Monday, September 14, 2009
Diamonds are a (Canadian) Miner's Best Friend
It is 5:45 AM, grab a cup and let's kick start this week. Some stories are just too much fun to pass up. Before we get to story telling, a faithful reader asked me the other day to explain Barrick's new direction and "de-hedging". I have included my reply below the sign off today for those of you that may also be wondering what's going on. Keep those questions coming!
The Colonel is a fan of the History Channel's summer show "Ice Road Truckers". It is a great series about the men and women that brave driving trucks in the great white north to deliver supplies to mines and oil & gas exploration sites near the Arctic Circle. One of their destinations has been Canada'a Diavik Diamond Mine which is only accessible 10-weeks out the year by ice road. You thought you have problems making a good list before driving to Elko's Walmart!
Diavik Mine is back in the news because they have canceled their scheduled winter shutdown and 2010 delivery is expected to ramp up to 7.5 million carats of diamonds or more. Diamonds are another canary in the global recovery mineshaft and this announcement is a positive sign for better times ahead. As you can imagine, demand for high-end diamond jewelry was one of the first fatalities in the economic downturn. Harry Winston Diamond Corp.(NYSE:HWD), a major Diavik owner, saw their share price drop from above $45 in the Fall of 2007 to below $5 this year. Signs of returning demand have created new interest in the fortunes of this hole-in-the-ground in Canada's Far North. In the words of chairman and chief executive Robert Gannicott:
"Since the market has improved substantially and consistently since the beginning of the first quarter, there is now a new mine plan under consideration..." (conference call, 9/11/09)
With a new salon in Singapore and eight others in Asia, Gannicott said Harry Winston is well positioned to profit from "a sector of the world economy that is expected to drive new growth."
Here are some related Web sites for the full story. There are some great mining photos on the Diavik site:
Harry Winston says new plan for Diavik would see 7.5M carats delivered in 2010 (Canadian Press, 9/11/09)
Harry Winston Diamond Corporation
Ice Road Truckers
The ole Colonel is considering putting a little money on Harry. I would caution that this is a highly speculative play and depends greatly on the sustainability of global recovery, ice roads and and a lot of other stuff. Ah, what the heck! HWD is presently trading around $7.50 and is one of the few mining stocks trading up on an otherwise downer day. More on that when we walk the walk.
On the other side of the coin, I continue to be concerned about the softness in metals. Even gold and silver are in retreat today. Unfortunately molybdenum and nickel, key ingredients in the manufacture of steel, continued to slide Friday. Moly is now at $14.75, considerably below our $16.50 magic number (what's this?). Here's a one-month chart of molybdenum and nickel:
The Colonel will keep this chart running for you until something moves up. Let's cross our fingers.
Enough talk, let's walk the walk:
4-WD is OFF (the VIX or "fear index" is low)
Yellow light is ON for declining molybdenum price (less than magic number: $16.50)
Yellow light is ON for possible adverse regulation/legislation (mercury emissions)
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
Oil is down $1.05 in early trading to $68.24 (October contract); Gold is down $7.60 to $998.8 (December contract, most active); Silver is down $0.180 to $16.520 (December contract); Copper is down $0.0590 to $278.75 (December contract); Molybdenum drops to $14.75.
The DOW is down 9.06 points to 9596.35; the S&P 500, down 0.15 points to 1042.58. The miners are not happy:
Barrick (ABX) $37.79 down 1.02%
Newmont (NEM) $46.04 down 1.05%
General Moly (Eureka Moly, LLC) (GMO) $3.15 down 1.25%
Freeport McMoran (FCX) $69.63 down 1.05% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are flat, (a "tell" for General Moly):
Nucor (NUE) $46.31 down 0.13% - domestic steel manufacturing
ArcelorMittal (MT) $39.65 down 0.05% - global steel producer
POSCO (PKX) $98.58 down 0.33% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is down 0.58% to $1,190,490.31(what is this?).
Headline Photograph by Mariana Titus, "Waterhole Reflections", Ackerman Ranch
All other photos courtesy of The Diavik Diamond Mine
Response to a Reader's Question about Barrick and de-hedging:
In markets, hedging is a technique used by both buyers and sellers to reduce risk. Of course with less risk there is less reward. The old adage comes to mind, "hedge your bets", where one puts a little money on other horses in addition to your favorite to win. De-hedging goes in the the opposite direction, increasing risk and the possibility for greatest reward. In our analogy, placing all your money on one horse to win is an unhedged bet.
A recent Forbes article has a good explanation Barrick's de-hedging announcement:
"Gold hedges are futures contracts that commit a company to selling the metal at set prices. While hedges guarantee certain cash flows, they often commit a metals producer to ship the gold at prices lower than the current spot price. Barrick's decision to pay off its hedges amounts to a bet that gold prices - which rose above $1,000 per ounce Tuesday - will keep rising." (Forbes, 9/12/09)
Hedging became popular with gold miners like Barrick when gold prices experienced a lot of price swings in the 1990s:
"The industry went on an orgy of hedging in the 1990s, when a combination of weakening spot gold prices and a steep forward curve made it very profitable. This decade, as gold's prospects have brightened, hedging has fallen out of favor. Barrick, one of the last holdouts, has seen its stock lag behind the broader sector significantly this year." (WSJ, 9/10/09)
Here's a simple example. If I guaranteed to buy gold from a miner every month for $950/oz; the miner does well if the spot price for gold drops below $950 and loses money if it heads higher. With a hedge, at least the miner can rely on a reliable flow of cash. The buyer (me) typically holds on to the miner's gold waiting for the price to move higher to sell. To "de-hedge", I believe Barrick is now buying back gold to relieve themselves from the obligations of futures contracts. If gold keeps heading north to say $1200/oz in 2010, they made a wise decision.
An interesting side to this is the size of Barrick. They are so big that their buy-backs (increased demand) can actually increase the price of gold which then becomes a self-fulfilling prophecy.