Sep 30

Klondex Mines Announces Updated Resource Estimate for Midas: Increased total M&I AuEq ounces to 526k oz

Gold Price Comments Off on Klondex Mines Announces Updated Resource Estimate for Midas: Increased total M&I AuEq ounces to 526k oz

Klondex Mines Ltd. (TSX:KDX,OTCQX:KLNDF) updated the mineral resource estimate at its 100%-owned Midas underground gold mine in Nevada:

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Sep 30

Gold Continues to Fall on Strong Dollar

Gold Price Comments Off on Gold Continues to Fall on Strong Dollar

Spot gold hit a nine-month low on Tuesday at $1,204.40 per ounce before rising to $1,207.50 an ounce, down 0.7 percent or $8.45 from yesterday’s close.

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Sep 30

Richmont Mines Announces Accelerated Development Plan for Island Gold, Reports Chip Sampling Results

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Richmont Mines Inc. (TSX:RIC,NYSEMKT:RIC) announced an accelerated and expanded development plan for the Island Gold Mine in Ontario, particularly the lower Island Gold zone where work is expected to commence mid-October. The ramp development will enable Richmont to prepare a second mining horizon by the end of 2015. Results from chip sampling averaged 12.68 g/t Au over an average width of 2.51 metres were also reported.

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Sep 30

Making Money with Merchants of Death

Gold Price Comments Off on Making Money with Merchants of Death
Want a truly “ethical” investment? Just stick to profit seeking instead…
 

“WHEN did you people turn into shills for the military-industrial complex,” asked one of our subscribers in an email, writes Addison Wiggin in The Daily Reckoning.
 
“My security would be greatly enhanced if every damn one of ’em would go home forever and the entire machine would grind to a halt, so don’t try to pump this bilge my way.”
 
We hear you. And we agree.
 
We’re not much on socially responsible investing…even when we judge a certain investment vehicle to be thoroughly irresponsible, if not downright reprehensible.
“The insidious increase in power,” says retired army Col. Lawrence Wilkerson, “and the influence over foreign policy that the military has is very dangerous. And maybe in the long run, it’s even more dangerous than a coup.”
Wilkerson was Colin Powell’s right-hand man in the military under the first President Bush…and again in the State Department under the second. It was Wilkerson who vetted the intelligence that went into Powell’s now-infamous speech at the United Nations 10 years ago during the run-up to the Iraq War.
 
He admits he fell down on the job.
 
The “mobile bioweapons labs” were the fantasy of an Iraqi defector, egged on by the Pentagon. In retirement, Wilkerson has turned into a trenchant critic of the military-industrial complex Eisenhower warned about 52 years ago. As such, he is also the harbinger of the military’s slow-motion coup.
 
“What happens,” Wilkerson explained to radio host Rob Kall in November of 2012, “is the power shifts gradually, and gradually, and incrementally over to the war-making side, to where you wake up one morning and all you’re doing is making war. And you have so many people – from Lockheed Martin, to the Congress of the United States, to the armed forces, to you name it – who are making so much money off that war-making that you can’t stop it. That’s not a coup, but it is something worse, in my view. It is, ultimately, the destruction of our Republic.”
 
So why, you might ask, would we suggest investing in defense or cybersecurity stocks or – to use a phrase made popular when Americans were having second thoughts about World War I – the “merchants of death”?
 
Simply put, because there are pitfalls of “socially responsible investing.”
 
We’re not much on socially responsible investing…even when we judge a certain investment vehicle to be thoroughly irresponsible, if not downright reprehensible.
“Maximizing profits and conforming to social policies are separate endeavors,” wrote the late Harry Browne in 1995. “You can cater to one endeavor only at the expense of the other.”
Name almost any investment, and we can come up with a valid objection to it…and not on hippy-dippy “save the Earth” or “fair trade” grounds, either:
 
If you own a gold stock, there’s a good chance the company is stomping all over the property rights of someone whose land happens to sit on top of a gold deposit. Third-world governments routinely cut sweetheart deals with mining firms to seize land held in the same family for generations, with zip for compensation.
 
Or if you own any kind of government bond, your stream of income depends on the ability of that government to extract tax payments from the citizens in its jurisdiction.
 
Meanwhile, if you shun the stocks of the major banks because they accept government bailouts, you’ve passed up monster rallies going back to late 2011 – 59% on J.P. Morgan Chase, 79% on Citigroup and 130% on Bank of America. Just sayin’.
 
