Thursday, September 23, 2010
Outlook for Barrick Gold (ABX) - Copper New High
It is 5:55 AM. Have a cup of Thor's thunderous java and let's play a video to start the day. Our favorite Norseman and I just watched a CNBC Business News interview with Barrick Gold's President and CEO, Aaron Regent. It is probably one of the best gold mining outlooks the ole Colonel can remember in some time including questions from business icon and former General Electric CEO, Jack Welch. I've included a video link to the entire discussion at the bottom of this blog page (just below the chart of the Eureka Miner's Index). Thor was less impressed and has switched the tube back to the weather station - after all it is "Thor's Day!"
Interview with Barrick Gold's Aaron Regent
The interview began with a question about $1300/oz gold and whether there was further upside. Mr. Regent painted a broad brush of the present global situation and how it effects current gold prices including reflationary trends and the looming clouds of global deficits. He noted that the world's central banks are now net buyers of gold and the introduction of gold exchange traded funds such as GLD have drawn considerable new investor interest (The Eureka Miner's Grubstake Portfolio holds the SPDR Gold Trust ETF GLD). Both are supportive of gold price going forward.
On the supply side, Mr. Regent noted that gold mining is declining an average of 1% per year as new resources are more difficult to find and new mine lead times can be up to 10 years. Tight supply coupled with new demand should move prices higher.
Jack Welch, in his characteristic ubber-CEO manner, interjected, "Trees don't grow to the sky" and quized Mr. Regent on what may drive gold to $500/oz. Barrick's CEO acknowledged downside risk and gave three possible events that could undermine the upward trend: 1) China recession (see note 1), (2) the return of a strong U.S. dollar and 3) central banks exit strategies form present monetary stimulus.
Arguing the reasonableness of $1300/oz gold, Mr. Regent stated that in "real terms" the present price is only 55% of the 1980 peak of $2300/oz (i.e. the inflation adjusted price). He also cited the stability of oil and copper prices in terms of gold (i.e barrels of oil and pounds of copper per ounce of gold). Followers of this Report understand the importance of the oil/gold and copper/gold relation since both oil and copper are proxies for global growth. Comparing their value with gold removes currency variability. Mr. Regent said that historical averages of 15 barrels of oil and 433 pounds of copper per ounce of gold are in line with today's prices (we'll check his numbers in a minute).
The Barrick CEO was reluctant to predict a future price of gold (nothing new here) but said that they're doing "quite well" at $1300/oz (no kidding!). He said for planning they put a healthy discount on spot gold prices and try to anticipate direction instead of price level realizing that gold will be volatile. Mr. Regent would rather be prepared for the bad times and surprised with more cash during the good.
Jack Welch closed the interview questioning the "cash cost" of gold mining. Aaron Regent said their present cost was about $450/oz and expected that to be stable in the foreseeable future. The logic is that older mines represent rising cost as mining intensity increases with diminishing resource but that this is offset by new mines with a lower cost basis. Mr. Welch's closing comment was that gold mining appeared to have a better cost story than other commodities today.
This is a good'un buckaroos.
Checking Aaron Regent's Numbers
Aaron Regents oil/gold and cu/gold numbers seem to be roughly inline with recent price movements of these three commodities. Since early June oil has been in a range of 14.5-17.5 bbl/oz, the mid-range a little higher than his quoted 15 bbl/oz. Copper has been in a range of 350-450 lbs/oz with his historical number of 433 lbs/oz slightly lower than the mid-range.
Here are some noteworthy dates:
Mining's "worst day" 12/5/2008, COMEX gold $745.2/oz
Au:oil 21.29 bbl/oz
Au:Cu 573.2 lbs/oz
S&P 500 high for 2010 1219.8 4/26/2010, COMEX gold $1155.2/oz
Au:oil 13.36 bbl/oz
Au:Cu 325.6 lbs/oz
Today, COMEX gold $1293.2/oz
Au:oil 17.46 bbl/oz
Au:Cu 361.49 lbs/oz
COMEX copper marked a new high 5-month high today at $3.5940/lb at 03:30:00 9/23/2010.
Enough talk, let's walk the walk:
Eureka Outlook Dashboard
The Eureka Miner's Index(EMI) is above-par at 232.76, down from yesterday's 257.26 and a long way from the 6/7/10 low of 50.7. The EMI high for the year was 259.35 on 4/12/2010 - the same day that COMEX copper peaked. Today's number is just below a lower trend level of 260.45 but comfortably above support at 186.51. Remember an EMI greater than 100 is good times (or at least better times) for the metals & miners relevant to Eureka County.
4-WD is OFF - improving roads in the marketplace; The VIX or "fear index" is below 25; metals & miners are on firm timber with bellwether Freeport-McMoRan (FCX) in the low-$80s above its 200-day average of $74.48 (our new warning level, 9/03 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment but there is still some deflationary caution now that we are sub-3%.
The YELLOW light is turned back on for Commodity Reflation. Although copper is trading above $3/lb, the 10-yr T-Note is below 3.00%
The GREEN light is turned on for Stable Markets with the VIX below the 30 level (what's this?)
The YELLOW light is turned on for Inflation/Deflation Watch as the Federal Reserve resumes buying back Treasurys and the 10-yr T-Note remains below 3.00%
The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets but the bond markets still signal trouble ahead
The GREEN light is turned on our Fuel Gauge with oil below $80
A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions , General Moly Mt. Hope Water Rights, U.S. House committee debates miner workplace safety bill
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
Commodity Market Morning Update
NYMEX/COMEX: Oil is down $0.63 in early trading at $74.083 (November contract, most active); Gold is up $1.3 to $1293.4 (December contract, most active); Silver is down $0.005 to $21.050 (December contract, most active); Copper is up $0.0130 to $3.5780 (December contract, most active)
Western Molybdenum Oxide is $15.00; European Molybdenum Oxide is $15.15; LME moly 3-month seller's contract is $16.33, LME cash seller is $16.01
Stock Market Morning Update
The DOW is down 59.60 points to 10679.71; the S&P 500 is down 6.98 to 1127.30. Miners are down:
Barrick (ABX) $46.78 down 0.93%
Newmont (NEM) $64.32 down 0.95%
US Gold (UXG) $5.09 down 1.93%
General Moly (Eureka Moly, LLC) (GMO) $3.16 down 1.86%
Thompson Creek (TC) $10.47 down 2.44%
Freeport-McMoRan (FCX) $82.82 down 2.00% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are down (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $32.26 down 2.57% - global steel producer
POSCO (PKX) $109.41 down 1.00% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 1.27% to $1,472,663.61 (what's this?).
Write Colonel Possum at firstname.lastname@example.org for answers to your questions or to request e-mail updates on the market
Note 1: Although Mr. Regent didn't explain what he meant by a "China recession", some Asia watchers throw up a red flag if China GDP growth drops below 7%. In the western developed world we often define recession as a prolonged negative GDP.
Headline photograph by Mariana Titus