"The best place to be is in commodities"

[drillinto]

September 05, 2009

That Was The Week That Was ... In Australia

By Our Man in Oz
www.minesite.com

Minews. Good morning Australia. Your market must have been a big winner as the gold price re-tested the US$1,000 an ounce mark last week.

Oz. Gold was certainly on top as the week drew to a close, but overall the tone was slightly weaker, which made for a somewhat confused picture. On the one hand, the metals index on the ASX fell by around two per cent, thanks to weakness in BHP Billiton and Rio Tinto. On the other, most sectors produced winners, with gold leading the way, and copper a surprise star in the wake of Marengo Mining's (MGO) deal with investment funds controlled by George Soros. Iron ore was mixed, with continuing concern over Rio Tinto’s sour relationship with China. Nickel and uranium also lost ground, but zinc produced a couple of interesting rises.

Minews. All that set against a background of an Australian economy in growth while the rest of the world shrinks.

Oz. That is awfully hard to explain, though, as has been said previously, it has never felt like a true recession down here. China has continued to soak up resources, and while prices might be down tonnage is up. We also had the advantage of going into the global financial crisis with a government budget in the black, which made it much easier to toss stimulus cash at potential problem areas. The upshot is that the Australian economy grew by 0.6 per cent in the year to June 30, the unemployment rate remains subdued at less than six per cent, fresh capital is flowing into the resources sector, a boom is underway in the development of natural gas fields, and the Aussie dollar cracked the US85 cent mark on Friday night, which will hurt mineral exporters.

Minews. Time for prices please, starting with gold.

Oz. As you would expect, it was pretty much up across the sector with one stand-out loser. Investors seem to be running out of patience with Avoca’s (AVO) attempts to land Dioro (DIO) as a takeover target, as we pointed out during the week. On the market, Avoca slipped A6 cents lower to A$1.79, while Dioro added A4 cents to A83 cents. Having got that bit of bad news out of the way the rest looks better, as a large number of gold stocks hit 12 month share price highs during the week. Andean Resources (AND) traded up to new high of A$2.44 on Friday before closing at A$2.43 for a gain over the week of A23 cents. Catalpa (CAH) rose to its new high of A15 cents before also slipping a fraction to end the week as A14 cents, a gain of A1 cent for the week. Emmerson Resources (ERM), one of the Tennant Creek specialists, closed at its new high of A26.5 cents, up A4.5 cents for the week. A3.5 cents of that gain came on Friday. Morning Star (MCO), which is about to pour first gold at its Morning Star gold mine added A7 cents to A27 cents, but did hit a 12 month high of A28 cents during Friday trade. Meanwhile Goldsearch (GSE) rose even more sharply, from A2.1 cents to A5.2 cents, as it announced the purchase of a 3.9 per cent stake in Morning Star.

Minews. Big moves by small companies.

Oz. Correct - that was one of the features last week, the re-discovery of the large crop of almost forgotten small gold stocks. West Wits (WWI) was another to set a new high at A14 cents during hectic Friday trade before it fell away to close at A11 cents, a rise over the week of A2.5 cents. Interest in the stock was so high that the ASX hit it with a query on both price and volume after it closed at A8 cents on Thursday, rocketed up to A14 cents on Friday when 3.7 million shares traded, and then slipped back to its close at A11 cents.

Finishing the call of the gold card Norseman Gold added A9 cents to a new high of A78 cents after reporting a maiden profit of A$20.4 million. Troy (TRY) set a fresh record price of A$2.18 on Thursday, before easing to close the week at A$2.15 for a gain of A15 cents over the week. Silver Lake (SLR) hit a high of A97.5 cents on Friday, but eased to close at A92.5 cents for a very impressive gain over the week of A17.5 cents. Kingsgate (KCN) added A50 cents to A$7.57. Chalice (CHN) rose by A4.5 cents to A34.5 cents, and Perseus (PRU) gained A6 cents to A92 cents.

Minews. Copper next, to see what that Marengo deal did to the sector.

Oz. The reaction was very interesting. Copper companies that are still in their exploration and project development phase, like Marengo Mining, outperformed copper companies in production. Marengo itself starred, with a rise of A6.5 cents to A16.5 cents, in very heavy turnover. That Friday closing price was slightly less than the high for the week of A18.5 cents, reached on Thursday. Citadel (CGG) was another winner in the emerging producer category, adding A4 cents to A36.5 cents, down a fraction on the 12 month high of A37 cents reached earlier on Friday. Sandfire (SFR) returned to the winner’s circle with a gain of A25 cents to A$1.77, helped along by fresh assay results from its Doolgunna project. Rex (RXM) joined in the copper rush with a rise of A41 cents to A$2.01, and CuDeco (CDU) added A56 cents to A$5.49.

Other copper stocks, the companies actually producing metal, were more subdued. Equinox (EQN) rose a truly modest A2 cents to A$2.99 despite a very positive presentation from its chief executive, Craig Williams, at an African-focussed investment conference in Perth. Anvil (AVM) presented at the same event, and managed a rise of A4 cents to A$2.74.

Minews. The other base metals now please, before swinging across to iron ore and uranium.

Oz. Nickel stocks, as mentioned, were weaker with the price of nickel easing over the week, though most falls were modest. Independence (IGO) eased back by A8 cents to A$4.37. Panoramic (PAN) lost A14 cents to A$2.26, and Mincor (MCR) slipped A1 cent lower to A$2.32. Zinc stocks were more interesting, perhaps because the zinc price firmed another US6 cents a pound over the week. Biggest winner was Mt Burgess (MTB), a stock which tends to fly beneath most radars. It rose by A1 cent to A2.8 cents, but did touch a 12 month high of A3 cents during Friday trade. TNG (TNG) was another zinc stock to set a fresh record price, closing at A8.5 cents for a gain on the week of A1.5 cents. Perilya (PEM) added A3 cents to A41.5 cents, but CBH (CBH) slipped A1 cent lower to A9.3 cents.

Iron ore stocks were mixed, perhaps because of the ongoing confusion over contract talks between Rio Tinto and Chinese steel mills. Fortescue (FMG) lost A33 cents to A$4.11. Iron Road (IRD), on the other hand, added A12 cents to A56, and did trade up to a 12 month high of A65 cents after an encouraging geological report on its Warramboo project in South Australia. Legend (LEG) was another winner from exploration news, rising by A0.3 of a cent to A2.2 cents after signing a deal on a promising iron deposit in the African country of Cameroon. Atlas (AGO) slipped A7 cents lower to A$1.64, but Giralia (GIR) and Golden West (GWR) each managed half cent rises to A72 cents and A36.5 cents respectively.

Minews. Uranium to finish, please.

Oz. Most uranium stocks lost ground as the spot market price of the metal slipped another dollar lower to US$46 a pound. Extract (EXT), which added A30 cents to A$9.80 and Bondi (BOM), which rose by A2.5 cents to A11 cents were the only winners. Extract’s strength was down to a well-received presentation at the Africa conference in Perth, while the little-known Bondi reported encouraging drilling results from its Murphy prospect in the Northern Territory. Uranex (UNX) slipped A1.5 cents lower to A33.5 cents. Mantra (MRU) lost A7 cents to A$3.48 and Toro (TOE) lost half a cent to A18.5 cents.

Minews. Thanks Oz.

 

[drillinto]

Gold boom for Australia

NIGEL AUSTIN
http://www.news.com.au/adelaidenow/story/0,22606,26037151-5016955,00.html
September 07, 2009 10:00am

A NEW gold boom is underway in Australia with increased production and a rising price expected to take the sector's export earnings to a record $18 billion this financial year.

A new report predicts rising production should see Australia become the world's second-largest gold producer as the price of the precious metal soars towards $US1000 an ounce.

A survey of gold producers by industry consultants Surbiton Associates showed that Australia was gearing up to increase production in 2009-10.

Surbiton said Australian gold production increased by two tonnes or four per cent more than the previous quarter to 57 tonnes during the June quarter.

"We seem to be seeing the start of a recovery in Australian gold production,'' Surbiton director Dr Sandra Close said.

Dr Close said the modern gold industry continued to make a substantial contribution to Australia's exports, despite the market's ups and downs.

Dr Close said the gold rushes and gold boom of the 1850s were probably the best known in Australia's history and they had a major impact on the country, both in social and economic terms.

But the modern gold boom, which started in the early 1980s, had been by far the largest in output.
``Almost half of the gold ever produced in Australia has been mined since 1982,'' Dr Close said.

``That amounts to about 5800 tonnes, or 190 million ounces.''

ABARE forecast the record value of exports of $18 billion in its June Australian Commodities report, compared to just $5.5 billion in 2004-05.

Australian and South African gold output is similar, making them the world's equal third-largest gold producing countries behind China and the U.S.

However, Dr Close said it was likely that Australia would move up to become the second-largest gold producing country in the coming year.

A further increase in production was likely to occur this quarter with the first contribution from Newmont's redeveloped Boddington mine in Western Australia, she said.

 

[drillinto]

September 07, 2009

Gold Closes In On US$1,000, As Government Printing Presses Roll

By Rob Davies
www.minesite.com


The sharp rally in risk assets like commodities and equities seems to have surprised commentators much more than it surprised market participants. A couple of commentators at least have admitted publicly that their recommendations to short the market have gone horribly wrong. But still they pontificate that these prices can’t be maintained and that a big correction is coming.
They might be right. But, as one financial adviser asked this writer, how many rich journalists do you know?

The risk inherent in buying into shares and metals is there for everyone to see. In some cases prices have doubled over the course of this year - surely that must mean prices could just as easily be cut in half again as they were last year? That is true. However, there is also risk in nominal assets, like cash and bonds. It’s just that the risk here is less obvious and more insidious.

The smart money knows this – even in spite of the recent equity and metals rallies, there is still a huge amount of money out there sitting in nominal assets that is looking to move into risk assets, primarily for protection against the inflation that most sage commentators expect to occur in a few years time.

Politicians and central bankers have done a great job in pretending to have solved the financial crisis by printing unimaginable amounts of money. That has given the illusion that the value of assets has been maintained. But the suspicion still lingers that actually all that’s happened is that a devalued asset has simply been repriced by a devalued currency.

This preserves people’s sense of perspective. In the biggest example, formerly great banks are seen to be recovering and normality is restored. In fact what has really happened is larceny on grand scale. These banks and other financial institutions had failed in a catastrophic fashion. That is part and parcel of the process of capitalism. Good companies succeed and bad ones fail, with the owners rewarded or punished as appropriate - “creative destruction”, as Schumpeter called it.

