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Europe
is not “all better” by a long shot and the net result will be
more turmoil and attraction to gold as a safe haven investment. Volatility is
the other most important trend this year as we ebb and flow between risk
aversion and risk appetite. Each new “revelation” about German
and French bank US$958B, or total European bank US$1.6T exposure to the PIGS
of Europe will bring on the volatility. UK has exposed themselves to US$370B
in loans to just Spain and Ireland.
What
many people fail to understand is that Greek debt has been reduced to junk
status meaning that banks have to account for these bonds as 100% risk
weighted capital. Their reserves have to match Greek exposure on a one for
one basis even if the bonds are trading at below par. This means that banks
cannot afford to carry Greek debt. The fall out is again like watching a slow
motion train wreck.
Gold
is going to keep on keeping on – the rally will continue for years to
come. All quality gold stocks have extremely bright futures as long as the
new world reality is adjusted to. This adjustment is unwilling and painful
because it involves difficult decisions which can only really be forced upon
governments in the face of disaster.
Quality
gold stocks have great ground positions, long mine life or a highly likely
potential of such, robust production, low to zero debt and low to medium cash
costs. A quality position is built in such a company during periods of
depressed share price which precede an era of strong price appreciation. Gold
stocks in Australia are in such a period after gradually awakening in
response to higher AUD gold prices from late 2005 as seen below.
I
will keep this simple because a picture is worth a thousand words. Here is a
chart of the emerging producers and I want you to compare the recent price
action of the chart above to the one below. To state that there has been a
‘disconnect’ or that this is overdone is an understatement. How
long this might last and when we should pounce on this opportunity is what we
need to cover for the rest of the article.
This
article must therefore include a follow up to “Disaster and Opportunity”
which I penned last week. Investors should never miss out on a good
opportunity. I do not down play the current damage done to the
Australian mining industry by our current government; instead I am providing
coverage on the investment angle.
Anglogold
Ashanti have come out and stated Australia is on the bottom of their list for
investment at present. Morgan Stanley has stated that they have remodelled
the BHP Olympic Dam Expansion and believe it will not be viable under the
tax. This is at the heart of the real problem as long as this proposal is on
the table because investment in mining requires stability and certainty.
This
hits new projects on Australian soil more than anything as the uncertainty
caused by the delay on the final policy format bites. This does force the
banks to look at all funding based on the worst case scenario; which would be
the current government re-elected and tax in current format passed into
legislation.
Last
weeks article delved into the opportunity and this week I want to update
investors on the developments. Should this proposal fail then we will have a
reversal on the depressed share prices for many companies. The major
opportunity lies in depressed prices of gold miners that are fully funded and
or currently producing. So what chance is there that this tax proposal will
ultimately fail?
Let’s
put it this way opportunity has already begun to rise like the phoenix
from the disastrous policy proposal blunder made by our current Government
here in Australia. I am sincerely a non-partisan writer simply because
politics is not my field. I have therefore covered the RSPT here from a
viewpoint of support for investors and miners and I make no apology
for that.
It
would seem the Federal Labor Government is going to be forced to back away
from the ill fated super tax proposal and water down their plan. I say this
even though they are saying they will “tough it out”. There is
talk of raising the ludicrous “fair return” threshold from 6% to
above 10%. There is also talk in The Australian newspaper about exemptions of
whole sectors of the industry and other major changes as this policy farce
disintegrates.
After
crunching the numbers the government have quickly realized this means almost
certain defeat at the next election. The latest WA opinion poll by Westpoll
came in as the worst ever of all time for the Federal Labor Party even though
they just pledged to spend billions of dollars on infrastructure in the
State.
The
primary vote was polled at just 26% compared to the opposition’s 52%.
There are calls to get rid of the Prime Minister yet this incredibly
misguided proposal has been sanctioned and loudly supported by the Deputy PM
Julia Gillard, the Treasurer Wayne Swan and Resources Minister Martin
Ferguson. In other words they are all responsible.
The
PM did a trip to WA to “attempt to put out the fire” however he
did no radio interviews, no public appearance, failed to meet the press or
even the Premier. Apparently he has won no support back as a result of the
visit which is telling as we attempt to analyse if we will actually have to
deal with the tax at all.
Would
this really weaken mining in Australia if it went ahead, or is the government
right? I was talking to an insider in the oil industry today who told
me that there has been no local oil exploration since the introduction of the
oil tax. The few petroleum engineers that remain employed are mostly in the
universities now and there have been no petroleum geologists coming through
the system for years. We have gone from self sufficient in oil to an
importer. The answer is yes you bet this would weaken mining and exploration
and hurt the economy.
