Oct 31

King Dollar in a Bull Market

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But change your goggles and hey! Commodities in AUD not too bad…!
 

BORING as it sounds, I want to talk a bit about the end of US QE today, writes Greg Canavan in The Daily Reckoning Australia.
 
Because it’s very important to how markets are going to behave over the next few months.
 
As you probably know, yesterday the US Federal Reserve voted to end its policy of quantitative easing. But it will still be reinvesting the interest payments from its $4 trillion plus portfolio and rolling over any maturing treasury securities, so it’s balance sheet will continue to grow, albeit much more slowly.
 
On the surface, US markets didn’t seem too fussed about the end of an era. Shares sold off around the time of the Fed’s statement and then rallied towards the close. Probably a case of “algo’s going wild” as automated high frequency traders tried to make sense of the Fed’s statement.
 
And the Fed did its usual job of promising to hold rates as low as they possibly could, which markets seemed happy enough with.
 
But the real action took place under the surface. That is, the US Dollar spiked higher again. This is an important point because when the US Dollar rallies, it usually signifies tightening global liquidity.
 
Think of it as liquidity returning to the source (US capital markets) and drying up…or disappearing. That’s certainly what has been happening these past few months. Since bottoming in May, the US Dollar index (which measures the greenback’s performance against a basket of currencies) has increased by nearly 9%.
 
That might not sound like a huge spike, but in the world of currency movements, it is. Imagine if you’re an exporter and your product just became 9% more expensive…chances are it will lead to a drop in sales as customers look for a cheaper substitute.
 
This is the problem with the end of QE. It leads to liquidity evaporation as ‘punt money’ returns home…which leads to a strengthening US Dollar…which hurts sales of US multinationals.
 
It’s not going to happen right away though. Most companies have hedging strategies in place that protect them from sharp moves in the FX markets. But if Dollar strength persists…and the chart above says that it will, then you’ll see the strong Dollar hitting companies’ revenue line in the coming quarterly reports.
 
Not only that, but the evaporation of liquidity in general could lead to another bout of selling across global markets. QE is all about providing confidence. Liquidity is synonymous with confidence. Take it away and you’ll see the mood of the market change.
 
Getting back to the Dollar strength…it’s a headache for Australia too. It’s smashing the iron ore price, and the Aussie Dollar isn’t falling fast enough to keep up. In terms of the other commodities though, things aren’t quite so bad.
 
All you seem to hear lately is negative news about commodities. That’s because the world prices commodities in US Dollars, and as you’ve seen, the US Dollar is a picture of strength. But if you look at commodity prices in terms of Aussie Dollars, things look a little better.
 
The chart below shows the CRB commodity index, denominated in Australian Dollars. It’s a weekly chart over the past five years. And y’know what…it doesn’t look that bad! Since bottoming in 2012, it’s made considerable progress in heading back to the 2011 highs.
 
But you’ll want to see it start to bottom around these levels. If it doesn’t, prices could head much lower.
 
 
The thing to note about this chart is that it doesn’t include the bulk commodities – iron ore and coal. These commodities tend to dominate the headlines in Australia. Things like nickel, tin, copper and oil don’t get much of a look in.
 
Which reminds me, in case you missed it, Diggers and Drillers analyst Jason Stevenson recently released a report on some small Aussie oil ‘wildcatters’. With the oil price low, now could be a good time to sniff around the sector.
 
You could say that about commodities across the board. In the space of a few years, they’ve gone from hero to zero…or the penthouse to the…
 
That usually means there could be some good value around. One thing you need to look for in the current environment is a decent demand/supply dynamic. Iron ore in particular is heading towards massive oversupply next year. I reckon that makes it a poor investment choice for the next few years.
 
You’re better off to wait until the China slowdown and supply surge knocks out the juniors and all the marginal producers….leaving the market to BHP and Rio. You’ll then probably be able to pick these mining giants up at much lower levels.
 
