Wednesday, August 31, 2011

AuRico Gold Intermediate Producer after wise acquisitions (Northgate Minerals, production, silver, 2012, exploration)

   Update for 4Q 2011 As reported on January 13, 2012 Aurico produced 72,119 ounces of pure gold (up from 29,384 in 2010) and 1.109 million ounces of silver (down from 1.2 million qoq), or 92,815 oz of gold equivalent (up from 53,030 qoq) during the three months ended Dec 31, 2011. Consolidated cash costs for the quarter were 67.1% higher to $680/oz due mainly to non Mexican operations in Australia acquired through the Northgate takeover (only produced 29,858 oz in the 2011 year but at a cash cost of $863/oz). North American operations finished the year at a cash cost of $499/oz (over 80% of production is still only coming from Mexico, Canadian projects won't start producing until 2012 at the earliest). Over the 12 months Aurico produced 187,401 oz of gold (up 64.3% from 114,064 oz) and 4.728 million ounces of silver (down 4.6% from 4.954 million yoy). The largest producing mine, Ocampo saw higher cash costs in the last quarter owing to lower grades being mined, while El Cubo's higher costs (up to $1,046 on the year) were due to a major conversion in its method of mining which may be part of the deal struck with workers in 2011 to raise standards at the mine, ending the shutdown. Ocampo still had relatively low production costs during the year ($413/oz in the 1st half, $436/oz in the third quarter). For the year Ocampo, which accounted for 72% of gold equivalent production had a cash cost of $415/oz (realized), down 5.0% (though it was $553/oz in the last quarter which could be an aberration considering Ocampo's cash costs have been inconsistent quarter to quarter throughout 2011 due to higher/lower grades being mined).

Stawell, AUS mine life ends in the second quarter of 2012 which you probably already realized considering 2011 4Q production between it and Fosterville was only 29,858 oz at a cash cost of $858/oz (2009 production there was 206,500 ounces, cash cost under $500/oz). Young-Davidson mine in Canada is 79% complete. Young Davidson will produce 180,000 ounces of gold a year for 15 years at a long term cash cost of $400/oz. El Cubo which was shutdown in 2010 had cash costs of $1,090 in the 4Q and $1,046 during the year BUT you have to remember that almost all of what El Cubo produces is silver (556,379 ounces in the quarter up 3.7% compared to only 8,670 ounces of gold).

Update for 3Q 2011 As reported by AuRico Gold on November 10, 2011 the company produced 45,686 gold ounces (up from 27,018) and 1.4 million silver ounces (up from 1.19m oz), or 76,630 oz of gold equivalent (up 68%) during the three months ended September 2011; All of the increases in production came from mines in Mexico meaning that the higher revenue and profit are not the result of the Northgate Minerals acquisition (Northgate's main properties are outside Mexico). Even though cash costs were up 9% to $487/oz margins were 55% higher ($1,217/oz) due to record breaking gold prices ($1,704/oz), that resulted in a 580% increase in profit (to $62.6M or 36c a share). The El Chanate mine became the first Mexican operation to record one million man hours of work without lost time injuries. Not all was rosy however, all of the production increases came from El Chanate and El Cubo two mines that produced neither gold nor silver in 2010, in 2011 they combined to produce 20,842 oz of gold (16,444 from El Chanate) and 308,528 oz of silver (all at El Cubo) while the company's main mine Ocampo showed negative production growth (-8% for gold production/-15.3% for gold sold and -10.5% for silver production/-20.4% for silver sold). Cash costs remained low at Ocampo ($436/oz) and high at El Cubo ($936/oz but down from 1,386/oz). Average realized gold price was $1,704/oz up 38.54% (from $1,230/oz), realized silver price was $38.13/oz nearly double what is was the year before ($19.19/oz). Higher production particularly from the smallest mine, El Cubo (gold equivalent ounces up to 11,360 oz from nil) propelled 2011 annual guidance up to a high of 195,000 oz from 189,000 oz. Range for silver is 4.95-5.0m ounces (up from 4.84-5.56). Cash costs for the year are on track to be $445-$475/oz. By comparison, in the first half of 2011 cash costs were $486/oz (even with Ocampo being $413/oz which is $23/oz lower than what it was in the 3Q).

   AuRico acquired Northgate Minerals on August 29, 2011 for US$1.49 billion which represents a whopping 46% premium to Northgate's average stock price in the previous 20 days, but a record low of 14.7 times EBITDA based on Northgate's earnings before tax, depreciation, ammortization in the previous 12 months, the lowest in a North American deal since 2004 when Goldcorp bought Wheaton (by comparison, Kinross Gold paid about 40 times more than EBITDA for Redback Mining). Ironically, Goldcorp is also the company that paid one of the highest premiums in a takeover, 56% higher than the average stock price for Andean
Resources in the 20 days leading up to the deal. (Bloomberg: Northgate Takeover Proving Cheapest) At a time when the price of gold is on the rise AuRico is being bold, making deals that most companies wouldn't think possible (AuRico made US$1.9 billion in takeovers since April 2011, that's 87% greater than AuRico's market value in 2010). (MorningstarAdvisers: Digging for Outliers in Gold Mining) Included in the deal is the $370 million Young-Davidson Mine in Ontario which could begin producing as early as late 2012 (3 million ounces/15 year mine life, Young-Davidson also has 1.5 billion pounds of copper). Also of note, Northgate's assets are scheduled to produce 75% more in 2013 than in 2011 compared to 40% for AuRico. AuRico also gains a foothold outside of Mexico for the first time. Ocampo, the company's biggest producing mine also produces silver at a rate of between 4 and 5 million ounces, annually. The two biggest operating mines, Ocampo and El Cubo each have their own ore processing mills with a capacity in excess of five thousand tonnes per day (combined). In the last quarter ended June 2011 the company's operating cash flow increased 247% and its 2011 pure gold production guidance increased to between 175 and 195,000 ounces, gold equivalent (includes silver) rising to 265-295,000 ounces (about 33% of total production comes from silver). (2011 2nd qtr report)

