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Sector Rotation Performance
Spreadsheet excerpt
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Relative positioning of mining sector groups out of
222 possible sector groups and their 1 year weighted average
performance in percentage.
Mining stocks have dropped in
ranking as funds/investors have liquidated positions based
on price and not valuation. Mining gold, silver, and
non-ferrous sector groups are at the bottom of sector
performance relative ranking and are thus now positioned for
above average performance going forward.
For brevity/display purposes only the top 5 sectors are
displayed then the
bulk of the sectors have been annexed up to the bottom 15
where our subject sector sub groups dwell. For full list
click
here. |
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Commodities Commentary, The Slowing Dragon, and
Gold Price Forecast
Madison Avenue Research
Group's outlook for gold is bullish. Our sentiments echo Philip Klapwijk,
Chairman of London-based research firm GFMS Ltd. at a conference in
London today. Klapwijk said "We're expecting gold to stage a powerful
rally in the fourth quarter” and believes gold may rise to $950 an ounce
by the end of year as central banks and miners hold back sales and
investors buy the metal as a haven against falling stock prices.
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Click here for technical charts |
Gold is now in an oversold position and the underlying commodity
stocks are poised for above performance after months of decimation. The
odds now favour a gold trend reversal upward is now based on its trading
pattern relative oil (in tandem) and the US dollar (inversely); adjacent
to the left is the oil vs. Dollar 60 day percentage change oscillator
(Sept 14/98 - Sept 12/08) which shows the dollar as very overbought,
especially after one of the steepest movements upward for $US dollar and
steepest downward moves over 60 trading days in the past decade for oil
(oil is technically extremely oversold). The recent flight to US
dollars seems more momentum based and not fundamentally based - a
pendulum will shift back towards tangibles (gold) can happen at any
time.
Physical demand for gold
remains high; dealers report shortages of gold bars in Singapore and
Honk Kong ahead of the upcoming festival seasons in Asia, India and the
Middle East. On the global supply side numbers continue to decline, in
fact global gold output numbers out of South Africa for the year leading
through July show production slumped 16.4 percent (the country has faced
power and infrastructure problems leading to rationing and outright
operations suspensions).
Although international
observers confirm there are signs of China's economy levelling off its
rampant growth pace, there has been a recent shift in credit, possibly in
reaction; credit has begun to expand
again in China after a tightening of the money-supply since 2006 in
small increments. China has in excess of $1.7 trillion dollars in
foreign-exchange reserves that would likely be put to use (if need be) in
order to keep their economy at steady pace, resulting in continued
global commodity demand. In fact, in response to the recent US Fed
credit crisis this last weekend (that
emanate from the subprime crisis), China cut short-term interest rates
overnight for the first time in six years .
Mining Sector Rotation
Breathtaking Velocity of
Rotation out of Resources has Created Opportunity Now
Sector Rotation is always happening, both between and within
sectors. There are many forces at play - both micro & macro. A
well balanced portfolio will have exposure to all sectors - the
key is the weighting and timing. The stock market is a
discounting mechanism; industry groups are priced now according
to investor’s perception of future company earnings and fortunes
within the various groups. Capital flows in and out of the
markets according to anticipated fortunes and momentum. The
flight from commodity based stocks has been breathtaking as fund
manager liquidated positions and appears to have created
opportunity. The relative ranking of the mining sector has
steadily fallen from week to week and now sits at a low relative
to almost every sector tracked (as illustrated in adjacent
Sector Rotation Performance Spreadsheet excerpt to the right).
Fund Managers exited sector
based on Price - Ignoring Valuation. There are some exceptional deals that now exist within the
mining sector and when the sector turns back in-favour look to
selected names to top the leader board. Picking selected names
in a sector that is out of favour is like swimming a river
upstream, however we need to take the time now – when blood is
in the streets to start accumulating and ensuring top candidates
are front and center on our radar screen now.
Review of Top Senior Gold
Producers
Gold prices are well above cost of
production and many major producers are throwing off large
amounts of free cash, have vast reserves, and are at very
attractive prices now. Below is a review of the top ten gold
producers in ascending order of ounces produced. Source Market
Equities Research Group Q3 Summer Resource Book.
First place) Barrick Gold Corp.
(NYSE:
ABX)(TSX:
ABX) Production of 7.6 - 8.01 Moz of gold at costs of
US$390-415/oz and 380-400 /lbs of copper at US$1.15-1.25/lb. The
company forecasts 2008 project capital expenditures of
US$1.5-1.7 billion and sustaining capex of US$600-800 million.
Barrick is the world's largest gold company in terms of market
capitalization, annual production, and reserves. The company
reported reserves of 124.6 Moz at the end of 2007. Current
growth projects include Buzwagi, Cortez Hills, Pueblo Viejo, and
Pascua-Lama.
