The Clock's Fuzzy!

The latest update on the lion “clock” by the Lion Selection group release on the 28 February 2011, has it about half-way through a possibly shorter cycle this time. The clock used to work quite well – at least for two 10-year cycles to 1997 and 2008, but appears to have become ”Fuzzy” as illustrated by the numerous IPOs and exploration occurring before, during and after the mergers, not after as shown in Figure 1.

Catalpa Resources Limited (CAH) – Targeting Gold Production of 150,000ozpa to 200,000ozpa or so at Cash Costs of ~A$550/oz to ~A$580/oz by June 2014

• Catalpa’s gold production is currently derived from its wholly owned Edna May open-cut mine at ~100,000ozpa and cash costs of ~A$750/oz in WA, and 30% of the Cracow underground mine realising ~30,000ozpa at cash costs ~A$550/oz. Cracow completed a 20% mill expansion in January 2010 and may be treating higher grade ore which could increase CAH's 30% share, closer to ~35,000ozpa.
• The higher grade ore at Cracow could come from the expected extraction of the sill/crown pillars at Royal Standard and Crown (as they approach the end of their lives), together with the newly defined Empire, and extra long Phoenix, orebodies.
• At Edna May, the commissioning and plant ramp up has taken longer than expected due to a number of internal and external factors that have gradually been resolved such that the June Quarter 2011 could be closer to ~100,000ozpa at cash costs of <A$700/oz. However, it is the progress that had been made on the understanding of the Edna May mineralisation and underground potential that could significantly transform Edna May and hence Catalpa.
• Catalpa has established that the pegmatite zone appears to steeply dip north and passes across the orebody from the northern hangingwall to the southern footwall such that the proposed underground mine should be essentially pegmatite-free. The lodes also appear to be uniformly striking NE/SW and E/W, forming a hinge and apparent curved shape.
• The proposed underground has the potential to significantly transform Edna May, even at an initial rate of ~150,000tpa @ 9g/t for ~40,000ozpa to 45,000ozpa could materially increase production to ~150,000ozpa and reduce cash costs to the ~A$550/oz region (assuming that the Tungsten by-product is also viable).

Broken Hill's New May Addition to the Mining Conference Calendar

We attended the inaugural Resources and Energy Symposium (RES) 2011 Conference held one week after the May RIU conference in Sydney and run by Kerry Stevenson's Symposium Company. Innovatively, the profits from the RES conference go into a scholarship program that provides funds to educate students wanting to undertake tertiary education within the resources field.

Gold Sector expected to pay $3bn by 2020 or ~A$40/oz from July 2012

Or at least that was the expectation in a MCA presentation at the Annual Stockbrokers' Conference in Sydney in late May 2011. At that conference, 3 papers were presented on the planned Carbon Tax (one by the MCA and two by Deutsche Bank) that appeared to cover most of the issues associated with it.

The Dealer of the Year was...

...quite surprisingly Ivanhoe for its Oyu Tolgoi transaction with RIO, at this years' Diggers 'n Dealers Conference in Kalgoorlie from 1 to 3 August 2011. It came as a surprise to many that it was not either Equinox, Andean or Alacer, especially as (we assume) share price appreciation should have been one of the main factors.

• The market cap size of the companies covered typically ranges from ~$25m to ~$2.5bn, are mostly gold, and depend on our perceptions of the management, project and country as to whether they are written.
• This presentation is based on our observation and analysis of Gold and Gold Shares for about 35 years, (or since 1977).
• We have used the GLD (SPDR) chart as a proxy for our comparisons as it does understandably have a close visual correlation to the Gold Price (in Slide 3).
• It is no secret that over the past year most Gold Shares have underperformed the Gold Price as shown in the greater than US$20bn market cap Megas (in Slide 4). And in the greater than US$10bn market cap Majors (in Slide 5).
• However in Australia, it has not been that simple with Regis and Alacer outperforming the Gold Price in the greater than >$1bn market cap category. And it should be borne in mind that the performances shown are in A$, which would have to be increased by at least 5% for US$.
• And apart from Ramelius, most of the >$0.5bn Australian golds shown tried to recover in the recent rally, with a number of the movements explained by fundamentals such as Silver Lake's fall around May 2011 (shown by the purple line in the chart) in Slide 6, due to a fund redemption.
• Measuring any form of recovery depends on the base, since as shown in the relationship with the Philadelphia Gold and Silver Index, XAU, - it hasn't recovered from the GFC setback.
• The comparison with the XAU looks better on a 2-year base, or it did up to December 2010, after which it went sideways. We have seen this behaviour pattern before where the gold shares appear to ignore the gold price, and then suddenly recover by a multiple (as in Slide 10),
• Examining the chart more closely, the gold shares rose to a point and then drifted sideways in late 1979, waiting for the gold price to drop back.
• And then soared, with the gold price rising, coinciding possibly with the leverage aspect that would have become more noticeable from the reporting of profitability, and again even more so in 1982, (in Slide 11).
• What leverage - well the impact that a rising gold price has on profitability and the NPV of the share as shown by the numbers in the table for the Australian gold producers that we cover.
• In which their after tax profits double for a 33% increase in the gold price from US$1500/oz to US$2000/oz, as in the case of Alacer, Silver Lake & Focus (in Slide 12).
• Or to put it another way, what gold price does the market appear to be basing the share prices on as in Silver Lake at US$1380/oz and Focus Minerals at US$1350/oz (in Slide 13).
• So on that historic gold price chart, where are we now ?. Do the shares reflecting a gold price about $1300/oz, correlate to when the market was at US$300/oz in 1979, and hence infer that the equilibrium level after the "spike" is $2000/oz, or are we further along in a different scenario?.
• The reality is that the Gold Producers are making money. As Focus Minerals remarked at the Australian Diggers and Dealers Conference in early August 2011, "we sold 1000oz gold and received more than $1.7m !!" (as in Slide 15).
• Hence despite the recent rally, Gold Shares or Gold Equities appear to be overdue for an upward correction that may be partly driven by profitability from analysts estimates and/or reporting by companies.