For AuRico, production costs are low (for the six months ended June 2011 it was $413/oz (2.4% lower) at its largest mine Ocampo which produces at a rate of just over 110,000 ounces annually, overall it was around $486/oz). Total production (after takeover of Northgate Minerals is complete) is comparable to Eldorado Gold, New Gold and Osisko mining, three companies that have a market value 2 to 3 times higher. Even after 2 deals in 5 months that boosted its size by more than 70% AuRico continues to be totally unhedged meaning that it is fully exposed to changes in the price of gold, not a bad position to be in at a time when gold investment is spiking (even debt laden nations like Greece are buying up the commodity, others like Thailand, Mexico, Russia, South Korea are increasing reserves).

The only downside of the deal is that it led to the break up of Northgate's takeover attempt of Primero Mining which would have given it another 3 million ounces of proven gold reserves at San Dimas, Mexico.

Saturday, August 27, 2011

Risks Assosicated With Gold Exchange Traded Funds & The Benefits of Direct Ownership (physical gold)

   Gold ETF's are index traded commodity funds with a total net worth that's tied to the value of its holdings of physical gold (for example SPDR's (ETF) market value on August 26 was $75.07B about the same as the total value of its 39.6M ounces of gold). The physical gold is stored in vaults/warehouses operated either by groups of institutions (London Precious Metals Clearing Limited made up of six entities) or individual ones that have been granted a vault license (as in the case with JP Morgan). Shares are issued, giving individual private investors exposure to commodity price movements. In general, ETF's have low tax costs in addition to other cost efficiencies, making them increasingly popular among investors. The first successful ETF ever launched was the Toronto Index Participation Shares (tracked the TSX exchange's 35 biggest stocks) which began trading in 1990.

Gold exchange-traded funds trade on stock exchanges like any other fund however their portfolio consists of only one asset, physical gold. Two of the most actively traded American ones are IShares COMEX Gold Trust (IAU, large cap) and SPDR Gold Trust (GLD, one of the largest in the world, started in 2004). Jewelry is also an important source of the physical gold supply, in 2007 it accounted for 25% of total supply. In terms of bullion, Kruggerands issued since 1967 and gold bars (some vaults require the stored bars to be a specific size, usually between 350 and 400 ounces) have traditionally been the most widely used. Alternatively, gold mutual funds aren't as dependent on physical gold; Their asset types include a range of gold stocks/companies (gold companies, for the most part have wide profit margins, making them attractive to all types of investors).

In many cases Gold ETF's have management and accountability issues. Since their early beginnings, there has been substantial growth in the size of Gold ETF's (10 largest American ones hold about 2,200 tons (2,000 tonnes/70.4M ounces) of pure gold in the form of bullion bars, other countries like China have launched their own gold trading platforms). (China's Gold Intake:like Sending Oil to Saudis) making the accountability issue an even greater concern. There is also growing angst over just how much gold is actually in the world's vaults; in March 2008 90 kg of fake gold was discovered in the vaults of Ethiopia's National Bank (replaced with gold plated steel), that happened even though gold sold to the central bank is required to undergo certification by the Geological Survey. (BBC News: Fake fears over Ethiopia's gold) In Europe, gold plated Tungsten was found at Germany's largest private gold refinery, though alarming that doesn't necessarily mean the government certified any of it.
There's also risk in the US where SPDR, the world's biggest physically-backed gold trust states in its list of risk factors:
"Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may temporarily hold the Trust’s gold bars until transported to the Custodian’s London vault, failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold bars could result in a loss to the Trust." and "Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss."
Owning physical gold eliminates those risks, removing concerns regarding delivery of the asset however the new costs makes it much more expensive to do especially if you're in it as a short term investor (dealer fees can range from a couple dollars to more than ten dollars an ounce over spot, ensuring secure storage of the physical asset is costly as well as time consuming).

Countries are taking more interest in gold; 10% of all foreign exchange reserves are in gold. (World Gold Council) South Korea purchased 25 tonnes of gold in the summer of 2011 for $1.24 billion, making its total reserves 17 times larger (39.4 tonnes) and ranking 45th among all countries. In 2011 Russia (41.8 tonnes), Thailand (9.3 tonnes) and Mexico (99.2 tonnes) also increased their reserves of gold. China's massive holdings only equal about 1.6% of their currency reserves. (S Korea buys gold as safe haven, first time since '98)

Because the prices of gold ETF's is more closely linked to the price of gold than other investment options (individual mining companies, mutual funds), risk also comes from spot price volatility (some companies actually hedge against that by fixing the price at which they agree to sell their gold in the near future). There is also slightly more risk than with mutual funds because like stocks, ETF's trade all day long (like their underlying commodities which also vary in price throughout the day, for mutual funds trading in the underlying stocks ends at the conclusion of the trading day and so they do as well).

Some other notes:
-If any widely used currency ever failed a new gold standard could be implemented as a temporary fix until the situation is resolved.
-Tungsten has nearly the same density as gold but differs in its color and hardness. Thermal conduction of gold (atomic number 79) is about two times that of tungsten (atomic number 74), the ratio of boiling points is also two.