Once you find a commodity with good supply/demand fundamentals, you need to make sure the producer is low cost. That protects it against further price falls…or a rise in the Australian Dollar.
 
It also protects it against foreign competition. One of the issues with the Aussie resources sector in recent years is costs. Other countries have much cheaper capital and labour costs and can therefore get stuff out of the ground cheaper than us.
 
That brings me to a final issue: Australia doesn’t really invest in its own resource sector. Via superannuation, we have a huge pool of capital. But this mostly goes into the banks or the major miners. Superannuation capital is not high risk capital.
 
That means a lot of the capital that flows into the resource sector is foreign. And when global financial conditions change…like the end of QE and the strengthening of the US Dollar…that capital departs.
 
This will create problems and opportunities for the sector. But given the bearishness towards commodities in general, it’s probably time to start getting interested again.
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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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Sep 22

Gold Mining "Hurt Long-Term", Output "Peaking in 2014"

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Gold mining producers cutting exploration, M&A spending as profit margins shrink…
 

GOLD MINING output worldwide is set to peak and then “plateau” in 2014, according to the leading data analysts, as today’s lower prices force producers to cut exploration spending in a bid to boost profit margins.
 
“It seems inevitable,” says the new Gold Survey 2014 Update from Thomson Reuters GFMS, that the mining industry’s response to 2013’s gold price crash “will be detrimental to mine supply levels in future years.”
 
Forecasting a 10% drop in the average market price to $1270 per ounce for full-year 2014 (currently at $1290), “The mining sector is increasing production this year,” says the consultancy, “with a number of important projects coming into production and/or ramping up to full capacity, having benefited from investment flows in earlier years when prices were much higher.”
 
But new investment is now being cut back, meaning that “longer term, the production profile is likely to come under pressure” with 2014 marking what Thomson Reuters GFMS calls “a cyclical top for mine production.”
 
Over the first half of the year, global gold mining output rose 4% worldwide from January-June 2013, led by increases from China, Australia and Russia – the top 3 producer nations.
 
Gold mining output fell however in the next 3 major producers – the United States, South Africa and, most sharply, Peru. There, the giant Yanacocha project, the world’s biggest operational gold mine at its peak a decade ago, saw the quality of gold ore drop 65% from a year before.
 
Better “husbandry” and falling energy prices mean the average cash cost of mining 1 ounce of gold fell 6% by mid-2014 from a year before, Thomson Reuters GFMS explains. But thanks to the slump in world market prices, the industry’s basic profit margin has fallen 25% year-on-year, it says.
 
Attempting to cut costs further, the gold mining industry’s “closures or suspensions have so far been limited to small or ageing operations,” the report says. But there have also been “deferrals of major development-stage projects”, because the last “turbulent year” in precious metals at one point saw gold’s market price dip below the mining industry’s average cost of production when exploration and new development expenses are included.
 
In the stock market this has also led to “a market sell-off that has severely depressed mining valuations.” Mergers and takeovers remain “anemic”, with no “blockbuster consolidation plays” despite continued approaches from Newmont – the world’s No.2 gold mining company – to the world No.1 Barrick aimed at saving $1 billion per year across their operations in Nevada, USA.
 
Today’s lack of corporate activity in the gold mining  sector, says Bernard Dahdah at French investment and bullion bank Natixis’s London office, contrasts with the “mine acquisition frenzy” of the decade-long bull market in gold prices. Then major companies were “typically purchasing mines at the higher end of the cost curve.” Miners also failed to protect themselves against any drop in prices, remaining “unhedged” after finally closing in 2009-2011 the huge forward sales made at prices 80% lower at the turn of the century.
 
Gold producers, says Dahdah, “are now resorting to consolidation at the lower end of the cost curve. Exploration budgets are also being cut back.”
 
Cost-cutting across the base metals sector is being driven further by slowing global demand, reports specialist news and data provider Platts.
 
