Originally published February 24th, 2016 in the Gold Stocks Sector
Focusing on The Gold Producers
"Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewellery. It's not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating." ~ Alan Greenspan, ex-US Federal Reserve Chairman, August 23, 2011
"Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted." ~ Alan Greenspan, May 20, 1999
The astonishing strength behind the most recent rally in gold is known to all readers. Also, the reasons behind gold's change in fortune have been well documented by such writers as Michael Pento, Egon Von Greyerz, Peter Schiff, Marc Faber, James Turk, Rick Rule and on this site by Clive. Hence, there is no need to discuss this here. Suffice it to say that the scale of the developing global financial and economic crisis has no historic precedent. Furthermore, such is the parlous state of the Central Bank based global banking system that interest rates can no longer be used to stimulate or correct the excesses of a world drowning in an ocean of debt where the lifeblood of the economy is being absorbed by unproductive banks and financial institutions and enormously bureaucratic, inefficient and vastly oversized governments hooked on a battery of taxes ranging from graduated personal income tax, corporate tax, value added tax, capital gains tax, death duties, habitation tax, stamp duties and so on and on. Indeed, so complicated have tax systems become that the 2016 tax guides for the UK, US, Canada, Australia and Europe virtually rival major encyclopaedia in size. The misallocation of capital and resources has reached epic heights with taxation, debt, corporate and unprecedented personal regulation and loss of liberty closely akin to Communist Russia and other dictatorial regimes. To say the world has never been in such an appalling mess would be putting matters mildly. The reader is highly recommended to read www.zerohedge.com which daily documents how things really are, rather than the totally misleading Orwellian "Disney World" like fantasy presented by the mainstream media.
The latest proposals of the Central Bankers, led by the very desperate Bank of Japan and the increasingly desperate ECB moving ever deeper into Negative Interest Rate Policy (NIRP) country, after years with Zero Interest Rate Policy (ZIRP) and QE1, 2 and 3 from the US Fed, testifies to the absolute lack of options left on the table and maniacal nature of the elite in their pursuit of Global Government and control of the planet and the sustaining of the surreal "all will be well" and "strong economy" nonsense purveyed on all controlled media outlets to the Joe Public.
To add to the systematically unravelling economic and financial shambles, the world is now faced with not one imminent "black swan" event but an entire flock of them hitting almost simultaneously, as follows:
The collapse of the BALTIC DRY GOODS INDEX (BDI) to its lowest level in history - down from over 11,500 to 290 last week - a staggering fall of 97.50%, thus recording a virtual collapse of trade in major commodities lead by oil, gas, coal and iron ore as most notably the Chinese economy as well as the world economy generally implodes, coincident with the extreme loss of money velocity. Put simply the world economy is seizing up, as shown on Figure 1 below;
Figure 1: The greatest collapse in the bulk tonnage freight index in global history. The Baltic Dry Goods Index falls from its zenith of nearly 11,000 to todays 290. This is the clear harbinger of economic collapse and the effective seizing up of the global economy.
All major global equity markets are in a bear market and moreover it's only just begun. Falls so far are off their peaks at between -12% and -20%. On this site, we are expecting at least a further 30% - 50% fall in these markets during 2016. The fall on the S&P will be the most spectacular with a 60% decline probable from its 2015 peak, as shown on Figure 1 below;
Figure 2: "STARING INTO THE MARKET ABYSS IN 2016". A graphical history of 20 years of crass monetary policy by the Central Banks and the enormity of market bubbles created (equities, T Bonds, Derivatives and Real Estate).
Commodity markets (the CRB Index) are down some 85% to 90% and many major mining stocks are down between 65% (RTZ) to 90% (VALE and Freeport MacMoran FCX).
The war in Syria and Iraq which has gotten steadily worse with the stakes getting ever higher threatens to turn into an all-out proxy war between Saudi Arabia, Turkey and Russia and Syria, with the US and UK waiting for the go signal to come in behind its Muslim allies. The US, Israel, Saudi Arabia, the UK, France and Turkey have been planning this one for years. Russia entering on the side of Syria (the elected Government, despite how President Assad is presented in the syndicated and biased Western media) against ISIS and Al Nusra, plus a host of other "legitimate" (US and "Allies" supported) opposition groups all funded and militarily supplied by the West and Saudi Arabia has been a game changer for the US, UK, EU, Turkish and Saudi Arabian planners. However, the US led coalition, Turkey and Saudi Arabia always knew that there was a chance that Russia could militarily support Syria.
