Stock Picks YTD, Newmont/Barrick and Randgold Q3 – Articles posted on Seeking Alpha

One of the other sites on which some of my articles are posted is U.S. site Seeking Alpha but this doesn’t allow me to publish the same articles here so if you’d like to read them you’ll need to read them on Seeking Alpha.  My three most recent articles here relate to the performance of the precious metals stocks I recommended at the end of last year – rather better than I had anticipated, particularly with respects of what are probably the top two royalty stocks, Franco Nevada and Royal Gold which both comfortably outperformed the Dow and the S&P500, despite the somewhat disappointing progress of the gold price, and a second one is on Randgold’s Q3, which on first look was pretty dire and the stock price plunged accordingly, but in fact was largely in the company’s own forecasts and still leaves it on track to reach the top end of its 2017 guidance.  Overall Randgold has been the star performing major gold miner and the recent stock price dip should provide a buying opportunity.

I also published one showing that Newmont is overtaking Barrick as the world’s No. 1 gold producing company – and may even do so this year:

To read the articles, click on the following links:

Precious Metals Stocks Update YTD

Newmont Closing Gap On Barrick As World’s Largest gold miner…

Randgold: Difficult Q3 But Still On Track To Meet Top End of Guidance.

Note:  the above articles were written for a North American investment audience so use U.S tickers – and spelling!

Advertisements

Will Gold Find A Better Environment to Move Higher? – The Holmes Gold SWOT

Strengths

  • The best-performing precious metal for the week was palladium, down slightly by 0.41 percent. In an overall down week for the precious metals sector, palladium remained flattish.
  • Following the release of disappointing U.S. economic data Friday morning, which reduces the chance of a rate hike next week, gold rebounded from near two-week lows (although still on track for its first weekly loss in three), reports Reuters. “Once past the FOMC, gold may find a better environment to move higher,” said Michael Armbruster, principal and co-founder at Altavest. “In the big picture, even if the Fed raises rates twice more a total of 50 [basis points], real interest rates will remain negative—a very bullish environment for gold.”
  • Copper posted the biggest gain in nearly three months, reports Bloomberg, as strong economic data from China fueled speculation that demand will strengthen in the country. Factory output, investment and retail sales all exceeded analyst estimates in the Asian nation. On the London Metals Exchange copper for delivery in three months rose 2.6 percent mid-week, the biggest increase since June 15, the article continues.

Weaknesses

  • The worst-performing precious metal for the week was platinum, down 4.18 percent. According to Bloomberg, platinum experienced a seventh week of losses (the longest run since 2013). John Meyer, an analyst at SP Angel Corporate Finance LLP, says investors are losing interest in both platinum and palladium on concern that the popularity of electric cars, which use less platinum and palladium than gasoline-fueled cars, will cut into demand.
  • Reports that U.S. inflation pressures are rising, with a rise in monthly inflation seeing its biggest jump since February, sent the U.S. dollar higher on Friday. Gold, which has an inverse relationship with the greenback, drifted lower on the news. “This continues the tennis match between bulls and bears, hawks and doves over whether or not the Fed will raise interest rates next week,” said Colin Cieszynski, chief market strategist at CMBC Markets.
  • Although 2016 started with a bang for commodities, the year could end with a whimper, reports Bloomberg. The Bloomberg Commodity Index is heading for a third-quarter slump after posting consecutive gains for the first two periods, the article continues. Investors pulled $791 million out of ETFs tracking commodities over the past month and hedge funds have cut their combined wagers on a rally for raw materials in nine of the past 11 weeks.

Opportunities

  • David Mazza, head of ETF and mutual fund research at State Street Global, doesn’t believe a rate hike in the U.S. will spoil investors’ appetite for gold, reports Bloomberg. “We’re still going to be in an environment where rates in the U.S. are still very low,” Mazza said. In fact, holdings in gold-backed ETFs are heading for a third quarterly gain, the longest streak since 2012, despite the rising odds of a rate increase, according to data compiled by Bloomberg.
  • Barrick Gold Corp. has turned to tech giant Cisco Systems Inc. to help digitize its global mining operations, reports Bloomberg. “We mean to create value and push the boundaries of our industry in entirely new ways,” Barrick Executive Chair John Thornton said. A flow of real-time data should help cut costs and wring additional value out of its existing mines. As seen in the chart below, Barrick’s debt is down 43 percent to $9 billion from a 2013 peak, with most of the heavy lifting done by Thornton, Bloomberg continues.

bswot

  • Klondex Mines announced this week its decision to put its underground True North Gold Mine in Manitoba, Canada, back into full production, reports Mining.com. This will be Klondex’s third operational mine and President and CEO Paul Huet sees it delivering “significant value” to shareholders. The positive production decisions estimates annual production at True North at 45,000 to 65,000 ounces of gold.

Threats

  • With the Federal Reserve’s interest rate decision due next week, some gold investors are getting a bit nervous, reports Bloomberg. Cohen & Steers Capital Management, for example, was overweight in the yellow metal until last week when it decided to pare its gold allocation. In fact, over the past week, investors pulled $698 million from SPDR Gold Shares (taking holdings to the lowest since June), the article continues.
  • Barrick Gold Corp. announced temporary suspension of operations at its Veladero mine in Argentina on Thursday, pending further inspections of the mine’s heap leach area. A new spill was confirmed in the area, but Barrick reported that no solution from the damaged pipe had reached any water diversion channels or watercourses. The impacted area has now been remediated. The company does not expect the incident to have a material effect on its 2016 operating guidance for the mine.
  • In South Africa, one of the biggest producers of gold, 60 mining deaths this year (through August) were reported, according to the Chamber of Mines, up 20 percent from the same period last year. Finding minerals is becoming more and more deadly in the country, reports Bloomberg. The annual tally is heading for its first increase in nine years, the biggest in at least two decades.