“Companies are not only becoming leaner and meaner because the old regimes…became too profligate when commodity prices were high,” writes Paul Bartholomew, Platts’ managing editor for steel in Australia. “Rather, they are responding to a slowing China and subdued global economy.”
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Sep 20

Chinese Zombies in Global Real Estate

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Coming to your neighborhood soon…?
 

I WANT to bring the spectre of zombies before your eyes, writes Callum Newman in Dan Denning’s Daily Reckoning Australia.
 
Not some half-mad, limping, flesh eating army. I’m talking about a different type of zombie. Pay attention – one day it might be in your neighbourhood.
 
Imagine an area of new developments, well located and catered for with inviting restaurants and retails shops. Everything seems wonderful. But something is amiss. The place is a bit lifeless. There’s less foot traffic. It’s not dead, but it’s not thriving. Welcome to Zombietown.
 
You can credit Canadian urban planner Andy Yan with the idea. This was the effect, he argued, that offshore (Chinese) money was having on parts of the city of Vancouver. The money was coming, but the people weren’t. Areas of empty living spaces and lifeless streetscapes were emerging. The real estate buyers never actually moved in.
 
They just wanted a secure place to park their cash and the privileges that come with a Canadian passport. They could simply visit once or twice a year to meet the visa requirements. This absentee owner phenomena is one reason Canada has since scrapped its ‘millionaire visa scheme’.
 
The economic benefits to the investors were actually very few. And ice hockey and maple syrup never had much to do with it from the beginning. Wealthy Chinese were hedging their position at home. They wanted a getaway plan locked in overseas should they ever need to flee China.
 
Now, if you happened to catch the front page of the Australian Financial Review on Wednesday, you can see how this ties in to Australia. The cage of the Foreign Investment Review Board is being rattled. From the article:
“Wealthy foreigners are illegally buying property because of Foreign Investment Review Board ineptitude, according to the federal MP leading an inquiry into the huge surge in property prices that has split Treasurer Joe Hockey and the Reserve Bank of Australia.
 
“Coalition MP Kelly O’Dwyer said evidence given to her inquiry suggested restrictions on foreign buyers – who cannot buy established homes without approval – are not being adequately enforced by the board.”
An experienced property investor who works with developers told me the other week that, plain and simple, Chinese money is making its way into Australia, regardless of the rules. All it takes is an un-ticked form, a look the other way or a title in the name of a relative. And he thought the Canadian decision to ban the millionaire visa was sending even more money our way.
 
Cashed up overseas buyers blur the link between property prices and normal valuation metrics such as wages and rental yield. In the case of millionaire foreign investors, those have very little to do with their prime motivation. One would think this money is going to keep coming, so we better get used to it.
 
Of course, nobody knows how much Chinese money is leaking in because there’s no conclusive data. There is the concern rising property prices might be increasing the chances of a crash.
 
You’d think that if we’re dealing with wealthy Chinese, they’re more likely to pay cash than use credit. That would seemingly make a crash less probable – for now. That’s what the real estate cycle suggests as well – if you know where we are. It’s always a question of timing.
 
There are, however, a mighty lot of residential towers going up or planned in Melbourne right now.
 
Tall buildings are something we track in Cycles, Trends and Forecasts for clues for timing the cycle as it progresses. Economic forecaster BIS Shrapnel warned that Melbourne was likely to be oversupplied with apartments in the next few years, citing slower population growth and a brewing oversupply of stock. Something to keep an eye on.
 
Regardless, despite the opinions and comments of all the experts, THE absolute best thing to know is where we are in the real estate cycle. That should be your starting point to put everything in perspective.
 
It’s not as if all this is particularly new in history. I picked up a good book called Owning the Earth the other week. Besides my colleague Phil Anderson’s book, The Secret Life of Real Estate and Banking, not many books make the connection between the land market and the boom and bust cycle. This one does.
 
