Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
In this issue:
I. Gold manipulation
II. Lessons learned from Yamana Buying XG
III. Gold valuation table update for June – Avg $34/oz ($36 May and $47 Dec)
I. Gold manipulation
Commodities took a beating on Thursday with crude oil approaching levels not seen since mid 2010. The commodity selloff was fueled by downgrades on major banks, a continued slowdown by Chinese manufacturers, increased jobless claims in the U.S. and that government’s decision to hold off on further stimulus, and the never ending problems in Europe.
What didn’t make sense to many in this carnage, was why gold took a $50 per ounce beating – the second time in two months.
Over the past few months we have seen reports of major physical gold purchases by central banks around the world. Keep in mind this is much different than the electronic “paper shuffling” we see daily on a massive scale and associated primarily with ETF Gold funds and Bullion Banks.
Buried within this physical movement, is the massive quantity of physical gold that many believe the Chinese government is accumulating and frequently moving between Hong Kong and the mainland. Top this off with Chinese consumers who continue to invest in massive amounts of gold and gold jewellery. Recent forecasts call for 600 million Chinese middle class within the next several years.
I was in China and Hong Kong two months ago and continually witnessed gold and jewellery stores full of consumers. What was shocking was that they seem to think nothing of spending tens of thousands of dollars for gold and gem encrusted jewellery – and paying for it in “cash.”
China is not the only one buying large tonnage of gold, so are countries like Russia and Iran. While only a portion of this is being reported or noted in the media, it seems to be well known amongst professional gold traders.
What has so many scratching their heads, is why we will see hundreds of tonnes of paper (digital) gold sold and driving down the price in wild volatility, yet there is nothing close in terms of physical movement that would indicate an excess of supply over demand. In fact, most reports you read would indicate there is a major imbalance as physical gold is being snapped up by central banks around the world.
So why the volatility we have seen over the past two months? In what appears to be a very serious concerted effort to keep gold below $1600 (it is also worth noting that this appears to be happening with silver but to a much lesser extent).
It would seem that there is such an imbalance between what is being bought on paper and what is physically available, that certain very powerful groups are doing everything they can to keep gold in a certain price range. Driving prices lower at certain points allows them to cover positions and buy physical gold over a realistic period of time without stepping into the market and driving prices back to $1700 or $1800.
These conspiracy theories have been around for years so this is nothing new. However, we haven’t seen this type of wild price volatility in the past with $50 one-day drops. It may indicate that the spread between what is physically available and what is being sold on paper is widening dramatically.
In theory the possibility exists that this could drive gold dramatically higher in the future. Yet one has to then question whether paper manipulation is able to simply drive it back down. One only needs to look at the U.S. dollar for proof of this. As their debt levels hit astronomical levels, we see the U.S. dollar remain stable and often a flight to safety in times of economic uncertainty.
Gold is more challenging to control because it is tied to something finite and tangible. However given its growing economic importance, banks seem to be getting more and more creative with ways to buy and sell metal that doesn’t exist. We saw this happen with mortgages in the United States and we know the outcome of that brilliant idea.
II. Lessons learned from Yamana buying XG
On Monday it was announced that Yamana would pay $400 million to acquire gold junior Extorre (TSX: T.XG, Stock Forum) for $4.26. This was a 67% premium to the previous day’s close and surprising for a couple reasons.
1) The Extorre project is in Argentina. All year we have seen a significant aversion to Argentina because of high taxation or nationalization risk. Investors both big and small have been dumping resource plays associated with this country - small companies in particular have been hardest hit.
2) The average valuation per ounce for junior gold exploration companies remains at grossly depressed levels. From the table of 55 we track and publish monthly (they must have a minimum one million gold ounces), we are now seeing an average of $34 per ounce. Over 1/3 of the companies continue to trade below $20 per gold ounce.
If we pull out Extorre's cash of approx. $30 million and risk their reserves by only giving them credit for 20% of the inferred, they are paying approx. $240 per ounce! And this is purely for the rock as there is very little infrastructure in place.
This deposit is only a couple kilometres long but it is shallow and contains high grade gold and silver (silver strength in particular).
Measured and Indicated (M&I) they have 7.4 g/t gold and 499 g/t silver - resulting in 17.4 g/t gold equivalent. 578k ounces gold and 39 million ounces silver for 1.3 million ounces gold equivalent. Inferred is a total estimate of one million ounces gold equivalent at almost half the M&I grade.
