Thomas Kelly

Thomas Kelly
Contributor since: 2006
we ought to also talk about production costs which provide a natural economic floor. we are talking about $1000 avg cost per oz, probably more like $1200 to bring new projects online. that is sort of a hard stop for gold. so anything within about 15% of there is probably going to look good long term. was a fair bit of research to compile.
$1600/oz vs. $300 cash costs on 250koz per year. Granted they won't get to 250koz until sometime in 2015 at the earliest.
Of course there is fear of seizure...hence the low valuation. But Yamana operates in Argentina already and felt comfortable with the purchase. Perhaps they feel they have more leverage as they are larger and their investment dollars more important. Argentina's not my cup of tea either but at the right price the political risk is worth taking.
Interesting read although I don't entirely agree with the idea that you should avoid the sector entirely. There are a number of miners that are already producing, that are not significantly exposed to rising labor costs or resource nationalism, and that are trading at historically low levels. The key is to pick the right stock. The sector as a whole might have been thrown out, but the ones who bounce back will be in stronger position than ever as mine supply is sure to grow slowly with capex costs surging and financing hard to come by.
The notion that Keynes espoused the idea that debt does matter is utterly false. In fact Keynes was well aware that debt does matter and he advocated running a surplus during a time of economic growth for this reason. The idea that our policies right now are following the Keynesian model is intellectual dishonesty.
I can see a Joe Camel lawsuit coming soon...
Pointless article.
Its not really enough to say M2 has not decreased. It has trended up over time for 20 years. What is much more important is that in the last 3 months the rate of increase in M2 has slowed dramatically. Second derivative is what really matters.
Indeed it is. That was a mistake.
Yes, the ANV mkt cap is supposed to be a billion. Typo. Still researching all of these but reader comments are correct that NAK, NG, and EGI also have huge copper reserves that make them much cheaper than this chart makes them seem. I'm still looking to see which others are in that situation. Haven't done one for the silver miners yet but I could try to put that out next week probably.
Whether or not the money goes back into the banking system depends on who the ECB buys the bonds from. When they buy directly at auction, the money goes directly to the governments in question. These governments don't loan the money back out...they use it to pay for obligations. This money is never loaned out and therefore not subject to the money multiplier (if you don't know what that is, you need to read a primer on how fractional banking works). But even more important is the act of sterilizing the bond purchase by sucking up bank reserves. This action is affected by the multiplier (so if you take away a dollar of reserves that is 10 less dollars the bank can loan out). Thats where the asymmetry comes in. A dollar goes out but M3 will contract as the overall amount of available credit shrinks by 9 dollars (the 1 dollar that comes out, multiplied by 10, minus the dollar that originally went out to buy the bond). If you still don't understand, just go to wikipedia and fractional reserve banking or pick up a macro 101 book.
Italy's gold holdings of 2450 tons are worth about $112 billion using $1400/oz. Italian debt outstanding at 125% of GDP is about 2.5 trillion. Frankly, I find the argument that Italy is safe because it has 5% of its debt in gold a bit like the argument of a banker who, in the middle of a bank run, tries to proclaim the soundness of his bank by saying, don't worry, we are 'adequately capitalized,' because we are holding 10% of everyone's deposits at the bank. If capital starts to flee and the central bank tries to put up a fight by deploying its gold, that gold will be gone in an instant. It's just not a large enough position to stem the tide. For examples of just how fast one can lose their gold in a crisis, pick up "Golden Fetters" by Barry Eichengreen (one of my favorite economic historians).
And on a separate note, Italian debt has really traded badly the last few days. We are very close to yields breaking out to levels that haven't been seen since 2002. I think I'm going to start monitoring the Spain/Italy credit spread since we know the ECB is supporting Spain, and looks less proactive on Italy. My guess is that the market will plug away at that spread until Italy gets put on the dole as well.
It sometimes find it ironic that Germany is so against the printing press even though the German export machine has been the primary beneficiary of weakness elsewhere in the eurozone that has driven the Euro lower. The Germans have a privileged status within the EMU because when a crisis hits, the euro goes lower and kicks the German export machine into high gear. Not unlike the US's privileged position in having the world's reserve currency...during a crisis, money floods back into dollars and that causes Treasuries to head lower across the yield curve. Germany and the US have built in stabilization mechanisms for their economies. In contrast, peripheral Europe, as well as Asia in '97 and Latin America before that, suffers from the opposite phenomenon--capital flight at the appearance of a crisis. This is unfortunately a distinction most Keynesian economists overlook. It's impossible to run countercyclical monetary or fiscal policy if capital is fleeing. To be fair, Keynes himself didn't make this error which is why he argued for governments to run a surplus in good times. But that ship has already sailed...