Here’s Andro Linklater, author of Owning the Earth, on the real estate cycle in the nineteenth century:
“The pattern of was most obvious in the United States, where five abrupt busts in 1819, 1837, 1857, 1873 and 1893 brought ends to periods of boom. Within each boom, there was a general upward rise in land prices over the period, at first gradual but then steepening as mortgage-lending accelerated to keep up, thereby fuelling an unsustainable burst of demand, and a final price explosion.”
Linklater notes that 1873 was the first ‘global’ crash, known at the time as the Great Depression. The savage downturn of 1893 eclipsed it later. In turn, the Great Depression of the 1930s overrode that bust in popular memory. Doesn’t seem like we’ve learnt much from this, have we?
 
We’ve now been living through what the Americans call the Great Recession since 2007. Where did it all start? Real estate. My suggestion: Learn about the cycle first, then make your moves.
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Sep 16

The Most Important Chart Right Now

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Dollar up, everything down. And the end of QE means it probably isn’t done yet…
 

I WANT to show you the most important chart in the investing world right now. It’s affecting the price of just about everything else, writes Greg Canavan in The Daily Reckoning Australia.
 
If the United States’ superpower status is on the decline, you wouldn’t know it by looking at the chart below – the US Dollar index. As you can see, it’s moved sharply higher over the past few months.
 
The momentum indicators at the top and bottom of the chart are severely ‘overbought’, and the index itself is well above the moving averages. This suggests a correction is imminent, but for now, everything denominated in US Dollars is weak.
 
 
The Aussie Dollar, gold, copper, oil and most other commodities have all been under pressure lately. And it’s why share markets around the world are struggling to push mindlessly higher…as they’ve been doing ever since late 2012 when Ben Bernanke and Co. got jiggy with it on the QE front.
 
But next month, it all changes. For a short time at least, global share markets will experience life without Federal Reserve QE for the first time since 2011.
 
In short, the market is having another ‘taper tantrum’ as the end of QE draws closer. The last such episode was back in June 2013. As you can see in the chart above, that was when the US Dollar last spiked to its current level.
 
Being the world’s reserve currency, US monetary policy is essentially global monetary policy. As the US Federal Reservewinds down QE, you can see the knock on effects starting to emerge.
 
US Dollar strength is just the most notable. Its strength since bottoming in May this year indicates tightening global liquidity. But until recently, the effects of this haven’t been all that obvious.
 
Emerging markets are usually most vulnerable to a strengthening Dollar. But that vulnerability only began to show in the past week or so, as you can see in the emerging markets index chart below…
 
 
Emerging markets rallied to new highs this year despite the strengthening Dollar. Until recently that is – when sharp falls took place, especially in markets like Turkey and Brazil. The Bank for International Settlements warned in its just-released quarterly report that these markets are particularly vulnerable because of increased US Dollar borrowing over the past few years.
 
As you know, borrowing in a strong currency while revenues and earnings are in a weaker currency doesn’t usually work out well. It places greater pressure on a company to service its debts, leaving less left over for shareholders.
 
You’ll have to wait and see whether emerging market resilience can continue, or whether the end of QE will finally have a more definitive impact on these peripheral economies.
 
I don’t know what the outcome will be. But I can say that markets often ignore issues for months on end and then all of a sudden worry about them acutely. Maybe this is just the start of an intense worry phase.
 
Whatever it is, Australia is a part of it. Our stock market and currency are under the pump, thanks to weaker commodities and a weaker iron ore price in particular. That, in turn, is because of a slowing Chinese economy, which, as it turns out, imports US monetary policy through a partially pegged exchange rate.
 
The US Dollar’s tentacles have a wide reach. And it touched China on the weekend with the Middle Kingdom announcing weaker than expected industrial production, fixed asset investment and retail sales growth.
 
The slowdown comes amid a deteriorating property market in China, which for years was the engine of growth for the country. But that engine is sputtering as China’s leaders grapple with trying to rebalance the economy without crashing it. It’s a tough task.
 
Which is why you can expect to hear calls for ‘more stimulus’ from China grow louder this week, because ‘more stimulus’ always works. If only we had done ‘more stimulus’ sooner rather than later, we’d not be in the position of needing ‘more stimulus’ now.
 
