Precious Metal Developers Provide Value and Upside in 2009 17 comments
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We are approaching an inflection point in the economy and the metals markets favorable to precious metals and mining equities. Moving beyond 2008, investors long in mining and metals equities are no longer burdened by the combination of redemptions and tax loss selling. While producers appear less risky, we see mining and metal equities with development potential as offering the greatest leverage for appreciation in the new year.
Increasing operating costs in 2007 and declining metal prices in 2008 have increased development risk and squeezed operating margins. Turmoil in the credit and housing markets have reduced access to capital, exacerbating a lengthy decline in both precious and base metals mining equities to the lowest level in several years.
Slower levels of economic growth worldwide have led to higher than anticipated inventories, declining base metal prices, and shelving base metal projects. As we anticipated, this has produced increased availability of labor and equipment leading to moderating operating and development costs. While in many cases, base metal prices have declined to below required levels for production, precious metal prices remain above real long-term price levels.
Investment Thesis Transitioning: Defensive Strategy for Liquidity Trap from Commodity Super Cycle
We suspect that these trends may remain in place until global economic growth resumes. This includes stable or increasing precious metal prices and moderate to declining operating costs. Also, considering the decline in supply of available viable precious metal projects to finance, we anticipate a relative increase in supply of available credit and capital. Despite the aggregate decline in the market capitalization of mining and metal equities, and the reduced supply of bankable projects and available credit, the amount of precious metals in the earth remains constant. While the availability of metal in the ground is an issue, this characteristic increases its scarcity and value which is at odds with the money supply, which is made scarce only by the moral fiber of the government and monetary authorities.
Real Gold Price Chart
Source: Analyst
We base our outlook on Irving Fisher’s Equation of Exchange, or MV=PQ. In general terms, the velocity of the money supply will be reflected in inflation and GDP. The left side has been adequately discussed in the investment and national media. Losses in the financial industry have reduced bank capital and bankers’ ability and willingness to lend, thereby retracting available credit and reducing both the supply and velocity of money. On the right side of the equation we have seen both declining commodity prices (oil, base metals, housing) and slower economic growth (lower sales, bankruptcies, layoffs). This suggests a deflationary environment including a strong dollar and low interest rates, where holding cash starts to look like making an investment.
Expected Inflation Chart
Source: Laffer Associates
The national media has documented the monetary authorities’ response to increase GDP by reducing interest rates. The government has also increased the money supply through the financial and auto industry bail outs. The incoming administration has also pledged to spur the economy through historic investment in infrastructure. The government appears sanguine regarding bankers’ willingness to lend and is making a strong effort to increase the money supply. There is skepticism as to whether these actions will produce the desired result.
Monetary Base Chart
Source: Laffer Associates
It is accepted that the government is increasing the money supply, and should banks begin to lend, the combination based on the Fisher Equation should lead to inflation or an increasing GDP. Optimistically, it may take years for infrastructure projects to commence or for the economy to grow. The only remaining variable to balance the equation is inflation. As monetary policy is more art than science, the ability to manage the money supply is suspect. (In our opinion, the optimal path is to allow the market to manage the economy to equilibrium by reducing taxes and regulation, leading to higher levels of productivity and production, none of which is regarded by the government as a solution). We question the Fed’s ability to smoothly reduce the money supply commensurate with an increase in lending by bankers (increasing velocity) resulting in volatility at best and inflation at the worst.
Precious Metal Production and Development Should Hold Value in 2009
These factors are favorable to junior precious metals equities. Gold and silver prices are correlated to inflation, suggesting stable or higher precious metal prices. Slower economic growth should increase the supply of labor and equipment for moderating operating expenses. The combination of increased prices and lower costs may expand margins, increasing the attraction of precious metal equities by investors. Though investors may recognize the importance of production and cash flow, the most attractive returns may be in development and exploration of precious metal resources. We believe that investors will look for leverage and screen precious metals companies by size (or resource) and probability of development. Our short list for consideration includes the following.
