Gold Supply Concerns Highlight its Rarity

Article by Frank Holmes – CEO and Chief Investment Officer U.S. Global Investors – abstracted from a longer article suggesting that commodities in general are flashing a once-in-a-lifetime buy signal .  To read full article click here.

Gold ended last week down slightly, the first time in three weeks it’s done so. It looks as if gold investors took some profits late in the week after the yellow metal came close to breaching $1,360 on Wednesday.

I still believe gold could hit $1,500 an ounce this year on rising consumer and producer prices, which I think are understated. This is more than apparent when you compare the official U.S. consumer price index (CPI) and alternative measures such as the New York Fed’s Underlying Inflation Gauge (UIG).And as Dr. Ed Yardeni points out in a recent blog post, the word “inflation” appeared as many as 106 times during the latest Federal Open Market Committee (FOMC) meeting, a sign that Fed members could be getting more and more concerned about mounting inflationary pressures.

Recent reports also suggest gold production is slowing, which could help support prices long-term. Exploration budgets have been declining pretty steadily since 2012 after the price of gold peaked, and fewer and fewer large-deposit mines are being discovered.

Last week the China Gold Association announced that the country, the largest producer of gold, produced 98 million metric tons in the March quarter, down some 3 percent from the same period last year. This comes after total Chinese output in 2017 fell 6 percent year-over-year to 426 million tons. Granted, miners have been pressured by Beijing to curtail production as part of the government’s enforcement of tougher environmental protection policies, but the decline in output is part of a downward trend we’re seeing across the board, especially among major producers.

Take a look at the declining quarterly output of Barrick Gold, the world’s largest gold miner. According to its preliminary results for the first quarter, Barrick produced a total of 1.05 million ounces from its 10 projects. That’s only a 2 percent decrease from the same quarter last year, but a far cry from where it was seven years ago.

Barrick gold reported lowest quarterly output in 16 years
click to enlarge

Since the news hit April 11, shares of Barrick are up about 3 percent, even after a Friday selloff.

While some investors might view the lower output as disappointing, others no doubt see it as a reminder that gold is a finite resource, one of the many reasons why it’s remained so highly valued for centuries. As I’ve written before, the low-hanging fruit has likely already been picked, making the task of mining the yellow metal more difficult as well as expensive. Supply isn’t growing nearly as fast as it once did.

And yet demand continues to climb. Not only do the peoples of India, China, Turkey and other countries have a strong cultural affinity to gold—an obsession that will only intensify as incomes rise—but the metal still plays a vital role as a portfolio diversifier in times of economic and political uncertainty.

Advertisements

Latest thoughts on Barrick Gold’s Veladero mine toxic release

The Argentinean media has reported that Barrick has been told by the local judiciary to close Veladero ‘indefinitely’.  However the term is non quantifiable and given the importance of the operation – Barrick’s third largest gold producer with a gold output of some 600,000 ounces annually – to the Provincial and Federal economies, we suspect ‘indefinite’ closure will actually mean perhaps a week or so longer than might normally have been the case in order to highlight local displeasure with the world’s largest gold miner.  But even a few weeks closure will affect Barrick’s bottom line given the mine generates revenues of around US$2.2 million a day at current gold prices.

Readers are directed to a more detailed article published today on Seeking Alpha – click on  Barrick’s Third Largest Gold Mine Suspended ‘Indefinitely’ to read the full article.

Barrick looking at selling Acacia?  It has been for years!

It must have been a slow news day in Vancouver for Reuters to come up with an ‘exclusive’ story  that Barrick Gold (NYSE:ABX, TOR:ABX)) is trying to offload its 64% holding in its African subsidiary, Acacia Mining (LSE:ACA), formerly African Barrick Gold – according to sources familiar with the situation!  Reuters described the story as ‘Exclusive’ but in truth, Barrick has been trying to offload its African offshoot for years.  Indeed it nearly closed a deal with the Chinese company, China National Gold to do so some four and a half years ago.  On a detailed analysis the Chinese walked away!

In order to reduce its still considerable debt burden, Barrick has been looking to offload what it sees as non-core assets, and those which don’t meet its cost criteria, and Acacia, with its three operating gold mines in Tanzania at one time fell into both categories.  However it has seen something of a turnaround bringing costs down and improving its earnings figures – but still almost certainly at least comes into Barrick’s non-core business category.  And in the Reuters article Acacia’s value was put at around $1.9 billion, which would provide a nice chunk of debt reduction for the Canadian gold mining giant.

The focus of the Reuters piece was that it had been having talks with the South African gold mining majors – Harmony, Sibanye, AngloGold, Gold Fields – and rather oddly Randgold & Exploration (which should not be confused with West and Central African top tier gold miner Randgold Resources which doesn’t like itself described as a South African company).  Randgold & Exploration has a market cap of only R179 million (US$12.5 million) which would presumably rule it out from bidding for a stake worth $1.9 billion!  The South Africans might indeed be a logical target for such a sale – particularly Sibanye where CEO Neil Froneman has expressed an interest in expanding outside its home country, and which has just reported some positive Q2 earnings figures.  The article then went on to say that the talks were at an early stage and there was no assurance a deal will be done!  This suggests an article just dragged out of thin air with no specific new substance at all behind it perhaps fed to the reporters by someone with a not so hidden agenda.

