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"GETTING READY FOR GOLD'S
IMMINENT COMEBACK"
FOCUSING ON THE GOLD
PRODUCERS
By
Nigel Maund
MSc, DIC, MBA, F.Aus.IMM,
F.AIG, F.SEG, FGS, MGSA
Economic Geologist
"Gold,
unlike all other commodities, is a currency...and the major thrust in the
demand for gold is not for jewellery. It's not for anything other than an
escape from what is perceived to be a fiat money system, paper money, that
seems to be deteriorating."
Alan Greenspan, ex-US Federal Reserve Chairman, August 23, 2011
"Gold
still represents the ultimate form of payment in the world. Fiat money in
extremis is accepted by nobody. Gold is always accepted."
Alan Greenspan, May 20,
1999
Introduction
The
astonishing strength behind the most recent rally in gold is known to all
readers. Also, the reasons behind gold's change in fortune have been well
documented by such writers as Michael Pento, Egon Von Greyerz, Peter Schiff,
Marc Faber, James Turk, Rick Rule and on this site by Clive. Hence, there is
no need to discuss this here. Suffice it to say that the scale of the
developing global financial and economic crisis has no historic precedent.
Furthermore, such is the parlous state of the Central Bank based global
banking system that interest rates can no longer be used to stimulate or
correct the excesses of a world drowning in an ocean of debt where the
lifeblood of the economy is being absorbed by unproductive banks and
financial institutions and enormously bureaucratic, inefficient and vastly
oversized governments hooked on a battery of taxes ranging from graduated
personal income tax, corporate tax, value added tax, capital gains tax, death
duties, habitation tax, stamp duties and so on and on. Indeed, so complicated
have tax systems become that the 2016 tax guides for the UK, US, Canada,
Australia and Europe virtually rival major encyclopaedia in size. The
misallocation of capital and resources has reached epic heights with
taxation, debt, corporate and unprecedented personal regulation and loss of
liberty closely akin to Communist Russia and other dictatorial regimes. To
say the world has never been in such an appalling mess would be putting
matters mildly. The reader is highly recommended to read www.zerohedge.com which daily documents how things
really are, rather than the totally misleading Orwellian "Disney
World" like fantasy presented by the mainstream media.
The
latest proposals of the Central Bankers, led by the very desperate Bank of
Japan and the increasingly desperate ECB moving ever deeper into Negative
Interest Rate Policy (NIRP) country, after years with Zero Interest Rate
Policy (ZIRP) and QE1, 2 and 3 from the US Fed, testifies to the absolute lack
of options left on the table and maniacal nature of the elite in their
pursuit of Global Government and control of the planet and the sustaining of
the surreal "all will be well" and "strong economy"
nonsense purveyed on all controlled media outlets to the Joe Public.
To
add to the systematically unravelling economic and financial shambles, the
world is now faced with not one imminent "black swan" event but an
entire flock of them hitting almost simultaneously, as follows:
1.
The
collapse of the BALTIC DRY GOODS INDEX (BDI) to its lowest level in history –
down from over 11,500 to 290 last week – a staggering fall of 97.50%, thus
recording a virtual collapse of trade in major commodities lead by oil, gas,
coal and iron ore as most notably the Chinese economy as well as the world
economy generally implodes, coincident with the extreme loss of money
velocity. Put simply the world economy is seizing up, as shown on Figure 1
below;
 
Figure
1: The
greatest collapse in the bulk tonnage freight index in global history. The
Baltic Dry Goods Index falls from its zenith of nearly 11,000 to todays 290.
This is the clear harbinger of economic collapse and the effective seizing up
of the global economy.
2.
All
major global equity markets are in a bear market and moreover it's only just
begun. Falls so far are off their peaks at between -12% and -20%. On this
site, we are expecting at least a further 30% - 50% fall in these markets
during 2016. The fall on the S&P will be the most spectacular with a 60%
decline probable from its 2015 peak, as shown on Figure 1 below;
Figure
2: "STARING INTO THE MARKET ABYSS IN 2016". A graphical history of
20 years of crass monetary policy by the Central Banks and the enormity of
market bubbles created (equities, T Bonds, Derivatives and Real Estate).
3.
Commodity
markets (the CRB Index) are down some 85% to 90% and many major mining stocks
are down between 65% (RTZ) to 90% (VALE and Freeport MacMoran FCX).
4.
The war
in Syria and Iraq which has gotten steadily worse with the stakes getting
ever higher threatens to turn into an all-out proxy war between Saudi Arabia,
Turkey and Russia and Syria, with the US and UK waiting for the go signal to
come in behind its Muslim allies. The US, Israel, Saudi Arabia, the UK,
France and Turkey have been planning this one for years. Russia entering on
the side of Syria (the elected Government, despite how President Assad is
presented in the syndicated and biased Western media) against ISIS and Al
Nusra, plus a host of other "legitimate" (US and "Allies"
supported) opposition groups all funded and militarily supplied by the West
and Saudi Arabia has been a game changer for the US, UK, EU, Turkish and
Saudi Arabian planners. However, the US led coalition, Turkey and Saudi
Arabia always knew that there was a chance that Russia could militarily
support Syria.