Run down all 10 sectors of the S&P 500 and we’ll find something objectionable. Health care? The government has totally co-opted the insurance industry and Big Pharma…or maybe vice versa. Telecom? All the big companies collude with the National Security Agency’s warrantless wiretapping. Consumer staples? Hope you don’t mind General Mills and Kellogg sucking up the corn subsidies for breakfast cereal (and adding to kids’ waistlines, which you’ll pay for years from now when they develop diabetes and go on Medicaid).
 
Okay, you get the idea.
 
Back to Col. Wilkerson’s interview. It reinforces our own thoughts about the empire having a logic of its own. The military’s silent coup “is something that just happens, and it directs American policy toward war in an increased and ever-dangerous manner, and we wind up one day with no money left, no economy, and the only thing we’re good at (and that’s going away fast, because you need money in an economy to support a military) is the military.”
 
We’re no happier about it than you or Col. Wilkerson. But if government is going to direct more and more of the economy going forward, it only makes sense to “follow the money” and channel your own investment flows into those areas that will benefit most.
 
“The stock exchange isn’t a pulpit,” wrote Harry Browne. “If you want to promote a particular environmental policy, political philosophy or other personal enthusiasm, do it with the profits you make from hardheaded investing.”
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Sep 30

Bond Bubble vs. the Ice Age

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Deflation and zero yields forever? Or a bond bubble bigger than we can comprehend…?
 

It SHOULD be striking that government bonds, in nominal terms, have never been this expensive in history, writes Tim Price on his blog, ThePriceOfEverything.
 
Even as there have never been so many of them.
 
The laws of supply and demand would seem to have been repealed. How could this state of affairs have come about? We think the answer is three-fold:
  1. The bond market is clearly not perfectly efficient;
  2. Bond yields are being manipulated by central banks through a deliberate policy of financial repression (and QE, of course);
  3. Many bond fund managers may be unaware, or unconcerned, that the benchmarks against which they choose to be assessed are illogical and irrational.
What might substantiate our third claim?
 
It would be the festering intellectual plague that bedevils the fund management world known as indexation. Bond indices allocate their largest weights to the most indebted issuers. This is the precise opposite of what any rational bond investor would do – namely, to overweight their portfolio according to those issuers with the highest credit quality (or perhaps, all things being equal, with the highest yields).
 
But bond indices do exactly the opposite. They force any manager witless enough to have fallen victim to them to load up on the most heavily indebted issuers, which currently also happen to offer amongst the puniest nominal yields.
 
As evidence for the prosecution we cite the US Treasury bond market, the world’s largest. The US national debt currently stands at $17.7 trillion…with a ‘T’. Benchmark 10-year Treasuries currently offer a yield to maturity of 2.5%. US consumer price inflation currently stands at 1.7%. (We offer no opinion as to whether US CPI is a fair reflection of US inflation.) On the basis that US “inflation” doesn’t change meaningfully over the next 10 years, US bond investors are going to earn an annualised return just a smidgen above zero per cent.
 
How do US Treasury yields stack up against the longer term trend in interest rates? The following data are from @Macro_Tourist:
 
10-year US Treasury yields since 1791
 
The chart shows the direction of travel for US market rates since independence, given that the Continental Congress defaulted on its debts.
 
Now, it may well be that US Treasury yields have further to fall. As SocGen’s Albert Edwards puts it:
“Our ‘Ice Age’ thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course.”
As things stand, the trend is with the polar bears. The German bond market has already broken down through the 1% level (10 year Bunds at the time of writing currently trade at 0.98%). 
Deutsche Bank Research – specifically Jim Reid, Nick Burns and Seb Barker – recently published an extensive examination of global debt markets (“Bonds: the final bubble frontier?”, hat tip to Arnaud Gandon of Heptagon Capital). Deutsche’s strategists ask whether bonds constitute the culminating financial bubble after almost two decades of them:
“After the Asian / Russian / LTCM crises of the late 1990s we entered a supercycle of very aggressive policy responses to major global problems. In turn this helped encourage the 2000 equity bubble, the 2007 housing / financial / debt bubble, the 2010-2012 Euro Sovereign crisis and arguably some recent signs of a China credit bubble (a theme we discussed in our 2014 Default Study). At no point have the imbalances been allowed a full free market conclusion.
 
