Gold Market Cheat Sheet (November 14, 2011)
For the week, spot gold closed at $1,788.68, up $34.03 per ounce, or 1.94 percent. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, rose 1.57 percent. The U.S. Trade-Weighted Dollar Index was essentially flat, with a slide of just 0.02 percent for the week.
Strengths
- The strength in both gold and the gold stocks continued again this week, although all the gains came on Monday and were followed by a strong rebound on Friday. Strength among the senior gold companies dominated this trading pattern with investors holding off on putting a lot of money into the junior miners.
- We believe the volatility was one significant factor that caused the large capitalization companies to lead. Both Goldcorp and Newcrest Mining gained 4 percent.
- In the junior space there still were some winners with Continental Gold Ltd. and Kirkland Lake Gold Inc. climbing 6 and 8 percent, respectively, for the week. Kirkland Lake made the final payment on its smelter royalty and this will improve the company’s margins. Continental Gold announced it achieved 97 and 96 percent recoveries on gold and silver, respectively, in its metallurgical test work for the Buritica Project.
Weaknesses
- It was a tough week for a number of companies with regard to reporting quarterly results. Silver Standard Resources cut reserves after it missed guidance and consequently the stock was down 17 percent. Pan American Silver Corp. disappointed investors with a miss on earnings due to operational issues.
- Ivanhoe Mines fell 8 percent, likely on copper prices falling 2.8 percent this week.
- Osisko Mining reported ore grades for its Hammond Reef have declined by an average of 23 percent, limiting the miner’s production levels despite moving twice the tonnage of rock. Investors didn’t see the news positively and the stock was down 6 percent for the week.
Opportunities
- Aaron Regent of Barrick Gold was interviewed by Bloomberg and noted Barrick may consider buying smaller assets near existing mines as part of its strategy to boost output. Regent noted that lower-grade gold deposits are only economic at higher gold prices. These deposits require multi-billion dollar investments in processing facilities that need to be sized up enough to get the economies of scale to be meaningfully profitable. The key risk is that these lower grade deposits have a lower probability of delivering a dollar of net income to the bottom line than a high grade ore body. Our focus at U.S. Global has been to structure our gold investments in those companies that own mineral deposits that are higher grade and more robust in the long term.
- Recent quarterly results illustrate how significant the grade of the ore is to the profitability of the company. Osisko Mining is processing gold ore at 0.85 grams per ton and just reported a $9.3 million in profit, delivering a net margin of just 8 percent, on a total earth moving operation of 11.8 million tons. In other words, Osisko made $0.79 for each ton moved. In contrast, SEMAFO’s recent quarterly results show they processed ore at an average gold grade of 2.15 grams per ton, delivered a $31.2 million profit and net margins of 31 percent on 4.9 million tons moved. SEMAFO delivered $6.55 of income for every ton moved in the most recent quarter. Just as investors are beginning to take a more value based approach, what Barrick and others recognize is the old adage “grade is king” in the mining industry and not tonnage.
- While the S&P 500 Index was up nearly 11 percent in the past month, let’s not forget that Chinese gold purchases have not slowed a bit. For just the quarter ending September, China imported more gold than the total amount imported for 2010. A recent CLSA presentation outlined that China’s intention is to transform the renminbi into a dominant currency within Asia and likely aspires world reserve currency status. James Steele of HSBC expects gold to average $2,025 per ounce in 2012 with a trading range of $1,700 to $2,300. Mr. Steele notes that gold is a tried and true protector of wealth over many decades.
Threats
- Although gold finished the week up, there was speculation more than once that the Chicago Mercantile Exchange (CME) would again target the gold futures markets by hiking customer margin requirements. In recent months, the CME did just such when investors were flocking to gold as a means of safety. Should gold prices accelerate back towards $1,900, as they did in August, investors should be cognizant of this risk.
- Australia’s parliament passed laws this week that impose a tax on carbon emissions. This will force the top 500 polluting companies, many of which are in the mining industry, to pay a price for carbon emissions. Some of the proceeds will be used to compensate households for the higher costs this will impose.
- The next climate change debate is set to take place in South Africa at the end of the year as the country publishes revised proposals on its carbon tax scheme. South Africa gets 94 percent of its electricity from coal and the government owned power utility, Eskom, is the largest polluter.