Second place) Newmont Mining
Co. (NYSE:
NEM)
2008 gold sales guidance is 5.1-5.4 Moz at costs of $425-450/oz.
Capital expenditures of $1.8-2.0 billion are expected, with
approximately half allocated to its development projects.
Newmont is the world's second-largest gold company in terms of
production. Yanacocha and Nevada remain Newmont's foundation,
but it operates in most other gold-producing regions, including
Australia, Canada, Indonesia and most recently West Africa.
Reserves were 86.5 Moz at December, 2007.
Third place) AngloGold Ashanti
Ltd. (JSE: ANG)(NYSE:
AU)
Revised 2008 guidance to 4.9-5.01 Moz at costs of US$440-460/oz.
Previous guidance had been 4.8-5.0 Moz at US$425-435/oz. The
increased production reflects an assumed power supply of 96.5%
in South Africa, while the higher costs are attributed to
inflationary trends. Production of 1.22 Moz was at cash costs of
US$464/oz in the June quarter. AngloGold Ashanti is a global
gold producer domiciled in South Africa. Production is sources
from Africa, Australia and the Americas. Reserves were 73.1 Moz
at year-end 2007.
Fourth place) Gold Fields Ltd.
(JSE: GFI)(NYSE:
GFI)
~4.02 Moz annual gold production. Gold Fields expects gold
production at its South African operations to be 2-4% higher
than in March quarter with more stable power supply. Cash costs
are forecast to be slightly lower with the effect of higher
production partially offset by increases in power, commodities
and royalties. Capital expenditures of US$327 million are
expected compared to US$277 million in the previous period, as
spending is expected to increase in South Africa and Ghana. Gold
Fields Ltd. is a senior gold producer with roughly two-thirds of
its production sourced from South Africa. It also has assets in
West Africa, South America and Australia. At the end of June
2007, attributable gold reserves were 91.6 Moz.
Fifth place) Harmony Gold Mining
Co. Ltd. (JSE: HAR)(NYSE:
HMY)
~2.33 Moz annual gold production. Through mergers and
acquisitions, Harmony has become a significant South African
gold producer. The company is restructuring its asset portfolio
around core operations in South Africa and growth projects in
Southeast Asia. At the end of June 2007, reserves were 53.6
million ounces.
Sixth place) Goldcorp Inc.
(NYSE:
GG)(TSX: G) 2008 guidance is for gold production of ~2.6 Moz
and average cash costs of US$250/oz on a by-product basis. The
company expects quarter-on-quarter improvements in both
production and costs as Los Filos ramps up and the Red Lake mine
expansion is completed. Capital expenditures are forecast to
total $1.2 billion, including $700 million at Penasquito but
excluding the company's share of Pueblo Viejo. Goldcorp is North
America's third largest producer, with 43.4 Moz of gold reserves
at the end of 2007. Operations and projections are focused in
the Americas. The company's growth projects include Penasquito
in Mexico and Eleonore in Quebec.
Seventh place) Freeport McMoRan
Copper & Gold Inc. (NYSE:
FCX)
~2.32 Moz annual gold production. Freeport-McMoRan Copper &
Gold, Inc. engages in the exploration, mining, and production of
mineral properties primarily in Indonesia, North America, South
America, and Africa. It focuses on the copper, gold, molybdenum,
and silver prospects. At December 31, 2007, it had total
consolidated recoverable proven and probable reserves of
approximately 93.2 billion pounds of copper; 41.0 million ounces
of gold; 2.0 billion pounds of molybdenum; 230.9 million ounces
of silver; and 0.6 billion pounds of cobalt. Freeport-McMoRan
Copper & Gold, Inc. was founded in 1987 and is based in Phoenix,
Arizona.
Eighth place) Newcrest Mining
Ltd. (ASX:
NCM) Recent production issues at Telfer are expected to
affect 2008 guidance of above 1.81 Moz of gold and 86,500-90,000
t of copper. Newcrest Mining is the largest Australian-domiciled
gold producer and has significant copper production. Key
operations are located in Australia and Indonesia. The company
has an extensive development pipeline, including Cadia East,
Ridgeway Deeps and Kencana. As of June 2007, reserves were 33.2
Moz of gold and 2.7 Mt of copper.
Ninth place) Kinross Gold Corp.
(NYSE:
KGC)(TSX: K) ~1.58 Moz annual gold production.