However, in the modern world, where exam failure has been replaced by a below average pass, the reality of such an implosion was too much to contemplate for the politicians, regulators, and bureaucrats who were supposed to prevent this from happening. So they pretended all was not bad and simply bailed out failed institutions with bucket loads of cash.

This has not gone unnoticed by the real investors. They have been moving funds into real assets almost from the moment these policies were put in place at the end of the first quarter. Shares have risen sharply and base metals even more so.

Even though equities took a little breather last week base metals, led by lead, generally moved higher. A 10 per cent jump in lead took it to US$2,223, while a rise of 3.5 per cent in zinc saw it move up to US$1,881 a tonne. Copper was more subdued and only rose a few dollars to US$6,279, while nickel retreated six per cent to US$18,775.

All those movements though, were outweighed by the news that gold had risen to within a few dollars of US$1,000 an ounce. In a world where no one is exactly sure what constitutes an asset and what a liability, there is no doubt that gold can be relied on. Especially if financial assets can no longer be trusted.

 

[drillinto]

Export earnings hit $160B record

Colin Jacoby, Mining News, Thursday, 10 September 2009

HIGHER export prices for iron ore and gold helped lift Australia’s export earnings from mineral resources to a record high in 2008-09, according to the latest figures from the Australian Bureau of Agricultural and Resource Economics.

In its June quarter 2009 edition of Australian mineral statistics, ABARE reported export earnings from mineral resources increased 37% year-on-year to a record $A159.7 billion.

ABARE deputy executive director Dr Terry Sheales said the record earnings reflected a 16% depreciation of the Australian dollar and higher contract prices for bulk commodities in the first nine months of the financial year.

The index of export prices of Australian mineral resources increased by 35% in 2008-09.

Iron ore was one of the big movers with 2008-09 export earnings up $13.7 billion, or 67%, to $34.2 billion, while gold gained $5.2 billion, or 48%, to $16.1 billion.

There were significant increases in export earnings for metallurgical coal, up 129% to $36.7 billion, and thermal coal, up 114% to $17.9 billion.

However, nickel led the commodities, recording significant declines with a $3 billion or 53% drop in 2008-09 export earnings to $2.7 billion.

Zinc also fared badly, falling $1.5 billion, or 45%, to $1.9 billion, while copper dipped $964 million, or 14%, to $5.8 billion and lead fell $424 million, or 21%, to $1.6 billion.

Australian production of energy and mineral commodities declined in 2008-09, with the index of mine production falling by 1%.

“In particular, production of nickel, iron and steel, zinc, gold and black coal declined in 2008-09,” Sheales added.

ABARE’s revised forecasts for minerals production, exports and prices for 2008-09 and 2009-10 will be released later this month.

 

[drillinto]

September 10, 2009

Barrick’s Decision To Close Off Billions Of Dollars Worth Of Hedging Is A Clear Sign Of China’s Influence On The Gold Market

By Charles Wyatt
www.minesite.com

So what is the connection between Barrick Gold, that long time proponent of gold hedging, and the Chinese government? Simple really, provided one thinks in straight lines. Since overtaking South Africa in the production stakes, China is now the world’s second largest producer of gold. It’s also the second biggest gold consumer after India. What’s more, it has the world’s biggest foreign exchange reserves at US$2 trillion. Yes, that is US$2,000,000,000,000. Yet in spite of that huge cash pile, Chinese gold reserves are way behind the US, Germany, France and Italy. Such a situation is not sustainable in a world where the financial system has proved so fallible. So it came as no real surprise when, only a few months ago, the Chinese Government revealed that it was adding significantly to its gold reserves.
Other countries, particularly those with reason to dislike the US and the power it holds through the dollar’s role as a reserve currency, will follow suit. This is where Barrick comes in. It knows that there is only one direction gold can go if countries in the Middle and Far East are buying gold. That’s why it’s just announced that it is raising US$3 billion through the issue of 81.2 million common shares at a price of US$36.95 per share. Barrick intends to use US$1.9 billion of the net proceeds to eliminate all of its fixed priced gold contracts within the next 12 months. A further US$1.0 billion will go towards eliminating a portion of its floating spot price gold contracts.

On the negative side, the company will book a US$5.6 billion charge against earnings in the third quarter, as it readjusts the way it treats its gold contracts in its accounts. The danger arises when gold is hedged at such a low price compared to the prevailing spot price that any request to close positions results in serious financial strain. Older readers will remember the difficulties a number of majors had to face up to the last time gold sustained a rise above US$1,000.

Poor old Barrick has three million ounces of gold sold forward at various prices and 6.5 million ounces of gold subject to floating contracts. If all the forward sales are bought back and half the floating contracts eliminated it would involve the purchase of about 200 tonnes of gold - no less than 10 per cent of all the gold that will be produced in the world over the next year. The price of gold is bound to rise, too, as it did on the last two occasions when Barrick bought back its hedges.

Interestingly the announcement of this gold deal coincided with the staging of the prestigious Ambrosetti Workshop at Lake Como, where Cheng Siwei, a former vice-chairman of the Standing Committee of the National People’s Congress, in an outspoken criticism of Ben Bernanke’s quantitative easing policy, said he believed the dollar will “fall hard” if the US continues printing money to buy back government bonds. Cheng went on to say that China is diversifying its US$700 billion of US foreign-exchange reserves into gold. “Gold is definitely an alternative, but when we buy, the price goes up”, he said. “We have to do it carefully, so as not to stimulate the market.”

The Chinese have long been shrewd buyers and sellers of raw materials. Remember how they built stockpiles of iron ore, nickel and copper when prices dropped through the floor at the end of last year? The conclusion has to be that little information will be forthcoming from China as it builds its position in gold, but that there is probably going to be a floor to the price somewhere above US$900 per ounce. And all this has come to pass just when the UN Conference on Trade and Development (UNCTAD) has announced that the system of currencies and capital rules which bind the world economy is failing, and was in fact responsible for the recent financial crisis.

UNCTAD has suggested that the answer is to replace the dollar as the word’s reserve currency. It is the first time such an august multinational institution has made this suggestion, though China, Russia and India have pointed in that direction on several occasions. The replacement of the dollar would not be simple, as it would require an artificial currency and a system of managed exchange rates. Maybe gold will be involved, maybe not, but the reluctance by the G20 group of nations to relinquish the policies of hyper-stimulus is bullish for gold and bearish for fiat currencies.

Like it or not - and economists such as Martin Wolf of the Financial Times will hate it - gold will now play an ever more important role in any discussions between world leaders about the future of currencies, just as China will play an ever more important role at the top table. We live in interesting times as the geopolitical balance of power inevitably moves from West to East.

 

[drillinto]

September 12, 2009

That Was The Week That Was ... In Australia

By Our Man in Oz
http://www.minesite.com/aus.html


Minews. Good morning Australia. Gold must have been the talk of your market last week!

Oz. You would think so, with the price sticking above US$1,000 an ounce. But when you look at the overall market, gold stocks actually underperformed slightly, which is rather surprising. The gold index on the ASX rose 4.7 per cent, but that was noticeably less than the broader metals and mining index, which rose by 5.2 per cent, as strong gains among copper and iron ore stocks boosted the entire minerals sector. What might have slowed gold was the continued rise in the Australian dollar, or the fall in the US dollar if you prefer. Whichever way you slice it, the Aussie currency added another US1 cent over the week to close at US86.34 cents, a fairly dramatic rise from the US63 cents that it was trading at as recently as March.

Minews. The strength of your currency seems to be reflecting the general march by investors back into hard commodities and away from soft currencies.

Oz. Bingo! The best example was the way the herd has followed billionaire speculator George Soros into copper stocks. Marengo (MGO), in which Soros took a big placement less than two weeks ago at A9.5 cents, stormed ahead last week to hit a new 12 month high on Thursday of A24 cents, before settling back to close at A21.5 cents. At that peak price, our George was looking at a return of 152 per cent for 10 days work.

Other copper stocks chimed in, but none could match the Marengo stampede. Sandfire (SFR), one of the new kids on the block, returned as a speculative favourite, adding A41 cents to A$2.18. Rex (RXM), another recent copper star, also rose by A41 cents to close at A$2.42, down on an all-time high of A$2.60 reached during Friday trade. OZ Minerals (OZL) put on A9 cents to A$1.12, confirming its return to favour with investors, even if it is still only one-mine wonder until management does something with the spare cash burning a hole in its bank account. Equinox (EQN) traded up to A$3.32 before easing to close at A$3.27, for a gain of A28 cents. Anvil (AVM) added A49 cents to A$3.23 as the market digested its recent news regarding development of the Kinsevere mine in Congo, and Syndicated (SMD), showed signs of revival, adding A2 cent to A20 cents.

Minews. Interesting as the copper market might be, many of our readers are keen to follow the gold sector, so let’s go there next.

Oz. As you would expect it was up, virtually across entire gold spectrum. But what was noteworthy was that some gold stocks did not react positively to the strength of the gold price. It might seem somewhat perverse, but it is worth starting with the negative news first, if only because there is so much positive news to follow, and because readers might spot a few under-valued situations in a sector which ought to be on fire.

Centamin (CNT) was one of the more interesting examples, losing A9 cents over the course of the week to close at A$1.90. Allied (ALD) was another “non-reactive”, rising mid-week to A54 cents before settling to close steady at A50 cents. Integra (IGR) and Catalpa (CAH) were two other stocks to open and close at the same price, A29 cents in the case of Integra and A14 cents in the case of Catalpa. Next week, as investors continue to digest a gold price which, fingers crossed, seems to have settled in for a long stay above US$1,000 ounce, we might see the laggards play catch up.

Minews. Point noted. Now for the good news, please.

