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Feb 2011 - Year End & China

  • Reading our introduction to last years’ comment dated 29 January 2010, little appears to have changed one year later, apart from the fall in share prices occurring earlier in January 2011, viz :
  • “I must admit that even after all this time, the recent falls (mid/late January 2010) in share prices and commodities on the basis of a China slowdown still comes as a surprise – as if China could suddenly grind to a halt. The market has yet to accept that China has a planned vision of where it wants to be and how it is going to get there for the next 20 years. The main beneficiary should be Australia because of its proximity and relatively high grade orebodies. We re-iterate what we have said before, if anyone gives a China view, ask them when was the last time they were there?”
  • In November 2010, after visiting Gryphon’s prospects in Mauritania and Burkina Faso we flew to the China Mining conference in Tianjin, and then saw some friends in Kunming (to get a greater feel for what is going on in China). After all, China is still the engine of growth for the commodity sector.
  • At China Mining, sessions are held covering the different commodities. Originally rare earths were planned to be covered, but then dropped and coal was excluded too. Perhaps China thinks it has or thought it had enough under control (which in the case of coking coal, it may have done as this was well before the QLD floods of January 2011).
  • Although China is trying to find ways of reducing the costs of various ores (possibly it will acquire its own shipping fleet), it felt that due to supply/demand gaps and hence shortages, the pricing pressures remained as scrap quantities reduce and India possibly reduces its exports (for its own domestic consumption) especially for copper (due to the emerging ETFs), and iron ore/steel due to the 3 majors (BHP, RIO & CVRD).
  • What was noticeable this year was the size of the booths at the conference and even Jinchuan manufacturing its own mining equipment as shown in Figure 1a. There is now a significant choice of mining equipment manufactured in China. China is also building self sufficient Circular Economic Parks centred on producing mines such as either coal or oil (there were nodding donkeys on the hills of the model) as shown schematically in Figure 1b. Datong (coal) has already built an operating one.
  • It was stated that China invested $301bn (2trn Yuan) during the 11th 5-year plan (2006 to 2010) to save energy and reduce emissions (hence the sudden slowdown at the end of 2010 in order for companies to try and meet their expected targets). In the 11th plan, more than 70% of coal-fired power stations installed the flue gas desulphurization (FGD) system. Greater reductions and energy savings targets are planned to occur in the current 12th 5-year plan from 2011 to 2015.

Aug 2011 - DnD - SLR , MRP, Gold

Post Dnd 2011 Review

This year at Diggers we visited Silver Lake's new Haoma hangingwall drive to check out its progress as to whether it could become SLR's third 60,000ozpa source (it could), and also had a visit to Macphersons Nimbus acquisition, as MRP intend to bring the silver mine back into production.

There are always a few stand outs in the booths, this year being Silver Lake's 1000oz solid "Gold Prospector" and Focus Minerals' innovative new (free) iPad app. Sandfire's drill core samples looked as impressive as ever - but we also saw them last year.

  • The guest speaker was Todd Bucholz (a former White House Director of Economic Policy) who observed that the market cap of the company that makes "hot wheels" cars is now greater than that of General Motors (on which the model cars are based). We have included a few of his presentation slides in this review in which he saw no viable alternative to the mighty US$ as China cannot let the US Treasuries go down the gurgler because they have so many of them (or was that wishful thinking?).
  • Todd Bucholz thought that China was having its 15-year "day in the sun" much as Japan once did, and the US was entering a critical 5-year period that was "its last chance to get its act into gear, before the rivets pop".
  • Well, Silver Lake's Haoma hangingwall lode looks like it could have the goods. SLR's strategy is to have 3 underground lodes producing ~50,000ozpa to 60,000ozpa with the balance of the ~200,000ozpa target coming from open-cuts. Daisy Milano has been the ~50,000ozpa to 60,000ozpa mainstay and Daisy East has since started (following the completion of the new ventilation shaft in June 2011) as the second one. And although it is only one level, if Haoma continues the way it has so far, it could become the third.
  • In this review we have included a chart comparison of the gold price to a gold share index from 1979 to early 1984, showing that gold shares drifted sideways when gold peaked at US$850/oz and waited for the gold price to find its new base before the share prices doubled due to the underlying profit leverage (the shares did in fact later triple from a lower base - because they had by then experienced the impact that higher gold prices have on profitability.
  • And in the past 3 days, we have certainly seen volatility, with the gold price at the Sydney close being US$1900/oz, US$1850/oz, and US$1750/oz, with last night touching US$1700/oz twice before recovering to US$1774/oz and currently trading at US$1765/oz (9am Sydney EST 26 August 2011).
  • Quite frankly we think that the market has overlooked the impact that higher gold prices is having on producing gold company's profitability. As a producer commented at Diggers "we sold 1000oz gold and received more than $1.7m !!"

Sept 2011 - Denver Gold Show

  • 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.