07goldinsight

Gold – Supply Predicament Driving the Longer Term Cyclical Bull
By James O'Rourke, Staff Mining Journalist - March 6, 2007

Gold supply from new production is not rising to support demand (See recent global production chart to the right). Gold is globally desired as a store of wealth with security, and global investment demand through such means as physical accumulation and ETFs is increasing. Per-capita income growth rates of nations in Asia have been and are expected to continue to rise faster and these nations which are growing (not only in population but economically, technologically, and industrially) will likely have a massive impact on gold demand in the future as wealth is distributed among a portion of the world that has historically had little opportunity to own gold. More gold per person will likely be demanded and in order to meet growing global demand, mined supply must continue to rise. With a world population of 8 billion people projected for 2025, over 93 million ounces will need to be mined just to sustain the 2006 per-person consumption of mined gold (77m oz of gold mined in 2006 divided by 6.6 billion population), and if per-person demand rises as expected, even more ounces will need to be produced. When the price of gold rises, there are natural forces that initiate to level out this imbalance; rising prices persuade suppliers to increase their output, and rising prices also serve to quell demand. But for commodities, precious metals in particular, supply and even demand-side propensities will not change quickly.

The life and blood of future production are global reserves; According the USGS, global reserves in 1980 were estimated at 1.13 billion ounces. As of the end of 2005, global reserves have grown 19% and were estimated at 1.35 billion ounces, which equates to a global mining life of about 17 years. Higher gold prices will play a large role in upgrading resources as reserves of this finite resource will be more economically recoverable.

Naturally as the price of gold rises, miners are in line to greatly profit on the sale of their gold and thus the gold-stock sector should remain one of the most powerful market sectors in the long term, and more so when mainstream interest and capital begins to flow into the gold stocks. Mainstream money has caught on nicely that above ground real estate is finite, they have yet to truly clue in to the same analogy below ground.

With global production and reserve growth lower and demand poised to unendingly rise in this growing global economy, the suppliers are going to have to initiate action in order to support the markets and is why we are seeing an environment of aggressive exploration, mergers and acquisitions (M&A) and eventually rising gold prices. M&A activity should continue strong in 2007, especially considering the escalating costs of mine construction and the fact that despite all the exploration throughout the world, gold and silver production has not kept up with the declines at existing mines since 2001. Major and mid-tier precious metal companies are finding it far easier, and cheaper, to buy current (or near-term) production/reserves (See Special Advisory Section Below). It will take numerous years for the gold mining industry to noticeably increase supply as it continues to explore, discover, develop and construct gold mines. Gold producers should greatly capitalize on these trends.

Capitalizing on the long-wave cyclical nature of the gold commodities markets

Mining production is stressed to bring sufficient gold to market and the companies engaged with this responsibility have exceptional upside exposure to rising gold prices. The 15 miners of the HUI are poised to lead the way as they increase their production and reserves, but they are not the only gold companies positioning themselves to capitalize on the windfall, numerous gold companies are worthy for investor attention and capital, some more than others (See Special Investment Alert/ Special Situation Advisory section on MTO.V below). The HUI gold-stock index offers an excellent measure to gauge the gold-mining industry, the 15 miners that comprise the HUI are as follows (AGNICO EAGLE MINES AEM, YAMANA GOLD INC AUY, COEUR D ALENE CP CDE, ELDORADO GOLD CORP EGO, FREEPORT MCMORAN FCX, GOLD FIELDS LTD GFI, GOLDCORP INC GG, RANDGOLD RES LTD GOLD, GOLDEN STAR RES LTD GSS, HECLA MINING CO HL, HARMONY GOLD MNG HMY, IAMGOLD CORPORATION IAG, KINROSS GOLD CP KGC, MERIDIAN GOLD INC. MDG, NEWMONT MIN CP NEM). A number of the largest and finest unhedged gold producers are components of this index, and its 996% trough-to-peak gain has given an incredible 5.4x leverage to gold’s 183% gain in this last bull market. Many mature and top-tier gold producers maintain enough reserves to provide a mining life of about ten years or greater based on their current rate of production, the HUI gold miners have averaged well over 15 years of mining life during this gold bull and have been steadily increasing this as reserve growth has outpaced production growth.

As seen in the chart above (at the top to the right), the global mined supply of gold has been falling in recent years. It is evident that bring gold to market for producers is challenging task logistically and economically, however as the supply side of gold is stressed, overweight demand should drive up the price of gold, creating the encouragement and incentive necessary. Gold producers/miners, that bring the metal to market will be the main beneficiaries in the end, as the price of gold rises, positively leveraged gold producers should be well-positioned to earn handsome returns for their shareholders as they derive higher prices for their gold.

In order to once again achieve a market balance, gold producers will have to extract more gold from the ground until their supply can meet demand at a stable price. With ever increasing per-capita demand this equilibrium could well be decades off. Mine construction costs are escalating while the availability of equipment, supplies and labor are getting very tight. This is not only causing budgets to increase, but construction delays are becoming the norm, further straining project economics. While capital may be available, it is becoming increasingly difficult for junior mining companies to attract skilled workers and make the transition from explorer to producer. Below is superior advanced stage development and exploration mining company about to pour it's first gold bar in Q2 2007. It is located in a region where gold mining is encouraged and supported and provides exceptional infrastructure. Embraced by a skilled and eager work force this region has historically produced over 30 million ounces of gold.