Oz. This could get rather boring but here we go, with many of the prices at fresh 12 month highs, as we move beyond the one year anniversary of the all-encompassing post-Lehman Brothers wipe out. Troy (TRY) continued to revel in its status as a re-emerging star of the gold sector, adding A27 cents to close at a fresh high of A$2.42. Kingsgate (KCN) joined in, with intraday trades on Friday at a new high of A$8.30, before easing back to close A$8.00 for a rise over the week of A43 cents. Alkane, another of our old favourites, got as high as A49 cents on Tuesday before easing to a close of A45 cents for a rise of A7 cents, perhaps due as much to growing interest in its rare earths assets as its re-emerging goldmining interests. Meanwhile, Perseus (PRU) rose A15 cents to A$1.07, but did get as high as A$1.18 on Tuesday. Azumah (AZM) added A3.5 cents to A15.5 cents. Carrick (CRK) said it was moving to a mine study now that it has lifted its resource base to four million ounces, and its shares put on A18 cents to A78 cents. Medusa (MML) was a star, with a rise of A60 cents to A$3.34. Eleckra (EKM) delivered perhaps the best percentage rise by adding A2.3 cents to A6.5 cents, and Silver Lake (SLR) put on A3 cents to A95.5 cents, but did “break the buck” on Monday when it sold at up to A$1.02.

Now for the best of the gold sector, with Westgold (WGR) reporting a bonanza drill hit at its Rover One project near Tennant Creek in the Northern Territory. That returned a best assay of 185 grams a tonne across a seven metre drill intersection, almost six ounces to the tonne, plus useful grades of copper, silver, bismuth and cobalt. On the market, Westgold rose by A15 on Friday to close at A52 cents, but did get as high as A56 cents. And that wonderful science of “near-ology” kicked in after Westgold reported, with two stocks exploring nearby delivering an even better stock market performance than the company that delivered the hit. Adelaide Resources (ADN) more than doubled from A13 cents to A29 cents, with Friday trades as high as A37 cents, and Emmerson Resources (EMR) added A9 cents to A35 cents.

Minews. Time to shuffle across to iron ore.

Oz. Like copper, all up, though precisely why is a bit unclear. Perhaps it was because of the continued flow of good news out of China, or because of the investment march into hard commodities. Atlas (AGO) returned to favour after announcing its merger with Warwick Resources (WRK), rising by A18 cents to A$1.84. Warwick added A15 cents to A57.5 cents. Gindalbie (GBG) rose as high as A$1.05 before closing at A$1 for a gain over the week of A17.5 cents. Giralia (GIR) was strongly supported, rising A18 cents to A90 cents, and Brockman (BRM) did even better with a gain of A23 cents to A$1.71.

Minews. Uranium, the other base metals, and any specials to finish, please.

Oz. There was continued strong demand for uranium stocks with the regular favourites Mantra (MRU), Extract, and Toro (TOE) leading the way. Mantra added A37 cents to A$3.85. Extract soared through the A$10.00 mark, closing at A$10.39 for a gain of A59 cents. Toro (TOE) rose by A5 cents to A23.5 cents. Paladin (PDN) failed to frighten the horses with a big capital raising, adding A12 cents to A$4.57, and promising to go on the acquisition trail, which could be a reason for the smaller U-stocks rising strongly, given that the uranium price has hardly looked poised for an upward run lately.

Nickel stocks were modestly stronger, but most of the interest last week was in other sectors. Mincor (MCR) added A16 cents to A$2.48. Independence (IGO) was A38 cents stronger at A$4.75, but that may have been to interest in its gold assets. Minara (MRE) rose by A2 cents to A90.5 cents, and Panoramic (PAN) was up A28 cents at A$2.54. Zinc stocks continued to strengthen. Terramin added A4.5 cents to A74.5 cents. Perilya (PEM) rose A8 cents to A49.5 cents, and Kagara (KZL) rose by A1.5 cents to A95.5 cents.

Minews. Specials?

Oz. Some investors took a fresh dose of lithium during the week, though given the potential for worldwide over-supply the lithium boom now seems to be a bit stretched. Galaxy (GXY) soared on Tuesday to a fresh high of A$2.40, before easing to end the week at A$2.19 for a gain of A81 cents, while Reed Resources (RDR) joined the rush with a rise of A19 cents to A58 cents. Platinum stocks showed signs of benefitting from the gold revival. Nkwe (NKP) added A2 cents to A29 cents. Platinum Australia (PLA) rose A6.5 cents to A93.5 cents, and Aquarius (AQP) gained A47 cents to A$5.66.

Minews. Thanks Oz.

 

[drillinto]

What the Heck Is Going on with China?
By Doug Hornig, Sr. Editor, Casey’s Gold & Resource Report, Sep 11, 2009

That’s a question that Westerners have been asking for, oh, several millennia now. Or at least since Marco Polo aimed his ponies down the old Silk Road in 1271.

Now as then, China keeps its own counsel. We know what they want us to know, plus what we can surmise from rumor and reading between the lines. But lately, we’ve been able to add presumption to news and come up with something that looks very significant.

Specifically, there’s been a flood of tantalizing stories out of the East that, taken together, strongly suggest a growing preoccupation with a form of money that was ancient even in Signor Polo’s time. And it ain’t silk. It’s gold.

We already learned, back in April, that China has been salting away bullion for the previous six years, out of sight of international gold watchers. To the tune of 14.6 million ounces. Now the evidence suggests that that was merely the prologue.

Let’s take these tidbits one at a time:

Sovereign wealth fund dumping $$ for gold? This one is still at the rumor stage, but highly-respected website Mineweb.com is supporting it (http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=88400&sn=Detail). What we know for sure is that the country founded its primary sovereign wealth fund, China Investment Corporation (CIC), two years ago, with the stated aim of rapidly deploying some of its $1.5 trillion forex surpluses – $200 billion initially, with another $100 billion recently added to the kitty – into investment in non-Chinese enterprises. This it has been doing in spades, acquiring businesses around the globe. Extractive industries are among them, including Teck Corp., the diversified Canadian mining giant.

Might it also be buying up gold? We don’t know that for sure, but it seems likely. And, in addition, rumors sneaking off the mainland indicate that within the CIC, a lot of effort is being poured into prospective investment deals in the oil and precious metals sectors. The more it produces, the more it can keep.

The Chinese have made no secret of their disdain for current American economic policy and what they see as the inevitable destruction of the dollar. That they would be moving to diversify out of the greenback shocks precisely no one, and gold is one logical landing place for all those bucks. We suspect that’s exactly what is happening, behind the scenes as well as center stage.

Gold and silver pushed to the people. As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now it’s actively pushing folks to buy some personal metal, with China's Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment.

It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity.

There are persistent rumors that the export of silver has already been banned. Gold could be next.

Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India – the top dog since forever – as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency.

All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon…

China repatriates its bullion. Meanwhile, in early September numerous sources (see, e.g.: http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03) reported an announcement that Hong Kong is pulling all its physical gold holdings from depositories in London and transferring them to a newly built, high-security depository at the city's airport.
That means the government is backing the promotion of Hong Kong to a more formidable status as a Swiss-style, regional trading hub for bullion, at the same time as it reduces London's role as a key settlement and storage center.

Press reports cited government officials as saying that marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility. Outreach will also be made to commodity exchanges, banks, precious metals refiners and ETF providers.

There can be little doubt this signals that the Chinese government fully recognizes the importance of gold in a time of crisis, and that the most prudent plan involves keeping its stores close at hand.

China threatens to “just walk away.” In one of the year’s most intriguing developments, commodity and derivative markets were thrown into a tizzy on Monday, August 31, by the worldwide circulation of a story published two days earlier in Caijing magazine (and reported by Reuters here: http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03).

According to the Caijing article, a spokesperson for China’s state-owned Assets Supervision and Administration Commission – the regulator and nominal shareholder for state-owned enterprises (SOEs) – told six foreign banks that SOEs reserve the right to default on contracts.
Say what?

Maybe the commission has been paying attention to the “just walk away” forfeiture movement that blossomed among American homeowners whose overall debt on their properties far exceeded the assessed value.
Small wonder there was panic in trading houses that hold a lot of Chinese paper. They hope any problems will be worked out short of a default. In fact, “It's [only] a handful of companies who are being encouraged by regulators to ‘re-negotiate’,” says one banking source. “It's outrageous, but it's China, so everyone is treading very carefully.” Very carefully.

Nevertheless, in addition to tangible losses, those potentially affected fear the establishment of a dangerous precedent, one that could lead to utter chaos in the enormous, tangled world of derivatives.

And there is one other, albeit highly speculative, possibility. Some major entities – we don’t know who, due to the opaque nature of international gold trading – have huge, perhaps quite concentrated short positions in the metal, both on the COMEX and OTC market. Is one of them China, acting through American intermediary banks?

A short position in precious metals means that the initiator of that position is obligated to deliver physical gold or silver if the buyer (who holds the long end) wants it. Suppose China is one of the big shorts. Suppose it’s been playing the market in order to buy at what it sees as bargain prices. Now suppose a gold rally induces it to just walk away from all those obligations to deliver. Who’s going to force it to make good? Guess what, no one has a gun large enough.

Granted, it’s an outlandish scenario. But impossible? No. Beijing has shown nothing but indifference to what others think of it. And if the dollar does crap out as the world’s reserve currency, there’s nothing to say that China won’t see its self-interest as lying in a completely new direction.

Conclusion. Gold, and the companies that produce it, have enjoyed a brisk runup of late, as the metal mounts yet another assault on the beckoning, symbolic $1,000 level. How much of this can be traced to what China has done, is doing, or may yet do?
We don’t know, but we suspect it’s not entirely coincidental. All rumor and speculation aside, as China clearly turns more and more bullish on gold, so will everyone else.

 

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September 14, 2009

The Insidious Weakness Of The US Dollar Drives Gold And Base Metals Higher

By Rob Davies
www.minesite.com/aus.html

A 1.8 per cent fall in the dollar last week was enough to take gold over the US$1,000 hurdle and revive talk of inflationary fears. The gold price also had separate support from news that Barrick was closing out its hedge positions. This double positive partly explains why the precious metal did better than base metals. Apart from nickel and lead, which fell 4.8 per cent to US$17,400 and 1.9 per cent to US$2,180 respectively, it wasn’t so much that base metals fell last week but that they failed to rise as much as the precious metals.

How much of that is due to anticipation of inflation is hard to tell. Although there is a great deal of comment about “the recovery” in Western countries, the statistics that demonstrate that economies are growing again really only illustrate that, compared to last year, the situation in the afflicted economies has simply stopped getting worse.

The boom that ended so dramatically with the collapse of Lehman Brothers a year ago was funded by credit. The scale of that funding - US$40.00 of debt for each US$1.00 of equity in the case of Lehman - is not about to come back in a hurry, if ever. The economic conditions of the mid noughties are unlikely to be repeated. Instead, what we have are various “measures” from governments, like Quantitative Easing and cash incentives to scrap perfectly drivable cars, in a scheme that is environmentally ludicrous.