Gold-equivalent production guidance is 1.9-2.0 Moz in 2008 and
2.5-2.6 Moz in 2009. Quarterly production is expected to
increase throughout 2008 to approximately 625,000 oz by
year-end. Forecast average costs of $385-395/oz for 2008
increased from previous guidance due to higher first-quarter
costs and operational issues at Maricunga and La Coipa. With the
start-up of its lower-cost projects, especially Kupol, the
company expects costs to decrease through 2008 to $335-345/oz by
the December quarter. The acceleration of the Fort Knox
expansion and update of the Cerro Casale feasibility study are
expected to increase 2008 capital expenditures by 10% to US$725
million. Kinross is a senior gold producer with operations
located in North America, Brazil, Chile and Russia. The company
is expected to complete three growth projects throughout 2008:
Paracatu in Brazil, Kupol in Russia and Buckhorn in the United
States. At December 31, 2007 reserves were 46.6 Moz. As of Sept
4, 2008 Kinross has succeeded in its bid for Aurelian - Kinross
now owns 74.8% of outstanding shares -the offer extended to
September 15, 2008.
Tenth place) Rio Tinto Plc
(LSE: RIO)(NYSE:
RTP)
~1.23 Moz annual gold production. Rio Tinto is a diversified
metals and mining company. The company is the world's second
largest producer of iron ore and coal, the third-largest
producer of uranium and gem-quality diamonds, the fourth-largest
copper producer and the largest aluminum producer. It is also
the world's largest producer of bauxite, titanium dioxide slag,
borates and talc, and the largest exporter of industrial salt.
Commentary on Jr. Miners
Junior miners as a group have
faired worse in stock price declines than majors; juniors are
inherently more risky as a group, offering less liquidity (the
lack of liquidity exaggerated price drops when there was a lack of
appetite to buy and sellers line-up to liquidate regardless of
valuation) - conversely they also offer exceptional upside. In
tight times investors of junior miners are likely to fair better
in the long-run by sticking to companies that 1) have a good
cash position and/or are producing cash-flow positive from
operations, 2) have proven management teams, 3) are able to
retain control of their properties without dumping them in a
fire sale or having to heavily diluting the share structure.
[The non abridged version of this report contains a summary of
in-situ gold for junior gold miners.]
Case Study: Metanor Resoruces Inc.
(TSX-V: MTO) - Exceptional
Valuation as New Gold Producer with Expanding Gold In-Situ
Metanor Set to top leader-board on
sector rotation based on cash flow metrics and valuation
Low market cap (exceptional
upside revaluation warranted) - Low cost gold producer -
Large infrastructure value - No long term Debt - Continued
resource expansion underway.
Metanor Resources Inc. (TSX-V:
MTO) is a new, unhedged, gold producer in mining friendly
Quebec. Metanor's 100% owned 1,200 (upgradeable capacity)
TPD mill in Desmaraisville (Val d'Or) is now being scaled
into full production. Production in 2008 -2009 should
conservatively in excess 25K of gold. Ore extract is coming
from their 100% open pit operation on their Barry gold
deposit (located approximately 65 km southeast of the mill).
Upside Valuation/Summary:
Bulk sampling is wrapping up and Metanor will turn to commercial
production by Fall 2008 at MTO.v's 1,200TPD (upgradeable
capacity) Bachelor Lake Gold Mill. The current market cap of
MTO.V is less than 30% the replacement value (~CDN$140M) of
their infrastructure alone, ignoring the ~1M oz gold resource,
significant exploration potential and substantial revenue
projections. Jay Taylor, mining expert, has made MTO.V one of
his top picks in 2008 saying "This is a story of production,
exploration, and building ounces". Production in 2008/09 should
conservatively come in at 25K gold and ramp up from there. The
mill is configured to produce dore bars of gold, with a small
component of silver. MTO.V has ~1,000,000 oz of Gold (NI-43-101
measured and indicated) available from their three properties
and the ongoing exploration drill program at their ever
expanding Barry deposit is just one of many venues to expand the
resource base that is exceeding expectations (new drill results
expected soon). Their forward projected EPS will likely be very
significant as a debt free unhedged gold producer and the
current market cap relative to expected revenues is
disproportionate; with approximately 74M shares outstanding and
currently trading under CDN$0.75/share, the present valuation of MTO.V provides exceptional opportunity for investors. Over 50%
of Metanor's outstanding shares are held by institutional
interests, amongst them Dynamic Mutual Funds (managed by Goodman
& Co.).
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Case Study Image 1) MTO.V's Batchelor Lake
Gold Mill - 1,200 TPD capacity, currently operating an
average 680 TPD in bulk sample testing phase
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Case Study Image 2: Exceptional Management
Metanor's President & COO, Mr.
Ghislain Morin (left) & Mr. Serge Roy, Chairman CEO (right)
holding first gold bar poured in early 2008. Since batch testing
start up, in a few short months time, they have increased the
production TPD by 40%, improved recovery rates to in excess of
95%, maintained strict cost control and ensured a successful
trouble free start-up - a rare feat for any new gold milling
facility. |
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