 

Killing the golden goose. Barrick Gold suspends Lumwana

Barrick Gold has announced that it is to put its $1 billion Lumwana copper mine in Zambia on care and maintenance following the Zambian government’s plans to up open pit mining royalties from 6% to 20%

By: Lawrence Williams

News that Barrick Gold is to put its Lumwana copper mine in Zambia on care and maintenance due to a huge increase in royalty payments should send warning signals to governments of resource rich nations everywhere.  In this case, as in any other where over onerous taxation or royalty impositions can have an impact, the government will be the loser in loss of export revenues, and perhaps most of all in the loss of tax revenues from mine employees and the knock-on effect on employee families and local suppliers to the mine itself and others who depend on mineworkers for their livelihoods.  A major mine like Lumwana tends to support perhaps ten times the number of people actually employed on the mine itself, and the operation itself directly employs around 4,000 people!

In countries where the government supplies financial support to the unemployed, the adverse effects on government finances would be even greater.

Where the warning should strike home is that many in government will believe that a major mining company like Barrick will have invested so much in the mining operation that it could not possibly walk away.  But in today’s environment, low metals prices – particularly in the copper and gold sectors, coupled with aggressive institutional shareholder pressures will force companies to exit operations which may be making significant losses.

Indeed in Barrick’s case also one only has to look at the massive Pascua Lama gold/copper project straddling the Chilean and Argentinian borders to recognise companies are being pressured not to throw good money after bad.  Barrick has spent billions of dollars already on Pascua Lama and while it has not yet intimated it is abandoning the project altogether, there are many out there who doubt that the proposed mine, with its considerable environmental problems, will ever come into production without a very big increase in the prices of both gold and copper and further billions of dollars in capital costs.  In financial terms Lumwana is small beer in comparison.

While anti-mining activists might argue the point, there is little doubt that a significant sized long-life mining project can bring huge benefits to local communities in otherwise poor countries, often in remote area effectively off the government grid.  Mining companies nowadays are not just about digging out the dirt without caring about the environment but have developed massive social consciences (or have had them forced upon them) and provide power, clean water, schooling, medical facilities, huge infrastructure benefits and many other positive attributes to the communities around them at zero cost to the government.  There are also enormous pressures on the mining companies to develop sustainable businesses around the operation so the local population has something to fall back on when the mine runs out of ore, perhaps many years hence.

All these benefits may be nipped in the bud by shortsighted government involvement which can, not only lead to mine closures or suspension, but also discourage other companies from exploring, and hopefully ultimately developing, other new mining operations as well as prevent existing project expansions:  In Zambia Glencore and First Quantum have both put already major mine expansion projects on hold.

What the Zambian government is proposing is to raise royalties on open pit mines from 6% to 20% and drop corporation tax on these operations from January 1st.  It sees this as an easier, and fairer, way of collecting revenues from the miners, but takes no account of falling metal prices.  Barrick’s Lumwana is currently producing copper at a small loss (it is a high cost mine) so an increase in royalties of this nature would be crippling.  Zambian politicians have felt that mining companies have been managing to avoid taxes by inflating apparent costs and that a royalty-only regime would prevent this from happening.  Underground mines in Zambia are not going to be quite so badly hit with royalties being raised from 6% to 8%.

Overall the government reasoning is that the move from tax to increased royalties will enable a more “equitable distribution of the mineral wealth between government and the mining companies.” according to Zambia’s Finance Minister.

Mining companies are worried that there is an increasing move among African nations in particular to alter their resource tax regimes to generate more revenues from the industry.  There seems to be a lack of realisation that mining development costs and risks are high and if government revenue raising structures are too onerous, not only will mining companies be wary about major investments, but the bankers won’t make capital available if they also see the risks of non-repayment of loans as possible.

In Zambia’s case there is thus huge pressure on the government from the country’s key mining sector to pull back from its proposals.  The Barrick decision may bring home the fact that the industry is not bluffing in its opposition to the new revenue raising regime as putting new mining projects and expansions, and some existing operations, in jeopardy while prices remain low.  Even if there is a change of heart, though, it may be too late for Lumwana, which produces over 80,000 tonnes of copper a year.  Barrick has a policy of closing down, or selling off mining operations which no longer meet its financial criteria and Lumwana is one of these regardless of the tax regime.

Barrick co-President, Kevin Dushinsky, noted in an announcement on the suspension  “The introduction of this royalty has left us with no choice but to initiate the process of suspending operations at Lumwana. Despite the progress we have made to reduce costs and improve efficiency at the mine, the economics of an operation such as Lumwana cannot support a 20 percent gross royalty, particularly in the current copper price environment”

Barrick is expected to write down the $1 billion carried value of the company in its books, probably in total and although in a statement the company’s other co-President, Jim Gowans commented “We sincerely regret the impact this will have on our people, as well as the communities and the businesses that depend on Lumwana, and we remain hopeful that the government will consider an alternative solution that will allow the mine to continue operating”.  But as we noted above, without a significant copper price increase Lumwana’s days are probably numbered regardless, at least under Barrick control.

Barrick says it will initiate procedures to transition Lumwana to care and maintenance with major workforce reductions planned to commence in March, following the legally required notice period. The transition to care and maintenance is expected to be completed in the second quarter of 2015.