Throwing money at the major economies has done wonders for stock markets and old bangers, but has it created a recovery? One wonders what will happen when these schemes come to an end. Will the mature economies return to sloth or will they be re-energised by voters driving around in newer cars.

The concern of many is that this injection of cash will be like a giving a three year old a bar of chocolate. A sugar rush will create a short period of unproductive frantic activity which will be followed by morose grumpiness and a demand for more. That first bar of chocolate is effectively devalued, as another is needed to maintain the economy.

It seems to many that the cash being thrown about by politicians and bureaucrats in our name is being progressively devalued. The only solution for those savvy enough to appreciate what is being done is to buy real assets, like gold, that cannot be materialised from thin air. Alongside gold sit the other precious metals - silver and the platinum metals.

But in a way, these others are hybrid metals, where part of their demand arises from their financial roles and part from their industrial applications. Base metals, meanwhile, are at the other end of the spectrum from gold, in that they have no financial role at all. Demand for the base metals comes almost exclusively from industrial applications.

Even so, they are priced in dollars, and as the dollar depreciates more dollars are required to buy each tonne of metal. And while base metals didn’t move as much as gold last week, a 0.3 per cent rise in copper took it to US$6,300 a tonne, a 0.2 per cent increase left aluminium at US$1,829 a tonne, and a 0.7 per cent rise left zinc at US$1,894 s tonne.

Those moves might not be dramatic but, on a cumulative basis, they gradually accrete to become significant changes and demonstrate the insidious decline in the dollar, whatever sort of recovery may or may mot be happening.

 

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September 19, 2009

That Was The Week That Was ... In Australia

By Our Man in Oz
http://www.minesite.com/aus.html


Minews. Good morning Australia. You seem to have had a quieter week, even if the gold price did stick at over US$1,000 an ounce.

Oz. Gold was certainly the hot topic down this way, but so was a continued and damaging rise in the value of the Aussie dollar, which cancelled out much of the value in the gold price rise. The net result was that while the overall market, as measured by the all ordinaries, rose by 2.1 per cent, the gold index managed a modest rise of just 0.6 per cent, due almost entirely to the Australian dollar rising from US85.6 cents to US87 cents.

Interestingly, the big game on the Australian market today is not mining or oil shares, it is banks and the currency carry trade. Relatively high interest rates down this way, coupled with a largely untroubled banking sector plus heavy-duty government guarantees on deposits, has seen a flood of low-cost cash entering the country. Banks have been the big beneficiaries, and the bank index rose by almost five per cent last week, taking the rise to 30 per cent over the past three months.

Minews. Let’s stick to mining, starting with gold.

Oz. Despite the overall flat performance, there were a few strong stocks. Perseus (PRU) reacted positively to a report of high grade drilling hits at its Tengrela project in Ivory Coast, rising A23 cents over the week to A$1.30. The stock hit a 12 month high of A$1.37 on Thursday. The best intersection reported was 217 grams over a one metre section, which was contained within 15 metres at 15.1grammes per tonne.

Most of the other gold stocks to rise moved on discovery and development news. Atlantic Gold (ATV), which has kept an ultra-low profile for the past year, came out with a positive development study on its Cochrane Hill project in the Canadian province of Nova Scotia. Investors stampeded into the stock on Friday, with 76 million shares out of an issued capital of 320 million changing hands in a matter of hours, all as the price oscillated between A5.6 cents and A10 cents. Atlantic finally closed the week at A8.3 cents, up A2.3 cents.

Heavy turnover was also seen in another stock we rarely hear anything about, Beacon Minerals (BCN). It reported encouraging near-surface gold mineralisation at its Barlee project in central Western Australia. An even bigger surprise than that was that on Thursday 196 million shares, or 55 per cent of the 357 million shares on issue, were exchanged at prices ranging from A2.9 cents to A3.2 cents. Beacon, which was once closely related to the Kyrgyz uranium and gold explorer Nimrodel, ended the week at A3.1 cents, up A0.6 of a cent.

Minews. Heavy volumes indeed. We might take a closer look at Beacon soon.

Oz. That can be done. Meanwhile, let’s finish with the better performing gold stocks before trawling through the sectors. A1 Minerals (AAM) announced a resource upgrade at its Delta project, copped a speeding fine from the ASX, and ended the week at A22.5 cents, for a gain of A10 cents over the past two weeks. Cortona (CRC) announced a fresh discovery at its Exeter Farm project, and added A3.5 cents to A18.5 cents, but did get as high as A24 cents on Wednesday. Troy (TRY) continued to attract fresh followers, rising by A18 cents to A$2.40, but did reach a new 12 month high of A$2.66 during Friday trade.

Elsewhere in the gold space, Alkane (ALK) added A2.5 cents on positive sentiment as it gets closer to a development commitment at its Tomingley project. Meanwhile, Resolute (RSG) started the climb back after its latest capital raising, putting on A3.5 cents to close at A64.5 cents. Also on the up, Medusa (MML) steamed further ahead with a rise of A26 cents to A$3.60. Finally, Allied (ALD) put on A3 cents after announcing a friendly takeover of Australian Solomons Gold, a company which owns the Gold Ridge project in the Solomon Islands - a project with what might be called an interesting history. Other gold stock price moves were modest, either way.

Minews. Uranium next please, because that seems to have been your next most interesting sector.

Oz. It was, with prices marching ever higher despite little evidence that the price of uranium is doing the same. Mantra (MRU) was the star of the week, following an announcement on 11th September of the discovery of thick, high-grade, uranium intersections at the Nyota prospect in Tanzania. On the market, Mantra added an eye-catching A$1.20 to close the week at A$5.05, a few cents shy of a 12 week high of A$5.18 reached earlier during Friday trade.

Paladin (PDN) and Extract (EXT), the two sector leaders, performed less strongly, but in heavy volume. Paladin added A12 cents to A$4.69. Extract rose by A21 cents to A$10.60. Another uranium company attracting attention was Cauldron (CXU), which announced an ambitious target of finding up to 35 million pounds of uranium at its Yanrey prospect in Western Australia. That was enough to lift the stock by A2.5 cents to A38.5 cents. Also arousing interest was Pegasus (PUN), a new player, which doubled from A5 cents to A10 cents in thin volume and with no fresh news. In its favour, it does at least have an interesting management team.

Minews. Iron seems to have been a bit dull last week, so let’s move along to the base metals, finishing with iron and any specials, please.

Oz. Copper remained a focus for many investors, with Sandfire (SFR) continuing to set the market alight as it drills ahead at its Doolgunna project. It traded heavily all week, ending up A54 cents at A$2.72. CuDeco (CDU) was another favourite, thanks to what is believed to be Australia’s biggest drilling programme, a 15 rig effort at its Rocklands project. This will receive a stockbroker visit next week, as interest grows. On the market, CuDeco added A70c cents to close at a new 12 month high of A$6.35. The third copper stock that’s excited investors lately, Rex Minerals (RXM), had a quieter week shedding A25 cents to A$2.17, which takes it back to where it was 10 days ago. Equinox (EQN) continued to build on interest in its big Lumwana mine in Zambia, adding A26 cents to A$3.53. Citadel (CGG) added A1 cent to A39 cents, and OZ Minerals (OZL) rose A3 cents to A$1.15.

Nickel stocks were mixed, with more fallers than risers. Independence (IGO), perhaps because of its gold assets, rose by A25 cents to A$5.00, while Mirabela (MBN), which has its best assets in South America, added A12 cents to A$3.30. After that it was all down. Mincor (MCR) slipped A12 cents lower to A$2.36, despite an excellent discovery which will extend the life of its Miitel mine. Minara (MRE) eased back by A3.5 cents to A88 cents, and Western Areas (WSA) closed down A5 cents at A$5.17. Zinc stocks were marginally stronger, with most rises in the A1 cent to A5 cent range. Terramin (TZN) added A1 cent to A75.5 cents, and Perilya (PEM) put on A4.5 cents to close at A54 cents.

Minews. Iron ore and specials now, please.

Oz. Mixed, much the same as the base metals. Atlas (AGO) dropped A3 cents to A$1.79. Iron Ore Holdings (IOH) was A1.5 cents lighter at A71 cents. Fortescue (FMG) fell A18 cents to A$4.07, and BC Iron (BCI) added A7 cents to A$1.09, after announcing the start of trial mining at its Bonnie Creek project.

A few specials are worth mentioning. Bauxite Holdings (BAU) continues to attract investor interest despite the challenge it faces of making a profit shipping low-grade bauxite from the west coast of Australia to China. It gained another A11cents to close at A$1.20 last week. Six months ago the stock was selling for A25 cents. Another example of this new-found interest in bauxite came from Hudson (HRS), which announced plans to spin off its bauxite assets into a new listed company, helping its shares by A5.5 cents to a close of A24.5 cents.

Minews. Thanks Oz.

 

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September 21, 2009

Will There Be An Autumn Wobble In Equities And Metals Prices?

By Rob Davies
www.minesite.com/aus.html


Keats said autumn is the season of mists and mellow fruitfulness. Most investors also know it as a period that can bring sharp financial shocks, and usually not good ones. The reasons are buried deep in the financial DNA of capital markets and, frankly, are not that important. What is important, though, is that everyone knows it. As a consequence market participants are currently seeking for clues in the financial undergrowth for any evidence that they are about to be ambushed.

And what makes them even more nervous this year is the steep rise in the price of risk assets like equities and commodities. Copper might be the best performer in the base metals, having doubled this year, but the others in the complex have also done well. Most equities have delivered good returns, as well, with major indices up nearly 50 per cent and emerging markets up 99 per cent. Mining shares combine the virtue of all three assets, and some of these have seen stellar rises. The best performers have tripled from their lows. It is not surprising that many investors are ready to sell and lock in the gains.

With so much good news, or to put another way with so much relief around that the bad news has stopped, the markets are now feeling more optimistic. Yet there are tell-tale sigs that all is not well. The continued rise in the price of gold, and the start of some weakness in longer term bonds are the two most obvious.

The reason both are moving is the incipient fear of inflation to come, as the scale of government borrowing is slowly being revealed. Printing vast amounts of money is politically more acceptable in the short term, but the ultimate “Zimbabweification “of the major economies is beginning to concern more and more people. The fact that the Financial Times has devoted a column to gold in two consecutive weeks is a measure of the change in mood.