Friday, August 26, 2011

Biofuels Getting Heavy Investment From The US Government and Petrobras

  The US committed over half a billion dollars of taxpayer money ($510 million to be exact) over the next 3 years to advancing biofuels into a more usable form available for use by commercial and military aircraft, bringing private and public investment to just over US$ 1 billion. ( Obama calls them "next generation biofuels" because the plan is that they will be cheaper (due to mass production) and more widely available (the algae could be used more effectively). The US government is confident that the investment will speed up biofuel development however that ignores over 50 years of scientific research that yielded few improvements. In Brazil, for example where 90% of new vehicles are being made to run on a combination of bio-fuel and fossil fuel, the country is facing record energy deficits, for example in 2010 imports of fuel skyrocketed as land use demanded during algal biofuel production simply overwhelmed the country; prices skyrocketed also with the price of biofuel rising 85% over the year. Even with the high cost impediments (in the range of $65-$100 per gallon), the US secretary of agriculture countered with "For every dollar increase in the cost of a barrel of oil, it costs the Navy $30 million". Petrobras aims at ending Brazil's supply shortage, it is investing $1.9B in the next four years to raise production of ethanol (will invest another $600M in biodiesel and $1.6B in other biofuel operations); $328M is going to Brazil's biggest sugar ethanol mill, the Boa Vista (49% Petrobras share was acquired in June 2010 for $240M; the other 51% is owned by Sao Martinho) to quadruple production (ethanol production has a 5-10% profit margin). (Reuters: Petrobras, Sao Martinho to expand ethanol output) (traditionally, algae makes up about 60% of biofuel production with the rest coming from other bio sources).

Traditionally, the American bioethanol industry (works to prevent other options from being considered) and the lack of progress in determining which biofuel feedstock is the most economically viable, have been major impediments to production increases. Strong opposition from the petroleum industry could also become a problem when biofuels gain wider acceptance, for now though oil companies have shown interest in gaining market share in the biofuel industry; in 2010 for example Royal Dutch Shell began a $21 billion milling and fuel distribution joint venture with Brazilian ethanol company, Cosan. The partnership has so far been extremely profitable for Cosan, by August Cosan reported a record $1.44B quarterly profit, net revenue was up 29.75%.
Over the last 45-55 years the US government has only spent about $2.5 billion on biofuel research with less than appealing results. While biofuels are a great option long term, for the short term it might not be considering the cost to produce (per kWh renewables in general are 23c, natural gas is 9c and coal (popular in China) is 4c) and the fact that in both the United States and Europe, both nations and people have increasingly tight budgets.
Additionally, there are the environmental impacts associated with algal biofuel production: Fertilizer used to grow algae at the rates needed comes largely from petroleum feedstocks. (Scientific American) Algae uses sunlight and water to convert CO2 into fuel-usable material; it is much more economical to use C02 coming from petroleum sources. Also, a high energy centrifuge is utilized to separate the algae from the surrounding water in order to extract the fuel source.

Algae is the third and latest generation biofuel and so it has an integral role to play in the future of biofuels. It earned that distinction by being environmentally friendly (biodegradable) and more effective than the alternatives (30X more energy per acre as compared to Soybeans). Third generation was preceded by second generation biofuels (attractiveness comes from its use of non food material such as wheat stalks and wood) and first generation biofuels (ethanol and biodiesel). The ethanol used in first generation biofuels is produced through fermentation of sugars extracted from plants (sugar extracting methods can be applied to almost any kind starch-based material). Drawback of first generation's bioethanol: gas powered vehicles can only run on a mixture of at most 15% bioethanol. A biofuel is by definition renewable material since the matter within it must be at least 80% renewable.

There are also other consequences to increased reliance on biofuels/ethanol : In January 2011 the United Nations director of Food and Agriculture called the US strategy of using foods like corn to make bio energy, a detriment to world food prices and supply. In fact only four countries in South America are able to increase biofuel production without endangering food security. In Brazil 3% of land is used to produce the sugar cane used in biofuels.

Currently, algal biofuel production is at least 40X that of soybean biofuel production (over 2000 gallons compared to about 50 gallons). ( The "Energy Independence and Security Act of 2007" set a "mandatory Renewable Fuel Standard," requiring fuel producers to use at least 36 billion gallons of biofuel in 2022.

Thursday, August 25, 2011

Trends In The Gold to Silver Ratio Point To Lower Ratio In Bull Markets (gold & silver standard)

   The gold to silver ratio was 16 in 1980 when silver reached $50/oz but it was only there momentarily, for most of the next two decades it was over 65 (when gold ranged in price from $250 to $500), between 2000 and 2003 it was 60 to 80 before falling to 47 to 55 in 2005-2008 which is notable since that coincided with gold's rise from $425/oz to $1000/oz. In the ensuing years (2008-2010) the ratio nudged higher, remaining between 50 and 70 at the same time gold went from $800/oz to $1250-$1300 per ounce (about 4X greater than it was during any of the previous 25 years);
However following that period the ratio experienced one of its biggest declines to date going from 70 in February 2010 to 33 in April 2011, subsequently gold broke into new territory, gold was $1540/oz in April 2011 when silver reached $49/oz (end of month) signifying that over the long term, the ratio decreases when gold prices reach higher support levels. In February 2011 in the midst of a commodities bull market the gold:silver ratio reached its lowest level in 13 years,
Meanwhile gold reached parity with platinum on August 8, 2011, an unusual occurrence but not surprising given that concerns over platinum demand coincided with gold investment peaking due to economic uncertainty. Prior to that, the 20 year high was 0.93, attained in October 1992. Platinum was worth 24% more than gold at the start of 2011, by August 23, 2011 the difference fell to only 1.8% even though Jan-Aug platinum production was 12X less than gold production. (Long-Term Decline In Gold/Silver Ratio To Favor Silver) 2nd Graph: Gold to Platinum Ratio 2007-2011