It also said Barrick had been talking about an Acacia sale to ‘some Australian and North American miners’.  No doubt it has.  Acacia has always been on the table to elicit interest from other mining companies, but having been unable to sell it when the stock was hugely depressed a year ago, Acacia’s 197% stock price rise this year may make it even more difficult to offload.

Yes, Barrick would probably love to divest itself of its stake in Acacia as part of its non-core business disposal efforts, but it may well still be no nearer so doing so than it was after its Chinese deal fell through in January 2012.

Acacia disappoints as Q3 gold production well below target

By Lawrie Williams – writing on biznews.com

LSE quoted Acacia Mining – formerly African Barrick Gold (ABG) – has come up with some poor Q3 production and cost figures, after a number of quarters of apparent improvement. It has led to annual gold production guidance being reduced and costs guidance rising.

While the Q3 figures may just be a temporary blip due to unavoidable circumstances, it brings back memories of the old ABG days where quarter of poor results followed quarter of poor results, which prompted parent company Barrick Gold, which owns 63.9% of the Tanzanian gold miner, to put the company on the chopping block for sale.

But since then, to give Acacia its due, restructuring, cost cutting and improving the mining plan had seemed to have come up with some substantial performance improvements and Acacia had looked to be on the route to sustained profitability and cash flow generation, even at the lower gold prices now prevailing. But the latest quarterly figures suggest that such improvements are perhaps at best tentative in the difficult mining environment that its Tanzanian operations present.

The latest production and costs figures show Q3 gold output falling below plan to 164,000 ounces, as several short-term factors negatively impacted output at Bulyanhulu and Buzwagi over the period……..

To read full article on www.biznews.com/gold CLICK HERE

World’s largest gold miner suffers credit downgrade to near junk status

Barrick Gold (ABX) the world’s largest gold mining company, has seen its credit rating downgraded to only one notch above ‘junk’ status by major credit rating agency, Moody’s.  Given Barrick’s debt position this might not be considered a surprise given another major credit rating agency, S&P, had already downgraded it to a similar level back in March.

The London arm of Investec, in its daily news comment, noted that this latest credit rating move by Moody’s has highlighted the major problem faced by many highly indebted mining companies regarding their ability to pay off debt over the long term given the current low commodity prices and the reckoning that these prices may not show any improvement in the short and medium term at least.  Investec thus expects rating downgrades to increase across the mining sector.

 

In announcing the downgrade, Moody’s made the following statement on its reasoning and on Barrick’s position as the credit rating agency sees it:

“Barrick has been downgraded because its leverage will remain elevated even after announced asset sales, material organic debt reduction is unlikely and production will start declining in the next several years”, said Darren Kirk, Moody’s vice president and senior credit officer.

Barrick’s Baa3 rating is underpinned by its large scale, diverse and low-cost gold assets, sizeable copper operations, favorable geopolitical risks and excellent liquidity. Moody’s expects Barrick will achieve its debt reduction target of $3 billion by the end of 2015 and that the company will continue to take aggressive actions to further reduce its costs and capital requirements in response to the current, lower gold price environment. Moody’s expects Barrick’s adjusted financial leverage will range between 3.5x to 3x through 2016, assuming a gold price between $1100/oz and $1200/oz. Barrick is likely to restrain its capital expenditures below production maintenance levels through the next couple of years in Moody’s opinion, in order to generate roughly breakeven free cash flow. Moody’s estimates Barrick’s organic gold production will remain relatively stable through 2017, but then begin to decline.

Barrick’s liquidity is excellent, which provides significant flexibility to maneuver through a low gold price environment. Cash of $2.1 billion and an undrawn $4 billion revolver (matures 2020) will be supplemented by pending asset sale proceeds of almost $2.5 billion. These liquidity sources are ample to fund mandatory debt repayments of $460 million through Q2/16 and they could eliminate all of Barrick’s debt maturities through 2020 if the company prioritizes repayment of its near term debt obligations with its asset sale proceeds. Moody’s expects that Barrick will produce breakeven free cash flow over the next year and maintain acceptable headroom to its consolidated tangible net worth covenant in its bank credit facility ($5.7 billion at Q2/15 versus a minimum of $3 billion).

The stable ratings outlook assumes Barrick will continue to make cost improvements a priority, and will continue to seek ways to opportunistically reduce its debt and leverage through asset sales or other means, particularly should the gold price remain below $1,200/oz.

An upgrade to Baa2 could occur should Barrick’s operating cash flows be able to fund the necessary investments to achieve at least stable production over time as well as sustain Debt/ EBITDA below 2.5x and cash from operations less dividends/ debt around 30%.

Barrick’s rating could be downgraded to Ba1 if Debt/ EBITDA appeared likely to be sustained above 3.25x and cash from operations less dividends/ debt sustained below 20%.