NovaGold Resources Inc. (NG) has nearly 22 million ounces of gold (plus 4.5 billion pounds of copper and 62 million ounces of silver) in the Measured and Indicated classification. Barrick Gold Corporation (ABX) should complete a Feasibility Study on the Donlin Creek project, in a 50-50 joint venture with NovaGold, in early 2009, which should advance much of the 32 million ounces of in-pit Measured and Indicated resource into reserves. Donlin Creek is one of the world’s greatest undeveloped gold deposits. In 2007, drill hole DH-1556 intersected 299 meters grading 5.26 g/t (1,573 gram-meters) and DH-1564 intersected 308 meters grading 4.60 g/t (1,417 gram-meters). NovaGold’s other assets include the world-class Galore Creek polymetalic project and the Rock Creek gold mine. Based on NovaGold’s share of Donlin Creek alone, at $45 per ounce (less than one half previous conservative acquisition levels), NovaGold may be valued at more than $6 per share not including its other assets.
Seabridge Gold Inc. (SA) continues to advance its KSM gold-copper project in British Columbia. KSM is one of the world’s largest undeveloped gold-copper-silver projects with a 19.7 million ounce Indicated gold resource (plus 5.3 billion pounds of copper and 64 million ounces of silver). Seabridge’s total gold resources total about 49 million ounces, or over 1.25 ounces of gold per share. Seabridge reported $11 million in cash on its balance sheet at the end of its third quarter. On December 15, 2009, Seabridge announced the closing of its Noche Buena project in Mexico for $25 million in cash. This should fund additional drilling and study at KSM, which we expect will lead to an increase in the resource and improved economics by converting waste to ore.
Exeter Resource Corporation (XRA) continues to advance its Caspiche gold-copper porphyry project in northern Chile. The project is well situated between Kinross’ Refugio mine with 6.2 million ounces of gold and the Barrick/Kinross Cerro Casale project with 25 million ounces of gold (grading 0.69 g/t gold and 0.26% copper). Exeter recently announced drill hole CSD023 at a depth of 102 meters intersecting 603 meters grading 0.89 g/t gold and 0.32% copper (under an oxidized cap of 0.65 g/t gold). Caspiche is open, and with the current footprint the eventual resource could exceed ten million ounces of gold. (Barrick acquired 51% of Cerro Casale for $775 million in October of 2007, roughly eight times the market capitalization of Exeter). They have three drills on site and are scheduled to produce a resource estimate by April of 2009. Exeter has one of the largest land positions in Argentina and Chile, with about $22 million in cash on its balance sheet as of the end of its third quarter.
South American Silver Corp. (SOHAF.PK) is rapidly advancing one of the largest silver resources in Bolivia. The Malku Khota silver-indium deposit has an Indicated Resource of 144.6 million ounces of silver and 845,000 kg of indium (an important industrial mineral used in flat screen televisions). The deposit has good exploration upside as the resource covers only 3.5 km of the project’s 15 km strike length. Malku Khota could be one of the largest silver discoveries in South America, if not the world. Given the change in administrations in the U.S., and an upcoming election in Bolivia, there are also good prospects for improving international relations which should become clearer in January. Currently, South American is trading at close to cash per share.
Alexco Resource Corporation (AXU) is scheduled to make a construction decision at its high-grade silver and base metal Bellekeno project (inferred resource of 537,000 tonnes containing 1,016 g/t silver, 13.5% lead and 10.7% zinc) in its wholly owned Keno Hill silver district in the Yukon Territory. Construction should be fully funded by the transaction with Silver Wheaton Corp. (SLW). Bellekeno is anticipated to be a modest but high-grade and highly profitable operation fueling development of the district. Keno Hill may be early in its production history, producing over 217 million ounces of silver between 1921 and 1988, and having been explored to depths of only several hundred meters. We believe the district has the potential to rival Idaho’s Silver Valley, which has produced over a billion ounces of silver, and mined to depths of over 5,000 feet.