The gold to silver ratio averaged 59 from 1976 through February 2011 but the average in the earlier years was much lower, the ratio average was 49.1 in the 1980's, 31.3 in the 1970's, 78.5 from 1990-1997 then 53.8 from 1998-2000; the current average of 44.5 (January through August 2011, update: as of Nov 19 the ratio is 53.2 which is about at the 1 year high of 54.24, average Jan-Nov is about 47) is still a lot higher than the 16:1 ratio that held up for more than 160 years from 1700 until the 1860's (was 16 during the US Coinage Act of 1873), in the 1930's was when things started to change but there was a new driving force there: China stopped using the silver standard spilling a lot of excess silver onto the open market, much more than industrial demand. In 19th century Britain, numismatically (coins were predominantly made of gold and silver) the gold to silver ratio was 14.29 as per the monetary law established in 1816 (20 schillings (silver) equaled 1 sovereign (gold). In France the ratio was set at 15.5 in 1803 the same ratio used the United States to determine the monetary relationship between gold and silver coins. Then, around 1870 the gold standard slowly replaced the gold-silver standard (silver was still used but fewer countries linked a coin's monetary value to the amount of silver it had (silver supply skyrocketed with higher US production rates while Germany and Scandanavian countries dumped silver onto the markets due to their abandonment of the silver standard). The ratio rose to a high of 30 by 1894. (Energy & Mining: The ratio gold and silver from 1800 to 1900)

Presently, the lower long term ratio has numerous causes: gold has few alternatives especially with regards to its biggest consumer (jewelery) and silver being much more affordable becomes a more attractive option. The price difference also makes silver a more attractive investment option (in January 2011 the US Mint recorded a one month silver coin sales record of 6.422 million ounces). Alternatively, the short term rise in the ratio is because the biggest investors in bullion (countries, banks, billionaires) favor gold and because a short term price correction always happens when silver rises too fast due to traders erring on the side of caution (if silver rises too fast traders begin to put more emphasis on technical data). In the year leading up to September 2010, gold soared 28% while silver grew only 4%, but in 2011 silver grew at a slightly faster pace showing once again that there's a time lag between silver and gold at the beginning of a commodities bull market. Production of silver is only about 9.5X greater than that of gold, another reason to consider the current price ratio of 43 to be too high.

Investing In Gold and Silver Physical Gold or Stocks and Which Companies To Look For (production by company)

&nbsp&nbsp When high inflation follows the beginning of a recession, they combine to produce long term stagflation making true hedges against inflation harder to come by due to the compound effect and its impact on currency markets. (high inflation in the world's developing economies is one of the key factors propping up long term gold prices) Currently, a number of the world's major economies find themselves in that situation and that's threatening to destabilize the world economy; Because of the changing face of the world's economy (relatively new sectors like the Quaternary playing a larger, central role), the way people do business and most importantly the much more deeply rooted connections nations have with each other, history can't be used as a guide for people looking for answers. Though risky, during the year, bonds have had the second highest rate of return second only to gold (price of gold up 43.93% or $527.70 (August 9, 2010 - August 9, 2011). The market volatility, inflation and overall economic tightening are errily reminiscent of the 2008 recession, the big problem now though is that the US government has used up most of its arsenal (quantitative easing, stimulus) leaving it highly vulnerable.

What is certain is that when money devalues, commodities like gold, silver and oil don't. Gold and silver have intrinsic value that isn't easily replaced (few substitutes); their properties are valued both economically (industrially) & aesthetically and according to history, are reliable stores of money (gold was used as legal tender even before the first coins, silver use in rfid scanners and tracking devices is one of the sources of demand growth). Also, overall base metal production has been falling, at the same time central banks which used to be net suppliers have become net buyers. Countries like the United States have become increasingly reliant on quantitative easing to stimulate the economy; Quantitative easing has as a direct consequence the devaluation of curency which contributes more to inflationary pressures (if the effects aren't felt immediately they ultimately do later on when the economy heats up).

U.S. deflation is part of the reason quantitative easing is such an attractive option (increasing the money supply lowers interest rates which raises prices through foreign currency markets) however the root of the deflation America is attempting to correct isn't even a result of high interest rates (more recently) or a money supply problem meaning the government may just be creating a new problem. (thetombstonenews: 'Quantitavie Easing') Some interesting facts about gold: 3/4 of all the gold ever extracted from the earth was mined after 1910. South Africa was the largest producer in most years since that time. Switzerland was the last country to tie its currency to the price of gold (1999). Until May 2009, all the gold ever extracted amounted to 5,835,876,025.6 ounces or about 85% of an ounce per person (165,446 tonnes). Gold weighs 19.3 times as much as water, is even more rare than diamonds, never oxidizes (maintains its shine), and in its more natural form is one of the softest metals.
When deciding on Gold ETF's/Gold Stocks consider this : contracts like the precious metals loan device (government/central banks) and those made by NYMEX/COMEX and London Precious Metals Clearing Limited (involves 6 big banks including JP Morgan) are short by a significant margin when it comes to the amount of gold and silver they need to cover those positions. Also, JP Morgan is now owner of a vault license, throwing more uncertainty into the equation as JP Morgan has used unallocated gold and silver to cover contracts. Though riskier, gold stocks also pay dividends annually or quarterly, in 2011 Q2 Barick Gold's African subsidiary doubled its dividend up to 3.2c/share for the quarter alone. or consider Palladium investing

Industrial and Commercial Bank of China (ICBC), the World's Largest Bank Is Bigger Than You Think

