Gold Market Radar (December 17, 2012)
For the week, spot gold closed at $1,696.10, down $7.95 per ounce, or 0.47 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.12 percent. The U.S. Trade-Weighted Dollar Index fell 1.06 percent for the week.
Strengths
- There were two mining deals this week which we benefited from. Primero Mining announced that it has entered into a definitive agreement with Cerro Resources whereby Primero will acquire all of the issued and outstanding common shares of Cerro. The offer represented an implied 62 percent premium to Cerro’s 20-day volume weighted average price and a 77 percent premium to the spot closing price the prior day. Mirasol Resources monetized its 49 percent stake in the Joaquin silver-gold project for consideration of $60 million ($30 million cash and $30 million of the acquirer stock). The transaction leaves Mirasol a portfolio of exploration properties in Argentina and Chile with enough cash to fund exploration activities for the next five years.
- We also saw very positive drill results come through from Atna Resources. The company announced additional results of underground development drilling at its Pinson Mine showing intercepts and gold grades of 13.7 meters at 31.2 grams per ton, 9.1 meters at 27.5 grams per ton, and 6.1 meters at 44.8 grams per ton. In addition, Torex Gold reported some exceptional drilling results on the company’s Morelos Gold Project. Its highest-grade intercepts yet were 21 meters carrying 30.3 grams per ton of gold, 44.2 grams per ton silver and 1.1 percent copper. At spot prices, a ton of this ore is worth $1,780, well more than the typical 1 gram per ton ore ($55 value) deposits that the majority of the gold industry is mining.
- Sales of American Eagle one-ounce gold bullion coins more than tripled in November of this year, from 41,000 ounces sold in November 2011 to 131,000 ounces. The U.S. Mint also reported that total gold sales increased 132 percent from 59,000 ounces in October 2012 to 136,500 gold ounces in November 2012.
Weaknesses
- We fortunately did not have any exposure to Centamin’s shares, which fell 50 percent midweek as the Egyptian government cut off fuel supplies to the company’s Sukari mine and customs officials halted the export of its gold for sale. An analyst at Canaccord’s London office wrote that the shares may fall 80 percent.
- Kirkland Lake Gold reported essentially a production miss of 50 percent below guidance this week and the stock dropped intraday its most in 13 years. Our funds did not have any exposure.
- According to Statistics South Africa, the country’s gold output fell by 45.7 percent in volume in October, largely due to the labor unrest, while total overall mineral production was down 7.7 percent compared with the same month in 2012.
Opportunities
- Dalman Rose’s gold team noted it believes that rising costs have been the major hindrance in performance for gold equities versus gold over the last two years. However, due to the global slowdown in the overall mining business witnessed so far in 2012, we see some evidence that capital costs may have peaked and labor inflation may be moderating on a global basis. Should this indeed be an inflection point in costs for the gold miners, we would expect gold equities to outperform gold going forward.
- Francisco Blanch, head of commodities research for Bank of America Merrill Lynch, forecasts that the gold price will rise to $2,000 an ounce by the end of 2013.
- David Rosenberg of Gluskin Sheff noted that investors have $7 trillion of cash currently sitting in retail money market funds and banking sector saving deposits. Rosenberg suggests exposure to precious metals and well-valued mining stocks for investors with long time horizons in this highly-charged reflationary global policy backdrop.
Threats
- Rosenberg further suggests that what the Fed really did this week was move from a mid-2015 time stamp to an end-of-2018 time stamp. “Six more years of financial repression. Get used to it.” Rosenberg went on to say, “If our assumptions are anywhere in the ballpark, the Fed’s balance sheet expands … to nearly $9 trillion or practically 50 percent of GDP by the time the unemployment rate gets to the 6.5 percent Holy Grail. At that point, Holy Grail is likely to turn into ‘Holy Cow’ as the Fed embarks on the inevitable process of unwinding all of this monetary largesse.”
- In Ghana, the incumbent president was reelected to office this week. In 2011, the incumbent Government of Ghana proposed increasing its corporate tax rate on miners to 35 percent from 25 percent, a uniform regime for capital allowance of 20 percent for five years of mining, and applying a separate 10 percent tax on windfall profits. The corporate tax increase and capital allowance came to pass, but the proposed windfall tax was deferred. A reintroduction of this bill in parliament could negatively impact the outlook on gold miners and developers with exposure to the country.
- Ivory Coast lawmakers voted unanimously to put a windfall profits tax on gold miners. Tax rates of 9 percent to 19 percent will be applied on profits above a benchmark cash cost set at $615 per ounce. Actual production costs to produce an ounce of gold are closer to $1,300 per ounce.
