Gold Has Room to Run – The Holmes SWOT Analysis

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Strengths

  • The best performing precious metal for the week was gold; with a 1.97 percent rise in what was a volatile week of trading. As gold prices head for a third straight weekly gain, reports Bloomberg, at least one measure shows that bullion could have even further to run. Open interest, which is a tally of contracts in Comex futures, reached a one-month high as traders remain bullish.
  • Investors continue to add money to precious metal funds, even as the gold rally shows signs of slowing, reports Bloomberg. Assets in gold-backed ETFs have risen every day in June due to the increased geopolitical stress caused by the U.K. referendum. Similarly, at Sharps Pixley, a gold showroom in London’s Mayfair district, the demand for bullion bars and coins is rising, as investors seek a safe haven metal in case of a British exit from the EU.
  • Gold jumped this week as fewer Federal Reserve officials expect the central bank to hike interest rates more than once this year. According to Bloomberg, projections from the FOMC show the number of officials who see just one increase rose to six from one in the previous forecasting round in March.

Weaknesses

  • The worst performing precious metal for the week was platinum; with a loss of 2.18 percent. The platinum price to gold price ratio has hit its lowest point since 1982. Historically, platinum has traded at a premium to gold. While platinum may look like a bargain relative to gold, the future acceptance of electric cars could be a game changer.
  • On Thursday, the British pound erased losses against the U.S. dollar following the killing of a U.K. lawmaker, reports Bloomberg. The tragedy fueled speculation that the nation’s voters will be more likely to favor remaining in the EU in next week’s referendum, continues the article, sending gold down from near two-year highs after it surged post the FOMC meeting.
  • Sabina Gold and Silver Corp. received a report from the Nunavut Impact Review Board (NIRB) this week relating to its Back River Gold Project in Nunavut, Canada. In the report, the NIRB recommended that the project not proceed to the licensing and permitting regulatory phase, noting the need for further consideration concerning caribou and climate change. Sabina’s share price was down 38 percent for the week.

Opportunities

  • On Sunday, George Ogilvie resigned as CEO from Kirkland Lake Gold and won’t stand for election as a director at the company’s annual meeting, reports the Canadian Press. Former CEO of Lake Shore Gold, Anthony Makuch, will step in as CEO. We have great respect for George Ogilvie as he was the catalyst that turned Kirkland Lake around. He accepted the CEO position in November of 2013, and as you can see in the chart below, during Ogilvie’s time at Kirkland, you would have never known this was a gold company that he was managing. Under Ogilvie’s tenure the share price of Kirkland Lake rose 262.46 percent while the S&P/TSX Global Gold Index only gained 41.29 percent. The gains for the index really only came over the last six months when the gold price started to rise. We wish George further successes in his future endeavors.

hswot

  • Brexit or not, James Steel of HSBC believes that gold can still rise to $1,400 an ounce, Barron’s reports. If Britain chooses to stay, Steel says the precious metal is likely to fall, but to no more than $1,220 an ounce, or a 7 percent downside. And if the Brexit campaign succeeds? According to a Bloomberg survey of 22 traders and analysts, gold prices could rise to the highest in more than two years – potentially reaching $1,350 an ounce within a week of the vote.
  • Under new proposed regulations, India is looking to open up mining of gems and precious metals, reports Bloomberg, in order to cut reliance on imports. Mines Secretary Balvinder Kumar said in an interview that the country is set to auction about 50 blocks for diamond and gold exploration in the fiscal year starting April 1, aided by changes in the national mineral exploration policy to be unveiled by month end. Historically, it has been extremely difficult for any company to move a mining project forward. Rio Tinto Group has been trying to get approvals for its Bunder diamond mine site since 2004. If India’s new mineral policies provide an economic path to production, then watch this space for potential new discoveries in the future.

Threats

  • The current ratio between gold and copper is showing a “recession-era fear level,” Bloomberg reports. Gold jumped to the most expensive relative to copper since 2009 this week. The price of copper (seen as an economic bellwether), has slumped over Brexit worries, while the low interest rate outlook has fueled demand for bullion – driving the ratio between the two farther apart
  • India’s monsoon season could be reduced by the receding El Nino, reports Bloomberg Intelligence, leading to a poor harvest in the country, and thus, rising food prices. This could lead the world’s largest consumer of silver, and second largest in gold, to spend more on food this year than jewelry, ultimately undermining demand for precious metals in the country.
  • Jeff Rhodes, CEO of Zee Gold in Dubai, added color to India’s situation this week during an interview on Bloomberg TV. Rhodes said there is no demand for the metal now in India due to the monsoon, adding that kilo bars are even selling at a $30 discount in the country. The price of gold, according to Rhodes, could fall to $1,100 an ounce if the U.K. votes to stay in the EU, but has the potential to climb to $1,600 an ounce if the U.K. leaves.