&nbsp&nbsp&nbsp&nbsp&nbsp Since July 24, 2007 when it overtook CitiBank in market capitalization (US$ 254 billion versus US$ 251 billion) ICBC has been the largest bank in the world by market value (4th overall. It is 22.7% bigger than domestic competitor China Construction Bank, in contrast, construction bank's (2nd largest bank by market cap) overall rank fell 5 spots to 12 down from 7 in March). (FT Global 500 List June 2011) ICBC's impressive performance during the economic crisis has lifted it higher in The Global 2000, a ranking system compiled by Forbes; in it ICBC was ranked 12 overall in 2009, 5 in 2010 and 7 in 2011 (2011 slight drop was because higher oil prices pushed 3 oil companies into the top 6, by comparison none were top 6 in 2010), in 2011 ICBC overtook Bank of America but was overtaken by JP Morgan (rank 1st overall on highest sales of any bank and strong earnings) and HSBC (rank 2nd on high sales and assets (4)); HSBC was ranked lower than ICBC in 2010 (8 versus 5) but in 2011 it shot up to 2 (ICBC 7), JP Morgan was ranked higher than ICBC both years even though its market value was much lower and ICBC had 41% more profit (US$24B vs US$17B). In March of 2009 ICBC became the world's biggest bank in terms of deposits after its clients added US$140 billion to accounts bringing the total to US$1.31 trillion, higher than JP Morgan and Mitsubishi UFJ Financial Group.

Although many key indicators for ICBC improved in 2010 [(cost/income ratio down to near record low levels (30.99%) at a time when wealth managers worldwide are facing higher cost/income ratio's ( Net fee, commission/operating income ratio 19.13 a 4 year high, 4 year high also in ROA assets (1.32% up 86% since 2006), ROA equity (22.79% up 336 basis points in 2 years), non-performing loans ratio down to 1.08 (down 49% since 2008)], the bank's market value has been slow to respond (growth) because of concerns among investors regarding banking risks faced industry-wide (brought on by banks abroad in countries where unemployment is high and consumer debt, national exceeds annual income, gdp) and a possible housing bubble in mainland China (loans secured by mortgages amounted to US$ 421.117 billion on December 31, 2010 up 31.2% since December 31, 2009 (US$ 321.063)); Market Values in the graph for the 3 big banks are from December 31 for each year, the end of the fiscal period.

In terms of revenue, JP Morgan still leads all banks however the major Chinese banks including ICBC significantly closed the gap between themselves and Bank of America/Citigroup. In the first half of 2011 HSBC leaprogged all banks except JPM even though its revenue grew by only 5%. Chinese institutions closed the revenue gap with their Western counterparts, ICBC only 45% the revenue of Bank of America (56% of Citigroup) in 2010 1st half but that increased to 88% in 2011. More info on 2011 revenue, assets at top 20 banks as of September 2011 ranked by 2011 2nd half metrics

Mortgage loans make up 41% of all loans at ICBC (2011 January 1) up from 38.3% a year earlier even though the government instituted new laws aimed at limiting lending to local governments (financing vehicles) and to the real estate sector. In May of 2011 in an attempt to reduce mortgage risks, ICBC told separate branches to raise certain minimum downpayments (up to 40% from 30% in places where prices are unusually high) and lending rates when the branch sees fit (110% higher than the benchmark best), in 2010 home prices were up 47% in Hangzhou (Zhejian ranks 5 in gdp per capita (US$7.4th), 10 in population), 37.9% in Chongqing (14 gdp pc (US$4th)/20 in pop.) and 37.1% in Beijing (3 in gdp pc (10.4th/26 in pop.). Prior to the increase, buyers of a second home were required to give a 60% down payment. (BBC: ICBC bank's profits surge as China economy grows, China Economic Review)

Also, the bank's less than perfect credit rating (A1+) due to the bank being highly exposed to a softening Chinese real estate market and having increased international exposure (Chinese government has shown interest in helping the bank gain a foothold outside the mainland since Chinese banks don't have as much global exposure as their western counterparts and China has the capability to do that; China has shown interest in establishing new international finance; In 2009 it gave China Investment Corp $200 billion to do that), may have scared away some investors who aren't aware of the bank's solid fundamentals (arrears/risks are as low as any other bank even those with better Moody's ratings).

At a time when the largest bank based outside of China (HSBC, US$ 176.9 billion in market cap) announced a 3 year plan to cut 30,000 jobs worldwide (10% of its workforce, 20-25% of its employees in Europe and North America), China's ICBC is hiring (workforce is over 397,000 up 1.8% on the year with over

Monday, August 22, 2011

Precious Metals Companies With Promising Growth Potential (undervalued gold, silver stocks)

&nbsp&nbsp The gold rush is on and miners Yamana Gold (up 16% last month), Agnico-Eagle Mines (up 5% last month), Buenaventura (up 8% last 3 months), First Majestic Silver (up 20% last 3 months) are benefiting from the surge in price while others can't seem to catch a break as evidenced by their volatility, leaving investors frustrated angry and confused (those changes in stock are as of September). Here are some companies that have been through a rough patch (like Yamana gold last year) but could be in the money over the next couple weeks if gold and silver prices continue their climb but in a less volatile manner:

European Goldfields - Update for November: For 9 of the last 10 months (down about 29%) due to a longer than anticipated permit review process in which Greece decided whether or not to grant approval for the Olympias and Skouries gold-copper porphyry projects in northeastern Greece (permit initially applied for in 2006) (even after decided the stock continued to fall slightly, down 13% in the 3 months leading to mid November). Skouries alone has the potential to produce at a rate of 350,000 ounces of gold equivalent (about half of that coming from silver). Since the permits were granted, the company hasn't even made up the 9% stock decline experienced over the two months leading up to the decision (July 12, 2011). Base metals like copper continue their lacklustre showing ($4 August 22, 2011 compared to $4.45 on July 29th) making the copper assets less attractive.
The two new permits take away a lot of the risk that scared investors away from the company. Including projects in Turkey and Romania, European Goldfields appears to be well on its way to becoming Europe's largest gold producer by 2013-2014 (over 400,000 ounces of pure gold/yr doesn't include silver and copper). Construction of the mines also won't be a problem with Greece's largest construction company, Ellaktor as its largest shareholder (19.36%). More reason to optimistic about the company outlook: takeovers! Eldorado Gold and Centerra Gold both operate projects in some of the same areas and would probably overpay in a takeover. Also, European Goldfields is considering a move to the main London Stock Exchange index moving up from junior AIM.