“Aggressive intervention has merely pushed the bubble elsewhere. With no obvious areas left to inflate in the private sector, these bubbles have now arguably moved into government and central bank balance sheets with unparalleled intervention and low growth allowing it to coincide with ultra-low bond yields.”
The French statesman George Clemenceau once commented that war is too important to be left to generals. At this stage in the game one might be tempted to add that monetary policy is far too important to be left to politicians and central bankers.
 
We get by with free markets in all other walks of economic and financial life – why let the price of money itself be dictated by a handful of State-appointed bureaucrats?
 
We were once told by a fund manager (a Japanese equity manager, to be precise – rare breed that that is now), around the turn of the millennium, that Japan would be the dress rehearsal, and that the rest of the world would be the main event. Again, the volume of the mood music is rising in SocGen’s favour.
 
We nurse no particular view in relation to how the government bond bubble (for it surely is) plays out – whether yields grind relentlessly lower for some time yet, or whether they burst spectacularly on the back of the overdue return of bond market vigilantes or some other mystical manifestation of long-delayed economic common sense.
 
But Warren Buffett himself once said that:
“If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”
The central bank bond market poker game has been in train for a good deal longer than half an hour, and the stakes have never been higher. Sometimes, if you simply can’t fathom the new rules of the game, it’s surely better not to play. So we’re not in the business of chasing US Treasury yields, or Gilt yields, or Bund yields, ever lower – we’ll keep our bond exposure limited to only the highest quality credits yielding the highest possible return.
 
Even then, if Fed tapering does finally dissipate in favour of Fed hiking – stranger things have happened, though we can’t think of any off the top of our head – it will make sense at the appropriate time to eliminate conventional debt instruments from client portfolios almost entirely.
 
But indexation madness is not limited to the world of bonds. Its malign, unthinking mental slavery has fixed itself upon the equity markets, too. Equity indices, as is widely acknowledged, allocate their largest weights to the largest and most expensive stocks. What’s extraordinary is that even as stock markets have powered ahead, index trackers have enjoyed their highest ever inflows.
 
The latest IMA data show that more UK retail money was put into tracker funds in July than in any other month since records began. We accept the ‘low cost’ aspect of tracker funds and ETFs; we take serious issue with the idea of buying stock markets close to or at their all-time high and being in for any downside ride on a 1:1 basis. 
 
But there is a middle way between the Scylla of bonds at all-time low yields and the Charybdis of stocks at all-time high prices: Value.
 
Seth Klarman of the Baupost Group once wrote as follows:
“Stock market efficiency is an elegant hypothesis that bears quite limited resemblance to the real world. For over half a century, disciples of Benjamin Graham, the intellectual father of value investing, have prospered buying bargains that efficient market theory says should not exist.
 
“They take advantage of the short-term, relative performance orientation of other investors. They employ an absolute (not relative) valuation compass, patiently exploiting mispricings while avoiding overpaying for what is popular and trendy. Many are willing to concentrate their exposures, knowing that their few best ideas are better than their hundredth best, and confident in their ability to tell which is which. 
 
“Value investors thrive not by incurring high risk (as financial theory would suggest), but by deliberately avoiding or hedging the risks they identify. While efficient market theorists tell you to calculate the beta of a stock to determine its riskiness, most value investors have never calculated a beta. Efficient market theory advocates moving a portfolio of holdings closer to the efficient frontier. Most value investors have no idea what this is or how they might accomplish such a move. This is because financial market theory may be elegant, but it is not particularly useful in formulating a successful investment strategy. 
 
“If academics espousing the efficient market theory had no influence, their flawed views would make little difference. But, in fact, their thinking is mainstream and millions of investors make their decisions based on the supposition that owning stocks, regardless of valuation and analysis, is safe and reasonable. Academics train hundreds of thousands of students each year, many of whom go to Wall Street and corporate suites espousing these beliefs. Because so many have been taught that outperforming the market is impossible and that stocks are always fairly and efficiently priced, investors have increasingly adopted strategies that eventually will prove both riskier and far less rewarding than they are currently able to comprehend.”
That sounds about right to us. Conventional investing, both in stocks and bonds on an indexed or benchmarked basis, “will prove both riskier and far less rewarding” than many investors are currently able to comprehend.
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Sep 29

Serabi Gold Secures $8 Million Loan Facility with Sprott Resource

Gold Price Comments Off on Serabi Gold Secures $8 Million Loan Facility with Sprott Resource

Serabi Gold (TSX:SBI,AIM:SRB) announced it has entered into an $8 million secured loan facility arrangement with Sprott Resource Lending Partnership. The funding will be used to provide additional funding for the continued development of the Palito Mine and the Sao Chico gold project

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Sep 29

Gold/Silver Ratio Leading the Dollar

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What the Gold/Silver Ratio said last year now the US Dollar is following…
 

WE’VE NOTED that Uncle Buck would be front and center in the markets, writes Gary Tanashian in his Notes from the Rabbit Hole.
 
