Dollar Falling Gold Rising price commodities rally silver mining production

What's different about this commodities rally is that it's not just the gold price that's up - gold equities and mining stocks in general are starting to exhibit overall growth, even the ones with known risks kinross, anglogold ashanti.

Get Used To The Dollar Falling

• A deteriorating relationship with Saudi Arabia means we might be witnessing the last days of the 'Petro Dollar' - at best this translates into even less support for US dollar denominated trade.
• China backed gold certificates issued by the BRICS fund gain traction
• The Federal Reserve The Fed losing control of situation it attempts to solve due to plunging interest rates and lack of interest in treasury notes

Diversity Is Important

• Don't limit your purchases to just one company spread it around but do favor companies that already have the infrastructure in place to produce gold since it can take a long time to develop a mine.  
• Also keep in mind that many established companies shuttered a large portion of their mine portfolio over the past few years due to declining prices
• Focus in on companies that weathered the storm and didn't resort to closing mines - in the short run they will yield the best returns.

Don't Ignore Silver

The gold silver ratio exceeded 80 for much of the last year but now with a new commodity bull run starting to take place, the ratio has already declined to 70.  Considering the recent past (10-15 years) the ratio has the potential to decline even further to below 40, leaving the possibility of a 2 to 1 return on silver verses gold.  Demand for silver remains strong but remember that central banks don't buy it - this means that global economic instability is less likely to benefit silver price and more likely to benefit the price of gold.  In the meantime make silver mining companies a priority.

Kinross Gold NYSE:KGC - has most to benefit from a new gold rally.  kept mines despite downturn in stock in recent years - weathered the storm.
iamgold NYSE:IAG - stock suffered more than competitors last five years down 85%.  key mines remain operational and showing robust growth.
Seabridge Gold NYSE:SA - 40 million ounces gold 300 million ounces silver and that's just 2P proven reserves.  any news regarding mine development will double the stock price overnight.
spdr gold trust
sprott gold trust - can redeem shares for physical gold

Gold Demand Remains Strong Despite Dip In Price (China, ETF, jewelry, bullion, central banks, supply)

     
          Between January 2012 and January 2013 central banks showed an insatiable desire for gold !   Even though prices weren't as high as they were in 2011 ($1895 in September 2011 vs $1780 September 2012) they were high enough as to give holders of the yellow metal a unique opportunity to sell at a generous price. 

So did debt laden countries sell ?  NOPE !  in fact just the opposite happened:

Italy kept its reserves stable at 2451.8 tonnes but because its total reserves fell slightly the % of reserves represented by gold went up from 71.0% -> 72.5%. 

Holdings by Greece actually went up 0.3 t to 111.9 tonnes which means gold now represents 82.7% of reserves up from 81.5% last year.

 Spain 29.7% -> 30.4%        281.6 tonnes ranks #18 globally

 

more information about gold reserves at International Gold Reserves by Country

 

China The Sleeping Giant

Though officially no significant movement was made by the Chinese, the world's second largest economy has routinely showed interest in boosting its reserves.  $3.3 trillion is in American dollars but the gold that it has is only worth around $50 billion (at a spot price of around $1500 an ounce). 

China has been the leading gold producing nation since 2007, at 370 tonnes in 2012 (+15t), its output is about the same as Russia and South Africa combined.  Because most of the gold is mined at many small operations by minor companies, it's not so easy to keep track of where all that gold ends up.  Taking into consideration the large number of nationalized companies in China and that almost none of China's gold output makes it out of the country, it's possible that Chinese reserves are higher than officially stated.  The only incentive China would have to not disclose the actual amount is to keep the price relatively stable, since skyrocketing gold prices would wreak havoc to their consumer market (jewelry demand alone is 265.5 tonnes, more than total US consumer demand in 2012).
America's excessive printing of money is another reason China needs to diversify out of the US dollar.  Gold represents only 1.7% of China's reserves compared to 64.1% average for all other countries (up from 62.6%).  To put things into perspective, if China's gold represented the same fraction of total reserves as US holdings do, China would have 5.8 times as much gold as the United States (47.2 tonnes).

Gold Demand for jewelry (-3.2%), bullion (-17.1%) down in 2012 but demand by central banks (457 -> 535t), ETF's (185 -> 279t), and China (779.8 -> 776.1t) remains strong.

 

Countries More Picky About Where Gold Is Stored

Germany announced earlier in 2013 that it wants to repatriate 674 tonnes of its reserves from American (300 tonnes) and French (374 tonnes) vaults.  Other countries such as Switzerland are also thinking about doing the same thing.  Switzerland has 20% of its reserves in the UK, 10% in Canada; Switzerland did this originally as a way to keep its gold safe during war times.

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.

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

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.

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

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. 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.