Saturday, August 13, 2011

Big Exploration Companies Only An Investment Away From Becoming Major Industry Players

&nbsp&nbsp It seems weird when a company with more resources of a particular commodity isn't valued higher by the stock market (compare, for example Seabridge Gold or Northgate Minerals to Detour Gold; Cenovus Energy (oil) to Anadarko Petroleum). When companies aren't producing (such as the case with many big exploration companies) people are more skeptical of their estimates, especially if they don't have the financing in place to turn projects into operations; Ivanhoe Mines suffered from that for years before Rio Tinto confirmed the company's standing by calling Oyu Tolgoi 'the biggest copper resource in the world'. Examples of companies that have gotten away with lieing about resources include Greywolf Resources, a group of companies in Argentina which the president claimed in 2004, lied about reserves, even Shell has been caught but that was at a time when regulations industry-wide, were softer. Furthermore, energy consumption experienced the biggest yearly increase since 1973 in 2010, in 2010 it was up 5.6% largely due to China (up 11.2% surpassing the USA) and non-OECD nations (63% higher than 2000 levels). (World energy consumption up 5.6% in 2010, biggest rise since 1973: BP) Brazil, for example was on pace to import 50% more gasoline in 2011 than in 2010 (3.2M barrels Jan-Aug compared to 3.2M barrels Jan-Dec accounting for 5% of domestic fuel needs). In 2010 90% of cars sold in Brazil run on a combination of bio-fuel and gasoline but bio-fuel is getting more expensive: Sugar cane price is up 85% over the last year. (Brazil boom takes world fuel markets by surprise)

Here are three companies that I think would benefit from more investment and media exposure.

Meg Energy - Recoverable oil resource is close to 6 billion barrels. That's almost as much as Canada's biggest petroleum companies Suncor (7-8 billion, with a market value of over US$50 billion), and Canadian Natural Resources (over 6 billion, MV is over US$40 billion). Being heavy oil doesn't really make a difference anymore as synthetic oil is easier to produce and more widely used than it used to be (though oil prices need to be at least $50/bbl for it to be economically viable to produce but I don't think that level will be breached anytime soon). Phase 2B of the Christina Lake project has costs totaling $1.4 billion (about the same as MEG's total cash and cash equivalents) that will be spent in 2011. The biggest phase of the project (will increase production by 250,000 barrels per day or 7X more than what phase 2B will produce) is the third phase. You can imagine the price tag there, receiving regulatory approval shouldn't be a problem but more investment will probably be needed. The company recently reached $10 billion in market value and China's third biggest oil company has already invested in it so attracting more shouldn't be difficult, but when it's announced, individual investors could show a lot more interest. Update: In October 2011 JP Morgan, the world's #1 bank in terms of revenue, forecast oil at $121/barrel by 2013, at the same time it expects oil prodction that year to rise by about 2M bbls/d to 91 million barrels a day.
By 2045 oil sands will produce close to 11M bbls/d and that will continue for a century. Between 2012 and 2020 oil output from the tar sands will double (1.7 mbpd --> 3.4 mbpd) and triple in the next 25 years to 5.1 million barrels per day. Tar sands crude is over five times more expensive to extract than middle east oil however with oil prices up more than 400% since 2001 and Alberta continuing to charge one of the lowest royalty rates in the world (fell from $3 to $2/bbl between 2001 and 2009) there is much profit to be made.

Bankers Petroleum - Has interest in Europe's largest onshore oil field (7.5 billion barrels in place). 2P reserves are over 268 million barrels and rising fast (proved reserves up 30% in 2010), including stakes held

Thursday, August 11, 2011

Even Amidst Record Breaking Gold Prices, Not All Gold Investments Are Good Investments

On August 11, 2011 it was announced that four Ireland-based gold funds (London Aliquot Commodity, Agriculture, Precious Metals and Intelligent Portfolio Asset Allocation, operating under Castlestone Investments of London) will be terminated, with the parent company blaming the volatile economic environment since 2008 for their demise. (Gold and commodities bull run fails to avoid $50m funds' closure)

It is alleged that inconsistent financial returns have kept them from maintaining solvency on their own (they required consistent cash from the parent company); combined, they have allocated holdings worth $50 million (in gold stocks) which is relatively small but significant for its handful of investors. This comes a month after the Financial Services Authority used search warrants to conduct an investigation into Castestone's business, suggesting that mismanagement and other flawed business practices are to blame.
So you see, even in bulls markets where the one main factor influencing valuations (the price of gold) is skyrocketing, investors are not always guaranteed a safe haven for their money. Due dilligance is one of the most important aspects of investing. Funds closing during the gold rush is ludicrous however that doesn't mean every fund is going to experience gains of mammoth proportion: many gold stocks haven't risen much (so far) during the commodity boom (Gold related equity funds in Canada haven't experienced the type of rise one would expect, though some stocks like Yamana Gold are up, Yamana up over 13% in July); Some base metals stocks like Taseko Mines (copper) have declined at an out of control rate; reasons for that include a market still overrepresented by people skeptical of the West's approach to its debt problems, they remain unconvinced that the United States has avoided a future default. The government of Canada has also been a problem for many companies, in November 2010 it declined to grant Taseko Mines a key mine license citing environmental effets. (globeandmail: Gold-related equity funds left in bullion’s dust)

The funds account for 13% of Castlestone's total assets under management (total without the 4 funds is $330 million/£205 million).