Economics really is that simple. Money may not grow on trees but it does lay dormant and abundant inside the computers of our heroic central bankers. (In case you need me to say it, yes…I’m being sarcastic.)
 
For that reason, all eyes will be on the Federal Reserve this week. They gather for a two-day meeting on the 16th and 17th, and boss Janet Yellen gets a chance to move markets with an accompanying press conference at the conclusion of the meeting.
 
Usually, the Federal Reserve provides soothing words about how interest rates won’t go up for ages and everyone can keep punting without any need to worry. That’s worked well for the past few years.
 
But the time is approaching where the Fed will actually start having to do something on the interest rate front. Or at least they’ll have to stop pretending they’ll keep interest rates low forever.
 
In other words, there are fewer rabbits in the hat. Or maybe there are no rabbits left at all?
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Sep 08

Vista Gold Receives Approval for Mt Todd Environmental Impact Statement

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Vista Gold (TSX:VGZ, NYSE:VGZ) has announced that the environmental impact statement for the Mt. Todd gold project in Australia has been approved.

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Aug 15

Russia Could Become World’s Second-largest Gold Producer

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Mineweb reported yesterday that this year, Russia may overtake Australia to become the world’s second-largest gold producer.

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Aug 15

Ready for Rising Uranium?

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Japan’s nuclear shutdown continues to weigh, but look further ahead…
 

DAVID SADOWSKI is a mining equity research analyst at Raymond James Ltd., and has been covering the uranium and junior precious metals spaces for the past six years.
 
Here he tells The Gold Report‘s sister title, The Mining Report, why the current bear market in junior uranium miners will prove only temporary…
 
The Mining Report: In past interviews with Streetwise Reports, you predicted that the price of uranium will rise this year. But that has not panned out. Why not?
 
David Sadowski: Simply put, there is a short-term supply problem in the uranium industry. We believe, however, in the long term, supply will not be able to keep up with demand growth. The point at which we previously expected demand to outstrip supply has been pushed out by a couple of years. That development has impacted the price in recent months, as well as Raymond James’ outlook for the price going forward.
 
The three main reasons for continued global growth of uranium mine production are the persistence of long-term fixed-price sales contracts, the intransigence of government producers who believe that security of supply is more important than mine economics, and byproduct uranium production. Secondary supply sources also remain robust.
 
TMR: Would you explain how these situations interrelate?
 
David Sadowski: Demand is lagging because Japan has been slower than expected to resume operations at its nuclear reactors. The Japanese reactors are not consuming uranium at the moment, but the Japanese utilities are continuing to take delivery on many of their supply agreements, causing their inventories to rise. A belief in the market that uranium might be dumped has, in part, kept other global utilities on the sidelines, resulting in lower levels of uranium buying and lower prices. And while uranium oxide “yellowcake” deliveries have continued to Japanese buyers, those buyers have slowed the movement of that material into the rest of the fuel cycle, which has decreased demand for conversion and enrichment products.
 
On the enrichment side, excess capacity has resulted in “underfeeding”. The centrifuges at the enrichment plants are always spinning. The plants are paid to supply a certain level of enrichment to their customers. And during times of lower demand, they can utilize otherwise empty centrifuges to squeeze out more uranium product.
 
An apt metaphor for this process is orange juice. Imagine that you are running a juice bar with 10 juicing machines that are always spinning. Your customers bring you oranges and sign a contract to take delivery of a set amount of juice from those oranges. But suddenly you lose 20% of your customers. They stop bringing you oranges and they no longer pay you for the juice. What are your options to make up for that lost revenue? Given that all 10 juicing machines must continue to run, you can take the oranges that would under normal circumstances be squeezed by eight machines and instead run them through 10 machines, squeezing more juice out of each orange. The juice in excess to what the eight remaining customers have agreed to buy is available to the juice bar owner to sell to other customers.
 
