Yesterday was a holiday in British Columbia – Family Day, a day off invented three years ago to put a long weekend in the long spell between Christmas and Easter. With family in town and two close friends having had babies in recent weeks, I was very happy to celebrate!
While I played, gold hit US$1,200. Wow. It came off slightly but continues to trade just below that mark, proving itself worth the 11% gain it has managed in the last month.
Analysis abounds. Gold is even making the covers of mainstream news for its ability to gain amidst the mess. And the gains are now enough that miners are enjoying a lift as well. Newmont Mining is up 51% in two weeks, Goldcorp has risen 45%, Kinross is up a whopping 72%, and Barrick has added 41%.
All the while, the US boards are stumbling along. Fourth quarters earnings are rolling in; whether they ‘hit’ or ‘miss’, most have been causing share price losses. Confidence is ebbing.
The debate over whether America is heading for a recession or not goes on, but I have come to think it doesn’t much matter, at least in the moment. What matters for gold is whether US markets turn down, which they are doing, because that pushes investors to look elsewhere for upside.
When that search lifts gold and miners, investors remember mining’s leverage. I’ve said it many times: to come back to life, the mining sector needs to make people money.
That is now happening. From most angles – technicals, fundamentals, sentiment – it looks likely to continue, at least for the next while. And in a self-propelling way, the more gains are gotten the more investors will return to the sector, creating continued lift.
Maven subscribers are benefitting. We bought a few gold stocks in late December that had been battered by tax loss selling, but offered good news to start the year and straightforward leverage to gold. Those stocks are performing, as are many of our longer-term holdings that combine high-calibre assets with top management teams, a duo that should produce strong leverage to metal price gains.
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Now for a snippet from last week’s Maven Letter. Enjoy!
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In The News…
Indonesian Copper Controversy
Freeport McMoRan’s Grasberg mine in Indonesia produces 300,000 to 420,000 tonnes of copper a year. That represents some 2% of world output – but as of last week that output is unavailable.
The situation started two years ago, when Indonesia decided it wanted to export blister copper rather than concentrates in order to keep more of the value chain in Indonesia. To make that happen, it imposed an export ban on unprocessed minerals.
That was a problem for miners already in operation. Freeport negotiated with the government and was granted a temporary export license after promising to start planning to build a smelter in the country.
Each temporary license lasted six months. Renewals had been fairly smooth, until last week when the government refused.
Details are foggy but it seems the government is demanding Freeport do more than think about building a smelter and instead put down $530 million towards actually building one. Freeport says that amount was not on the table.
Further complicating things, Indonesia has also been demanding the right to buy 10.6% of Grasberg. In mid-January Freeport said OK, but put a $1.7-billion price tag on the sale. The government was none too happy with the valuation.
For now, Grasberg is still operating but output is being stockpiled.
This is one example of the kind of disruption that could tip the copper market’s tight supply-demand balance. I dive more into that topic in this week’s On The Macro, which is a look at copper.
Gold Standard gets $16M from Goldcorp
Last week one of my thoughts was titled Some Stocks Will Work, about how companies with the right combination of asset, jurisdiction, commodity, management team, and stage will do well this year, whatever happens in the overall mining markets.
Looks like Gold Standard (TSXV: GSV) could be one of those stocks.
Gold Standard’s flagship project is Railroad-Pinion, a large Carlin Trend property with three defined deposits. It’s a land package that was splintered for years, which stymied systematic exploration.
Gold Standard first outlined the North Bullion deposit, a high-grade zone of refractory gold mineralization at the north end of the package. More recently the company defined two deposits at the south end of the property. Pinion and Dark Star are both oxide zones and Dark Star, in particular, produced some very promising gold intercepts late last year.
All three deposits remain open for expansion and the property offers a good number of other targets. And now Gold Standard has a re-filled bank account to expand those deposits and test those targets, following a $16.1-million buy-in by Goldcorp. Goldcorp is buying 16.1 million GSV shares at $1 a piece, to establish a 9.9% stake in the company.
The deal price represented an 11% premium to GSV’s shares price. The news pushed GSV shares up to match the premium.
It was less than a year ago that GSV attracted a similar amount of cash from another investor. In May OceanaGold spent $16.3 million to buy 25 million GSV shares.
That cash let the company drill last year, and the results were very much worth the effort. A set of holes announced in early November hit into a new zone at Dark Star with thicker, high-grade mineralization that the main deposit. Results included 149 metres of 1.38 g/t gold and 157 metres of 1.51 g/t gold.
Gold Standard also drilled into new mineralization at North Bullion and at Pinion. All together, 2015 was a very successful year for the company – and apparently Goldcorp thought so too.
Royal Nickel Buys
The team at Royal Nickel (TSX: RNX) knows nickel. Most of them came from Inco after it and Falconbridge, Canada’s two nickel giants, were sold to foreign owners in 2006. Royal Nickel emerged soon thereafter and the company has done a laudable job advancing Dumont, its nickel project in Quebec.
But nickel prices are not making things easy…so Royal Nickel is diversifying.
“Too many mining companies get focused on being in a certain metal or a certain geography,” said CEO Mark Selby on a conference call. “Our belief has always been that it’s all about cash flow.”
Royal Nickel is targeting cash flow by buying 67% of Salt Lake Mining, a private company that owns the Beta Hunt nickel-gold mine in Australia, and VMS Ventures, which owns 30% of the Reed copper mine in Manitoba alongside HudBay Minerals.