In other news on the day (Thursday August 11, 2011):

Italy and France joined Greece, South Korea and a growing list of other countries in banning short selling (borrowing stocks/securities/assets from a broker, selling them to another group with the intent of returning them to the broker some time later after buying them back at a different price) after it was rumored that short sellers were trying to exploit a French downgrade. A Europe-wide ban is unlikely given the EU's lack of authority to enforce it. Turkey has also curbed short selling.

Canada's trade deficit rises to $1.6 billion in June (all countries) or $5.2 billion with countries other than the United States (US-Canada trade surplus is at $3.63 billion down from $3.73 billion in May), making it even harder for the country to lessen its reliance on trade with the USA (in the USA, the trade deficit was $53.1 billion in June up 4.4%, the highest since October 2008). For Canada, both imports and exports fell but exports fell by a wider margin. In May, Canada's trade deficit was only C$814 million (US$840 million).

Wednesday, August 10, 2011

Oil Sands Reserve Estimate Has The Potential To Increase But Future Developments Could Face Obstacles Due To Environmental Concerns

Alberta Energy Board's reserve estimate for the oil sands assumes a 20% recovery rate but companies using Steam Assisted Gravity Drainage to recover in-situ crude have a recovery rate in excess of 60% (Infomine: Oil Sands Mining In Canada Industry Review) meaning that reserves located within the oil sands district could climb much higher in the near future (total resource is around 1.6 trillion barrels or 18% of the world's total, energy board reserve estimate is 173 billion barrels). Since the estimate was made, other technologies like Petrobank's Toe To Heel Air Injection method have been introduced, raising production efficiencies even further (THAI is 17% more effective than SAGD, Petrobank is so confident in its technology that it has invested heavily in regions with great quantities of resource but little reserves (Kerrobert, Dawson) (McDaniel and Associates Consultants Ltd.)

When production was 726,000 bpd in 2007 (60% as much as it was in 2008, 22% as much as it is expected to be by 2020) the oil sands released 1 billion ft3 daily of carbon through the burning of natural gas used in various stages of production and upgrading. That accounted for about 40% of Alberta's and 5-8% of Canada's greenhouse emissions. If production triples in the next decade those emissions consequently will be higher and given Canada's commitment to the Kyoto Protocol, future oil sands projects could be at risk if a less tolerant government is elected (Canada's current opposition party (2011, NDP) was led by someone who opposed the oil sands on environmental grounds). ( Layton would slash oilsands subsidies (March 31, 2011) Canada ranked 7th in emissions in 2008 up from 8th for most of the previous decade but it only ranks 15th in per capita emissions (2008). By 2045 oil sands will produce close to 11M bbls/d and that will continue for a century. Between 2012 and 2020 oil output from the tar sands will double (1.7 mbpd --> 3.4 mbpd) and triple in the next 25 years to 5.1 million barrels per day. Tar sands crude is over five times more expensive to extract than middle east oil however with oil prices up more than 400% since 2001 and Alberta continuing to charge one of the lowest royalty rates in the world (fell from $3 to $2/bbl between 2001 and 2009) there is much profit to be made.
According to Alberta's 2012 budgetary report, total oil production will reach 3M bpd by 2014, 2.4M of that is from non-conventional sources like bitumen (bitumen royalties totalled $5.7B in 2011 will be $9.9B in 2014).  2011-2012: non-conventional oil production was at 1.78 million barrels per day.  Conventional oil production will be 500,000 bpd in 2013.  Provincial royalty revenue:  Bitumen contributed $5.7B of the $6.5B total which includes conventinal, in 2012, 30% higher than the $4.4B earned the year before.  Total will be around $12.2B in 2014.
Furthermore, energy consumption experienced the biggest yearly increase since 1973 in 2010, in 2010 it was up 5.6% largely due to China (up 11.2% surpassing the USA) and non-OECD nations (63% higher than 2000 levels). (World energy consumption up 5.6% in 2010, biggest rise since 1973: BP) Oil accounts for about a third of the world's energy needs (about 140 out of 420 million BTU's (2011 pace as of August).

Monday, August 8, 2011

August 8, 2011: Stocks Fall Hard, Dow Records Its Second Largest Loss Since 2008, In Just Two Days; Credit Swap Prices Rise By Record Amount (insurance, banks)

On Friday, August 5, 2011 the Dow Jones recorded its largest single day loss since the 2008 recessionary period, just following that the S&P downgraded its credit rating to AA+ from AAA (even though other debt-laden countries such as France were allowed to keep their AAA rating) and another record breaking day ensued on Monday, August 8 when the Dow fell twice as much, 635 points (5.55%). All three American indices fell by a significant amount (S&P 500 6.66%, Nasdaq 6.90%), that compares to drops of 3.77% in Shanghai, 2.18% in Japan, 2.17% in Hong Kong, 3.39% in the UK and 4.04% in Toronto.