What we can learn from this
First is that there is no denying junior valuations are ridiculously low, but while a major paying $200 plus per ounce validates what has been paid for several projects in the past year or two, it simply means the economics must be exceptionally strong. And if they are, the buyer is prepared to assume the country risk.
Large mining corporations (in almost all countries) continue to run into severe capital cost and operating cost over-runs. As they struggle with their own internal problems, they have pushed acquisitions aside unless they can build ounces while ensuring their shareholders that they can make money by paying $200 + for gold or gold equivalent ounces.
In the case of Extorre's project, they were buying higher grade gold and very high grade silver. Extorre's economic feasibility study showed that they could produce 170,000 gold equivalent ounces per year with a capital cost of only $124 million - this low capex cost leaves plenty of margin for error when developing a mine plan.
Equally important is the low operating cost because the project is shallow. They forecast operating costs of only $303 per ounce. Yamana believes they could produce 248,000 ounces per year at a cash cost of only $303/oz over the first five years.
With gold over $1500 and silver doing equally well, these projects can be a significant cash cow and even for a major will have a nice impact on the bottom line.
With respect to the juniors we’re tracking, this now creates a huge amount of work. It is one thing to have the value per ounce and working capital position, but now we'll need to go through all the projects carefully and try to determine average grades and (where available) identify average operating costs and capital costs.
These have been issues from day one with any junior gold speculation, but when we saw fair value across the board, the details were not as much of an issue. Investors and speculators were prepared to bid prices up simply on projects with large ounces (or the potential).
Without a sector rally, those days are gone for a while. Now the real money will be made by identifying those projects with depressed gold ounce valuations, but also with low capital and operating costs.
I am working on these modifications through the summer but a decision has not been made to provide this to free readers. Considering the amount of time that goes into the existing tables, providing something more comprehensive for free makes no sense to me. On the Internet people have this expectation of “something for nothing” and I don’t know too many that tell their employer they will work half their shift for free.
We will continue to publish the gold valuation tables in their current format near month end (on the Stockhouse home page – weekend edition), but it will be up to free readers to digest the data further if they so wish. Paid Ticker Trax subscribers will be emailed the more comprehensive tables.
If we can separate this information (including gold equivalent ounces) along with showing estimated cash costs and capital costs to build a mine, then we should have a much more useful tool - at least until some element of a sector rally emerges.
III. Gold valuation tables update for June – Avg $34/oz
Standardized monthly notes for our gold tables
We have sorted the same table four ways so you can determine which format is the most useful.
NOTE: Due to limited space for website presentation, we are not able to display various additional notes for many of the companies. This may include additional copper or silver resources that were not taken into consideration for the valuation. Only resources that were specifically reported in a 43-101 report were included. Many of these companies own various other projects or assets that may add additional value. Almost all companies host a Powerpoint presentation on their website and this is a valuable tool for doing further due diligence.
(Please click on the individual table to see bigger size)
Comparative Chart of Junior Gold Companies - Sorted by EV / Risked Reserves - June 22, 2012
Comparative Chart of Junior Gold Companies - Sorted by Cash - June 22, 2012
Comparative Chart of Junior Gold Companies - Sorted by Total Ounces - June 22, 2012
Comparative Chart of Junior Gold Companies - Sorted by Name - June 22, 2012
IMPORTANT NOTE: Our Ticker Trax Comparative Gold Analysis is an educational tool. If you are not a professional money manager we strongly suggest working with a qualified investment advisor prior to making any investment decisions based upon these tables. Once a month we will update this analysis and publish it on Friday afternoon with any relevant notes.
GOLD TABLE REFERENCE NOTES:
Measured Mineral Resource: is that part of a resource for which quantity, grade or quality, densities, shape, and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of a deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity.
Indicated Mineral Resource: is very similar to the Measured classification but the resource can be estimated with a level of confidence “sufficient” to evaluate economic viability of the deposit. This classification is much stronger than Inferred but still makes a significant number of assumptions. Most junior exploration companies in Canada report Measured & Indicated (M&I) in the same category.
Inferred Mineral Resource: is that part of a resource for which quantity and grade or quality can only be estimated on the basis of geological evidence that involves limited sampling and reasonable assumptions. The estimate is based on limited information gathered from locations such as outcrops, trenches, pits, workings and a very limited number of drill holes. The Inferred category is similar to saying “we have a reasonable expectation the minerals are there but have yet to prove it through sufficient drilling”. Moving a resource from Inferred to M&I can be time consuming and expensive.