Investment Alert/Special Situation Advisory: Metanor Resources Inc. (TSX Venture Exchange: MTO chart). MTO is about to become a gold producer utilizing their 100% owned Bachelor Lake Gold Mill in the prolific Abitibi Mining District of Quebec. A current review of Metanor Resources Inc. is available at http://miningmarketwatch.net/mto.htm and a brief overview is made available in the case study section below.

Metanor Resources Inc. has over 400,000 oz of Gold (NI-43-101 measured and indicated) available from their 100% owned Barry gold deposit and Bachelor Lake Gold Mine, Metanor Resources is about to kick start their gold milling facility producing a projected 60K oz gold per annum. Their gold milling facility has a replacement value of CDN$60M and sits geographically as the only mill located within 200 km in a gold rich district that possesses resources exceeding 1.5M oz. Metanor has also begun amassing properties within this area, near their Bachelor Lake Gold Mine & Mill, and will play a central role mining the resources in the region for decades. With less than 31M shares outstanding, and currently trading near $1/share, the present valuation provides exceptional opportunity for investors. (Short Cut to the full MTO Story).

CASE STUDY: Metanor Resources Inc. (TSX-V: MTO) offers insight and opportunity for investors as they become Canada's next gold producer.

Excerpt from February Mining MarketWatch Review of Metanor Resources Inc.

“Under The Radar and Undervalued; New Profitable Gold Producer in Q2 2007;

Metanor Resources Inc. (TSXV: MTO)”

60K Ounces of Gold Annually at $60M Refurbished Gold Mills - MTO Appears an Exceptional Value

MTO.V appears to be an exceptional buy. Using $600 per oz gold, the Bachelor Lake mill could generate revenues in excess of CDN$35,000,000 a year once upgraded to handle 750 tpd producing in excess of 60,000 oz gold per year with an average estimated cost per oz by Mining MarketWatch of less than $325 oz; this justifies a share price in excess of $5/share based on conservative P/E ratios. Additionally MTO currently trades near $1 per share and has a current market cap that equals value of their Bachelor Lake Gold Mill structure alone (appraised at CDN$28M depreciated value with a replacement value of CDN$60M including headframe and all surface equipment). Metanor possesses known resources between the Barry Deposit and Bachelor Lake of over 400,000 oz + over 100,000 oz historic at the Hewfran extension but more importantly the Bachelor Lake Gold Mine has a proven geological model that is open in all directions at depth with plans to upgrade to 1,000,000 oz. ...MTO is possibly in line for a serious price change to the upside.

...Full Copy from Source

Gold returned 24.75% in 2006, rising from $497 to $620 per ounce. It completed its 5th year of gains and is up by more than 140% in the last 5 years.

Madison Avenue Research Group remain bullish on both gold and particularly silver and are confident that, as we have continually pointed out, they are now both in multi year bull markets. Commodities, like all asset classes follow long term economic cycles. Commodities increased in value in the late 1960’s and 1970’s; broadly declined in value in the 1980’s and 1990’s to record lows and have been rising again since 2001.

Madison Avenue Research Group's outlook for gold is extremely bullish after current retracing/consolidation. Our sentiments echo Louise Yamada, managing director of Yamada Technical Research Advisors LLC in New York, former head of technical research at Citigroup. Yamada sees gold surpassing $730 next year on its way to $3,000 within a decade. "Gold is the purest play against the dollar,'' said Louise Yamada. Yamada is highly respected and was was voted Wall Street’s best technical analyst from 2001 to 2004.

Commentary on recent precious metals market pull-back: "If China sneezes the entire world gets a cold"; there appears to be a reliance of the markets on the health or otherwise of the Chinese economy. The Chinese drop was seen, not as a correction, but possibly as an indicator that there was something intrinsically insecure about the state of the Chinese marketplace. However market indicators in China suggest there is little to support this view and that consumerism and metals demand appears unchanged. Possibly the correction was brought on by profit taking and a series of stop-loss sales being triggered, other market professionals have suggested the correction was due in part to investors that needed to sell gold in order to cover positions in the stock market. A true Chinese downturn would most likely have seen base metal prices sell off substantially yet this never occurred, however shares prices of nearly all producers did have noticeable pull-backs. In order to move higher we need pull-backs and this is more likely than not to be viewed as a buying opportunity by many.

Disclaimer & Disclosure: The information contained herein is believed to be accurate but this cannot be guaranteed. The analysis does not purport to be a complete study of securities and issues mentioned herein, and readers are advised to discuss any related purchase or sale decisions with a registered securities broker. Companies mentioned herein may be very early stages of development and thus can therefore be subject to business failure, and are to be considered speculative and high risk in nature. Reports herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned. The author may or may not hold a position (long or short) in the securities mentioned herein. This is a journalistic article and the author is not a registered securities advisor, and opinions expressed should not be considered as investment advice to buy or sell securities, but rather opinion only. The publisher may make take journalistic liberties employing the use of pseudonyms as reference contacts and accepting information at face value from what it believes to be credible sources. Further disclaimer and disclosure regarding various aspects of this report / article including compensation and other points may be seen at http://www.madisonaveresearch.com/disclaimer.htm.