That is the same type of activity that is going on in the uranium space. Enrichers with excess capacity especially during a period of relatively weak enrichment or “SWU” prices can squeeze more enriched product out of the material being provided to them, which generates excess uranium that the enrichers sell to others. Given the protracted outage of Japanese nuclear reactors, this squeezed source of supply has been greater than expected. In part due to our revised estimate that only one-third of Japan’s nuclear fleet will return to operations, we expect underfeeding to continue to exacerbate oversupply for some time.
 
TMR: What about the uranium extracted from Russian nuclear warheads?
 
David Sadowski: Similarly, with respect to Russia, the end of the Megatons to Megawatts high-enriched uranium (HEU) deal was long anticipated to usher in a new period of higher uranium prices. But the same plants that were used to down-blend those warheads can now be used for underfeeding and tails re-enrichment. In this way, the Russian HEU-derived source of supply that provided about 24 million pounds to the market did not disappear completely; the supply level was just cut roughly in half. Meanwhile, uranium mines, in aggregate, have increased their output – even though prices are now well below average production costs. Kazakhstan, for example, has continued to grow its uranium industry, despite recent guidance from officials in Kazakhstan to the contrary.
 
Furthermore, since Fukushima, only one major uranium mining operation has closed down due to weak prices. The high-cost Ranger mine in Australia, which has been processing its stockpiles since 2012, has defied protests from locals and restarted production following a major accident in late 2013. And Cigar Lake in Canada and Husab in Namibia are charging into production, even in this oversupplied environment. The bottom line is that oversupply will persist until 2020.
 
TMR: How will that solemn reality affect future prices?
 
David Sadowski: Current prices are untenably low and some producers are refusing to sell at rock-bottom prices. Upward pressure on prices into the $35 per pound range should occur as utilities buy more uranium in the marketplace, and as secondary trading activity among financial entities picks up. The biggest factor is the behavior of the end-users of uranium, the nuclear utilities. Given what we know from available data, global utilities are going to have to sign a lot of new supply contracts to meet their uncovered reactor requirements in the years 2017 and beyond.
 
But looking at current utility-held inventories and the global supply/demand picture over the next five years, we predict that the utilities will not be rushing to sign new deals. A major upswing in prices toward mine incentivizing levels of $70/lb is thus at least a couple of years down the road. The spot price is $28/lb today. It should average $35/lb in 2015 – a 20% rise and we see US$70/lb in 2018. Furthermore, it should be noted that this outlook can change in a split second. A flood at Cigar Lake, sanctions against Russian nuclear fuel exports, a major mine shutdown – if any of these events occur, the equation changes and prices could rise a heck of a lot faster, comparable to the rise in 2006–2007 and in late 2010.
 
TMR: What do you look for in a uranium mining junior?
 
David Sadowski: The best junior opportunities are to be found in companies with best-in-class assets, access to capital, and the potential for value-added news flow. Solid management teams, clean capital structures and trading liquidity are also key.
 
TMR: Is there synergy in going after both uranium and gold?
 
David Sadowski: Uranium deposits can occur alongside other metals, improving mine economics. In South Africa and Australia, uranium is mined as a byproduct of gold with a positive impact at those mines. In other cases, gold, nickel, molybdenum, and other metals can be an encumbrance to primary uranium production and can negatively impact costs.
 
TMR: Thanks for your time, David.
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Aug 05

Gold Prices Flat Again But Shanghai Premium "Healthy" as London Gold Borrowing Rates Rise

Gold Price Comments Off on Gold Prices Flat Again But Shanghai Premium "Healthy" as London Gold Borrowing Rates Rise
GOLD PRICES held in a tight range again Tuesday morning in London, trading less than 0.2% down from last week’s finish as crude oil ticked higher with major government bond interest rates.
 
European stock markets continued their rally from last week’s 4.5% drop, but Asian equities were muted after new data showed China’s services sector flat-lining in July.
 
Sinking from June’s 15-month high, the Markit consultancy’s non-manufacturing PMI of 50.0 was the lowest reading since the series began in 2005.
 