Just as telling is the widening spread of 10 year bonds over two year paper, now at three per cent, and the continued weakness of the two currencies, sterling and the dollar, that represent the two countries most impacted by the banking crisis. A steepening bond yield curve has implications for the base metals, as forward prices should now increase to reflect the higher cost of money in the future. And all metals now have higher forward prices than cash prices. That reinforces the view that the market is not being squeezed, but is in fact properly reflecting future demand and funding costs.

The mining industry is unique in entering the recovery with very little spare capacity and with stockpiles at low levels even for normal times, let alone for one of the worst recessions on record. So the positive outlook for the sector can easily be justified. Indeed, one of the industry gurus, Jim Lennon of Macquarie Group, has suggested copper may rise a further 15 per cent this year to US$3.20 a pound. He is quoted on Bloomberg as saying that copper has the best prospects in the metals space because of its low stocks, limited idle capacity and the lack of new projects.

Autumn is a time to reflect on the outlook for the remainder of the year and to look ahead into the next. Sometimes it causes a sharp change of view that is quickly reflected in valuations. Maybe that is what is going on now with bond and gold prices. But the strong fundamentals of base metals should not be overlooked either. Even if equities do have an autumn wobble, the chances are that commodities, and mining shares, will fare better than most sectors, even after the gains we’ve already seen this year.

 

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September 27, 2009

That Was The Week That Was … In Australia

By Our Man in Oz
www.minesite.com/aus.html

Minews. Good morning Australia. Those lower metal prices must have hit your market hard last week.

Oz. They did, but the pain was largely felt in the gold stocks. There was a slightly happier result in the copper and iron ore sectors, where a few stocks swam against the tide. And overall the Australian stock market actually put on a few points in spite of the difficult conditions. The movement was a negligible 21 points, or less than half a percent, but the fact that the market rose at all gives an indication of the levels of international money currently flowing into Australia, chasing exposure to one of the healthier economies in the region.

Minews. But if most resource stocks were weaker, how did the overall market rise?

Oz. Banks. Curious as it might seem, the four major banks in Australia have emerged from the global financial crisis strongly, and now rank in the top 20 worldwide. The cause is somewhat ironic and not really a credit to bank management. It was more a case of the government banning Australian banks from participating in some of the sillier investment schemes conceived on Wall Street. Our banks actually complained loudly about not being allowed to participate in the securitisation packages that were created out of US home and commercial property mortgages. They’re not complaining today, though.

Minews. Time to look at the week’s numbers.

Oz. Before getting to share prices, the indices are interesting. Overall, as mentioned, the all ordinaries rose by 0.4 per cent, thanks to a two per cent rise in the financial index, which offset a 2.6 per cent fall from the minerals index, and a four per cent fall on the gold index, with gold and other minerals hit by the pincer of lower metal prices and another modest upward move in the value of the Australian dollar against the US dollar. There is talk in the market of the two Australian and the US dollar trading at parity by the middle of next year, for the first time in 30 years. If parity does come it will put further pressure on mining company earnings.

Minews. Prices now, please, starting with copper and the other base metals, leaving the bad news about gold for last.

Oz. The twin stars of the copper sector were again Sandfire (SFR) and Talisman (TLM), the two stocks with the best exposure to the exciting Doolgunna discovery in central Western Australia. Sandfire added A59 cents to close the week at A$3.31, but did hit an all-time high of A$3.40 on Friday when its managing director, Karl Simich, was delivering an upbeat report to an investment conference on the Gold Coast. The essence of his presentation was that Doolgunna will become a mine - it’s just a question of how big it will be. He also said that a fourth drilling rig is due to start work at the project in the next few days to accelerate the work rate. Talisman continued to ride comfortably in Sandfire’s slipstream, and also benefited from appearing at the same investment conference. It is yet to do any drilling, but expects to start early in the new year. On the market, Talisman also hit an all-time high on Friday, of A75 cents, but eventually closed at A67 cents, up A12 cents on the week.

Other copper stocks performed reasonably well, in a week when the price of the metal slipped. Syndicated Metals (SMD) attracted interest, courtesy of the overall Australian copper revival, and because it is working in the home of copper, the Mt Isa district of Queensland. It added A3 cents during the week to close at A26 cents. Also on the up, OZ (OZL) also rose A3 cents to A$1.18 and Marengo (MGO) put on A2.5 cents to close at A21.5 cents. Meanwhile, Ivanhoe (IVA) generated a lot of interest amid speculation that it might sell a slice of itself to a sovereign wealth fund, news that helped lift the stock by A43 cents to A$3.71. Going down, Citadel (CGG) slipped A1 cent lower to A38 cents, Rex (RXM) eased back by A2 cents to A$2.25, and the other recent copper favourite, CuDeco (CDU), dropped A62 cents to A$5.73.

Minews. Nickel, zinc and iron ore, in that order, please.

Oz. Not a lot in nickel and zinc, and most share prices moves were modest. Minara (MRE) was the best of the nickel stocks, putting in a rise of A7 cents to A95 cents. Mincor (MCR) managed a gain of A1 cent to A$2.37, while Breakaway (BRW) which is slowly getting back on its feet after a horrid 2008, crept fractionally higher to A8.7 cents. After that it was all down. Western Areas (WSA) fell A55 cents to A$4.62, and Poseidon (POS) fell A2.5 cents to A32.5 cents.

No surprises among the zinc stocks, either. Terramin (TZN) was the only one to rise, putting in a gain of A8 cents to A83 cents. Perilya (PEM) fell A5.5 cents to A48 cents. Kagara (KZL) dropped A7 cents to A$1.03, and Bass Metals (BSM) eased back by A1.5 cents to A21 cents.

Iron ore stocks were mixed. The best performer was BC Iron (BCI) which is making solid progress with its Nullagine joint venture with Fortescue Metals (FMG). Over the week BC added A8 cents to A$.17, although Fortescue dropped A6 cents to A$4.01. Also moving ahead, United Minerals (UMC) added A2.5 cents to A93 cents, Brockman (BRM) rose by A5 cents to A$1.72, and Giralia (GIR) put on A4.5 cents to A$1.03. Going down, Atlas (AGO) slipped A10 cents lower to A$1.68. Gindalbie (GBG) fell A11.5 cents to A88 cents, and Golden West (GWR) lost A2.5 cents to A36.5 cents. Finally, Centaurus (CUR), a stock we don’t hear much about because it’s developing small iron ore mines in Brazil, slipped half a cent lower to A33.5 cents, although it is a company with an interesting story to tell.

Minews. Gold, uranium and any specials to finish, please.

Oz. Before we list the gold stocks which fell, thanks to the double whammy of the gold price falling and the Aussie dollar rising, let’s have a few bits of good news. Saracen (SAR) reported a higher resource figure for its Carosue Dam project, and rose A3 cents to A32 cents. And Carrick Gold also boosted its resource base. Its shares rose A4.5 cents to A85 cents in response. And Scotgold (SGZ) delivered a similar result, reporting on work at its Cononish project in Scotland, and creeping half a cent higher to A18 cents. After that it was mainly downhill, although a few stocks held their ground. Perseus (PRU) managed to stand still at A$1.30, and Cortona (CRC) was steady at A18.5 cents. Going down, Troy (TRY) dropped A21 cents to A$2.39, thanks in part to a boardroom bust up between the former managing director, John Jones, and the incumbent, Paul Benson. Also worse off, Kingsgate (KCN) fell A26 cents to A$7.83, Sino Gold (SGX) lost A48 cents to A$6.75, Dominion (DOM) slipped A27 cents lower to A$3.85, and Allied (ALD) was A5 cents lighter at A48 cents.

Uranium stocks showed much the same pattern as the price of uranium dropped another US$4.00 a pound to US$42.00. The one piece of good news was from Thundelarra (THX), which rose an eye-catching A15.5 cents to A44 cents after reporting excellent drill hits at its Thunderball prospect near Pine Creek in the Northern Territory. After that, it was all down. Extract (EXT) fell A73 cents to A$8.93, Uranex (UNX) lost A6.5 cents to A32.5 cents, Energy and Metals (EMA) eased back by A1 cent to A24.5 cents, and Paladin (PDN) lost A20 cents to A$4.49.

No specials worth reporting, except Lynas Corporation (LYC) which has become the latest Australian company to have been prevented from selling effective control to a Chinese investor. “Not in the national interest”, ruled the Australian government. Lynas has a promising rare earths project and the Chinese are keen to cement their hold on that industry. On the market, Lynas rose A8 cents to A90 cents.

Minews. Thanks Oz.

 

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September 28, 2009

Two Recoveries Are Underway, But Only One Is Strong And Good For Metals

By Rob Davies
www.minesite.com/aus.html

It is well known that the market can believe two things at the same time. Bear and bull theories can co-exist. The prevailing price of an asset is the best balance between the two arguments. However, the current state of the capital markets is more complex than usual because there are currently positive and negative arguments for not just one economy, but for two. There is the “normal” western economy that is still staggering along after the shock of the biggest financial crash in over half a century. And then there’s the totally new economy, represented by the emerging markets, and led by China.

Unsurprisingly the average investor can be left totally bemused as market commentators trip up trying to explain what is actually going on. According to John Authers of the Financial Times, the S&P 500 now exceeds the level that nine out of ten strategists forecast for the end of the year. Does that mean sell?

Meanwhile, famed hedge fund manager Crispin Odey says that the while capital markets might be in a bubble, it is a rational bubble. He argues that because governments are underwriting the markets with gargantuan levels of cash, both real and fabricated, capital values can only go up.

All this liquidity is being used by Western banks to buy short terms bonds, thus driving down yields on two-year paper to below one per cent in the US and UK. With such cheap money, it is not surprising that other assets, like equities and commodities, have risen as the opportunity cost of holding them is so low.

The fear, of course, is that interest rates will rise at some point and disturb this happy story. Here is where the conflict between the two global economic systems comes to a head. China has US$2,000 billion worth of foreign exchange reserves to fund its growth. Western economies have… well a lot of debt and very low interest rates.