Also consider that the rise and fall of stocks isn't entirely determined by commodity prices. Other factors such as the enterprise value (see Yamana Gold blog entry), free cash flow (cash flow minus capital expenditure) and most importantly total cash cost per ounce (the main reason Canadian companies like Goldcorp and Eldorado Gold make it to the top in terms of market value while others like AngloGold and Gold Fields which produce and own a lot more than their counterparts, aren't ranked significantly higher) tend to have more of an effect on prices. There are many examples of gold companies that have a market value close to what it was 2 years ago despite commodity prices being many times higher; there was less than a 30% difference in market value for Agnico-Eagle Mines, Yamana Gold, Gold Fields, Kinross Gold (not considering the Red Back acquisition its capitalization was actually steady) while others like First Majestic Silver realized the change in price (was worth US $215 million in 2008 ten times less than in 2010 despite only producing 1.89 times less silver). Also, consider this: For most of 2008 when gold prices started their overall upward trend, it was the large cap companies that outperformed the small cap; the opposite was true in the summer of 2011 when gold prices broke through new levels, the change in behavior might simply be the result of a much higher support level for gold prices making high production costs less of an issue for startup companies (many more juniors entered the market in 2011 than in 2008). Physical gold and physical silver remains the safest investment option as there is less risk (no concerns regarding delivery of the asset) and the investor gets to realize 90-100% of the rise in gold and silver prices (on demand price paid by bullion dealers at coins stores for the metal). What the physical gold investor loses out on are dividends paid out by gold mining stocks. A major factor affecting spot prices, which is unrelated to stocks are margin calls. For example in early August of 2011 (when there was a lot of economic uncertainty) gold and silver spot prices declined at the same time major stock indices fell by their largest margins since the 2008 recession, the commodities selloff was sparked by a margin call (temporary selloff due to traders being required to meet call options). Recently, South Korea, Thailand and even debt-laden Greece added more gold to their reserves. (Gold Cartel losing, price to top $3000) On August 8, 2011 when stocks performed poorly, gold spiked again (gold is the first thing central banks/banks/investors hoard when they want a stable investment medium, also when banks realize they might have to fulfill their significant short positions) but don't be concerned about the more gradual silver rise (historically, silver has lagged gold (time) when increases occur; the reason is that banks and large investors tend to wait until gold gets too expensive before buying the white metal); also when gold gets too expensive jewelers, industrials turn to alternatives and silver is one of them. Also consider the gold/silver ratio which is 44 (August 8, 2011), much higher than the historic ratio of under 20. Silver has, in just 5 years gone from $14/oz to a support level of between $34 and $40 per ounce.

Goldcorp (GG), the lowest cost per ounce producer of gold among tier 1 companies. In 2010 it produced 23 million ounces of silver giving it the distinction of leading producer of silver among gold companies that year, though production was still only about half of BHP Billiton's (46.6 million ounces) it was high enough to rank 4th among all companies, ranking just behind Pan American Silver (24.3 million ounces). What's more, 77% of Goldcorp's 2P silver reserves (1.0 of 1.3 billion ounces) are at Penasquito, Mexico, a property that hasn't even reached commercial production yet.

First Majestic Silver (FR) has significant resources that don't show up as reserves because of their status, has one of the lowest cash costs industry-wide, nearly doubled silver production in 2010 and mints its own bullion bars and rounds (unlike many of its competitors like Pan American Silver which produce and market bullion through other companies (Northwest Territorial Mint for example).

Silver Standard Resources (SSRI) is another to keep watch of. The company is already a major producer and that's with only 1 of its 4 properties producing. Cash costs are still high because many new mines have high initial production, initial construction and other development costs.

Hecla Mining Company - The gold to silver ratio remains high (about 43 compared to 35 on May 3, 2011 (Silver 44, Gold 1540)) but is starting to come down; August 19-22 gold was up about 5.5% but silver was up more than 9%). Hecla Mining, like many other silver miners, has suffered from volatile prices since silver recorded a high of about $49/oz on April 29, 2011 however with gold about 20% higher than it was at that time and silver 10% lower, silver should eventually break through into the $50 level again. Hecla Mining has high growth potential relative to other silver miners because its fall over the last couple months has been more pronounced (as of Monday morning Aug 22; -33% last 6 months, -11.6% last 3 months, -13% last month compared to Coeur d'Alene (-6.7%, +.24%, -8% respectively) and Silver Standard Resources (-3%, -9%, -12.6% respectively); during that period First Majestic released reports confirming growth in production and earnings in 2010 and 2011 (71.8% rise in silver production in 2010 with cash costs among the lowest industry-wide (near $7/oz) compared to $12/oz for Pan American Silver (largest pure-play silver producer). Hecla also has low net cash costs realized (-$1/oz in 2010).

Primary silver producers (2010)

Fresnillo (38.6 million), Pan American Silver (24.3 million), Silver Wheaton (23.865 million up 37%) Coeur d'Alene Mines (16.8 million), Hecla Mining (10.566 million down 3.8%), First Majestic Silver (6.56 million up 72%), Silver Standard Resources (6.302 million up 48%) and Silvercorp Metals (4.624 million up 10%). (individual company notices)