 

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Gold Grade is King at Kirkland Lake

Lawrie Williams

In general gold mining and exploration juniors have been having a horrendous three or four years since the gold price started its decline from its peak at the end of Q3 2011, but high grade, profitable operations like Kirkland Lake Gold (TSX: KGI) have tended to buck the overall trend – and here it is indeed the gold grade which is the key.  In short, Kirkland Lake gold is one of the highest grade operating gold mines in Canada – or indeed in the world.  And it is being very successful in maintaining mill grade at very close to reserve grade – achieved by current management under George Ogilvie, former CEO of Rambler Metals and Mining, in not chasing tonnage, but rather putting the emphasis on grades to the mill.  It is thus running well under mill throughput capacity of over 2,000 tonnes a day, but generating excellent returns as a result – and leaves it with scope for expansion from existing operations, let alone from the excellent exploration potential across its land holdings.  LawrieOnGold interviewed Ogilvie yesterday in London and these are the impressions gained.

Year to date, Kirkland Lake Gold’s share price has outperformed the gold price by 77%, while the GDXJ Junior Gold ETF has fallen by 20% over the same period.  Overall the stock price is up around 55% ytd – not a bad performance in a hugely depressed market sector!  Kirkland Lake Gold is currently producing at a rate of a little over 150,000 ounces of gold/year and expects to up this to around 170,000 ounces a year in 2016.

The Kirkland Lake camp has been one of Canada’s most prolific gold producers with some of the biggest old mine names in Canadian gold mining under Kirkland Lake Gold’s control – all high grade mines in their time.  Interestingly of the company’s production at the moment around 70% comes from what it terms its Macassa South Mine Complex, which is a separate ore occurrence from the main production lodes in the area on what was an unexplored part of the camp.  But the grades remain high and appear to be increasing with depth.  It is a fairly deep mine by Canadian standards – with operations below 5,000 ft.  It is also hot and the area has a history of seismicity, so mining conditions are potentially difficult and need to be monitored closely.  However Ogilvie, in times past, worked for Anglo American in some of South Africa’s even deeper mining operations which faced many of the same problems – but on mostly narrower reef structures – so has some excellent relevant experience behind him.

Current ore reserves are estimated at just under 2.6 million tonnes in the Proven and Probable categories grading 19.2 g/tonne gold for gold content of 1.46 million ounces with around 65% in the South Mine complex currently being mined.  The ore deposit is open both on strike and at depth.  In addition the area resource is estimated at a further 4.2 million tonnes Measured and Indicated at 16.8 g/tonne gold for a contained 2.07 million ounces (Reserves are not included in the Resource figure).  There does appear to be huge potential to extend the resource through drilling in areas to the south of the other old mines under Kirkland Lake gold’s control with the prospect of the South Mine Complex ore type being duplicated along strike.

But despite its excellent gold grades, Kirkland Lake gold is a relatively high cost producer with All in Costs and All in Sustaining Costs (currently at CAN$1,234 and CAN$1,193/oz respectively).  But these are highish because of relatively high capital expenditures at present, but coming down as production is set to increase.  Cash operating costs are at CAN$792/oz and the mine is generating free cash flow estimated at $4 million in the current 8-month ‘stub’year (the company is changing its FY end from April to December).  [Note: The current gold price in CAN$ is at a little over $1490 an ounce at the time of writing as compared with the US$ price of $1144 showing the benefit to Canadian miners of the weak Canada to US dollar parity].

As noted above gold grades appear to be increasing at depth.  Most current mining is at the 5025 and 5300 level where reserve grades are between 16.5 g/tonne and 16.1 g/tonne, whereas grades at the 5400 and 5600 levels are at between 20.9 g/tonne and 26.4 g/tonne.  Even deeper the 5700 level grades are estimated at a very high 35.3 g/tonne and below that at 28.5 g/tonne.  This all shows huge potential for increasing output at the current mill throughput, quite apart from a potential increment from some previously unexploited near surface material with an Indicated resource of 330,000 tonnes grading 11.7 g/tonne.

Kirkland Lake Gold is thus not an easy mining operation with the previously mentioned difficulties of depth, heat and seismicity all likely to combine to keep sustaining capital costs relatively high.  But there would seem to be enormous potential for extending resources and reserves to both east and west and at depth, while maintaining the high grades for which the area is known.  Again, exploring all this costs money, particularly where it involves deep drilling from surface, so management will need to maintain a good balance between continuing cash flow and expenditures and hope the gold price doesn’t fall further in the meantime.  In a rising gold price scenario, of course, the profit potential would look to be particularly strong provided costs can be well-controlled.