Sovereign
risk status
There
has been talk that our first class sovereign risk status has been irreparably
ruined however I would argue that over time we might look back and consider
this an important test. I hope the world will soon see that even a misguided
Federal Government does not have the power to over rule or even attempt to
destroy mining here in Australia because it is literally a major part of our
national backbone.
I
visit a major investment network forum that briefly put up an advertisement
from the government promoting the RSPT however they removed the advertisement
due to the uproar from members. This shows a true democracy in action where a
company knocks back the government in support of its own clients.
Did
this proposal ever have any hope of being approved? Mining has literally
formed and shaped Australia’s history and is a hugely important part of
our cultural in economic identity. The industry and many special interest
sectors of the population were never going to accept any proposal that would
weaken mining.
I
would argue that Australia could never become a Hugo Chávez led
Venezuela with nationalised industry and mining and this is incredibly strong
for our sovereign risk status. Imagine if the political system in
Venezuela had allowed the people and miners there to stop Chávez in
his tracks. This is part of the fail safe mechanism here in Australia and
this essential fact should not be overlooked by the international investment
and mining communities. In the meantime they will sit back and await the
verdict of the next election. They will quite rightly sit back and see what
happens.
Contrarian
opportunity, takeover mania
In
the meantime at GoldOz we continue to structure our services to suit the
situation because we can see the massive opportunity presented here. If the
Australian public actually votes back the incumbent political party, which I
seriously have to doubt from current indications and trends, then we get takeover mania and all sorts of chaos. We
are preparing for this scenario just in case the unthinkable happens.
We
have separated the companies with offshore operations and listed the
proportional onshore production for all mining stocks. We have been building
an offshore data file on the global industry. We also have some more plans
and programs that will be announced once they are complete.
If we
get rid of the government and or the tax then some of these stocks will play
catch up and represent excellent leverage. We will be presenting this
opportunity as part of our normal operation but I want to say this –
there are some screaming bargains here in our gold sector.
Offshore
investors marvel at how cheap some of these producers are compared to North
American stocks. When you look at how far the AUD gold price ran correlated
to the movement in the ASX listed gold stocks you can not only see the damage
the tax proposal has done you can see the glaring opportunity.
The
AUD gold price was up 25% from $1200 to $1500 and now we are consolidating up
at the $1430 level which is up around 19%. During this same period the
larger producers, emerging producers and juniors are down 8%, 11% and 12.5%
respectively. Remember many of these companies are unhedged producers with
zero debt or low gearing – join up with us now and examine this
situation for yourselves.
This
divergence between the AUD price of gold, rising price of USD gold and
falling Australian gold stocks will not last. I am urging investors to get
educated about this so they can book some exceptional profits when
statistical normality eventually returns.
Good trading / investing.
Neil Charnock
Editor,
Goldoz.com.au
REGISTERED
ADVISOR – WHO THE ADVICE COMES FROM IN THE GOLDOZ NEWSLETTER:
Colin
Emery is currently a Branch Manger and Senior Client Adviser of a Stock
Broking Company in Queensland Australia. Prior to his work in Share broking
he spent nearly 20 years in Senior Management and Trading positions in
Treasuries for major International Banks such as Bank Of America, Banque
Indosuez, Barclays Bank, Bank Of Tokyo and Deutsche Bank AG. He spent a
number of years as a Senior trader in New York, London, Singapore, Tokyo and
Hong Kong with these institutions. He also was Global Head of emerging energy,
emission and commodity products for the leading Energy and Commodities
brokerage firm of Prebon Yamane Ltd – Prebon Energy for four years
before moving to Cairns in 2003 to focus on the Stock market and Private
consulting work. The private consulting and advisory work currently
undertaken is with companies involved in Resources, Energy and Renewable
Energy and Forestry.
Neil
Charnock is not a registered investment advisor. He is a private investor
who, in addition to his essay publication offerings, has now assembled a
highly experienced panel to assist in the presentation of various research
information services. The opinions and statements made in the above
publication are the result of extensive research and are believed to be
accurate and from reliable sources. The contents are my current opinion only,
further more conditions may cause my opinions to change without notice. The
insights herein published are made solely for international and educational
purposes. The contents in this publication are not to be construed as
solicitation or recommendation to be used for formulation of investment
decisions in any type of market whatsoever. WARNING share market investment
or speculation is a high risk activity. Investors enter such activity at
their own risk and must conduct their own due diligence to research and
verify all aspects of any investment decision, if necessary seeking competent
professional assistance.
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