Gold prices in Shanghai closed Tuesday slightly lower in the Yuan, but extended their $2 per ounce premium above London quotes of $1291.
 
“The premium in Shanghai,” Bloomberg quotes analyst Nikos Kavalis at London-based consultancy Metals Focus, “might be a sign that the inventory overhang in China we saw earlier this year is not a big issue.”
 
“We expect a very healthy rebound in physical demand in the last four months of the year.”
 
Suggesting tighter supply in London – heart of the world’s wholesale trade – the cost of borrowing gold in one-month deals today held near the highest levels since May, with gold lenders asking for a rate of interest on top of the cash interest they earn during such gold-for-money swaps.
 
This rare situation, as shown on data collected from the market-making members of the London Bullion Market Association, applied throughout summer 2013’s sharp gold rally from 3-year lows, and again as prices rose this spring.
 
Amongst private investors in the West, BullionVault users last month grew their aggregate holdings to a new record above 33 tonnes of gold as prices slipped 2.6%.
 
Sales of gold and silver products by Australia’s Perth Mint, in contrast, fell to a 3-month low.
 
That took year-to-date sales of gold to 8.3 tonnes, data from the government-backed mint said, down 43% from the first 7 months of 2013.
 
The US Mint has sold 56% fewer American Eagle gold coins so far in 2014 than the same period last year.
 
Yesterday saw the gold bullion needed to back shares in the SPDR Gold Trust (NYSEArca:GLD) drop by 1.8 tonnes, taking the world’s largest exchange-traded gold fund’s holdings back to 800 tonnes – a five-year low when first reached last December.
 
“While the present negative factors remain,” says a note from Germany’s Commerzbank – “a strong US Dollar, weak physical demand in Asia, and weak coin sales in the West – we do not envisage any serious price gains” in gold.
 
Facing what Baring Asset Management calls “increasing global demand for resources,” mining-stock manager Duncan Goodwin says “Investors should focus on investing in companies not commodities.”
 
The Baring Global Resources Fund shows an average annual return of -11.6% since August 2011, according to data from MorningStar.
 
The Philly Gold Bugs Index of gold and silver mining stocks (IndexNasdaq:XAU) has a compound annual growth rate of -20.5% over the last 3 years.
 
Physical gold bullion shows a compound annual return of -12.4% from its summer 2011 records above $1900 per ounce, hit at the start of September that year.
 
Israeli troops meantime pulled out of Gaza Tuesday morning amid the 72-hour ceasefire starting last night, but militant Syrian rebels again clashed with Lebanese troops at the border town of Arsal.
 
The United Nations said today that the number of internal refugees from the fighting in eastern Ukraine has jumped to 100,000 in the last two months.
 
A white paper adopted Tuesday by the Japanese cabinet calls China’s recent actions over disputed islands “profoundly dangerous“, making the security situation in East Asia “increasingly severe.”
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Aug 03

War Coming in Europe

Gold Price Comments Off on War Coming in Europe
So says a Moscow insider dismissing the $50bn Yukos Oil fine…
 

ONE HUNDRED years ago a feisty little Bosnian Serb, Gavrilo Princip, shot and killed the Archduke of Austria, Franz Ferdinand, and his wife Sophie in the city of Sarajevo, writes Greg Canavan in The Daily Reckoning Australia.
 
It was the “shot that rang out across the world”. A month later, the world was at war.
 
While historians have subsequently shown that the war was a long time coming – the result of rising imperialism of the great powers and the faltering old Austro Hungarian and Ottoman Empires – no one saw it at the time.
 
Take this contemporary account from Austrian novelist and playwright, Stefan Zweig, recounted in his memoir, The World of Yesterday. In the days following the assassination, Zweig was holidaying in the Belgian seaside resort of Le Coq…
“The happy vacationists lay under their coloured tents on the beach or went in bathing, children were flying kites, and the young people were dancing in front of the cafes on the digue (a bank or dike). All nationalities were peaceably assembled together, and one heard a good deal of German in particular…The only disturbance came from the newsboy who, to stimulate business, shouted the threatening captions in the Parisian papers: L’Autriche provoque la Russie, L’Allemange prepare la mobilisation.
 