Currently,
a very dangerous escalation has been precipitated by the imminent fall of
Aleppo to the Syrian forces. Saudi Arabia and Turkey could send in ground
troops and aircraft based in Turkey to "attack ISIS" a Saudi and
CIA backed creation, but everyone knows their prime targets are to: 1) depose
President Assad and replace him with a puppet Government; 2) neutralize
Russia's influence in the region; 3) meet Israel's regional strategic agenda
to neuter and control the Arab States in the region; 4) take control of the
important Kurdish controlled Iraqi oil fields of Mosul and Kirkuk and those
of Southern Syria, currently being pumped out and sold by ISIS and the Turks.
5.
Finally,
as if all this were not enough, China has been militarizing its newly built
"islands" in the Spratly Island Chain in the South China Sea,
jointly claimed by the Philippines, Malaysia and Vietnam. The Spratlys,
besides being the potential site of major oil and gas fields containing
billions of barrels of oil and trillions of cubic feet of natural gas, sit
astride the world's greatest trade route between Japan, China and the Indian,
African, European and North American markets where some US$ 5 trillion in
goods passes every year. This has all the makings of a major conflict
flashpoint between China, the US, Australia, the Philippines, Malaysia,
Taiwan and Vietnam.
Simply
put, the situation for gold has never looked better in history, and this site
believes that the next few years in the gold market may be the greatest the
yellow metal will ever experience. Given the scale of the: 1) financial
imbalances especially within the equity, bond and derivatives markets where
risk levels are rising at an exponential rate; 2) colossal misallocation of
resources and dislocation of society; 3) massive wealth imbalances due to monstrous
redistribution of wealth into the hands of the few at the expense of the
majority with all the inherent socio – political risks this implies; 4) most
companies and individual people are submerged under unprecedented colossal
debts from students to real estate mortgage holders; 5) growing and very
serious geo-political risks from Estonia, Ukraine, Syria, Turkey, Iran,
Afghanistan, Pakistan to the South China Sea and Korea, the stage is set for
enormous upheaval not seen since 1914 and 1939. Against this unique and
horrifying global canvas, gold is set to experience a resumption of its bull
market and reach unprecedented valuations as the global markets face a brutal
rebalancing in a world that is now a "tinder box" set to explode
into war and conflict.
GOLD
– GETTING SET FOR THE GREATEST BULL MARKET OF ALL TIME
Prior
to the New Year, the US$ had been experiencing a bull market rally for some
15 months whilst almost all other currencies had been in decline, especially
those whose economies were seriously exposed to the fortunes of commodity
prices like, Brazil, Russia, Kazakhstan, Venezuela, Nigeria, Saudi Arabia,
Canada and Australia. Effective currency devaluations of the order of 30 to
40% have been the norm. For Australia the A$ has fallen from US$1.10 to
today's US$0.70 a loss in value of some 35%. The Canadian $ (the Looney) has
experienced a similar devaluation. Hence, for those gold producing companies
whose mining operations are located in Canada and Australia in TSX or ASX
listed companies, the gold price in their local currencies has actually
appreciated and with it their profit margins. As discussed in my earlier
article on The
Best of the Australian Mid-Cap Gold Producers, these companies have been
in a bull market since November 2014, and their stocks have seen rises of
between 75% and 110%, whilst the general markets have now entered clear bear
market territory.
Figure
3: A 15
year chart of the XAU index with key historic events annotated. The current
gold "break out" is indicated at the juncture of selling exhaustion
in the XAU and the imminent weakness and collapse of the US$ and the major
equity markets.
In
the early phase of the return to the gold bull market, whilst the gold price
breaks above the falling 200 and 300 day moving averages (MA's) and overcomes
various inherited resistance levels around US$ 1,250 and 1,350 / ounce gold
prices, it is wise to build portfolios in companies that have the following
main characteristics:
·
Low debt
exposure especially substantial longer term liabilities;
·
Carry a
good cash balance of greater than C$ or A$ 20 million;
·
Have
operating cash costs of between US$ 450 – 650 / ounce;
·
All in
Sustaining Costs (AISC) per ounce of gold produced of between US$ 800 – 950 /
ounce;
·
Gold
reserves of > 8 years of current production;
·
Are
valued at little more than the companies "Enterprise Value" and
sometimes less than this. This is a clear buy signal in the emergent gold
bull market;
·
Are
leveraged to the US$ gold price and may have been seriously undervalued like
RSG in Australia which operates its largest producing assets in West Africa;
·
Do not
invest in gold producers operating in counties offering increasing Sovereign
and business risks such as Turkey, Greece and China for example; and,
·
Have
strong Board of Management with track records of success in the gold mining
industry.