Last week, reports that Chinese imports of copper fell 25 per cent in August to 219,000 tonnes were enough to drive copper prices down 3.4 per cent to US$6,089 a tonne. Other metals were dragged down in it its wake. But, according to Macquarie Bank, China still has 400,000 tonnes of copper stockpiled. At a value of US$2.4 billion that is quite a bit of cash to have tied up. But then China knows it can fabricate it to make products either to improve its own infrastructure or to sell to the west. It undoubtedly makes more sense for the Chinese to hold metal than dollars, especially if 60 per cent of its reserves are in dollars already.

Contrast that policy to that of European carmakers in the face of massive overcapacity. Governments have become heavily involved in bailouts, but no firm action has been taken. Sergio Marchionne, the Fiat boss, described it well when he noted that no car plants have been closed in Europe as a result of the crash.

Even so, it is clear that metal demand in Europe will remain weak while Western countries, companies, and individuals are so indebted. Any recovery will be weak and slow. That may be cause for concern for industries that service the developed markets, and explains the dilemmas many investors face in regard to current equity valuations.

But commodities, and miners, are dancing to a different tune in a different market which is stronger and well funded. The news this week that Michael Geoghegan, chief executive of HSBC, is relocating to Hong Kong clearly shows which market he thinks is going to be more important in the years ahead. But commodity investors have known that for a long time already.

 

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Scotiabank bullish on copper as base metals lead commodities higher
John Morrissy, Financial Post, Canada, September 29, 2009

Copper is expected to outperform all other base metals over the next five years, leading Scotiabank to raise its target on the red metal even as its price falters temporarily in the face of weaker Chinese demand.

The widely used industrial metal will average US$2.30 a pound in 2009, rising to an average of US$2.90 in 2010, said Scotiabank commodity analyst Patricia Mohr.

Her forecast coincides with the release Tuesday of Scotiabank's monthly commodity price repor, which highlighted an 8.1% surge in base metals prices in August. That led the broader index 3.5% higher after a dip in July.

"Base metal prices have already returned to profitable ‘mid-cycle' levels, a development normally taking several years following the end of a global downturn and a testimony to the resiliency and growing importance of China and ‘emerging' Asia (including India) in the world economy," said Ms. Mohr.

As a result, Ms. Mohr said, "copper will continue to outperform other base metals, given under-investment in new capacity during the last cyclical peak in 2007-2008."

Ms. Mohr expects average copper to rise again in 2011 to US$3.25 a pound. But she said prices could run much higher as Asian growth drives demand higher.

Prices have trailed off lately, trading now around US$2.75 from a high of US$2.94 in August, as a surge in Chinese buying in the first half of the year has slowed. Ms. Mohr expects prices could slide further, but firm up in the first quarter of 2010 once China returns to the market and demand from the West begins to pick up.

Precious metals also helped boost the index, with gold surging as high as US$1.024 an ounce in mid-September and silver outperforming gold to trade above US$17 an ounce. Continued declines in the U.S. dollar and news of Barrick Gold closing out its hedge book should be "quite supportive"of prices, Ms. Mohr said.

The index, which tracks prices paid for key Canadian exports, also found energy on the rise, up 3.9% for the month, during which oil prices spiked as high as US$75 a barrel, before settling back to the US$66 to US$67 range.

Mr. Mohr said commodity prices have been supported by the return of hedge funds, sovereign wealth funds and institutional investors, who have returned significantly to commodities as an asset class since last spring.

The agriculture subindex was the only one to fall in August, down 7.21%, "with seasonal harvest pressure pushing down grain prices."

 

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October 02, 2009

China Celebrates Its Advance Towards World Economic Leadership, As Should Investors In Resource Stocks

Source: www.minesite.com/aus.html

It is 60 years since Chairman Mao came to power, but it was certainly not he who set China on the path to economic power. The honour for that goes to Deng Xiaoping, the leader who started a series of economic and political reforms which led to the gradual implementation of a market economy and some political liberalization that relaxed the established communist systems.
His reforms did not come quickly enough for many who watched the political liberalisation that had been undertaken in the name of glasnost by Mikhail Gorbachev. The massacre in Tiananmen Square on 4 June 1989, came after a wave of protests all round the country and was intended to remind the protelariat of their position in life. It actually achieved the opposite as it reminded Deng of the power of the people and he accelerated his reforms. The result was the amazing progress of China over the last 20 years from a backward nation mired in poverty, a state-planned economy and held back by socialist dogma into the third biggest economy in the world.

Its progress is not going to halt here and this was what was being celebrated at Nation Day yesterday. The International Monetary Fund forecasts Chinese growth of 8.5 per cent this year and 9.0 per cent next, as the country leads Asia's recovery. The country's PMI (purchasing manager's index) rose to 54.3 in September up 0.3 points, with a value above 50 implying expansion, and manufacturing expanded at fastest rate for 17 months in September. Moreover stimulus funding and liberal bank loans encouraged manufacturers to continue to expand activity. A little bit different from our experience in the west.

Portraits of China's Communist leaders were paraded through Tiananmen square while President Hu Jintao looked on. He was joined by his predecessor Jiang Zemin, Premier Wen Jiabao and other senior leaders. "The development and progress of the new China over the past 60 years fully proved that only socialism can save China, and only reform and opening up can ensure the development of China," Mr Hu told the crowd. After his speech, there was a two-hour parade of 8,000 soldiers, tanks and missiles - including long-range nuclear missiles. Later there was a spectacular fireworks show and a concert of patriotic songs and dancing.

Quite a day and it was amusing to see that the Empire State Building in New York lit up in red and yellow in honour of China’s Nation Day .Or maybe it was to acknowledge that the baton of economic power was passing from West to East. And just to give an idea of the scale of this progress Joel Bowman reported from Taiwan yesterday for Rude Awakening that China’s universities churned out 30,000 MBAs last year: back in 1998 there were none. Even more pertinent, there are now more English-speaking Chinese people than there are people living in the United States.

Although the country already has more than 160 cities with a population of greater than one million (the U.S. has nine, the U.K two), housing, feeding and catering to the needs of China’s 1.3 billion people is no small task. Today China consumes half of all the world’s cement as it strives to build 97 new airports, 500 additional coal fired plants and 30 nuclear plants in the next decade. It commissions a new power plant every four days and, in 2007 alone, added as much power generating capacity as the entire output of France.

Its supplies of energy, metals and minerals have to come from somewhere and last month China’s sovereign wealth fund, China Investment Corporation splashed out over US$3.6 billion on resource investments around the globe. Its latest purchase, an 11 per cent stake in Astana, an exploration and production arm of Kazakhstan’s state-run energy company, is right in line with the fund’s mandate - Buy the world’s resources and buy them now!

CIC’s latest Central Asia investment tops off a month in which the fund also secured a 15 per cent stake in Noble, a Hong Kong-based commodity supplier and a 17 per cent chunk of Teck Resources, Canada’s largest diversified mining company. Add to that a US$1.9 billion debt purchase from Bumi Resources, Indonesia’s main coal producer, and the story starts to tell itself. Closer to the US, China has been doing deals in South America to great effect. Earlier this year Brazil’s national oil company, Petrobras, walked away with a US$10 billion loan to help develop its mega Tupi field. Petrobras will, in turn, supply 150,000 barrels of crude per day to China this year and 200,000 barrels next year. Every day a deal is the cry and in the last couple of days came news that China National Offshore Oil Corporation, is expected to join talks with UK independent Tullow Oil over its US$5 billion oil project in Uganda.

China’s industrial revolution has been in progress for 20 years at most: the UK’s took 65 years. So what will the global economy look like in 2005 when this revolution should have run out of steam? Dr Marc Faber who wrote the book ‘Tomorrow’s Gold’ back in 2002, which was essentially a preview of what is now happening in the East, reckons that China will be the world’s biggest economy by then. The economies of the U.S. and India, should be neck and neck for the No 2 spot - about 60 per cent of the size of China’s. A personal view is that it will be good to see India in that spot. Indians speak English, they have a sense of humour and they understand cricket. Americans fail at all three.

A distant fourth, at maybe a quarter of the size of the U.S. economy, will be Brazil, followed closely by Mexico, Russia, Indonesia and Japan. No mention there of the European Union, but maybe Dr Faber deals with it country by country.He uses the motor industry to illustrate China’s future path to growth. Cars don’t operate in a vacuum. They require an entire operating system to run, as software does. You need roads, for instance, and you need petrol stations and fuel stations, and gasoline. In 2008 sixteen of the largest emerging markets, which includes China and India, passed the US, the EU and Japan as the world’s biggest automotive markets. What’s interesting here is that even in this recession that gap has widened.

It is easy enough to speculate how demand for oil will rises in these circumstances as the US uses 25 barrels per person per year. In China with its vast population the figure is 1.5 barrels and in India, which runs it close in terms of population, even less. The argument can be taken even further as China is nowhere near self sufficient in metals and minerals for all the building and construction that lies ahead so the theory of an economic super-cycle still stands even after the disastrous end to 2008. Commodity markets never rise in straight lines. Production tends to catch up with demand as prices rise and eventually there is a hefty correction.

“Hard asset booms,” explains Marc Faber, “are fueled as much by pessimism about economic prospects as by optimism about a continuously high appreciation of the commodity in question. “In this sense, commodity booms are characterized by greed based on fear.” Heard that somewhere before.

On the question of the dollar, Faber is convinced that it will lose value against the real world of commodities. Sooner or later he expects major inflation thanks to government stimulus and money printing. Therefore the good doctor is long of gold and silver. He also thinks Japanese equities are depressed and points out that many Asian equities are near 20-year lows, except China’s. He also likes financial services in emerging economies and infrastructure stocks.

On this latter idea, Faber said, “There are bottlenecks everywhere,” and noted a potential problem of delays or cancellations. He likes farmland, too, which is encouraging for the writer who has farmland in Kent close to the Channel ports. The overall message, however, is that the Chinese will continue to be key to growth in demand for energy, metal and mineral resources for many years to come and investors should not miss out on the companies concerned.

 

[drillinto]

October 04, 2009

That Was The Week That Was … In Australia

By Our Man In Oz
www.minesite.com/aus.html

Minews. Good morning Australia, a grim week all round by the look of things.

Oz. Not the happiest, with every sector down, even gold, which should have benefited from the twin boosts of a higher metal price and a lower Australian dollar. Despite that the gold index fell by 4.2 per cent, which was the same as the overall metals and mining index, with both close to double the 2.3 per cent drop in the all ordinaries which was again held up by the banks.