Etruscan Resources Inc. (ETRUF.PK) has exceeded anticipated gold production levels at its Youga project in Burkina Faso. Youga has good potential for resource expansion at its Ouare´ satellite target, which may lead to reserve expansion with increased capacity or mine life. The current price environment is conducive to funding exploration. As Etruscan focused on West Africa early in the metal cycle, they acquired the largest land position of any mining company in the region, and consequently may be best positioned for exploration. We also believe Etruscan is ahead of the curve on diamonds and rare earth development in southern Africa. Etruscan has a gold resource of over three million ounces and recently produced a Feasibility Study for its Agbaou project in Côte d’Ivoire.
Looking Forward to Increasing Demand for Developers in 2009
We believed that 2008 would favor investment in emerging producers assuming stable metal prices and moderating operating expenses. These companies appeared to have proportionally less risk than metals and mining equities on the exploration end of the spectrum. We see higher metal prices and moderating costs already increasing the attraction of mining and metal equities. As exploration companies have declined more than most, we see these now as potentially having the greatest upside potential. Moving out of a period of tax loss selling, equities in general may see a real bounce. Developers may enjoy the greatest appreciation from stable or increasing precious metal prices, moderating operating or development costs, and increasing availability of credit or profitability of major producers.
Disclosure: The author is long NG, SA, SOHAF.PK, AXU and ETRUF.PK. An affiliate of the author's employer provides corporate advisory services to NG, AXU and ETRUF.PK.
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This article has 17 comments:
The democrats are not going to lower taxes or reduce regulation. The author appears to have forgotten what party will be in office in 3 weeks.
Disclosure: The author is long NG, SA, SOHAF.PK, AXU and ETRUF.PK. An affiliate of the author's employer provides corporate advisory services to NG, AXU and ETRUF.PK.
Check out Mike Niehuser's web site, there's a wealth of information:
www.kogc.com.cn/
Interesting that this web site seem to originate from China. Note the "cn" suffix in the site. By the way, China is the world's largest producer of Gold. It is also a large importer of silver.
"If you believe in a recovery of asset prices as a result of money printing, you should be in hard assets, particularly precious metals."
marcfaberblog.blogspot...
A 100% rise from an ultra-depressed valuation is peanuts. When small to midsized precious metals stocks rise 500-1000% from their lows of late 2008, then one can start talking about them possibly having gotten ahead of themselves.
Secondly, in my view a market commentator has a lot more credibility if they own the stocks they are touting.
Why is it a good thing for a market commentator to not have the courage to invest in what he or she claims they believe are good investments?
I think the price of Gold is going to fall and when it does it will fall very fast and unexpectantly. I own alot of gold and silver and hope I am wrong. But when everybody and their grandmonther is buying gold, thats a good sign to sell.
Obama and the democrat controlled congress are going to raise taxes. Anybody that thinks otherwise is delusional. Dont believe all of the positive talk your hearing on CNBC about a "Bull" market. The stock market is the worst place to have your money long term right now. Trading the market is fine, but long term is very very risky.
The fed does not grow the money supply, banks do. The dollar is the ultimate safe haven.
On Jan 02 12:58 PM Gold Barron wrote:
> The government is not Marxist....it is Fascist. Bailing out corporations
> is not Marxism, it is Fascism. Dont worry about inflation too much
> because there will be much higher taxes and some major wars in the
> next few years. We are in a deflationary period and will be for a
> long while.
>
> The fed does not grow the money supply, banks do. The dollar is the
> ultimate safe haven.
www.beaconrockresearch...
On Jan 02 10:26 AM silver-bullet wrote:
> Folks,
>
> Check out Mike Niehuser's web site, there's a wealth of information:
>
>
> www.kogc.com.cn/
>
> Interesting that this web site seem to originate from China. Note
> the "cn" suffix in the site. By the way, China is the world's largest
> producer of Gold. It is also a large importer of silver.
The Fed is printing money as always. That is nothing new. That printed money is basically an investment not an expenditure. The Fed is going to get most of that money back, possibly more.
