Gold Market Radar (May 7, 2012)

Gold Market Radar (May 7, 2012)

For the week, spot gold closed at $1,642.30 down $20.45 per ounce, or 1.23 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 5.79 percent. The U.S. Trade-Weighted Dollar Index gained 1.0 percent for the week.

Strengths

• While the industry remains under uncertain long-term pressures, the prior week was a positive light with the takeover of Trelawney Mining by IAMGOLD.  In a matter of days, many of the downtrodden gold equities bounced off their recent lows, as much as 25 percent.
• Rubicon Minerals pulled a deeply experienced mine operator away from Goldcorp’s upper echelons to take its top position and help the company grow from a junior explorer to junior gold miner.  Rubicon said that Goldcorp’s director of underground mining, Michael Lalonde, was coming on board to take over as president and CEO. He replaced David Adamson who has moved Rubicon from discovery through development, most recently raising some C$200 million to build Rubicon’s flagship Phoenix gold project.
• In other stock specific news,  PMI Gold Corp pulled some positive results from the first 13 holes of an initial drill program on the high-priority Fromenda prospect which is located 15 kilometers south of Obotan within the prospective Asankrangwa gold belt.  Clarus Securities believes these results, along with the recent discovery at Kaniago, firms up PMI’s growth thesis as the company advances its global resources towards 10 million ounces over the next 12-18 months.
• There is also a 15 percent depreciation in the value of the rupee against the dollar since September 2011, which has meant that the price of gold in India is back to the level last seen on December 8, 2011. Analysts are of the opinion that gold prices could well rise over 15 percent over the next 12 months given the uncertain economic environment.

Weaknesses

• Goldcorp announced that the Chilean Supreme Court has suspended the approval of the environmental permit for the El Morro project.  The main grounds for the court ruling are that the El Morrow joint venture company has not adequately consulted nor compensated the indigenous people.  El Morrow is a joint venture between Goldcorp and New Gold, whereby New Gold owns 30 percent of the project.
• Dundee Precious Metals Inc. announced that following completion of the Namibian government’s report on the environmental, health and safety audit, the government issued a letter to the company relating to the operation of its Tsumeb smelter and has instructed the company to reduce feed to the smelter by approximately half until the projects designed to capture fugitive emissions have been completed.  These improvements are currently underway, and will be completed in the second half of the year.
• AngloGold Ashanti reported its Mongbwalu gold mine in Democratic Republic of Congo faced the obstacle of tens of thousands of ex-fighters already mining the area who do not want to leave.  AngloGold plans to start output there late next year but as many as 200,000 artisanal miners, mostly ex-combatants from the conflict, have set up operations in the 6,000 square kilometer concession.

Opportunities

• In a research report George Topping at Stifel Nicolaus wrote “Stop ‘Growth At Any Price’ (GAAP) Building”.  Topping notes that rampant mining inflation has benefited those involved in mine building to the detriment of shareholders.  Mines that used to cost $2 billion only a few years ago now cost $5 billion.  Topping pointed out that if mining companies deferred lower internal rate of return (IRR) deposits this would allow management to better focus on cost control, send a message to consultants/contractors that fees have gone too far, and free up labor for the remaining projects. Projects should pass stress test levels of using a $1,200 per ounce long-term gold price and deliver a minimum 10 percent IRR. Shareholders are likely to be supportive if the capex savings are paid out as dividends which could be raised to levels that approach 5 percent. Topping points out that a change of strategy by the gold mining companies is required to reverse the flow of funds out of the gold sector.
• Relatively low capex, below $2 billion, deposits with competitive lower third quartile cash costs should be favored as being lower risk investments.  Additionally, building a new mine is fraught with difficult and typically a source of seemingly endless bad news flow during construction and build up. At current gold prices, Hammond Reef does not appear to be worth the risk. The current dynamic in the sector of escalating cash costs and capex creep have made the high grade/high margin deposits more accretive and with less downside exposure on the gold price, and these are the types of companies our gold funds focus on for delivering the best value creation over time.
• Marc Faber recently noted in an interview that people say the price of gold is in a bubble stage, and is up substantially from the lows in 1999. However, as he remarks about conferences and speaking engagements, “I usually ask the audience, ‘How many of you own gold?’  Normally, hardly anyone owns it.  I’ve been to conferences with thousands of people attending, and nobody owned any physical gold.”  A recent headline earlier in the week noted that more people own Apple stock than own physical gold.

Threats

• Gold Resource recently obtained an independent 43-101 report and reported 1.5 million ounces in 4.5 million tons, versus the company’s prior internal estimate of 1.7 million ounces in 3 million tons.  However the new study reports that the company holds 300,000 ounces in actual gold, while the other 79 percent is gold equivalent.
• It is disturbing that all the co-products the company expects to mine are swapped into gold at $1,000 per ounce, which may appear conservative at first glance but is actually very misleading.  Swapping gold at $1,000 per ounce creates the other 1,200,000 of gold equivalent ounces they say they have.
• However if you use spot gold prices that gold equivalent number drops to just 700,000 ounces of gold equivalent and you really only have about 1 million gold plus gold equivalent ounces; considerably less that the 1.5 million cited.  The half million ounces that disappear are more properly characterized at “paper ounces” because they are only exist in paper form versus physical gold.