Investor confidence is also at a low point evidenced by the rising popularity of Credit Default Swaps (CDS, if a government default occurs, holders of the bond are able to exchange it with the seller of the CDS for its face value less value of defaulted debt, if there's no default, the seller earns an annual rate of interest, 1bp = 1 basis point = $1000 annually on contract protecting $10 million worth of debt). Overall, the average credit swap for the 6 biggest banks by assets was 32.3% higher to 210.9 bp (highest since May 2009). Bank of America default swaps rose 42.2% (to 295 bp) at the same time AIG was suing it for $10 billion in losses claimed on mortgage bond investments, Morgan Stanley swaps up 40.1% to 280.1. Swaps on the biggest insurers was up to its highest level since July 2010. (SFGate: Bank of America Leads Surge in Credit Swaps on Downgrade Concern) There was concern also that S&P might lower its ratings of major US banks but it shot down that rumour saying that none of the banks have a higher rating than the AA+ US rating. Though risky, on the year, bonds have had the second highest rate of return second only to gold (price of gold up 43.93% or $527.70 (August 9, 2010 - August 9, 2011).

The market volatility, inflation and overall economic tightening are errily reminiscent of the 2008 recession, the big problem now though is that the US government has used up most of its arsenal (quantitative easing, stimulus) leaving it highly vulnerable. Grmike's advice: Don't take cheap energy for granted! It's the best remedy for an economy on life support. Per kWh of energy production: coal 4 cents, natural gas 9 cents, renewables 23 cents.

As big as the US news was, the potential for a financial armageddon came from Europe where the world's 8th and 12th largest economies (Italy and Spain) are also facing possible defaults down the road as high borrowing rates make it harder to borrow and borrowing is something the countries cannot do without (interest on debt is already very high). The European Central Bank (ECB) risked its own downgrade by buying up Italian and Spanish bonds in a bid to lower interest rates enough to keep those economies afloat. The fix is short term only, it doesn't change the long term outlook for either economy but does have long term negative ramifications for the European Central Bank which has now committed itself to buying €2.5 billion worth of Spanish and Italian bonds, daily; That's a significant increase from the €80 billion worth of debt in total that the ECB invested in Greece, Ireland and Portugal. The move lowered Italy 10 year bond yields (interest rate) by 0.7 to 5.3% and Spain bond yields by 0.9 to 5.14%. The European Reserve Fund has put together a $1.5 trillion rescue package for Italy and Spain, France which is in its own fiscal quagmire will be responsible for a couple hundred billion of that. Can the euro withstand the European debt crisis? Will the bond between EU countries become stronger or weaker? What is an appropriate level of debt? those are just a few of the many questions that have investors frustrated.On August 11, 2011 Italy and France joined Greece, South Korea and a growing list of other countries in banning short selling (borrowing stocks/securities/assets from a broker, selling them to another group with the intent of returning them to the broker some time later) after it was rumoured that short sellers were trying to exploit a French downgrade. A Europe-wide ban is unlikely given the Europe's lack of authority to impose it.

Some other things to take note of

Italy is home to the third largest bond market in the world (valued at about US$ 2 trillion) meaning a bond crisis would have an even more devastating effect on the country. Italy is also the world's 7th leading export nation (US$ 458 billion in 2010).

French banks hold a lot of France's debt, which credit agencies are beginning to take a closer look at. Holding French debt is getting more expensive and that is taking a toll on them, on August 10, 2011 Societe Generale lost around 14% of its market value (down to $24.11 billion), Credit Agricole 11.8% (to $14.59 billion), BNP Paribas 11% (down to $68.12 billion); In Italy, Intesa Sanpaolo lost 15.4% (to $29.45 billion); In Spain, Banco Santander 9.48% (to $70.14 billion) and Banco Bilbao 10.42% ($37.55 billion). BNP Paribas Credit Agricole and Societe Generale rank 2nd, 10th and 18th among all companies in terms of assets ($2.7 trillion, $2.2 trillion and $1.5 trillion (Forbes: March 2011 The Global 2000 List) but their combined market value has fallen to $74 billion about the same as the Royal Bank of Canada (August 10, 2011 at the close of the market) making them severely undervalued (considering Societe Generale earned about the same amount of net income as Royal Bank of Canada ($5.3 versus $5.6 billion), had more than twice as many assets but only half the market capitalization. Further complicating things for France is the 0% 2nd quarter gdp growth announced on August 12, 2011, which follows 0.9% growth in the first three months (business stocks increased which didn't happen in the second quarter, consumer spending ended with the 2010 fiscal year). Only if France's gdp grows by at least 2% in 2011, will it be able to lower deficit to 5.7% of gdp which is important since that could determine whether credit rating agencies downgrade the country's debt.

The Canadian dollar was the only major currency to lose ground against the greenback (August 8, 2011). Possible reasons for that include 0.78% drop in the price of oil (down to US$ 80.45 or about 20% off what it was a couple months ago); even more concerning for Canada is that heavier oil (crude) was down 5.15% to $103.74 a barrel, government policies designed to keep the exchange rate from being too high as to encourage exports (60% of exports go to the USA) and Canada having one of the lowest bank rate/interest rates in the world (was as much as 4X lower than Australian rates). Gains by Canada's gold companies have helped to buffer against losses in other sectors (on August 10th, gains by Canada's gold miners pared losses suffered by oil and technology companies). When oil companies begin to release their second quarter results (Crescent Point Energy, Canada's 12th biggest oil company with $11B in market cap, experienced 158% increase in 2011 2Q earnings, up to C$184.9M or 59% of revenue compared to a loss of C$102M in the previous qtr), they should begin to prop up Toronto's Stock Exchange.
Of concern in Canada is a widening trade deficit; in June it was up to $1.6 billion or $5.2 billion with countries other than the United States making it even harder for the country to lessen its reliance on trade with the USA (in the USA, the trade deficit was $53.1 billion in June, the highest since October 2008). For Canada, both imports and exports fell but exports fell by a wider margin.