Currently, a very dangerous escalation has been precipitated by the imminent fall of Aleppo to the Syrian forces. Saudi Arabia and Turkey could send in ground troops and aircraft based in Turkey to "attack ISIS" a Saudi and CIA backed creation, but everyone knows their prime targets are to: 1) depose President Assad and replace him with a puppet Government; 2) neutralize Russia's influence in the region; 3) meet Israel's regional strategic agenda to neuter and control the Arab States in the region; 4) take control of the important Kurdish controlled Iraqi oil fields of Mosul and Kirkuk and those of Southern Syria, currently being pumped out and sold by ISIS and the Turks.
Finally, as if all this were not enough, China has been militarizing its newly built "islands" in the Spratly Island Chain in the South China Sea, jointly claimed by the Philippines, Malaysia and Vietnam. The Spratlys, besides being the potential site of major oil and gas fields containing billions of barrels of oil and trillions of cubic feet of natural gas, sit astride the world's greatest trade route between Japan, China and the Indian, African, European and North American markets where some US$ 5 trillion in goods passes every year. This has all the makings of a major conflict flashpoint between China, the US, Australia, the Philippines, Malaysia, Taiwan and Vietnam.
Simply put, the situation for gold has never looked better in history, and this site believes that the next few years in the gold market may be the greatest the yellow metal will ever experience. Given the scale of the: 1) financial imbalances especially within the equity, bond and derivatives markets where risk levels are rising at an exponential rate; 2) colossal misallocation of resources and dislocation of society; 3) massive wealth imbalances due to monstrous redistribution of wealth into the hands of the few at the expense of the majority with all the inherent socio - political risks this implies; 4) most companies and individual people are submerged under unprecedented colossal debts from students to real estate mortgage holders; 5) growing and very serious geo-political risks from Estonia, Ukraine, Syria, Turkey, Iran, Afghanistan, Pakistan to the South China Sea and Korea, the stage is set for enormous upheaval not seen since 1914 and 1939. Against this unique and horrifying global canvas, gold is set to experience a resumption of its bull market and reach unprecedented valuations as the global markets face a brutal rebalancing in a world that is now a "tinder box" set to explode into war and conflict.
Gold - Getting Set for The Greatest Bull Market of All Time
Prior to the New Year, the US$ had been experiencing a bull market rally for some 15 months whilst almost all other currencies had been in decline, especially those whose economies were seriously exposed to the fortunes of commodity prices like, Brazil, Russia, Kazakhstan, Venezuela, Nigeria, Saudi Arabia, Canada and Australia. Effective currency devaluations of the order of 30 to 40% have been the norm. For Australia the A$ has fallen from US$1.10 to today's US$0.70 a loss in value of some 35%. The Canadian $ (the Looney) has experienced a similar devaluation. Hence, for those gold producing companies whose mining operations are located in Canada and Australia in TSX or ASX listed companies, the gold price in their local currencies has actually appreciated and with it their profit margins. As discussed in my earlier article on The Best of the Australian Mid-Cap Gold Producers, these companies have been in a bull market since November 2014, and their stocks have seen rises of between 75% and 110%, whilst the general markets have now entered clear bear market territory.
Figure 3: A 15 year chart of the XAU index with key historic events annotated. The current gold "break out" is indicated at the juncture of selling exhaustion in the XAU and the imminent weakness and collapse of the US$ and the major equity markets.
In the early phase of the return to the gold bull market, whilst the gold price breaks above the falling 200 and 300 day moving averages (MA's) and overcomes various inherited resistance levels around US$ 1,250 and 1,350 / ounce gold prices, it is wise to build portfolios in companies that have the following main characteristics:
Low debt exposure especially substantial longer term liabilities;
Carry a good cash balance of greater than C$ or A$ 20 million;
Have operating cash costs of between US$ 450 - 650 / ounce;
All in Sustaining Costs (AISC) per ounce of gold produced of between US$ 800 - 950 / ounce;
Gold reserves of > 8 years of current production;
Are valued at little more than the companies "Enterprise Value" and sometimes less than this. This is a clear buy signal in the emergent gold bull market;
Are leveraged to the US$ gold price and may have been seriously undervalued like RSG in Australia which operates its largest producing assets in West Africa;
Do not invest in gold producers operating in counties offering increasing Sovereign and business risks such as Turkey, Greece and China for example; and,
Have strong Board of Management with track records of success in the gold mining industry.