A trawl through the mining stocks found the odd nugget of good news, but you had to look hard. Kingsgate (KCN) was best among the gold miners thanks to news of a handy reserve increase and a fresh discovery near its A-pit at the Chatree mine in Thailand. Chalice (CHN) benefited from an updated scoping study at the Zara project in Eritrea, and a company with the delightful name of Montezuma (MZM) poured first gold at its Peak Hill mine in Western Australia and managed a small share price increase.

Minews. Time for prices, please.

Oz. Before that, it’s worth a few more observations about trends which might be emerging in the Australian market. The new floats game is returning, perhaps prematurely. From zero for most of 2009 there are now four mining stocks with applications to list in front of the ASX. No guarantee that any of them will succeed, but it’s a pleasing sight nevertheless.

Capital raisings by existing miners have also continued apace with Lynas (LYC) cobbling together a pool of capital for its Mt Weld rare earths mine after failing to win Australian Government support for a deal with a Chinese partner. Silver Lake (SLR) is looking for a spot of fresh capital to expand its exploration effort and Platinum Australia (PLA) has raised A$30 million, also because a Chinese deal fell through.

One other curious trend is that the much-maligned zinc sector appears to have had the best week of all thanks to small price rises by Herald (HER) which put on A9.5 cents to A90 cents after directors accepted a takeover bid from an Indonesian company. Mt Burgess (MTB) hit a 12-month high of A3.2 cents, before easing to close at A2.9 cents, and Ironbark (IBG) did better than double from A13.5 cents to a mid-week high of A29 cents after announcing a deal with Nystar over its Citronen project in Greenland. It eased on Friday to end the week at A22.5 cent.

Minews. We might take a closer look at Ironbark next week, but for today let’s finish the base metals call-of-the-card and then travel through the sectors.

Oz. Sounds like a good plan, with a final word on zinc stocks, because life might be returning. If you look at the price trends of copper, nickel, lead and zinc it is zinc which has led the way for the past six months, though possibly because there have been more zinc mine closures than of the other base metals. Perilya (PEM), one of the local leaders, slipped A1.5 cents lower last week to A47 cents, and Terramin (TZN) was A7 cents lighter at A76 cents.

Copper, which has been the hottest of the base metals thanks to discoveries by Sandfire (SFR), Rex (RXM) and CuDeco (CDU), was relatively quiet last week. Sandfire added a modest A9 cents to A$3.40, but did hit a fresh all-time high of A$3.99 on Tuesday. Rex fell A19 cents to A$2.06 and CuDeco added A4 cents to A$5.75. Other copper moves were minor either way. Citadel (CGG) added half-a-cent to A38.5 cents. Syndicated (SMD) fell A1.5 cents to A24.5 cents. Vulcan (VCN) lost A1 cents to A13 cents after confirming its plan to merge with Universal (URL) which slipped one-tenth of a cent to A2.3 cents.

Nickel stocks were generally down with Western Areas (WSA) the one exception with a rise of A4 cents to A$4.66, while Mincor (MCR) lost the same amount of A4 cents to A$2.33. Minara (MRE) fell A6.5 cents to A88.5 cents and Independence (IGO) lost A19 cents to A$4.35.

Minews. Gold now, please, because that’s probably the most interesting metal in an uncertain world.

Oz. Kingsgate, as mentioned earlier, was the pick of a rather ordinary crop, adding A36 cents to A$8.28, which is almost back to its 12-month high of A$8.39 reached in the previous week. Both Chalice and Montezuma, the other two stocks mentioned higher up in this report, added A1.5 cents to A39.5 cents and A16.5 cents respectively. The only other rise among the gold stocks was a minimal half-a-cent gain to A12 cents by Southern Gold (SAU) which announced a joint venture with Dominion Gold (DOM), which slipped A4 cents lower to A$3.81.

After those blips of good news it was all down, with a few prices to convey the mood of the sector. Troy (TRY) fell A25 cents to A$2.14 as it battled boardroom disquiet. Silver Lake lost A5.5 cents to A88.5 cents in the wake of its capital raising. Adamus slipped A7 cents to A42 cents. Perseus (PRU) fell A12 cents to A$1.18. Resolute (RSG) lost A1.5 cents to A62 cents, and Scotgold (SGZ) eased back by A1.5 cents to A16.5 cents.

Minews. A pretty dull lot. Let’s move across to iron ore, uranium and coal, please.

Oz. One up and the rest down is a quick summation of the iron ore sector. The only rise came from Crusader (CAS), one of the small Australian players trying its hand in the Brazilian iron ore business. It announced plans to start a one million tonne-a-year mine, adding what was an eye-catching A7 cents in a flat week to close at A23 cents. Centaurus (CUR), another of the Aussies in Brazilian iron ore patch, slipped A1 cent lower to A32.5 cents. After that, it’s a long list of losers, like gold. Fortescue Metals (FMG) suffered a setback with its Chinese fund-raising plans, dropping A38 cents to A$3.63. Atlas (AGO) lost a less-painful A6 cents to A$1.62. Murchison (MMX) fell A15 cents to A$1.44, BC Iron (BCI) lost A11 cents to A$1.06, and Cazaly (CAZ) won the loser’s sweepstakes with a fall of A8 cents to A24 cents after failing with its latest round of legal argument over the Rhodes Ridge iron ore deposit controlled by Rio Tinto.

Uranium stocks were generally down, with two exceptions, not that their price rises amounted to much. Mantra (MRU) added A1 cent to A$4.51, and Nimrodel (NMR) added half-a-cent to A9 cents, though perhaps more because of fresh news from gold exploration in Kyrgyzstan. After that, it was all down. Paladin (PDN) fell A15 cents to A$4.34. Extract (EXT) slipped A10 cents lower to A$8.83. Toro (TOE) lost half-a-cent to A18 cents and Uranex (UNX) fell A2 cents to A30.5 cents. Coal stocks were mixed. Coal of Africa (CZA) lost A12 cents to A$2.12. Cockatoo Coal (COK) added A1.5 cents to A36 cents, and Riversdale (RIV) fell A16 cents to A$5.26.

Minews. Specials to end please.

Oz. There were a few specials worth mentioning. Lynas, the rare earths hopeful mentioned earlier, fell a sharp A25 cents to A65 cents after announcing a big share issue to make up for the collapsed Chinese deal, and OM Holdings (OMH), a manganese miner, lost A12 cents to A$1.69 after announcing a deal with Brian Gilbertson’s Pallinghurst group over the Tshipi manganese project in South Africa.

Minews. Thanks Oz.

 

[drillinto]

"Banks expand commodities trading desks"
Fri Oct 9, 2009 5:28pm EDT // Reuters


¤GOLDMAN SACHS (GS.N: Quote, Profile, Research, Stock Buzz)

Global head -- Isabelle Ealet

Staff -- Has more than 200 commodity professionals in locations throughout the world, such as New York, Calgary, Houston, London, Sydney, Singapore and Tokyo

History -- Entered the commodities business in 1981 with the purchase of a firm called J. Aron.

Focus -- Serving corporate clients and financial investors ranging from hedge funds to institutional investors and private equity firms. It is one of the few investment banks in the world that physically trades and ships crude oil.

¤BARCLAYS CAPITAL (BARC.L: Quote, Profile, Research, Stock Buzz)

Global head -- Benoit de Vitry

Staff -- The bank had 240 people in commodities at the end of the last fiscal year.

History -- Started trading commodities in 2000.

Focus -- Active in oil, refined products, metals, power and gas, coal, agriculturals, emissions and investment products.

Growth plan -- Plans to increase its commodities staff by over 30 percent to 320 by the end of the fiscal year.

The main area of growth is the physical markets and Barclays created a shipping division called Pendle in March to support its physical oil trading operations. [ID:nLR198602]

¤CREDIT SUISSE (CSGN.VX: Quote, Profile, Research, Stock Buzz)

Global head -- Adam Knight, who joined in 2007 from Goldman Sachs where he was head of global metals trading.

Staff -- At the end of 2008 it had more than 130 staff globally.

History -- Entered the business in 2005 and has accelerated its expansion since 2007.

Focus -- The bank is active in oil and refined products, coal, metals and agricultural commodities such as wheat, soybeans, milk and sugar.

It has a large presence in the physical market through its alliance with Swiss commodities trading house Glencore.

Growth plan -- The bank has hired 100 people since 2007 and plans to add another 100 in the next 18 months, Knight told Reuters in an interview last week.

It brought on two new directors in New York and a head of Vanilla Index Trading in July.

It is in the process of closing its U.S. power business but has now started trading European gas and power in-house.

¤STANDARD CHARTERED (STAN.L: Quote, Profile, Research, Stock Buzz)

Global head -- Vincent Van Pelt. He joined last year from Bear Stearns where he spent 14 years, mostly as co-head of European equities.

History -- The bank started its commodities business three years ago. It tripled its customer base in 2008 from the previous year and is hoping to double it again this year.

Focus -- It offers commodity-linked financing and structured products in precious metals, base metals, energy and farm products.

Growth plan -- The bank plans to expand its coal trading operations by hiring more people this year and will aim to start trading physical commodities trading by next year. It is keen to expand its presence in sugar and palm oil.

¤RBS SEMPRA (RBS.L: Quote, Profile, Research, Stock Buzz)

Global head -- Kaushik Amin. He joined in May and formerly worked for Lehman Brothers where he was global head of liquid markets.

History -- The commodities joint venture between the Royal Bank of Scotland and Sempra Energy (SRE.N: Quote, Profile, Research, Stock Buzz) was created in April 2008.

Focus -- RBS Sempra Commodities is mainly active in physical markets and its main markets are crude oil, base metals, European power gas and coal and North American gas and power. It also trades U.S. agricultural products and emissions.

Growth plan -- A spokesman said it is planning to expand and is currently hiring, but declined to give details. RBS Sempra appointed two new managing directors in June, both from Lehman.

¤MACQUARIE (MQG.AX: Quote, Profile, Research, Stock Buzz)

Global head -- Andrew Downe

Staff -- 680 in commodities and treasury combined.

History -- Macquarie has provided trade financing and risk management services across the commodities complex since the early 1980s. It is one of the longest standing providers of agricultural over-the-counter derivatives and tailored risk management services in the financial sector.

Focus -- Macquarie is active in metals, agricultural commodities, oil, products and natural gas.

¤AUSTRALIA AND NEW ZEALAND BANKING GROUP (ANZ.AX: Quote, Profile, Research, Stock Buzz)

Global head -- Christophe Renaud. He joined in 2006 from Societe Generale (SOGN.PA: Quote, Profile, Research, Stock Buzz) where he was a commodity derivatives trader.