“We could see the faces of those who bought copies grow gloomy, but only for a few minutes. After all, we had been familiar with these diplomatic conflicts for years; they were always happily settled at the last minute, before things grew too serious. Why not this time as well? A half hour later, one saw the same people splashing about in the water, the kites soared aloft, the gulls fluttered about and the sun laughed warm and clear over the peaceful land.”
Within a few days, Belgian soldiers arrived on the beach, with machine guns and dogs pulling carts. Then Austria declared war on Serbia. The resort town become deserted. Zweig quickly booked a train back to Austria.
 
Early in the journey, the train stopped in the middle of an open field. It was dark, but Zweig saw freight trains – open cars covered with tarpaulins – heading in the opposite direction. They were full of German artillery heading for Belgium. The war was underway.
 
What’s the point of recounting this story? Well, there’s the regional conflict in Ukraine that’s heating up. But the main point is that no one knows what the future holds.
 
In early 1914, the (Western) world had experienced a long period of economic expansion and freedom. Zweig travelled freely around the world without needing a passport or ‘papers’. Capital and labour mobility were high. There was virtually no income tax (nor was there a welfare state), the Federal Reserve had only just come into existence, and government involvement in all areas of life was minimal.
 
But that all changed with the Great War. It led to the rise of larger governments, the welfare state, and the unions. It led to greater state control of financial markets and it led to systematic inflation.
 
The world changed massively in 1914, and no one at the time would have picked the direction it was heading. Even after the war started, the general consensus was that it would be over by Christmas. As it turned out, it endured nearly to Christmas 1918.
 
These days, people seem pretty certain that the Fed has things under control. That interest rates will stay low for many, many years, stocks won’t have a meaningful decline. They seem confident in China’s ability to manage an historic credit boom, and confident that Australia’s 25 year property bull market will keep on giving. That could well be true. No one knows.
 
But history tells you that things change…often dramatically. It tells you that bear markets follow bull markets…that cheap prices follow expensive prices. That you can’t see the catalyst doesn’t mean it won’t happen. And just because governments and central banks around the world are trying desperately to levitate markets, doesn’t mean they will succeed.
 
And who would’ve thought that 100 years after the peak of the British Empire, the Commonwealth Games would still be going, or more unbelievably, that people still care? Seriously, what a strange little tournament it is.
 
Getting back to the 1914/2014 parallels (which may be a little closer than you think), last week the Permanent Court of Arbitration in The Hague awarded former shareholders in Yukos Oil US$50 billion in damages for having their assets taken from them by the Russian state.
 
Will Russia pay? It’s unlikely. They’ll just see this as a Western attempt to apply further economic sanctions over the standoff in Ukraine. As the Financial Times reported:
“But if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the West could sour further.
 
“One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine. ‘There is a war coming in Europe,’ he said. ‘Do you really think this matters?’…”
Maybe that’s just a bluff. But economic sanctions are often a path to war. Russia is an energy powerhouse and can inflict great damage on Europe if it wants to.
 
The repercussions for investors are obvious. It all comes down to confidence. When confidence (the belief that, y’know, everything will be fine) evaporates, so does liquidity. And it can go very quickly.
 
In 1914, the two largest exchanges in the world – the London and New York Stock Exchanges – closed for the first time in their history on July 31 to stop capital flight. New York remained closed for four months, London five months. At the time, no one thought such an occurrence possible.
 
That’s the problem. People, even experts, lack imagination during important historical turning points. Following the global financial crisis, the Queen asked a bunch of experts how no one saw this crisis coming. The response was along the lines of, ‘It was a failure of imagination.’
 
Hubris and overconfidence often inhibit the imagination. And if you look around markets and investors today, well, hubris and overconfidence are leaking out all over the place.
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