Gold Market Cheat Sheet (May 16, 2011)
On Friday, spot gold closed at $1,493.22, up $2.38 per ounce, or 0.16 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 3.43 percent. The U.S. Trade-Weighted Dollar Index strengthened 1.27 percent for the week.
Strengths
- CPM Group noted China’s importance not only as the world’s third largest silver miner but also as a major global silver consumer. While Chinese silver mine supply accounted for roughly 16 percent of global silver mine production last year, CPM Group indicated the country was also a major manufacturer of many silver containing products. And CPM found domestic demand for silver has outpaced supply growth. “China was a net exporter of silver until 2006, but became a net importer since 2007.”
- A new PricewaterhouseCoopers (PwC) report, “Seize the Day-The Mining Industry in British Columbia (BC) 2010”, found BC mining companies turned in near-record results for revenues, net income and cash flows last year. “The 2010 financial performance of the BC mining sector was outstanding, driven by strong coal and metals prices and a lot of hard-working people in the industry,” said Michael Cinnamond, leader of PwC's BC mining practice. The PwC report shows that just about every aspect of the BC mining sector has done better than expected and many of the positive trends we saw last year have continued into the first quarter of 2011.
- The slump in silver prices has raised demand for silver in India, where companies are handing out silver coins as part of employee bonus packages and jewelry stores promote silver as an affordable alternative to gold.
Weaknesses
- With gold prices up significantly, gold majors are looking for acquisitions to significantly boost their ounces of reserves but are finding the affordable pickings slim and competition fierce. Soaring gold prices have put company valuations at record levels, making deals, especially those in the multimillion-ounce club, very costly endeavors.
- Dundee Securities mining analyst Paul Burchell said: “It’s getting more and more difficult for these larger companies to add new projects that are significant. It doesn't mean that there aren’t valid projects out there. It’s just that there’s a lot of competition for the few of them that are there.” Also Morningstar analyst Ming Tang Varner noted “I think companies are very cautious when they are looking at properties because it’s a very delicate dance that these gold companies are doing.”
- In hindsight, overzealous acquisitions have been a tremendous challenge for management to retain a high level of credibility with investors.
Opportunities
- The Canadian province of Quebec plans to develop its huge frozen northern reaches into a powerhouse of mining and renewable energy, targeting $83 billion of private and public investment. Quebec's 25-year “Plan Nord,” launched on Monday, envisages funding for infrastructure, mines and the development of renewable energy, taking advantage of an improving investment climate as the Earth warms and polar ice melts. Plan Nord covers an area roughly the size of South Africa.
- The sparsely populated region of Quebec has 11 mining projects in development now and over $8 billion (in Canadian dollars) in mining investment. The province, which topped a Fraser Institute survey of best mining districts from 2007 to 2009, slipped to third after it raised mining taxes unexpectedly last spring. It is now in fourth place on uncertainty over mining legislation.
- UBS restated their outlook on gold by saying, “Our average gold price for the course of this year is $1,500, so it is just a tiny bit below where gold is trading right now, so I think a gold price above $1,600 this year is very, very possible.” Edel Tully, UBS precious metals analyst, said one of the main reasons for this is the slate of continued macroeconomic concerns facing countries around the globe. Inflation concerns in China, which Tully acknowledges is a very important market for gold, have further boosted demand for the metal. “Whenever I go to China, the actual view on inflation appears to be much higher on the ground than what the official statistics would reveal. So, I think the Chinese population will remain friendly toward gold so long, really, as inflation is a problem.”
Threats
- The South African mining industry is facing “a very serious” threat from silicosis claims that could result in implied damages of $100 billion, says RBC Capital Markets equity research unit. The potential silicosis claim is 100 times larger than the claims in an asbestos-related case in 2003 which saw British company Cape paying $5 million to 7,500 workers. Former South African mining company Gencor is establishing a $37.5 million trust fund for its former workers. “The risk of this becoming something very serious should not be ignored,” the analysts said. They added that the risk applies mainly to South Africa’s hard-rock gold and platinum mines.
- China, the world’s largest user of natural resources, is pulling back from commodities and energy acquisitions as the rest of the world pursues deals at the fastest pace since the start of the financial crisis. China’s companies have spent $14.2 billion on acquisitions this year, down 30 percent from the same period last year, according to data compiled by Bloomberg. Globally, the value of takeovers in the industry is $176 billion, the fastest pace since 2007.
- “Indonesia’s mining industry is undergoing a regulatory overhaul that is likely to weaken the operating and financial performance of domestic mining companies,” Standard & Poor's warned this week. “For example, the provision on domestic market obligations for coal could increase the price of coal and pressure the financial performance of coal-based electricity generators across Asia,” the analysts suggested. “Likewise a ban of metal and mineral ore exports could also affect the operations of foreign smelters that rely on ores from Indonesia.”