Other issues to watch out for are any precipitate falls in a company's stock price due to mistakes with ore resources such as Regis Resources Limited (ASX: RRL) or companies that operate mines in areas where weather events may cause flooding of open pit mining operations and temporary mine closure impacting on production. RRL has addressed its issues and is now back on track, but nonetheless it was punished in the markets for ore resource problems and flooding of its operations.
Amongst the mid-cap gold producers, the Australians comprise the overall best investment right now and are actually better than comparable Canadian companies of similar overall specifications in terms of reserves, ounces of gold produced and cash on hand. The differences lie in the geology of the Australian gold deposits in terms of their overall recovered gold grades and their impact on Cash Operating and AISC costs and the typically better profit margins of the Australian producers. Of the major Mid Cap Canadians, Agnico Eagle Mines Limited (AEM, TSX: AEM) is the biggest company in terms of its market capitalization and its enterprise value, overall resources and in terms of the size and grade of its world class core mines at La Ronde - Penna, Bousquet and Canadian Malartic (which it shares 50%:50% with Yamana Gold Inc). AEM is arguably the King of the Canadian gold mining mid - cap producers and demonstrates great strength in depth in all aspects of the business. AEM has the scope to grow into another Barrick Gold Inc. only it is stronger at the level of its Management and has vast operating experience in this difficult industry. AEM also carries significant leverage, although the debt is readily serviceable given AEM's cash flow from 1.6 Moz annual gold production at an AISC of US$ 880 / ounce and stands at 20% of its market capitalization.
Yamana Gold Inc (AUY, TSX: YRI) carries a large debt burden amounting to 100% of its market capitalization and 55% of its Enterprise Value. This serves as a major drag on the stock price and its overall profit margins generated due to debt servicing costs. Also, the quality of its gold deposits, excluding Canadian Malartic, are best described as technically marginal and all require a significantly higher gold price before AUY can breathe more easily.
Detour Gold Corporation (TSX: DGC) is totally focussed on its large, low grade, open pit mine at Detour Lake, Ontario, where it produces some 500,000 ounces per annum at relatively high cash costs of US$810 / ounce and AISC costs of US$ 1,130 / ounce. DGC is highly leveraged to the gold price and hence it will advance strongly with the gold price. It benefits from the weak C$. DGC also has the advantage that it carries no debt and has not hedged its gold production.
Of the Australian mid cap producers, there are two plays which are quite different. The 1stTier Mid - Caps which includes Northern Star Resources Ltd (ASX: NST), Evolution Mining Limited (ASX: EVN) and Oceana Gold Corporation Limited (ASX and TSX: OGC), have all recently advanced strongly and now represent safe investments to trade on the "dips" and sell on the "highs" or merely hold longer term. However, their upside profit potential as they are now already at an elevated level is in the order of 150 - 300% depending on how high gold goes in the coming resumption of its bull market. However, amongst this group, OGC could really appreciate given its low cost production profile and the eventual bringing on stream of the large, low cost, open pit Haile gold project in South Carolina, USA, which will bring OGC's annual production up to > 500,000 ounces per annum and make it one of the lowest cost mid - cap gold producers in the world.
The real upside in the Australian mid-cap gold producers will come in those companies that have been largely ignored by the market for several reasons as follows:
Their gold producing mines are located outside Australia in a US$ dominated regime such as West Africa (Resolute Mining Limited ASX: RSG) and, therefore, they could not benefit from the onshore Australian $ gold price;
Their cash operating and AISC costs of gold production are at the higher end for the industry, such as Silver Lake Resources Ltd (ASX: SLR) and, therefore, profit margins are reduced;
In view of the recent ISIL (DAESH) terrorist actions in such countries as Mali (Bamako) that their gold assets are considered to be located in counties with high Sovereign and business risks (RSG whose flagship Syama gold mine is located in Western Mali).
A series of 4 articles, Parts 1 to 4, are currently being produced on this site appraising the technical fundamentals of the mid cap Canadian and Australian gold producers. The reader is referred to Part 1 and Part 2 already published on the site for subscribers only.
Finally, it is too early to gamble on the gold exploration companies as few of these have any defined resources. The ones that have defined NI43-101 or Aus.IMM JORC compliant gold resources of any significance would be worth investing a modest portion of a portfolio in but careful due diligence is recommended of the company's financial state and of the project itself will be necessary. We will be looking at some of these companies for subscribers very soon.
Be aware, the recent gold rally is probably now experiencing a pull back before it takes off and attempts to break free of the 200 day moving average and the 50, 100 and 200-day MA's move into bullish alignment and start a clear uptrend. Readers should be on the watch out for this important technical development.