Lets put things into perspective. So far the "cost" or "investment" of the bailout is 7.76 Trillion Dollars. About $25,000 dollars for every man, woman, and child in the USA. As a percent of total national net worth (government and non-governmental assets minus liabilities) it’s less than 6 percent. Peanuts.
Did you know that the wealthiest 50,000 Americans net worth combined is nearly 25 trillion dollars?
I think it is fair to say that Obama is going to raise taxes. The states are also going to raise taxes. Corporate taxes will increase. I bet all taxes will go up. As long as everybody pays their taxes, we should be okay.
Gold may get to $1300/oz someday in the future, but all of this talk about the dollar someday being worthless is paranoid and delusional thinking.
Anybody that believes what Ross Perot said is a moron.
Socialism has many faces. Marx was all about centering power in a ruling class (which he pretended would be the working class, but that turns out to be, as in Animal Farm, animals that were once equals to the others, but are now "more equal" than they the rest) and in taking power by destroying the fabric of the society and its economy. All of them work toward the same end: concentration of power in a few...the means to the end may vary a little, but the means used is determined by the easiest path to it.
Obama is flat out Marxist in his background, beliefs, and promises, and our country is in a fascist mode right now...but it's all headed away from what we as a country were set up to be. Our healthcare system will be heading directly for socialist medicine. Our country and govt are run by bankster plutocrats who'd rather deal with a socialist/communist/fa... govt...ie a ruling elite they can deal with...than with a constitutional representative democratic republic...a "messy" system that needed to be brought down. When the main goal is a new world order, a one world govt with the plutocrats as bankers to the world, in control of its money supply and therefore of its policies, the fewer people one has to deal with to get there, the better.
You have made some horrible arguments my friend. You first said that the Federal Reserve does not grow the money supply, banks do. Then you said the Federal Reserve is printing money like always, which is expanding the money supply aka the classic definition of inflation.
Then you go on to say that the $7 trillion bailout is mere peanuts. That's two WWII's buddy! I want to know where you think the United States is going to get this money because I know the country does have the funds in reserves
And how is cash king? The "dollar" has lost 98% of its value in less than a century. I don't know about you, but I would rather put my trust in something that has been valuable for thousands of years than a fiat currency. Hundreds of fiat currencies have failed before.
What you fail to understand is that the USA is the leader and makes the rules in this world. They can change the rules anytime they want and all other countries abide by them.
I did not say "Cash is king" I said that right now the dollar is the best place to have your money right now because we are in a deflationary period. Sure, have some gold in your portfolio (10-20%) but the price of Gold will fall back to the $500 range soon. Buy it then!
On Jan 02 12:58 PM Gold Barron wrote:
> The government is not Marxist....it is Fascist. Bailing out corporations
> is not Marxism, it is Fascism. Dont worry about inflation too much
> because there will be much higher taxes and some major wars in the
> next few years. We are in a deflationary period and will be for a
> long while.
>
> The fed does not grow the money supply, banks do. The dollar is the
> ultimate safe haven.
Nova gold, (down from 12 dollars / share to 1.60) within the last 12 months. driving it down was a multitude of factors, their suspension of operations, their large 20 million dollar bridge loan, environmental conditions that halted production, and ultimately the massive sell-off that resulted.
now that they got a 60 million dollar equity deal with electrum, there are very few reason why this would not jump over the next 3 months.
regardless who wins the epic-battle over what type of government you think we are living in.. i think we can all agree that we like to see our investments double.. triple etc... and so, i intend to invest heavily into nova-gold, and ride it up to 6.50 / share.
the only question yet on my mind, is just what i figure you will do, or want with my 2 cent opinions, but I figured i would say it in plain enough English, NG is a no-brainer, which is why i will double down on it in the short term, and laugh my way to my socialist/marxist/Fasc... bank, to deliver my easily won trophy fat-sacs.
If i am wrong, i assure you I will be more concerned about my net-loss than any gloating i will receive from writing this opinion hahaha.