The Salt Lake Mining deal will see Royal Nickel hand over 32.5 million shares and $2.5 million in cash. The VMS deal involves a $3.5-million cash payment, 36 million shares, and a distribution to VMS shareholders of the 30 million shares of North American Nickel that VMS currently owns. The deal values each VMS share at $0.081, a 39% premium.
Beta Hunt is a storied operation. It has produced nickel fairly consistently since the late 1960s, but it also hosts gold in zones adjacent to the nickel deposits. Gold mining rights had held separately from the nickel rights until Salt Lake Mining consolidated both in 2013. Gold production started in late 2015.
“You go down into the mine and over to the left you have nickel; to the right, you’re into the gold,” said Selby. “The ability to have meaningful production of both is what makes this a low-cost mine and is why this mine is going to continue to operate despite nickel prices being so low.”
The other deal brings 30% ownership of the Reed mine, near Flin Flon, Manitoba. HudBay built Reed in 2012 and achieved commercial production in early 2014. The mine taps into a high-grade copper deposit, to produce 15,000 tonnes of copper annually at a cash cost of $1.64 per lb. At present the mine has four years of reserves left, but the deposit remains open at depth. Hudbay is waiting until the decline gets a bit deeper before drilling at depth.
Both assets make money at today’s prices, thanks to their gold credits. Neither will do much for Royal Nickel’s bank account in the near term thanks to debt repayments, but once those obligations are satisfied they look like good assets to own.
“This is the time to add quality assets,” Selby said. “Mining is cyclical. The bottom is the time to be acquiring assets.”
Rates and Gold
Let’s step back and set the stage a little. A year ago, the Federal Reserve was looking forward to seeing the economy fire up. After three rounds of quantitative easing, what felt like endless rounds of forward guidance, the ballooning of the Fed balance sheet and an 86% increase in federal debt over seven years, surely these feats of monetary and fiscal policy were about to take effect, aided by the wealth effect of a five-year US stock market bull run.
Or not.
GDP slowed, gaining just 3% in 2015 versus 3.9% in 2014 and 4.1% in 2013. Personal consumption, which is the largest contributor to GDP in the US, grew only 3%, its smallest increase since 2009. If you exclude auto purchase (fueled by subprime loans) and health care spending mandated by the Affordable Care Act, personal consumption was downright weak.
Industrial production fell 1.4%, which matters because the industrial sector backs a quarter of real GDP on a value-added basis. Corporate profits fell year-over-year in the second and third quarters (expectations for fourth quarter results are worse). Bond spreads widened. Commodity prices declined. Stock markets around the world entered bear territory.
So 2015 did not play out as the bankers expected. Nevertheless, at the end of the year they stuck to their guns and raised interest rates.
Conviction in the Fed’s four-hikes-in-2016 plan lasted mere days. As soon as stocks started melting down in January, markets cut the number of expected hikes to one and pushed it out to late in the year.
I think the Fed will still hike in March, because its models (which rely mostly on trailing indicators) will still be showing a fairly good job market, positive GDP growth, rising inflation (because lower fuel costs will allow more inflation-prone categories like health care and utility bills to have greater influence in CPI calculations), and general an America holding steady despite international economic angst.
The problem is that the indicators simply won’t have caught up to reality before March. As such Yellen will raise again, encouraging more dollar strength. That will enhance the already significant edge that America’s trading partners are getting through exchange rates, which conversely is a hit to US exports and represents an importation of deflation.
In other words, a second hike will only make things worse. That worsening might turn indicators enough to prevent a third hike in June, or it might not show until second quarter GDP data is available in late July.
By then America will be too close to presidential election time for the Fed to do anything drastic (without looking like an obvious attempt to help the Democratic candidate).
Recession, or at least stagnation that feels like a recession, will follow. Rate cuts will be involved. The US dollar will weaken, then if it doesn’t sooner.
At that point a weaker dollar and falling US interest rates will meet negative rates in Europe and Japan.
Gold anyone?
Gold Of Late
Speaking of gold, its recent price moves deserve comment.
Off its low of US$1,050 in December, gold has now climbed 8.8%. That’s a pretty good ‘strong season’ move – but the difference this year is that stock market mayhem is encouraging safe haven buying, a wave of interest that is amplifying the strong season effect.
And I don’t think we’re done. Any significant move up tempts correction, but for gold right now that kind of mentality only surfaces when there are no other major influences. And since gold is gaining partly because of global economic weakness, every release of economic data matters, which means gold has reason to move up or down almost every day.
Today, for instance, we had January numbers for the ISM non-manufacturing index, which tracks an array of industries including utilities, retail, and health care. This group of businesses expanded at its slowest pace in two years, coming in at 53.5, two points below consensus expectations. And this group matters, as the non-manufacturing sector makes up 90% of the US economy. The other 10% is manufacturing, the numbers for which were released two days earlier and showed a sector in its fourth month of contraction.
In response to the ISM numbers, the US dollar had its worst day in years, losing 1.7% against nine of its biggest peers. The correction brings the dollar closer in line with the bond market, where 10-year yields sank on a week ago to their lowest levels in a year.
Dollar down, economic concerns up, gold gains. The yellow metal added almost 3% today, bringing it up to its 200-day moving average.
Gold has broken above its 200-day moving average a handful of times in the last five years, but this time it has fear on its side.
Speaking of fear…next up: January employment numbers come out on Friday. A weak jobs report would send the dollar down, as people abandon all hope of further Fed rate raises.
The chart has its support levels and resistance levels, but what matters to me is that the fundamentals for gold are strengthening, day by day.