Yes, depending on how much the silver and Ambler manage to raise, any additional financing required would reduce the value of the buyout. It's tough to assign to how much lower because we don't yet know how they will finance it. Obviously an equity offering would be most dilutive for shareholders. But for an acquiring company with access to the capital markets, raising debt to cover development costs shouldn't be a significant problem and therefore the value of NG's assets would fetch a price consistent with debt financing in a takeover.
As for splitting up the assets, I don't think it makes sense unless absolutely needed to raise capital for development costs. You would lose the diversification from a 60/40 gold/copper split and you also give away a significant established reserve in return for a lot of excess capital that must then be invested in identifying new projects with much longer times to production. To me there seems to be a lot more upside in keeping them together and selling in pieces.
As for the acquiring company, thats tough to speculate on. Barrick could still do it but given the history it would not launch a hostile bid again. I don't think Teck has any interest. I think some of the big copper miners would have an interest. Someone like FCX as it would virtually double the size of their gold reserves, diversify the business better, and still add a big reserve to their core copper business. And the diversified miners have been showing increased interest in stepping outside their traditional products of iron and copper toward more esoteric things like potash, etc. They would certainly have the lowest cost of capital in acquiring so if they want to diversify the business and add precious metals exposure, they could. There aren't many projects the size of Donlin out there that would be meaningful for a big miner so it remains a possibility.
Having looked costs further, the $4.5 billion does appear to be NG's share give or take half a billion. With regard to financing it, selling forward the silver and selling Ambler should get you around halfway there, maybe a bit more depending on the price of silver going forward. Whether the rest is paid by a debt offering (NG CEO's stated intention), by selling forward copper or gold, or by an equity offering is a question mark.
Didn't take into account the silver because a good amount of it will probably be sold forward to cover development costs. That, along with Ambler, should cover the costs and perhaps cover costs and then some. And I think the $4.5 billion cost you speak of is overall costs not NG's share. Since Teck and Barrick are 50/50 they'll be half that.
As for the 27 vs 33 mill ozs, 27 is proven and probable, 33 is measured and indicated. I think the M&I will ultimately be a more accurate number since the proven reserves were proven at $900/oz and with gold where it is now, a lot more will be economically recoverable.
Yes we can both agree it is speculative. And I use the term speculative in a volatility sense and in a Hyman Minsky earnings are not covering the cost of doing business sense. And to be perfectly honest, I think we would all agree that the key variable for NG is going to be where the gold price is trading in a year. That's the real speculation because at $1000 gold, NG is probably priced right and at the very least wouldn't have much in the way of upside. At $2000 gold, obviously it is hugely undervalued. But my opinion on gold is constantly evolving and I think it is an instructive thought exercise to give a valuation to anchor NG relative to the gold price. Would like to put pen to paper on the bull and bear case for gold soon if I can find the time.
As far as the timing goes, I took my source from an interview with Novagold's CEO where he said production could be as early as 2015. You can quibble with that aspect of the argument but I don't see it changing the premise of the article that NG is substantially undervalued. Even making the assumption that neither mine starts production until 2018 and adding in 3 years and discounting out to 32 years, you still get a valuation around $19/share. And given that I haven't accounted for the additional boost in reserves that is very likely with the next feasibility, the question of whether production starts in 2015 or 2018 is sort of minor.
Cash flow is not simply not a useful way of measuring development stage resource companies in their early stages as it is plain to see with all mining, oil and gas, etc that the bulk of the capex costs are front-loaded and then they start to print money like crazy on the back end.
And NG's checkered past, funding issues, share dilution are all out there and plain to see for anyone doing the research. With regard to Barrick's previous bid, I intentionally used the figure of $1.6 billion as the takeover price rather than the $16/share that most people throw around in order to provide an honest look at Barrick's offer and not make it seem bigger than it was. Companies change with time. My goal isn't to evaluate NG in 2006, but rather, in 2011. And on the whole, I think, the analysis is pretty credible.