Not because the strength in the (anti-market) currency was not expected (it was). But because our big picture theme of an ongoing economic contraction had remained intact (ref: gold vs. commodities ratio) over the long-term.
 
It is important here to remember that NFTRH would only stick with its big picture macro themes as long as indictors implied they are still viable. I will be damned if I will let us follow a Pied Piper off an ideological cliff, no matter what readers (including me) might want to hear. We must dedicate to know what is happening, not what our hopes, dreams, egos, etc. think or worse, hope will happen.
 
 
The correlation is loose but the monthly (big picture) patterns of the Gold/Silver ratio (GSR) and USD have generally been in alignment over time.
 
We made a big deal about the GSR’s breakout last year as a macro signal, potentially bringing on a phase of weakness for equity markets (usually including gold stocks) and strength for the USD. Well, how long these events take to play out. The stock market has been just fine to date but now the US Dollar, finally, is making its move to get in line with the GSR.
 
What would need to come next in the macro plan would be a follow-through in USD strength, the US economy fraying at the edges (manufacturing would be pressured by a persistently strong currency) and eventually stock market weakness, possibly leading to a bear market. So you can see that the picture is incomplete but may be in progress.
 
This is what the GSR did last week that caught my attention. The move looked impulsive as silver plummeted and it seemed a wake up call to asset markets.
 
 
Yet, another part of the macro plan and any future bullish view for gold, includes weakness in the US stock market, which has just not been happening outside of little ripples that barely qualify as corrections. US stocks are now quite over valued (though not in a bubble) by traditional metrics.
 
The bubble is in policy, not the stock market as the first chart below has made clear several times for us. The second chart shows the 10 year view of the S&P 500 vs. corporate profits. Profits are not yet in a negative trend, but in a negative divergence that bears watching as the market becomes over valued even by traditional metrics.
 
 
 
Returning to the GSR, we have a colorful monthly chart showing the GSR’s correlation to the S&P 500 over the last 1.5 decades. An indicator that has been reliable over the long-term has gone dysfunctional for the last 2 years as the SPX made the most impulsive leg of its journey upward despite a GSR that has ground upward as well.
 
 
Considering a potential drop off in corporate profits (here we remember that the manufacturing sector for one would not like a strong Dollar) if the impulsive move in the GSR on the daily chart above is indicative of things to come, one would think US stocks would be vulnerable, considering that the USD is part of the move now.
 
Ah, but we have been here before. Dare to call this market at risk and you get served with a heaping helping of bull. So there is price and momentum to consider as well. But just as we have stated for so long that gold was at risk from a macro fundamental standpoint, we now state clearly that so too is the US stock market. It’s not me or my bias speaking, it’s the indicators and data, just a few of which are illustrated above.
 
We’ll conclude the segment with another negative view of market participation. Similar setups in the recent past have led to minor or moderate corrections. Risks are gathering against the US stock market by this measure. Other indexes and sectors are showing similar divergence.
 
Per Stockcharts.com:
“The Participation Index (PI) measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope.”
 
Consider this another warning on the stock market for a coming correction at least. Timing, if this is destined to resolve bearish, looks like the next several weeks to a month or so. Now, will the market play ball as the red boxes imply?
 
The stock market has rendered certain individual indicators dysfunctional over the last 2 years. When several indicators start to gather toward similar conclusions, it is time to pay attention. Meanwhile, price momentum continues upward until it no longer does.
 
In much the same way we have noted gold’s macro fundamentals are not fully formed, the US stock market takes the other side of that trade and states that any negative macro fundamentals are not fully formed either.
 