Other
issues to watch out for are any precipitate falls in a company's stock price
due to mistakes with ore resources such as Regis Resources Limited (ASX: RRL)
or companies that operate mines in areas where weather events may cause
flooding of open pit mining operations and temporary mine closure impacting
on production. RRL has addressed its issues and is now back on track, but
nonetheless it was punished in the markets for ore resource problems and
flooding of its operations.
Amongst
the mid-cap gold producers, the Australians comprise the overall best
investment right now and are actually better than comparable Canadian
companies of similar overall specifications in terms of reserves, ounces of
gold produced and cash on hand. The differences lie in the geology of the
Australian gold deposits in terms of their overall recovered gold grades and
their impact on Cash Operating and AISC costs and the typically better profit
margins of the Australian producers. Of the major Mid Cap Canadians, Agnico
Eagle Mines Limited (AEM, TSX: AEM) is the biggest company in terms of its
market capitalization and its enterprise value, overall resources and in
terms of the size and grade of its world class core mines at La Ronde –
Penna, Bousquet and Canadian Malartic (which it shares 50%:50% with Yamana
Gold Inc). AEM is arguably the King of the Canadian gold mining mid – cap
producers and demonstrates great strength in depth in all aspects of the
business. AEM has the scope to grow into another Barrick Gold Inc. only it is
stronger at the level of its Management and has vast operating experience in
this difficult industry. AEM also carries significant leverage, although the
debt is readily serviceable given AEM's cash flow from 1.6 Moz annual gold
production at an AISC of US$ 880 / ounce and stands at 20% of its market
capitalization.
Yamana
Gold Inc (AUY, TSX: YRI) carries a large debt burden amounting to 100% of its
market capitalization and 55% of its Enterprise Value. This serves as a major
drag on the stock price and its overall profit margins generated due to debt
servicing costs. Also, the quality of its gold deposits, excluding Canadian
Malartic, are best described as technically marginal and all require a
significantly higher gold price before AUY can breathe more easily.
Detour
Gold Corporation (TSX: DGC) is totally focussed on its large, low grade, open
pit mine at Detour Lake, Ontario, where it produces some 500,000 ounces per
annum at relatively high cash costs of US$810 / ounce and AISC costs of US$
1,130 / ounce. DGC is highly leveraged to the gold price and hence it will
advance strongly with the gold price. It benefits from the weak C$. DGC also
has the advantage that it carries no debt and has not hedged its gold
production.
Of
the Australian mid cap producers, there are two plays which are quite
different. The 1stTier Mid – Caps which includes Northern Star
Resources Ltd (ASX: NST), Evolution Mining Limited (ASX: EVN) and Oceana Gold
Corporation Limited (ASX and TSX: OGC), have all recently advanced strongly
and now represent safe investments to trade on the "dips" and sell
on the "highs" or merely hold longer term. However, their upside
profit potential as they are now already at an elevated level is in the order
of 150 – 300% depending on how high gold goes in the coming resumption of its
bull market. However, amongst this group, OGC could really appreciate given its
low cost production profile and the eventual bringing on stream of the large,
low cost, open pit Haile gold project in South Carolina, USA, which will
bring OGC's annual production up to > 500,000 ounces per annum and make it
one of the lowest cost mid – cap gold producers in the world.
The
real upside in the Australian mid-cap gold producers will come in those
companies that have been largely ignored by the market for several reasons as
follows:
1.
Their
gold producing mines are located outside Australia in a US$ dominated regime
such as West Africa (Resolute Mining Limited ASX: RSG) and, therefore, they
could not benefit from the onshore Australian $ gold price;
2.
Their
cash operating and AISC costs of gold production are at the higher end for
the industry, such as Silver Lake Resources Ltd (ASX: SLR) and, therefore,
profit margins are reduced;
3.
In view
of the recent ISIL (DAESH) terrorist actions in such countries as Mali
(Bamako) that their gold assets are considered to be located in counties with
high Sovereign and business risks (RSG whose flagship Syama gold mine is
located in Western Mali).
A
series of 4 articles, Parts 1 to 4, are currently being produced on this site
appraising the technical fundamentals of the mid cap Canadian and Australian
gold producers. The reader is referred to Part 1
and Part
2
already published on the site for subscribers only.
Finally,
it is too early to gamble on the gold exploration companies as few of these
have any defined resources. The ones that have defined NI43-101 or Aus.IMM
JORC compliant gold resources of any significance would be worth investing a
modest portion of a portfolio in but careful due diligence is recommended of
the company's financial state and of the project itself will be necessary. We
will be looking at some of these companies for subscribers very soon.
Be
aware, the recent gold rally is probably now experiencing a pull back before
it takes off and attempts to break free of the 200 day moving average and the
50, 100 and 200-day MA's move into bullish alignment and start a clear
uptrend. Readers should be on the watch out for this important technical
development.
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