History -- Started in gold in 1996 and expanded into base metals and agricultural commodities in late 2000. Since 2000, it has entered the oil, thermal coal, electricity and emissions markets.

 

[Garpal Gumnut]

Its all about OIL stupid.

To paraphrase Bill Clinton

WPL CVN MOS and any other oiler you care to mention on the ASX.

gg

 

[drillinto]

October 12, 2009

Remember, Escondida Was Once A High Risk Project: Markets Are More Efficient Than Many Commentators Realise

By Rob Davies
www.minesite.com/aus.html

It is amusing that newspaper columnists are convinced that market prices are wrong. This week several pundits have taken the view that mining shares are too expensive and are due for a fall. And of course they all think the gold price is too high.
But for anyone who thinks metal prices are too high the simple riposte is to invite them to go out and find some more metals for themselves, and then to arrange finance and get permission to build a mine and then to actually dig the stuff up, refine and sell it. It’s not something that can be done overnight, even in a developed country - or maybe especially in a developed country.

Then again it is not particularly easy in undeveloped countries either, as the stalemate this week over Tenke Fungurume in the Democratic Republic of Congo (DRC) shows. Tenke Fugurume is one of the world’s largest undeveloped copper deposits. If it was fully in production today its output would transform the supply and demand balance for copper. However, it is located in the DRC where the rule of law is still getting re-established after the kleptocracy of Mobutu.

The current government thinking there is that owners Freeport McMoran and Lundin were given the licence on terms that were too easy, although given that the spend on the project has already run into the billions, and that the political risk on the project is just as intense as ever, the word “easy” may stick in the craws of some Freeport investors,

In Mongolia, though, there is a different big project story. Rio Tinto and Ivanhoe Mines have reached agreement with the government to develop the Oyu Tolgoi deposit, one of the world’s other large known but unexploited copper deposits. Obviously the Western partners in this project are comfortable with the level of return they expect to get for the risks involved. It is unlikely, though, that the project would have got the green light when copper was trading at less than US$1.00 a pound, a price which is still in the not-too-distant past.

What many observers outside the industry totally fail to comprehend is the level of risk, complexity, time and sheer expense in finding a new large metal deposit and bringing it to production. That commitment can only be made if the rewards are high enough and that means metal prices will rise until they are.

Of course demand is needed to pull metal prices up. Implicit in many of the negative comments about metal prices and the valuations of mining shares is the expectation that demand is about to collapse. That seems an odd view as the Western world struggles with it worst recession for half a century. Can car making or construction get any more depressed?

It is the strength of Chinese demand, though, that worries these doomsters. And, to be fair, there are some grounds for concern, especially on the issue of the stockpiles the Chinese have amassed. If these were used to satisfy internal demand then the impact on world metal prices would be severe, but only for a while. Once normal consumption had depleted the inventories fresh material would be needed.

So the doomsters might be right. Maybe metal prices have risen too far too fast, but anchoring valuations to where they were at the beginning of the year is missing the point. For a real perspective, what’s needed is a look back ten or twenty years to when today’s mines were commissioned. It was low metal prices then that prevented more being built. Remember, Escondida was once a high risk project.

 

[drillinto]

October 15, 2009

Western Australia Shines Brightly While The Rest Of The Western World Is Still Feeling Its Way In The Dark

By Alastair Ford
www.minesite.com/aus.html

If you’re sitting somewhere in the Square Mile, or in Canary Wharf, the West End, or in Toronto or Vancouver, you may still be feeling cautious about the global economy, and wondering if the recent positive trends will be sustained through to the end of the year. Not so in Australia, where the banks managed to avoid the worst excesses of the credit crunch, and especially not so in Western Australia, where most of the country’s resources companies are based. These are now back up and running after what turned out, from the Aussie perspective, to be a relatively minor blip in the economic cycle. Western Australia is busy selling commodities and assets to the Chinese, and the Chinese are only too happy to buy.

This trend is reflected in recent movements in the index of the top hundred Western Australian-listed companies as compiled by Deloitte. Overall the index, which is dominated by miners, has doubled in value since the start of the year. The total value of the companies on the index at the end of December was A$144 billion, up a further five per cent on the August number. It was noticeable, however, that of the three miners in the top five companies, Fortescue, Paladin and Equinox, the first two actually declined in value, while only Equinox rose. Equinox, of course has been helped by the bedding down of operations at its Lumwana copper project, and by the recent strength in the market for copper, centred around Chinese buying. The uranium market has been less helpful to Paladin, while questions around Fortescue’s financing options have wiped some of the smiles off the faces of an otherwise happy bunch of shareholders.

So, with the top end underperforming, it was the lower levels of the index that really drove growth in the early autumn. Star performers were Sandfire Resources, up 97.7 per cent, Bauxite Resources, up 110.1 per cent, and Arafura Resources, up 59.7 per cent. Sandfire’s leap in value was based around excellent progress on its Doolgunna copper-gold project, and the announcement of a positive looking joint venture on another property. Shares in Bauxite Resources, meanwhile, moved up after it closed a A$57 million financing, and on the back market uncertainty about the overall bauxite market as major supplier Rusal teeters on the brink of insolvency.

And Arafura was in positive territory as it issued A$23 million worth of shares to a Chinese investor, and embarked on a major round of promotion as regards its rare earth project in Northern Territory. Rare earths have been much talked about lately, as China, the major supplier, has been very public about its intention from now on to channel the bulk of production into the domestic market. This has led to a flurry of interest in rare earth companies with assets elsewhere, including Arafura and Greenland Minerals and Energy (which hasn’t, as yet, made it onto the index). There was even an article in the economist which mentioned Arafura, so full marks to the company’s PRs.

Also on the move were uranium-focused Extract and gold-focused Centamin, both of which sit comfortably over the A$2 billion threshold these days, and both of which, it has to be said, look set to add more value in the future. Some think Extract overbought, given the lack of production, but powerful and acquisitive neighbours are very useful when it comes to supporting a share price, especially when the resource base just keeps on growing. There are no such worries about Centamin, which has just gone into production, and which, according to a presentation given by the company’s chief Josef El-Raghy to our October Minesite forum this week, ought to be producing at an annualized rate of 200,000 ounces by the end of the year. Centamin won’t be long for the Deloitte index, though, as the company will dispense with its ASX listing, following an imminent move up from Aim to the full list in London. Centamin’s Canadian listing will be retained.

Deloitte’s managing partner in Western Australia, Keith Jones, sums up the current mood fairly well: “The powerful rebound in the value of West Australian entities is reflective of sustained demand for resources, stronger commodity prices, and growing market confidence. The market rebound has been underpinned by demand from China for resources and investment opportunities, with many companies capitalising on the improved sentiment by raising new capital to advance projects”. That’s it in a nutshell, and though it has to be said that the FTSE also improved by five per cent last month, and the US S&P was up by just over three per cent, neither of these indexes have come anywhere near to doubling since January.

But the Aussies have hardly blinked in this recession. It now looks like Australian interest rates might be about to rise for the second month in a row, according to a recent Bloomberg survey of analysts. In the UK, by contrast, talk is that rates will be on hold for the better part of two years. It’s no wonder the Aussie dollar is so strong.

 

[drillinto]

October 19, 2009

It's Only A Matter Of Time Before Mick Davis Seduces Cynthia's Shareholders

By Rob Davies
www.minesite.com/aus.html

Last week Goldman Sachs reported net profits for its third quarter of US$3.2 billion. That’s a staggeringly large number by most standards. What’s sobering, though, is to put Goldman’s recent run of profits into context by comparing them with those generated by other industries. Take mining, for example. Such a comparison is timely because Xstrata announced last week it would not pursue a merger with Anglo American. In the first half of this year Xstrata made a net profit of US$643 million while Anglo American made US$3 billion. But before we can to a figure that is comparable to that generated by the bank over the same period, we need to add in the US$2.5 billion net profit that Rio Tinto made in the first half.

In other words the total effort made by three of the four largest mining companies generated the same reward as just one, albeit large, bank. And the money made by those miners is a consequence of capital committed decades ago by lots of clever people in some hostile locations and surmounting formidable technical challenges. The bank made its profit by shifting money, its own and other people’s, in very clever ways and using its balance sheet. So why don’t all the miners go and work for Goldman Sachs instead?

Of course there is more to it than that. A lot more. Goldman Sachs would probably have failed a year ago if Uncle Sam had not bailed out AIG, which insured much of Goldman’s business, in aftermath of the credit crises. So close did the financial system come to failure that the US, and all major economies, flooded the market with liquidity and dropped interest rates to virtually zero. Those banks that survived suddenly found themselves in the nearest thing to financial heaven this side of the Pearly Gates. Not only had most of their competitors disappeared overnight but they had access to virtually free money.

It took a little while for the remaining participants to pinch themselves and comprehend the windfall they had been given. That took until the beginning of the second quarter of this year. But then they went bananas. With the price of risk so expensive it meant every asset had become incredibly cheap. Commodities and equities were a one way bet. The gains in the last six months have been eye-watering and most of them have been captured by the banks which now have the status of endangered species. No government will be allowed to disturb their natural habitat, at least for a while.

Even so, the view that risk assets such as commodities and equities have risen too far too fast is widespread. A correction can only be a matter of time. How the banks will cope with that remains to be seen. One thing is for sure though. Those super returns will attract lots of capital and people keen to get a small slice of those returns, even if they won’t be quite so large in the future.

After all what do you need? Just an office in the City or Wall Street, an address book and, oh yes, some capital. Even after the 40 per cent collapse in global wealth there is still plenty of capital out there. And, eventually, governments will be keen to introduce some competition into banking.

What about mining? Well, that’s all a bit difficult and dangerous. Besides the returns aren’t great, just look at those profits in the first half. Anyway, Rio Tinto and Xstrata have just raised a lot of money. No, mining is unlikely to attract a lot more capital in the short term. And that is precisely why the returns from capital currently invested in mining are going to be high for many years yet. It is only a matter of time before Mick Davies seduces Cynthia’s shareholders and combines the two miners to make a powerful third force in mining. That will drive up the return on capital for it and its two rivals to the benefit of all mining investors. For those that have the patience, the long term investor in mining may well have the last laugh. After all, who would be mad enough to start a new mining company?