Above we have noted some negatives gathering, but we should also realize that several indicators remain a-okay, from the declining 10yr-2yr yield curve (a declining curve tends to go with a strong economy and favor stocks), to a lack of inflation expectations (TIP-TLT tanked last week) to the sedate TED spread (admittedly, a laggard) to the long-running zero rate policy (ZIRP) that market participants are currently obsessing about.
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Sep 29

Gold Bullion "Faces Aggressive Shorting" as Hong Kong Protests Grow Ahead of China’s Golden Week Holidays, US Jobs Data Loom

Gold Price Comments Off on Gold Bullion "Faces Aggressive Shorting" as Hong Kong Protests Grow Ahead of China’s Golden Week Holidays, US Jobs Data Loom
GOLD BULLION prices rose to $1223 per ounce in London on Monday, 0.4% higher from last week’s close, before slipping back as world stock markets cut their earlier losses.
 
Hong Kong’s main stock index lost 2.0% as pro-democracy protests spread across the city.
 
The US Dollar dropped from new 4-year highs on the currency market, helping food commodities bounce from multi-year lows.
 
Silver dropped in early Asian trade, before tracking gold bullion’s rally to stand unchanged from Friday’s finish above $17.60 per ounce.
 
“Quiet physical demand in China this week could leave gold lacking crucial support,” writes Jonanthan Butler at Japanese conglomerate Mitsubishi, pointing to the Golden Week holidays starting Tuesday.
 
“Though short covering may offer upside,” Butler adds, noting heavy bearish betting by speculative traders in US futures and options, “quarter-end squaring may leave investors with little appetite for gold in the coming days.”
 
Tuesday also marks the new Martyrs’ Day in China, aimed “to commemorate those who sacrificed for their country,” according to the New York Times.
 
Tens of thousands of protesters continued to block Hong Kong’s main business district Monday, extending the weekend’s march against Beijing’s refusal to allow a free choice of candidates in the city’s 2017 leadership elections.
 
Beijing’s censorship of social media site Weibo hit new record levels during this weekend’s protests, says the South China Morning Post.
 
“Usually a lot of Chinese tourists come to Hong Kong for the holiday,” Reuters quotes German bullion refining group Heraeus’ general manager in the city, Dick Poon.
 
“[Typically] they end up buying jewellery, but this time they might be turned off by the protests.”
 
This week’s absence of China’s wholesale dealers, says Swiss refiner MKS’s Asian desk, “could heap added pressure on gold,” especially if “combined with another strong US payrolls figure expected this Friday.
 
“This is a very similar scenario to last year where gold was aggressively sold by speculators during the absence of the Chinese.”
 
Consensus forecasts for Friday’s US employment data say 203,000 net jobs were added to non-farm payrolls this month, reversing August’s shock reading of just 142,000.
 
Thursday’s European Central Bank decision “could weaken the Euro and strengthen the Dollar,” adds Butler at Mitsubishi. “[But] the impact of this on bullion prices could be offset by safe-haven buying of physical gold.”
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Sep 28

The Bells, the Bells!

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From high art to Russia and US housing, the bells are ringing out…
 

TALK about ringing a bell! says Bill Bonner in his Diary of a Rogue Economist.
 
This ring-a-ding-ding comes from the New York Observer:
“Sales of contemporary art at public auctions surpassed $2 billion for the first time last year, the Paris-based arts-data organization Artprice said.
 
“The report tallied auction sales between July 2013 and July 2014, and it found that contemporary art sales grew 40% from the previous year. The number of big-ticket items that sold for over 10 million Euro ($12.8 million) more than doubled in the period.
 
“Those who follow the art market will remember the record-breaking Christie’s auction in November that saw buyers walk away with the most expensive publicly auctioned piece of art ever, Francis Bacon’s $142.4 million Three Studies of Lucian Freud (1969). That auction also minted Jeff Koons’ $58.4 million Balloon Dog (Orange) (1994-2000) as the most expensive piece by a living artist ever sold at auction…”
That’s another bad thing about being rich – you have to live with this stuff.
 
Even if you don’t own it, your new friends and neighbors will.
 
Unless you’re autistic – or a savant, like Warren Buffett – you’ll find it hard to avoid. Contemporary art and big, expensive houses are hugely popular among the wealthy elite. And most people are very susceptible to peer influence.
 
That is what creates investment opportunities, too. The lumpen investoriat – like the lumpen electorate – does not do much serious thinking.
 
Instead, it reacts emotionally and primitively.
 
It takes up positions that are too expensive. And then, in a panic, it stampedes away from them…leaving them too cheap. That’s when the bells start ringing.
 
Monday’s Financial Times, for example, chimed loudly.
 
It reported on page one that US private equity group Blackstone “calls it a day in Russia.”
 
