to generate cash for the group with exploration potential in the region that could extend the mine life. The company also has the Great Australia Royalty which covers sulphide ores under the Great Australia Mining Lease at Cloncurry that is being mined by Copper Chem and based on current LME prices and 1.7mt of ore to be mined, gross cash revenues could generate A$30m to Exco.
• Shareholder approval is required for the transaction to go through and a meeting is planned for early June. The board approves the proposal from Xstrata.

Conclusion: Exco will have a particularly robust balance sheet and cash flow streams to come from White Dam and the Great Australia Royalty that will help it pursue exploration work at Hazel Creek. The management team is demonstrated competence at delineating resources and developing projects. Shareholders will also no doubt be very grateful to receive US$100m in cash from the company if the Cloncurry deal is approved.

Nyota Minerals (NYO LN) 14.75p mkt cap £77m - Richard Chase to become CEO

• Nyota has appointed MD of Ambrian Partners Richard Chase as CEO. Richard was previously a mining geologist before moving to the City of London. He has 19 years of experience in the resource sector of which 8 were in the mining industry.
• Nyota's key project Tulu Kapi has a substantial resource, however we are not convinced that it is an economic proposition, although other deposits around the asset could be identified that change the economics of the project. We look towards exploration results to give greater confidence in potential viability of the project.

IFM (IFL LN) 27p, mkt cap £152m - ferrochrome production rises as prices gain pace

• Things are at last looking up for IFM
• Ferrochrome production is rising and Q2 ferrochrome prices are set substantially higher to help offset the impact of rising costs in South Africa
• FY Q3 production rose 9% to 51,446t
• FY Q3 sales of 48,420t were 24% lower yoy due to high stockpile liquidation. Chinese fiscal tightening may be having some impact here.
• Net borrowings fell slightly to SAr213m from SAr216m despite a rise in ferrochrome stock
• The Metal Bulletin reported Nippon Steel and Sumikin Stainless Steel corp settled April-June prices with South African miners 10c higher at US$1.43/lbs. Reports suggest that the apparent recovery in the US and Europe had prompted miners to look for a 20c increase. The April -June price is effectively flat from the same period last year as a result of demand prospects from Japan.

Conclusion: Demand looks strong for stainless steel and capacity is rising in the sector. ENRC is raising production levels to meet much of this demand but South African cost pressures are still raising ferrochrome prices to counteract rising energy and other local costs. IFM like other producers is slowly emerging from tough times.

Mining this week:

Kenmare Resources (KMR LN) 49.6p mkt cap £1,192m - Preliminary results to December

Blackthorn Resources (BTR LN) 62.5Ac mkt cap A$66.8m - Update on enhancement work at Perkoa

Stellar Diamonds (STEL LN) 8.38p mkt cap £18m - Bulk sample results from Tongo

Cluff Gold (CLF LN) 97.5p mkt cap £128m - Events in Burkina not affecting operations

Aureus⁺ Mining (AUE LN) 97.5p mkt cap £84m - Progress update plus positive drilling results

European Nickel (ENK LN) 14.75p mkt cap £39m - Operational update

EMED MINING * (EMED LN) 16p mkt cap £110m - Progress on Rio Tinto copper mine project closer to restart

Discovery Metals* (DME LN) 79p mkt cap £213m - Report highlights mine construction & exploration progress

BUY Target price - 94p

Triple Plate Junction (TPJ LN) 8p, mkt cap £24m- Newcrest upgrades Wafi to 40moz target + 15mt contained copper

DISCLAIMER - Non Independent Research

⁺Fairfax employees may have previously held, or currently hold, shares in the companies mentioned in this note.

DISCLAIMER

This note has been issued by Fairfax I.S. PLC in order to promote its investment services.

This information is a marketing communication for the purpose of the European Markets in Financial Instruments Directive (MiFID) and FSA's Rules. It has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.

This document is not based upon detailed analysis by Fairfax of any market; issuer or security named herein and does not constitute a formal research recommendation, either expressly or otherwise.

The value of investments contained herein may go up or down. Where investment is made in currencies other than the base currency of the investment, movements in exchange rates will have an effect on the value, either favourable or unfavourable. Securities issued in emerging markets are typically subject to greater volatility and risk of loss.

This [note] is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published in whole or in part, for any purpose.

Neither the information nor the opinions expressed herein constitutes, or is to be construed as, an offer or invitation or other solicitation or recommendation to buy or sell investments. This information is for the sole use of Eligible Counterparties and Professional Customers only and is not intended for Retail Clients, as defined by the rules of the Financial Services Authority ("FSA") and subject to Fairfax's Terms of Business as published or communicated to clients from time to time.

It is not investment advice and does not take into account the investment objectives and policies, financial position or portfolio composition of any recipient. This document should not to be relied upon as authoritative or taken in substitution for the exercise of you own commercial judgment. Fairfax I.S. PLC is not responsible for any errors, omissions or for the results obtained from the use of the information in this document.

This document has been prepared on the basis of economic data, trading patterns, actual market news and events, and is only valid on the date of publication. Fairfax does not make any guarantee, representation or warranty, (either expressly or implied), as to the factual accuracy, completeness, or sufficiency of information contained herein. This document has been prepared by the author based upon information sources believed to be reliable and prepared in good faith.

Fairfax's officers, directors and employees may own or have positions in any investment(s) mentioned herein or related thereto and may, from time to time add to, or dispose of, any such investment(s).

Fairfax I.S. PLC is a company registered in England and Wales with company number 5496355 and whose registered office address is 7, Queen Street, Mayfair, London W1J 5PB. Fairfax I.S. PLC is authorised and regulated by the Financial Services Authority whose address is 25, The North Colonnade, Canary Wharf, London E14 5HS and is a Member of the London Stock Exchange plc.

Source: FAIRFAX I.S. PLC