This followed a withdrawal from Russia earlier this month by DMC Partners, a private equity group founded by former Goldman Sachs executives.
 
Further reporting revealed that the European Bank for Reconstruction and Development had “also suspended investments in the country.” And if that weren’t enough, “US group Carlyle has retreated from the market twice.”
 
Over on page 15, the FT continues to ring the bell, telling us that “Russia’s Gazprom could lose 18% of its revenues as a result of competition from US liquefied natural gas exports.”
 
On Tuesday, the bell ringing went on. A front page revealed that even the Rockefeller fortune was pulling out of fossil fuels.
“The effort to make oil, gas and coal investments as unpopular as tobacco stocks…gathered momentum…” the paper declared.
Geez, you’d have to be crazy to invest in Russian energy stocks now, right?
 
Yeah…crazy like a fox. Any time the newspapers give you nothing but reasons to sell, it’s time to buy. You can buy Gazprom for less than three times earnings…with a 5% dividend yield.
 
“And that’s post-theft,” says Rob Marstrand, chief investment strategist at our family wealth advisory, Bonner & Partners Family Office.
“You don’t have to worry about corruption…or politics…or sanctions,” he says. “It’s all in the price already.”
The news about Russian energy companies is all bad. It’s time to buy.
 
Meanwhile, what are people almost universally in favor of buying?
 
A house!
 
Poor people buy cheap houses. And when they get more money, they believe they should “trade up” to an expensive one.
 
Both rich and poor:
  • take advantage of mortgage deductions…
  • lock in low interest rates for the long term…
  • build equity…
  • improve their credit scores.
All by buying a house. But is it true? Is housing a good deal? Now? Ever?
 
A year ago, housing was one of our favorite investments. But our lead researcher at The Bill Bonner Letter, EB Tucker, thinks he hears the bell ringing for housing too.
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Sep 28

Cash Starved Mining Stocks Go Bang

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Tough times for Australian miners are not letting up…
 

RICHARD KARN is managing editor of the Emerging Trends Report.
 
Speaking here to The Gold Report, he notes how nearly 150 mining companies listed on the Australian Stock Exchange went into bankruptcy during the fiscal year that ended June 30, and another 23 have gone under since then. Now Karn believes a fresh wave of Aussie mining stock failures will hit when the current financial quarter ends September 30. A major shakeout at some point appears likely…
 
The Gold Report: When we interviewed you in April, you said the pending demise of zombie companies on the Australian Stock Exchange (ASX) was a good thing because there were too many deadbeats in the specialty metal sector. Has that process worked its way through the system or are there still some “walking dead” making it difficult for investors to pick out the promising companies?
 
Richard Karn: Unfortunately, the latter is still the case. According to the Australian Securities & Investment Commission (ASIC), 146 companies in the mining sector went into administration (bankruptcy) during the fiscal year ending June 30, 2014. As Luke Smith pointed out last month in your publication, yet another 226 resource companies did not have sufficient cash to meet their anticipated expenditures for this quarter.
 
Since then another 23 resource companies have failed, and as of Aug. 25, 2014, 17 more had not paid their listing fees and were suspended from trading on the ASX.
 
So no, we do not think the process is over.
 
TGR: How are companies accessing capital today?
 
Richard Karn: By and large, they’re not. We’ve been picking up on some positive activity in the base and precious metal sectors, but that mostly has yet to trickle through to the specialty metal sector.
 
In the case of specialty metal companies, most are unable to raise money either from the capital markets or from their shareholders. Failed or abysmal uptake of rights issues and the like continue to be common. Many companies are literally being starved of cash.
 
TGR: Can companies sell some of their assets to cover costs on other projects?
 
Richard Karn: Asset sales are difficult in the current environment because so many companies are now so desperate to sell that it has become a buyers’ market. That being said, the Chinese have been stepping in to snap up the occasional bargain.
 
TGR: If companies have no more options, how long can they keep the lights on?
 
Richard Karn: Not long. The end of the quarter is September 30, and companies will have to disclose their financial situations. We expect a fresh wave of failures within the next six to eight weeks as more resource companies become insolvent.
 
We don’t know what the catalyst will be, but for some time we’ve been expecting a final selling frenzy that will mark at least an intermediate-term bottom in the specialty metal sector.
 
Some assets are so mispriced that the market appears to be pricing in failure well before the fact. In fact, so sure is the market that a number of these companies will fail that they are trading for less than the cash they have on hand, literally placing no value whatsoever on their resource projects.
 
Final washouts often occur when markets are oversold, and the specialty metal sector remains oversold. The spark for the selloff could be another failed rights issue or poor uptake on an option scheme, either of which would reflect a fundamental lack of confidence in management.
 
It could be some unknown – perhaps an otherwise meaningless threshold event – that “spooks the herd,” and shareholders just start selling everything indiscriminately to ensure they recover some of the money they’ve invested.
 
It could be that it finally dawns on investors that a number of these junior resource companies hold a lot of each other’s stock, which they are carrying on their balance sheets at par as a liquid asset when in actuality those shares are so illiquid they could not be sold except at a steep discount – and could well crash the share price in any case.
 
As I said, we do not know what will spark the selloff – just that it is coming.
 
And when the selling has been exhausted, it will constitute at least an intermediate bottom in the specialty metal sector.
 
In the final shakeout, we are anticipating a number of mismanaged companies will deservedly go under – as, unfortunately, will some quite good companies – and some very good projects will be picked up very inexpensively.
 
And being able to pick up outstanding assets for very little money always marks the bottom of the cycle, because it increases the odds of success as the cycle turns up again.
 
TGR: What characteristics should investors look for to avoid these doomed ventures?
 
Richard Karn: At the moment I would avoid small-cap specialty metal companies that are carrying any debt, especially if they are not cash-flow positive. If or when their ability to service that debt is called into question, it will likely be too late to get out.
 
In addition to reading financial statements to get a grasp of their financial situations and those circumstances just mentioned, I would look at what managements are actively doing to help their long-suffering shareholders.
 
For example, have they reduced staff, cut expenditures and taken a cut in salary themselves or are they still maintaining a “resource boom” lifestyle at their shareholders’ expense?
 
Most important, I would look for either positive cash flow from operations or sufficient cash on hand to sustain operations through to some pivotal event the market has been waiting for, such as commencing production, receiving project funding, permits or approvals, or receiving the results of a bankable feasibility study, etc. – something that will demonstrate management is delivering on its promises.
 
TGR: Could the recent repeal of the mining tax in Australia help all of these companies, or will it only impact large operators?
 
Richard Karn: The Minerals Resource Rent Tax (MRRT) did not apply to the specialty metal end of the resource sector in Australia, so its repeal will have little direct impact on these companies.
 
Indirectly, however, repealing the tax serves returns Australia to the ranks of the safest, most mining-friendly jurisdictions in the world, and at some point that will indeed lead to increased investment flows into the specialty metal sector.
 
What markets fail to fully appreciate is that many, and arguably most, of the technological advances we enjoy today, whether found in consumer electronics or transportation or renewable energy sources or military hardware, rely on secure, uninterrupted supply of a range of specialty metals.
 
With military conflict raging across the Middle East and North Africa; a full-fledged arms race between the countries with claims to the South China Sea, notably China and Japan; and the numerous potential conflicts brewing throughout the world, now more than ever secure supply of these specialty metals should be a very high priority. Should a war erupt, common sense, as well as history, dictates the first victims will be the very notion of globalization, free market economics and “just in time” delivery.
 
If it were in China’s strategic interests to stop exporting rare earth elements or tungsten or antimony or graphite, to name just a few of the specialty metal markets China controls, all of which are crucial to a range of military applications, there is absolutely nothing anyone could do about it.
 
Of the 50 specialty metals we track, more than 40 could be mined economically in Australia alone, thanks to its unique geology.
 
We’ve been writing about this trend for more than six years now, but except for a relatively brief period from mid-2010 through late 2011, in the panicked response to China cutting off supply of REEs to Japan, the aftermath of the global financial crisis has squelched the market’s appetite for mining projects in general and specialty metal projects in particular. They require the long-term commitment of capital and a sustained effort to put into profitable production.
 
The flood of liquidity sloshing around the planet since 2008 in search of a return appears to have such a short investment horizon that mining projects are largely off the radar.
 
So nothing has been done. There’s been a lot of talk, a lot of bureaucratic posturing and comic sputtering as World Trade Organization complaints are ignored or unfair business practices perpetuated, but nothing has been done. And the longer this continues, the more vulnerable the West becomes.
 
The specialty metal price spike the West suffered in 2010-2011 in panicked response to the Chinese curtailing exports of REEs will be nothing compared to what a “shooting war” would provoke.
 
Thinking otherwise is the height of naiveté.
 
TGR: Thank you for your insights.
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